Annual Statements Open main menu

HANGER, INC. - Quarter Report: 2022 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
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 1-10670
HANGER, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
84-0904275
(I.R.S. Employer
Identification No.)
10910 Domain Drive, Suite 300, Austin, TX
(Address of principal executive offices)
78758
(Zip Code)
Registrant’s telephone number, including area code: (512) 777-3800
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareHNGRNew York Stock Exchange
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  x 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 x 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
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 x
As of August 3, 2022, the registrant had 39,123,266 shares of its Common Stock outstanding.



TABLE OF CONTENTS
Hanger, Inc.

ii


PART 1.    FINANCIAL INFORMATION

HANGER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value and share amounts)
(Unaudited)
As of June 30,As of December 31,
20222021
ASSETS
Current assets:
Cash and cash equivalents$24,380 $61,692 
Accounts receivable, net150,898 152,058 
Inventories88,018 87,462 
Income taxes receivable— 581 
Other current assets19,614 16,536 
Total current assets282,910 318,329 
Non-current assets:
Property, plant, and equipment, net81,015 82,434 
Goodwill377,164 363,554 
Other intangible assets, net25,147 25,892 
Deferred income taxes43,069 45,494 
Operating lease right-of-use assets139,009 144,491 
Other assets18,552 17,945 
Total assets$966,866 $998,139 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$15,636 $14,938 
Accounts payable67,651 63,565 
Accrued expenses and other current liabilities56,151 60,399 
Accrued compensation related costs56,795 54,465 
Current portion of operating lease liabilities34,326 33,438 
Total current liabilities230,559 226,805 
Long-term liabilities:
Long-term debt, less current portion465,022 502,307 
Operating lease liabilities117,230 124,016 
Other liabilities28,847 34,840 
Total liabilities841,658 887,968 
Commitments and contingencies (Note P)
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 39,276,679 shares issued and 39,133,858 shares outstanding at 2022, and 38,891,438 shares issued and 38,748,617 shares outstanding at 2021
393 389 
Additional paid-in capital376,717 373,644 
Accumulated other comprehensive loss(1,330)(11,150)
Accumulated deficit(249,876)(252,016)
Treasury stock, at cost; 142,821 shares at both 2022 and 2021
(696)(696)
Total shareholders’ equity125,208 110,171 
Total liabilities and shareholders’ equity$966,866 $998,139 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
Net revenues$312,033 $280,819 $573,320 $518,289 
Material costs98,433 89,271 184,025 164,441 
Personnel costs110,275 97,549 211,950 187,429 
Other operating costs38,970 32,788 75,138 64,286 
General and administrative expenses35,444 33,110 67,886 64,013 
Depreciation and amortization8,124 8,007 16,079 16,005 
Income from operations20,787 20,094 18,242 22,115 
Interest expense, net7,524 7,152 14,909 14,492 
Non-service defined benefit plan expense160 167 320 334 
Income before income taxes13,103 12,775 3,013 7,289 
Provision for income taxes2,986 2,616 873 460 
Net income$10,117 $10,159 $2,140 $6,829 
Basic and diluted per common share data:
Basic income per share$0.26 $0.26 $0.05 $0.18 
Weighted average shares used to compute basic income per share39,089,865 38,647,042 38,946,937 38,458,733 
Diluted income per share$0.26 $0.26 $0.05 $0.17 
Weighted average shares used to compute diluted income per share39,250,735 39,208,155 39,293,775 39,216,725 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(Unaudited)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
Net income$10,117 $10,159 $2,140 $6,829 
Other comprehensive income:
Unrealized gain on cash flow hedges, net of tax provision of $942, $388, $3,001, and $1,184, respectively
$2,866 $1,225 $9,762 $3,737 
Unrealized gain on defined benefit plan, net of tax provision of $15, $19, $63, and $38, respectively
46 60 58 120 
Total other comprehensive income2,912 1,285 9,820 3,857 
Comprehensive income$13,029 $11,444 $11,960 $10,686 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars and share amounts in thousands)
(Unaudited)
Common
Shares
Common
Shares, Par Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Treasury
Stock
Total
Balance, December 31, 202138,749 $389 $373,644 $(11,150)$(252,016)$(696)$110,171 
Net loss— — — — (7,977)— (7,977)
Share-based compensation expense— — 2,903 — — — 2,903 
Issuance of common stock upon vesting of restricted stock units 324 (3)— — — — 
Effect of shares withheld to cover taxes— — (3,452)— — — (3,452)
Total other comprehensive income— — — 6,908 — — 6,908 
Balance, March 31, 202239,073 $392 $373,092 $(4,242)$(259,993)$(696)$108,553 
Net income— — — — 10,117 — 10,117 
Share-based compensation expense— — 3,601 — — — 3,601 
Issuance in connection with the exercise of stock options— 51 — — — 51 
Issuance of common stock upon vesting of restricted stock units 52 (1)— — — — 
Effect of shares withheld to cover taxes— — (26)— — — (26)
Total other comprehensive income— — — 2,912 — — 2,912 
Balance, June 30, 202239,134 $393 $376,717 $(1,330)$(249,876)$(696)$125,208 

Common
Shares
Common
Shares, Par Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Treasury
Stock
Total
Balance, December 31, 202038,179 $383 $365,503 $(20,215)$(293,998)$(696)$50,977 
Net loss— — — — (3,330)— (3,330)
Share-based compensation expense— — 3,179 — — — 3,179 
Issuance in connection with the exercise of stock options29 — 366 — — — 366 
Issuance of common stock upon vesting of restricted stock units365 (4)— — — — 
Effect of shares withheld to cover taxes— — (4,520)— — — (4,520)
Total other comprehensive income— — — 2,572 — — 2,572 
Balance, March 31, 202138,573 $387 $364,524 $(17,643)$(297,328)$(696)$49,244 
Net income— — — — 10,159 — 10,159 
Share-based compensation expense— — 3,239 — — — 3,239 
Issuance in connection with the exercise of stock options80 — — — 
Issuance of common stock upon vesting of restricted stock units69 (1)— — — — 
Effect of shares withheld to cover taxes— — (40)— — — (40)
Total other comprehensive income— — — 1,285 — — 1,285 
Balance, June 30, 202138,722 $389 $367,726 $(16,358)$(287,169)$(696)$63,892 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
For the Six Months Ended
June 30,
20222021
Cash flows provided by (used in) operating activities:
Net income$2,140 $6,829 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization16,079 16,005 
Benefit from doubtful accounts(68)(292)
Share-based compensation expense6,504 6,418 
Deferred income taxes(734)232 
Amortization of debt discounts and issuance costs1,044 948 
Gain on sale and disposal of fixed assets(863)(718)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net1,262 5,363 
Inventories309 (5,899)
Other current assets and other assets(2,197)(6,202)
Income taxes584 57 
Accounts payable4,597 (6,577)
Accrued expenses and other current liabilities1,606 (2,765)
Accrued compensation related costs2,284 (21,412)
Other liabilities(1,186)(522)
Operating lease liabilities, net of amortization of right-of-use assets(416)(780)
Changes in operating assets and liabilities:6,843 (38,737)
Net cash provided by (used in) operating activities30,945 (9,315)
Cash flows used in investing activities:
Purchase of property, plant, and equipment(10,596)(13,339)
Acquisitions, net of cash acquired(12,490)(35,349)
Purchase of therapeutic program equipment leased to third parties under operating leases(1,358)(870)
Proceeds from sale of property, plant, and equipment1,392 1,332 
Net cash used in investing activities(23,052)(48,226)
Cash flows used in financing activities:
Payment of employee taxes on share-based compensation(3,478)(4,560)
Payment on Seller Notes(5,000)(2,265)
Repayment of term loan(36,263)(2,525)
Payments of financing lease obligations(515)(529)
Payments under vendor financing arrangements— (1,375)
Proceeds from the exercise of options51 371 
Net cash used in financing activities(45,205)(10,883)
Decrease in cash and cash equivalents(37,312)(68,424)
Cash and cash equivalents at beginning of period61,692 144,602 
Cash and cash equivalents at end of period$24,380 $76,178 
Non-cash financing and investing activities:
Purchase of property, plant, and equipment in accounts payable at period end$2,732 $3,349 
Seller Notes and other non-cash consideration related to acquisitions4,002 10,057 
Right-of-use assets obtained in exchange for finance lease obligations223 95 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5


HANGER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A — Organization and Summary of Significant Accounting Policies
Description of Business
Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries. We provide orthotic and prosthetic (“O&P”) services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments, Patient Care and Products & Services.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “SEC”).
In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position, and cash flows. All such adjustments are of a normal, recurring nature.  The results of operations for the interim periods are not necessarily indicative of those to be expected for the full year.
A detailed description of our significant accounting policies and management judgments is contained in our 2021 Form 10-K.
Reclassifications
We have reclassified certain amounts in the prior year condensed consolidated financial statements to be consistent with the current year presentation. These relate to immaterial classifications within expense line items in the condensed consolidated statements of operations.
Recent Developments Regarding COVID-19
We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”). The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition remain uncertain and difficult to predict. As a result of the COVID-19 pandemic, we believe that our patients are continuing to defer visits to our O&P clinics, as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. While the emerging variants of the COVID-19 virus continue to contribute to employee absences and our use of temporary labor, we believe the overall adverse impact of the COVID-19 pandemic on our business volumes has diminished and stabilized over time. The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020.
CARES Act
The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $203.5 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.
During the full year of 2021, we recognized a total benefit of $1.1 million in our consolidated statement of operations within Other operating costs in our Patient Care segment for the grant proceeds we received under the CARES Act (“Grants”) from HHS. We accounted for the proceeds from the Grants by analogy to International Accounting Standard (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance and its principles surrounding the recognition of grants related to income. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We are using the Grants for their intended purpose, and are compliant to the reporting requirements set by the terms and conditions of the grant.
The CARES Act also provided for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allowed us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We paid the first half in September 2021, and deferred $5.9 million of payroll taxes within Accrued compensation related costs in the condensed consolidated balance sheet as of June 30, 2022.
Recent Accounting Pronouncements, Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU, effective beginning on March 12, 2020, provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. We are currently evaluating the effects that the adoption of this guidance, and related clarifying standards, will have on our condensed consolidated financial statements and the related disclosures.
Note B — Earnings Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus any potentially dilutive common shares, such as stock options, restricted stock units, and performance-based units calculated using the treasury stock method. Total anti-dilutive shares excluded from the diluted earnings per share computation were 213,957 and 100,387 for the three and six months ended June 30, 2022 and 2,721 and 1,302 for the three and six months ended June 30, 2021.
Our Credit Agreement (as defined below) restricts the payment of dividends or other distributions to our shareholders by us or any of our subsidiaries. See Note K - “Debt and Other Obligations” within these condensed consolidated financial statements.
6


The reconciliation of the numerators and denominators used to calculate basic and diluted net income per share are as follows:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands except share and per share amounts)2022202120222021
Net income$10,117 $10,159 $2,140 $6,829 
Weighted average shares outstanding - basic
39,089,865 38,647,042 38,946,937 38,458,733 
Effect of potentially dilutive restricted stock units and options160,870 561,113 346,838 757,992 
Weighted average shares outstanding - diluted
39,250,735 39,208,155 39,293,775 39,216,725 
Basic income per share$0.26 $0.26 $0.05 $0.18 
Diluted income per share$0.26 $0.26 $0.05 $0.17 
Note C — Revenue Recognition
Patient Care Segment
Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs (the “VA”), or private or patient pay (“Private Pay”) individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.
The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands)2022202120222021
Patient Care Segment
Medicare$83,013 $74,248 $148,867 $131,583 
Medicaid49,334 43,688 88,606 77,736 
Commercial insurance / managed care (excluding Medicare and Medicaid managed care)88,801 79,769 166,144 149,432 
VA25,393 21,633 46,442 41,397 
Private Pay19,129 17,449 35,429 32,321 
Total$265,670 $236,787 $485,488 $432,469 
The impact to revenue related to prior period performance obligations was not material for the three and six months ended June 30, 2022 or 2021.
Products & Services Segment
Revenue in our Products & Services segment is derived from the distribution of O&P components and from therapeutic solutions which includes the leasing and sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.
7


The following table disaggregates revenue from contracts with customers in our Products & Services segment for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands)2022202120222021
Products & Services Segment
Distribution services, net of intersegment revenue eliminations$35,978 $33,275 $67,368 $63,935 
Therapeutic solutions10,385 10,757 20,464 21,885 
Total$46,363 $44,032 $87,832 $85,820 
Note D — Accounts Receivable, Net
Accounts receivable, net represents outstanding amounts we expect to collect from the transfer of our products and services. Principally, these amounts are comprised of receivables from Medicare, Medicaid, and commercial insurance plans. Our accounts receivable represent amounts outstanding from our gross charges, net of contractual discounts, sales returns, and other implicit price concessions including estimates for payor disallowances and patient non-payments.
We are exposed to credit losses primarily through our accounts receivable. These receivables are short in nature because their due date varies between due upon receipt of invoice and 90 days. We assess our receivables, divide them into similar risk pools, and monitor our ongoing credit exposure through active review of our aging buckets. Our activities include timely account reconciliations, dispute resolution, and payment confirmations. We also employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
Our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current status of our patients and customers’ trade accounts receivable balances. We also group our receivables into similar risk pools to better measure the risks for each pool. After evaluating the risk for each pool, we have determined that additional credit loss risk is immaterial for the Patient Care segment. For the Products & Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” As of June 30, 2022, we have considered the current and future economic and market conditions resulting in a decrease to the allowance for doubtful accounts by approximately $0.1 million since December 31, 2021.
Accounts receivable, net as of June 30, 2022 and December 31, 2021 is comprised of the following:
As of June 30, 2022As of December 31, 2021
(in thousands)Patient CareProducts & ServicesConsolidatedPatient CareProducts & ServicesConsolidated
Gross charges before estimates for implicit price concessions$167,017 $23,527 $190,544 $173,115 $21,459 $194,574 
Less estimates for implicit price concessions:
Payor disallowances(30,863)— (30,863)(33,007)— (33,007)
Patient non-payments(6,835)— (6,835)(7,500)— (7,500)
Accounts receivable, gross129,319 23,527 152,846 132,608 21,459 154,067 
Allowance for doubtful accounts— (1,948)(1,948)— (2,009)(2,009)
Accounts receivable, net$129,319 $21,579 $150,898 $132,608 $19,450 $152,058 
8


Note E — Inventories
Our inventories are comprised of the following:
As of June 30,As of December 31,
(in thousands)20222021
Raw materials$23,850 $22,759 
Work in process20,772 15,807 
Finished goods43,396 48,896 
Total inventories$88,018 $87,462 
Note F — Acquisitions
2022 Acquisition Activity
During 2022, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash flows.
In the first quarter of 2022, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $5.0 million, of which $4.0 million was cash consideration, net of cash acquired, and $1.0 million was issued in the form of notes to shareholders at fair value.
In the second quarter of 2022, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $11.7 million, of which $8.5 million was cash consideration, net of cash acquired, and $3.2 million was issued in the form of notes to shareholders at fair value.
We accounted for these transactions under the acquisition method of accounting and have reported the results of operations of each acquisition as of the respective dates of the acquisitions. We based the estimated fair values of intangible assets on an income approach utilizing the excess earnings method for customer relationships. The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions. Other significant judgments used in the valuation of tangible assets acquired in the acquisitions include estimated selling price of inventory and estimated replacement cost for acquired property, plant, and equipment. For all other assets acquired and liabilities assumed, the fair value reflects the carrying value of the asset or liability due to their short maturity. We recorded the excess of the fair value of the consideration transferred in the acquisitions over the fair value of net assets acquired as goodwill. The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce. We expect that substantially all of the goodwill, which has been assigned to our Patient Care reporting unit, will not be deductible for federal income tax purposes.
Acquisition-related costs associated with Hanger’s acquisition of O&P businesses are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the three and six months ended June 30, 2022 were $0.3 million and $0.6 million, respectively, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the three and six months ended June 30, 2022 were $0.2 million and $0.3 million, respectively.
We have not presented pro forma combined results for these acquisitions because the impact on previously reported statements of operations would not have been material individually or in the aggregate.
Purchase Price Allocation
We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisitions. The final purchase price allocations will be determined when we have completed and fully reviewed the detailed valuations which could differ materially from the preliminary allocations. The final allocations may include changes in allocations of acquired intangible assets as well as goodwill and other changes to assets and liabilities, including deferred taxes. The estimated useful lives of acquired intangible assets are also preliminary.
9


The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:
(in thousands)
Cash paid, net of cash acquired$12,490 
Issuance of Seller Notes at fair value4,195 
Additional consideration36 
Aggregate purchase price16,721 
Accounts receivable697 
Inventories865 
Customer relationships (Weighted average useful life of 5.0 years)
2,270 
Non-compete agreements (Weighted average useful life of 5.0 years)
243 
Other assets and liabilities, net(418)
Net assets acquired3,657 
Goodwill$13,064 
Right-of-use assets and lease liabilities related to operating leases recognized in connection with the acquisitions completed for the six months ended June 30, 2022 were $0.7 million.
During the third quarter of 2022 to date, we completed the acquisitions of two O&P businesses for a total purchase price of $8.1 million. Total consideration transferred for these acquisitions is comprised of $6.3 million in cash consideration and $1.8 million in the form of notes to shareholders at fair value. Due to the proximity in time of these transactions to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the acquisitions. Acquisition-related expenses related to these transactions were not material.
2021 Acquisition Activity
During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash flows.
In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form of notes to shareholders at fair value, and $1.0 million in additional consideration.
In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $21.0 million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value, and $0.1 million in additional consideration.
In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of notes to shareholders at fair value, and $0.8 million in additional consideration.
In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1 million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair value.
10


Acquisition-related costs are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the year ended December 31, 2021 were $2.1 million, which includes those costs for transactions that were in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the year ended December 31, 2021 were $1.6 million.
The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:
(in thousands)
Cash paid, net of cash acquired$79,927 
Issuance of Seller Notes at fair value22,706 
Additional consideration, net1,925 
Aggregate purchase price104,558 
Accounts receivable6,569 
Inventories4,683 
Customer relationships (Weighted average useful life of 5.0 years)
11,745 
Non-compete agreements (Weighted average useful life of 5.0 years)
558 
Other assets and liabilities, net(5,121)
Net assets acquired18,434 
Goodwill$86,124 
Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2021 were $8.9 million.
Note G — Goodwill and Other Intangible Assets
We assess goodwill and indefinite-lived intangible assets for impairment annually as of October 1st, and between annual tests if an event occurs, or circumstances change, that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
The following table summarizes the activity in goodwill of the Patient Care operating segment for the period indicated:
For the Three Months Ended June 30, 2022
(in thousands)Goodwill, GrossAccumulated ImpairmentGoodwill, Net
As of December 31, 2021$792,222 $(428,668)$363,554 
Additions from acquisitions13,064 — 13,064 
Measurement period adjustments (1)
546 — 546 
As of June 30, 2022$805,832 $(428,668)$377,164 
(1) Measurement period adjustments primarily relate to 2021 acquisitions of approximately $0.5 million and are primarily attributable to adjustments to the preliminary allocations of acquired assets.
11


The balances related to intangible assets as of June 30, 2022 are as follows:
As of June 30, 2022
(in thousands)Gross Carrying AmountAccumulated AmortizationAccumulated ImpairmentNet Carrying Amount
Customer lists$30,894 $(12,799)$— $18,095 
Trade name255 (214)— 41 
Patents and other intangibles9,818 (6,924)— 2,894 
Definite-lived intangible assets40,967 (19,937)— 21,030 
Indefinite-lived trade name9,070 — (4,953)4,117 
Total other intangible assets$50,037 $(19,937)$(4,953)$25,147 
Amortization expense related to other intangible assets was approximately $1.7 million and $3.3 million for the three and six months ended June 30, 2022, respectively, and $1.2 million and $2.2 million for the three and six months ended June 30, 2021, respectively.
Note H — Other Current Assets and Other Assets
Other current assets consist of the following:
As of June 30,As of December 31,
(in thousands)20222021
Non-trade receivables$6,582 $7,725 
Prepaid maintenance5,658 4,553 
Prepaid insurance1,706 510 
Other prepaid assets5,668 3,748 
Total other current assets$19,614 $16,536 
Other assets consist of the following:
As of June 30,As of December 31,
(in thousands)20222021
Implementation costs for cloud computing arrangements$6,213 $6,459 
Cash surrender value of company-owned life insurance3,945 4,471 
Finance lease right-of-use assets2,563 2,732 
Deposits2,240 2,178 
Non-trade receivables1,565 1,172 
Other2,026 933 
Total other assets$18,552 $17,945 
12


Note I — Accrued Expenses and Other Current Liabilities and Other Liabilities
Accrued expenses and other current liabilities consist of:
As of June 30,As of December 31,
(in thousands)20222021
Patient prepayments, deposits, and refunds payable$29,236 $26,475 
Insurance and self-insurance accruals9,857 8,943 
Accrued sales taxes and other taxes8,272 7,803 
Accrued professional fees1,400 750 
Accrued interest payable774 707 
Derivative liability— 6,425 
Other current liabilities6,612 9,296 
Total$56,151 $60,399 
Other liabilities consist of:
As of June 30,As of December 31,
(in thousands)20222021
Supplemental executive retirement plan obligations$18,980 $20,779 
Long-term insurance accruals7,599 7,112 
Derivative liability— 4,664 
Other2,268 2,285 
Total$28,847 $34,840 
Note J — Income Taxes
We recorded a provision for income taxes of $3.0 million and $0.9 million for the three and six months ended June 30, 2022, respectively. The effective tax rate was 22.8% and 29.0% for the three and six months ended June 30, 2022, respectively. We recorded a provision for income taxes of $2.6 million and $0.5 million for the three and six months ended June 30, 2021, respectively. The effective tax rate was 20.5% and 6.3% for the three and six months ended June 30, 2021, respectively.
The increase in the effective tax rate for the three months ended June 30, 2022 compared with the three months ended June 30, 2021 is primarily attributable to a windfall from share-based compensation for the three months ended June 30, 2021 compared to a shortfall from share-based compensation for the three months ended June 30, 2022. Our effective tax rate for the three months ended June 30, 2022 is similar to the federal statutory tax rate of 21%, but the difference consists primarily of research and development credits offset by non-deductible expenses and shortfall from share-based compensation. Our effective tax rate for the three months ended June 30, 2021 differed from the federal statutory tax rate of 21% primarily due to research and development credits, non-deductible expenses, and windfall from share-based compensation.
For the year ending December 31, 2022, we estimate a research and development tax credit of $2.7 million, net of tax reserves. We record the tax benefit, net of tax reserves, as a deferred tax asset. For the year ended December 31, 2021, we recognized research and development tax credits of $4.3 million, net of tax reserves.
13


Note K — Debt and Other Obligations
Debt consists of the following:
As of June 30,As of December 31,
(in thousands)20222021
Debt:
Term Loan B$449,800 $486,063 
Seller Notes28,885 29,812 
Deferred payment obligation4,000 4,000 
Finance lease liabilities and other3,112 3,344 
Total debt before unamortized discount and debt issuance costs485,797 523,219 
Unamortized discount and debt issuance costs, net(5,139)(5,974)
Total debt$480,658 $517,245 
Current portion of long-term debt:
Term Loan B$5,050 $5,050 
Seller Notes9,672 8,969 
Finance lease liabilities and other914 919 
Total current portion of long-term debt15,636 14,938 
Long-term debt$465,022 $502,307 
Credit Agreement and Term B Borrowings
As of June 30, 2022, we have a Senior Credit Facility (the “Credit Agreement”) which provides for (i) a Term Loan B facility with $449.8 million outstanding which is due in quarterly principal installments with all remaining outstanding principal due at maturity in March 2025 and (ii) a revolving credit facility with an availability of $135.0 million which matures on November 23, 2026 (subject to a springing maturity if the term loans outstanding under the Credit Agreement are not repaid prior to the date that is 91 days prior to the stated maturity thereof). In June 2022, in addition to our normal quarterly principal payment of $1.3 million, we made an additional prepayment of $33.7 million, for total repayments of $35.0 million under the Credit Agreement. Availability under the revolving credit facility is reduced by outstanding letters of credit, which were $5.2 million as of June 30, 2022, resulting in approximately $129.8 million in available borrowing capacity.
Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.
Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, subject to a LIBOR interest rate floor of 0.00% per annum, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. For the three months ended June 30, 2022, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 4.2%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note M - “Derivative Financial Instruments.”
We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such letter of credit.
14


The Credit Agreement and its amendments contain various restrictions and covenants, including: (i) requirements that we maintain certain financial ratios at prescribed levels, (ii) a prohibition on payment of dividends and other distributions and (iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry. The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement: (i) a maximum consolidated first lien net leverage ratio (“Net Leverage Ratio”) (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) shall be up to (a) 5.00 to 1.00 for the fiscal quarters ending June 30, 2022, and September 30, 2022 and (b) 4.75 to 1.00 for the fiscal quarter ending December 31, 2022 and the last day of each fiscal quarter thereafter, (ii) permit, at our election and up to three times during the term of the Credit Agreement, the maximum allowable leverage ratio for covenant purposes to be temporarily increased by an additional 0.50 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions, and (iii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.
The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency, or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) upon acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the lenders’ request, during the continuance of any other event of default.
We were in compliance with all covenants at June 30, 2022.
Seller Notes and the Deferred Payment Obligation
We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of $0.8 million and $0.9 million as of June 30, 2022 and December 31, 2021, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.50% to 3.00%. Principal and interest are payable in quarterly or annual installments and mature through May 2027.
Amounts due under the deferred payment obligation to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized discount of $0.4 million as of June 30, 2022 and December 31, 2021. The deferred payment obligation was measured at its estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due in annual installments beginning in 2024 and for three years thereafter.
Note L — Fair Value Measurements
Financial Instruments
The carrying value of our outstanding term loan as of June 30, 2022 (excluding unamortized discounts and debt issuance costs of $4.3 million) was $449.8 million compared to its fair value of $432.9 million. The carrying value of our outstanding term loan as of December 31, 2021 (excluding unamortized discounts and debt issuance costs of $5.1 million) was $486.1 million compared to its fair value of $484.8 million. Our estimates of fair value are based on a discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.
We have interest rate swap agreements designated as cash flow hedges which are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement. See Note K - “Debt and Other Obligations” and Note M - “Derivative Financial Instruments” for further information.
15


We believe that the carrying value of the Seller Notes and the deferred payment obligation approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement. The carrying value of our outstanding Seller Notes and the deferred payment obligation issued in connection with past acquisitions as of June 30, 2022 and December 31, 2021 was $32.1 million and $32.9 million, net of unamortized discounts of $0.8 million and $0.9 million, respectively.
Note M — Derivative Financial Instruments
Cash Flow Hedges of Interest Rate Risk
In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024. As of June 30, 2022 and December 31, 2021, our swaps had a notional value outstanding of $275.0 million and $287.5 million, respectively.
Change in Net Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended June 30, 2022 and 2021, respectively:
(in thousands)Cash Flow Hedges
Balance as of March 31, 2022$(1,608)
Unrealized gain recognized in other comprehensive income before reclassifications, net of tax1,481 
Reclassification to interest expense, net of tax1,385 
Balance as of June 30, 2022$1,258 
Balance as of March 31, 2021$(14,259)
Unrealized loss recognized in other comprehensive loss before reclassifications, net of tax(712)
Reclassification to interest expense, net of tax1,937 
Balance as of June 30, 2021$(13,034)
The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the six months ended June 30, 2022 and 2021, respectively:
(in thousands)Cash Flow Hedges
Balance as of December 31, 2021$(8,504)
Unrealized gain recognized in other comprehensive income, net of tax6,501 
Reclassification to interest expense, net3,261 
Balance as of June 30, 2022$1,258 
Balance as of December 31, 2020$(16,771)
Unrealized loss recognized in other comprehensive loss, net of tax(183)
Reclassification to interest expense, net3,920 
Balance as of June 30, 2021$(13,034)
16


The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021:
As of June 30, 2022As of December 31, 2021
(in thousands)AssetsLiabilitiesAssetsLiabilities
Derivatives designated as cash flow hedging instruments:
Other current assets$922 $— $— $— 
Other assets751 — — — 
Accrued expenses and other current liabilities— — — 6,425 
Other liabilities— — — 4,664 
Note N — Share-Based Compensation
On May 19, 2022, the shareholders approved the Hanger, Inc. 2022 Omnibus Incentive Plan (the “2022 Plan”). The 2022 Plan authorizes the issuance of (a) up to 1,960,000 shares of Common Stock, plus (b) 402,974 shares available for issuance under the Hanger, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). Upon approval of the 2022 Plan, the 2019 Plan was no longer available for future awards.
As of June 30, 2022, there were 1,519,125 unvested restricted stock awards outstanding. This was comprised of 1,127,637 employee service-based awards with a weighted average grant date fair value of $20.64 per share and 391,488 employee performance-based awards with a weighted average grant date fair value of $20.58 per share. As of June 30, 2022, there were 253,908 outstanding options exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 4.9 years.
We recognized approximately $3.6 million and $6.5 million of share-based compensation expense for the three and six months ended June 30, 2022, respectively, and a total of approximately $3.2 million and $6.4 million of share-based compensation expense for the three and six months ended June 30, 2021, respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.
Note O — Supplemental Executive Retirement Plans
Defined Benefit Supplemental Executive Retirement Plan
Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives. The DB SERP, which we administer, calls for fifteen annual payments upon retirement with the payment amount based on years of service and final average salary. Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates, and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.
17


We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The change in net benefit cost and obligation during the three and six months ended June 30, 2022 and 2021 is as follows:
Change in Benefit Obligation:
(in thousands)20222021
Benefit obligation as of March 31$16,273 $18,079 
Service cost116 123 
Interest cost100 88 
Payments(12)(12)
Benefit obligation as of June 30$16,477 $18,278 
Benefit obligation as of December 31, 2021 and 2020, respectively$17,935 $19,746 
Service cost232 246 
Interest cost199 175 
Payments(1,889)(1,889)
Benefit obligation as of June 30$16,477 $18,278 

Amounts Recognized in the Condensed Consolidated Balance Sheets:
As of June 30,As of December 31,
(in thousands)20222021
Current accrued expenses and other current liabilities$1,913 $1,913 
Non-current other liabilities14,564 16,022 
Total accrued liabilities$16,477 $17,935 

Defined Contribution Supplemental Executive Retirement Plan
In 2013, we established a defined contribution plan (“DC SERP”) that covers certain of our senior executives. Each participant is given a notional account to manage his or her annual distributions and allocate the funds among various investment options (e.g., mutual funds). These accounts are tracking accounts only for the purpose of calculating the participant’s benefit. The participant does not have ownership of the underlying mutual funds. When a participant initiates or changes the allocation of his or her notional account, we will generally make an allocation of our investments to match those chosen by the participant. While the allocation of our sub accounts is generally intended to mirror the participant’s account records (i.e., the distributions and gains or losses on those funds), the employee does not have legal ownership of any funds until payout upon retirement. The underlying investments are owned by the insurance company with which we own an insurance policy.
As of June 30, 2022 and December 31, 2021, the estimated accumulated benefit obligation is $4.5 million and $4.8 million, of which $4.2 million and $4.1 million is funded and $0.3 million and $0.6 million is unfunded at June 30, 2022 and December 31, 2021, respectively.
In connection with the DC SERP benefit obligation, we maintain a company-owned life insurance policy (“COLI”). The carrying value of the COLI is measured at its cash surrender value and is presented within “Other assets” in our condensed consolidated balance sheets. See Note H - “Other Current Assets and Other Assets” for additional information.
Note P — Commitments and Contingencies
Guarantees and Indemnification
In the ordinary course of our business, we may enter into service agreements with service providers in which we agree to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement. We have reviewed our existing contracts containing indemnification or clauses of guarantees and do not believe that our liability under such agreements is material.
18


Other Matters
From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, and are also subject to additional payments under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on our consolidated financial position, liquidity or results of operations.
We operate in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities. No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on our consolidated financial statements.
Note Q — Segment and Related Information
We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each segment’s income from operations. The operating segments are described further below.
Patient Care - This segment is primarily comprised of Hanger Clinic, which specializes in comprehensive, outcomes-based design, fabrication, and delivery of custom O&P devices. We also provide payor network contracting services to other O&P providers through this segment. The principal reimbursement sources for our services are:
Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators, and similar sources;
Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with disabilities;
Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons requiring financial assistance, regardless of age, which may supplement Medicare benefits for persons aged 65 or older requiring financial assistance; and
the VA.
Products & Services - This segment is comprised of our distribution services and therapeutic solutions businesses. As a leading provider of O&P products in the United States, we engage in the distribution of a broad catalog of branded and private label O&P devices, products, and components to independent O&P providers nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients.
Corporate & Other - This consists of corporate overhead and includes unallocated expense such as personnel costs, professional fees, and corporate offices expenses.
The accounting policies of the segments are the same as those described in Note A - “Organization and Summary of Significant Accounting Policies” in our 2021 Form 10-K.
Intersegment revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care segment. The sales are priced at the cost of the related materials plus overhead.
19


Summarized financial information concerning our reportable segments is shown in the following tables. Total assets for each of the segments has not materially changed from December 31, 2021.
Patient CareProducts & Services
For the Three Months Ended
June 30,
For the Three Months Ended
June 30,
(in thousands)2022202120222021
Net revenues
Third party$265,670 $236,787 $46,363 $44,032 
Intersegments— — 63,433 54,900 
Total net revenues265,670 236,787 109,796 98,932 
Material costs
Third party suppliers71,623 62,631 26,810 26,640 
Intersegments10,462 9,086 52,971 45,814 
Total material costs82,085 71,717 79,781 72,454 
Personnel expenses93,838 83,198 16,437 14,351 
Other expenses44,426 37,445 6,871 6,763 
Depreciation & amortization4,783 4,787 2,179 1,963 
Segment income from operations$40,538 $39,640 $4,528 $3,401 
Patient CareProducts & Services
For the Six Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands)2022202120222021
Net revenues
Third party$485,488 $432,469 $87,832 $85,820 
Intersegments— — 118,108 101,905 
Total net revenues485,488 432,469 205,940 187,725 
Material costs
Third party suppliers131,541 114,290 52,484 50,151 
Intersegments21,520 17,349 96,588 84,556 
Total material costs153,061 131,639 149,072 134,707 
Personnel expenses180,247 158,952 31,703 28,477 
Other expenses85,122 73,586 13,928 12,566 
Depreciation & amortization9,527 9,602 4,202 3,898 
Segment income from operations$57,531 $58,690 $7,035 $8,077 
20


A reconciliation of the total of the reportable segments’ income from operations to consolidated net income is as follows:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands)2022202120222021
Income from operations
Patient Care$40,538 $39,640 $57,531 $58,690 
Products & Services4,528 3,401 7,035 8,077 
Corporate & other(24,279)(22,947)(46,324)(44,652)
Income from operations20,787 20,094 18,242 22,115 
Interest expense, net7,524 7,152 14,909 14,492 
Non-service defined benefit plan expense160 167 320 334 
Income before income taxes13,103 12,775 3,013 7,289 
Provision for income taxes2,986 2,616 873 460 
Net income$10,117 $10,159 $2,140 $6,829 
A reconciliation of the reportable segments’ net revenues to consolidated net revenues is as follows:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands)2022202120222021
Net revenues
Patient Care$265,670 $236,787 $485,488 $432,469 
Products & Services109,796 98,932 205,940 187,725 
Corporate & other— — — — 
Consolidating adjustments(63,433)(54,900)(118,108)(101,905)
Consolidated net revenues$312,033 $280,819 $573,320 $518,289 
A reconciliation of the reportable segments’ material costs to consolidated material costs is as follows:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(in thousands)2022202120222021
Material costs
Patient Care$82,085 $71,717 $153,061 $131,639 
Products & Services79,781 72,454 149,072 134,707 
Corporate & other— — — — 
Consolidating adjustments(63,433)(54,900)(118,108)(101,905)
Consolidated material costs$98,433 $89,271 $184,025 $164,441 

21


Note R — Subsequent Events

On July 21, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hero Parent, Inc., a Delaware corporation (“Parent”), and Hero Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are indirect subsidiaries of funds managed and advised by Patient Square Capital, a dedicated health care investment firm. The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). At the Effective Time (as defined in the Merger Agreement), by virtue of the Merger, each share of common stock of the Company issued and outstanding immediately prior to the Effective will be converted automatically into the right to receive $18.75 per share in cash. After the Merger, Hanger’s common stock will no longer be traded on the New York Stock Exchange.
22


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of Transaction with Patient Square Capital

On July 21, 2022, Hanger, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hero Parent, Inc., a Delaware corporation (“Parent”), and Hero Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are indirect subsidiaries of funds managed and advised by Patient Square Capital, a dedicated health care investment firm. The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). At the Effective Time (as defined in the Merger Agreement), by virtue of the Merger, each share of common stock of the Company issued and outstanding immediately prior to the Effective Time will be converted automatically into the right to receive $18.75 per share in cash. After the Merger, Hanger’s common stock will no longer be traded on the New York Stock Exchange and will be deregistered under the Securities Exchange Act of 1934, as amended.
The descriptions of the Merger Agreement and the transactions contemplated thereby contained in this Quarterly Report on Form 10-Q are summaries only and are qualified in their entirety by reference to the full text of the Merger Agreement, which was included as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2022.
The closing of the Merger is subject to various closing conditions, including (i) adoption and approval of the Merger Agreement, including the Merger, by holders of a majority of the Company’s shares of common stock then outstanding, (ii) the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any other similar approvals, (iii) the consummation of the Merger shall not be restrained, enjoined or prohibited by any law or order that is continuing and remains in effect, and (iv) subject to Company Material Adverse Effect (as defined in the Merger Agreement) and other customary materiality qualifications, the accuracy of the representations and warranties contained in the Merger Agreement and compliance with the covenants and agreements contained in the Merger Agreement. The closing of the Merger is not subject to a financing condition.
Forward-Looking Statements
This report contains statements that are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as “believe,” “expect,” “project,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” or similar words. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in these circumstances. We believe these assumptions are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports.

23


These statements involve risks, estimates, assumptions, and uncertainties that could cause actual results to differ materially from those expressed in these statements and elsewhere in this report. These uncertainties include, but are not limited to, the inability to consummate the Merger within the anticipated time period, or at all, due to any reason, including the failure to obtain required regulatory approvals, satisfy the other conditions to the consummation of the Merger or complete necessary financing arrangements; the risk that the Merger disrupts our current plans and operations or diverts management’s attention from its ongoing business; the effects of the Merger on our business, operating results, and ability to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom we do business; the risk that our stock price may decline significantly if the Merger is not consummated; the nature, cost, and outcome of any legal proceedings related to the Merger, contractual, inflationary, and other general cost increases, including with regard to costs of labor, raw materials, and freight; labor shortages and increased turnover in our employee base; the financial and business impacts of the COVID-19 pandemic on our operations and the operations of our customers, suppliers, governmental and private payors, and others in the healthcare industry and beyond; federal laws governing the health care industry; governmental policies affecting O&P operations, including with respect to reimbursement; failure to successfully implement a new enterprise resource planning system or other disruptions to information technology systems; the inability to successfully execute our acquisition strategy, including integration of recently acquired O&P clinics into our existing business; changes in the demand for our O&P products and services, including additional competition in the O&P services market; disruptions to our supply chain; our ability to enter into and derive benefits from managed-care contracts; our ability to successfully attract and retain qualified O&P clinicians; and other risks and uncertainties generally affecting the health care industry.

Readers are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. “Risk Factors”, contained in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), as well as those described in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained therein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition, and results of operations may be affected by the risks set forth in Item 1A. “Risk Factors”, contained in our 2021 Form 10-K, in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, or by other unknown risks and uncertainties.
Non-GAAP Measures
We refer to certain financial measures and statistics that are not in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We utilize these non-GAAP measures in order to evaluate the underlying factors that affect our business performance and trends. These non-GAAP measures should not be considered in isolation and should not be considered superior to, or as a substitute for, financial measures calculated in accordance with GAAP. We have defined and provided a reconciliation of these non-GAAP measures to their most comparable GAAP measures. The non-GAAP measure used in this Management’s Discussion and Analysis is as follows:
Same Clinic Revenues Per Day - measures the year-over-year change in revenue from clinics that have been open a full calendar year or more. Examples of clinics not included in the same center population are closures and acquisitions. Day-adjusted growth normalizes sales for the number of days a clinic was open in each comparable period.
Business Overview
General
We are a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries, and we and our predecessor companies have provided O&P services for nearly 160 years. We provide O&P services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments - Patient Care and Products & Services.
24


Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in comprehensive, outcomes-based design, fabrication, and delivery of custom O&P devices through 761 patient care clinics and 117 satellite locations in 48 states, the District of Columbia, and the U.S. Virgin Islands as of June 30, 2022. We also provide payor network contracting services to other O&P providers through this segment.
Our Products & Services segment is comprised of our distribution services and therapeutic solutions businesses. As a leading provider of O&P products in the United States, we engage in the distribution of a broad catalog of branded and private label O&P devices, products, and components to independent O&P providers nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately 3,800 skilled nursing and post-acute providers nationwide.
For the three and six months ended June 30, 2022, our net revenues were $312.0 million and $573.3 million, respectively, and we recorded net income of $10.1 million and $2.1 million, respectively. For the three and six months ended June 30, 2021, our net revenues were $280.8 million and $518.3 million, respectively, and we recorded net income of $10.2 million and $6.8 million, respectively.
Industry Overview
We estimate that approximately $4.3 billion is spent in the United States each year for prescription-based O&P products and services through O&P clinics. We believe our Patient Care segment currently accounts for approximately 24% of the market, providing a comprehensive portfolio of orthotic, prosthetic, and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.
The O&P patient care services market in the United States is highly fragmented and is characterized by regional and local independent O&P businesses operated predominantly by independent operators, but also including two O&P product manufacturers with substantial international patient care services operations. We do not believe that any single competitor accounts for 2.5% or more of the nation’s total estimated O&P clinic revenues.
The industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of O&P devices. We anticipate that the demand for O&P services will continue to grow as the nation’s population increases, and as a result of several trends, including the aging of the U.S. population, there will be an increase in the prevalence of disease-related disability and the demand for new and advanced devices. We believe the typical replacement time for prosthetic devices is three to five years, while the typical replacement time for orthotic devices varies, depending on the device.
We estimate that approximately $1.8 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components, devices, and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P services. We estimate that our distribution sales account for approximately 7% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).
We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be approximately $150 million annually. We currently provide these products and services to approximately 24% of the estimated 15,000 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs, and training within the broader post-acute rehabilitation markets to be approximately $400 million annually. We do not currently provide a meaningful amount of products and services to this broader market.
Business Description
Patient Care
Our Patient Care segment employs approximately 1,660 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which are certified by either the American Board for Certification (“ABC”) or the Board of Certification of Orthotists and Prosthetists, which are the two boards that certify O&P clinicians. To facilitate timely service to our patients, we also employ technicians, fitters, and other ancillary providers to assist our clinicians in the performance of their duties. Through this segment, we additionally provide network contracting services to independent providers of O&P.
25


Patients are typically referred to Hanger Clinic by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the selection of an orthotic or prosthetic device to meet the patient’s needs. O&P devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process, and lower the cost of rehabilitation.
Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs. When fabricating a device, our clinicians ascertain the specific requirements, componentry, and measurements necessary for the construction of the device. Custom devices are constructed using componentry provided by a variety of third party manufacturers that specialize in O&P, coupled with sockets and other elements that are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs. Our clinicians and technicians typically utilize castings, electronic scans, and other techniques to fabricate items that are specialized for the patient. After fabricating the device, a fitting process is undertaken and adjustments are made to ensure the achievement of proper alignment, fit, and patient comfort. The fitting process often involves several stages to successfully achieve desired functional and cosmetic results.
Given the differing physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic, and other needs of each individual patient, each fabricated prosthesis and orthosis is customized for each particular patient. These custom devices are commonly fabricated at one of our regional or national fabrication facilities.
We have earned a reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability and can significantly enhance the rehabilitation process. We utilize multiple scanning and imaging technologies in the fabrication process, depending on the patient’s individual needs, including our proprietary Insignia scanning system. The Insignia system scans the patient and produces an accurate computer-generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.
In recent years, we have established a centralized revenue cycle management organization that assists our clinics in pre-authorization, patient eligibility, denial management, collections, payor audit coordination, and other accounts receivable processes.
The principal reimbursement sources for our services are:
Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators, and similar sources;
Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with disabilities;
Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons requiring financial assistance, regardless of age, which may supplement Medicare benefits for persons aged 65 or older requiring financial assistance; and
the U.S. Department of Veterans Affairs (the “VA”).

We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be reimbursed for our services. These contracts usually have a stated term of one to three years and generally may be terminated without cause by either party on 60 to 90 days’ notice, or on 30 days’ notice if we have not complied with certain licensing, certification, program standards, Medicare or Medicaid requirements, or other regulatory requirements. Reimbursement for services is typically based on a fee schedule negotiated with the third party payor that reflects various factors, including market conditions, geographic area, and number of persons covered. Many of our commercial contracts are indexed to the commensurate Medicare fee schedule that relates to the products or services being provided.
26


Government reimbursement is comprised of Medicare, Medicaid, and the VA. These payors set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each year based on the Consumer Price Index for All Urban Consumers (“CPI-U”) unless Congress acts to change or eliminate the adjustment. The CPI-U is adjusted further by an efficiency factor known as the “Productivity Adjustment” or the “Multi-Factor Productivity Adjustment” in order to determine the final rate adjustment each year. There can be no assurance that future adjustments will not reduce reimbursements for O&P services and products from these sources.
We, and the O&P industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits, Supplemental Medical Review Contractor (“SMRC”) audits, and Unified Program Integrity Contractor (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, and SMRC audits are generally post-payment audits. UPIC audits can be both pre- or post-payment audits, with a majority currently pre-payment. TPE audits replaced the previous Medicare Administrative Contractor audits. Adverse post-payment audit determinations generally require Hanger to reimburse Medicare for payments previously made, while adverse pre-payment audit determinations generally result in the denial of payment. In either case, we can request a redetermination or appeal, if we believe the adverse determination is unwarranted, which can take an extensive period of time to resolve, currently up to six years or more.
Products & Services
Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we distribute branded and private label devices, products, and components to independent O&P clinics and other customers. Through our wholly-owned subsidiary, Accelerated Care Plus Corp. (“ACP”), our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute rehabilitation providers. Our value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence-based clinical programs, and ongoing consultative education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We currently serve approximately 3,800 skilled nursing and post-acute providers nationwide. Through our SureFit subsidiary, we also manufacture and sell therapeutic footwear for diabetic patients in the podiatric market. We also operate the Hanger Fabrication Network, which fabricates custom O&P devices for our patient care clinics, as well as for independent O&P clinics.
Through our internal “supply chain” organization, we purchase, warehouse, and distribute over 350,000 active SKUs from approximately 750 different suppliers through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and distribution facilities provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days. In Q2 2022, we closed the warehouse and distribution facilities in Illinois and Texas, consolidating their operations into our Georgia and Nevada facilities.
Our supply chain organization enables us to:
centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;
better manage our patient care clinic inventory levels and improve inventory turns;
improve inventory quality control;
encourage our patient care clinics to use the most clinically appropriate products; and
coordinate new product development efforts with key vendors.
27


Effects of the COVID-19 Pandemic
We began to see a reduction in business volumes as a result of the COVID-19 pandemic starting in the last weeks of March 2020. As federal, state, and local authorities implemented social distancing and suppression measures to respond to an increasing number of nationwide COVID-19 infections, we experienced a decrease in our patient appointments and general business volumes. In response, during the last week of March 2020, we made certain changes to our operations, implemented a broad number of cost reduction measures, and delayed certain capital investment projects. Although our business volumes have shown gradual improvement from their initial significant decline in mid-2020, our results of operations were adversely affected by COVID throughout 2020, 2021 and into the early months of 2022. The volume effects and our operating responses are discussed further in this section, and the effects of COVID-19 on our financial condition are discussed in the “Financial Condition, Liquidity and Capital Resources” section below. Our results of operations for any quarter during the COVID-19 pandemic may not be indicative of results of operations that may be achieved for a subsequent quarter or the full year, and may not be similar to results of operations experienced in prior years. Additionally, current period comparisons should be viewed in the context of the adverse effects which the COVID-19 pandemic had on comparative prior period results.
Effect on Business Volumes
In the early months of 2021, vaccines for combating COVID-19 were approved by the US Food and Drug Administration, and the US government began a phased roll out. However, the initial quantities of the vaccines were limited, and the US government prioritized distribution to front-line health care workers and other essential workers, followed by individual populations that were most susceptible to the severe effects of COVID-19. The lack of achievement of broad immunity coupled with an increase in infections caused by variants contributed to an increase in the duration and effect of COVID-19 on our business volumes and staffing shortages. Specifically, we experienced increased employee absences, particularly due to the Delta variant in the third quarter of 2021 and the Omicron variant in December of 2021 and January of 2022. We believe our business volumes during those periods were inhibited primarily by reduced medical procedures due to surgical constraints, reduced referral volumes from in-patient and out-patient providers due to decreases in their volumes and the effect of COVID related protocols on their businesses, patient hesitancy to seek care during the pandemic, and increased patient mortality. Additionally, we believe that our patient volumes have been affected by our own labor constraints in technical and administrative positions, employee absences related to COVID-19, as well as decreases in our sales of off-the-shelf orthotic devices. While the emerging variants of the COVID-19 virus continue to contribute to employee absences and our use of temporary labor, we believe the overall adverse impact of the COVID-19 pandemic on our business volumes has diminished and stabilized over time.
Patient appointments in our clinics during the second quarter of 2022 increased by approximately 2% as compared to the corresponding period in 2021. During the quarter, our prosthetics and orthotics day-adjusted sales, excluding acquisitions, increased by 6.2% on a per day basis, when compared to the same period in the prior year.
Operating, Cost Reduction, and Other Responses
Throughout the periods affected by the COVID-19 pandemic, given that our services are considered essential, we have continued to operate our businesses. However, due to the risks posed to our clinicians, other employees, and patients, we made certain changes to our operating practices in order to promote safety and to minimize the risk of virus transmission. These included the implementation of certain patient screening protocols and the relocation of certain administrative and support personnel to a “work at home” environment.
We recommenced our implementation of supply chain and financial systems, further discussed in the “New Systems Implementations” section, in the second quarter of 2021, after we elected to temporarily delay these activities in 2020 as part of our efforts to preserve liquidity. We also recommenced activities related to the reconfiguration of our distribution facilities in the second quarter of 2021, after they were suspended in 2020, which are still currently ongoing.
Despite the effects of the COVID-19 pandemic on our business volumes, for the foreseeable future, we currently believe that our cash flows from operations and retained cash and cash equivalent balances are sufficient to enable us to fund our operations, capital expenditures and other financial obligations as they become due. Please refer to the “Financial Condition, Liquidity and Capital Resources” section below for a discussion of our liquidity position.
28


CARES Act
The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $203.5 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid-enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the COVID-19 pandemic, such as lost revenues attributable to canceled procedures, as well as to provide support for health-care related expenses. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.
During the full year of 2021, we recognized a total benefit of $1.1 million in our consolidated statement of operations within Other operating costs for the Grants we received from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment.
The CARES Act also provided for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allowed us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We paid the first half in September 2021, and deferred the remaining $5.9 million of payroll taxes within Accrued compensation related costs in the condensed consolidated balance sheet as of June 30, 2022.
Other Products & Services Performance Considerations
As discussed in our 2021 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we generally believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care segment and, depending on their ability to adapt to the increased claims documentation standards that have emerged in our industry, this may either limit the rate of growth of some of our customers, or otherwise affect the rate of growth we experience in our distribution of O&P componentry to independent providers. In certain circumstances, we may pursue acquisition of inventory in advance to preserve pricing to offset inflation and potential supply chain constraints. During future periods, in addition to the adverse effects of the COVID-19 pandemic discussed above, we currently believe our rate of revenue growth in this segment may decrease as we choose to limit the extent to which we distribute certain low margin orthotic products. Additionally, to the extent that we acquire independent O&P providers who are pre-existing customers of our distribution services, our revenue growth in this segment would be adversely affected as we would no longer recognize external revenue from the components we provide them.
Within our Products & Services segment, in addition to our distribution of products, we provide therapeutic equipment and services to patients at SNFs and other healthcare provider locations. Since 2016, a number of our clients, including several of our larger SNF clients, have been discontinuing their use of our therapeutic services. We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities. As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations. Within this portion of our business, we have and continue to respond to these historical trends through the expansion of our products and services offerings.
29


Reimbursement Trends
In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid, and the VA. The following is a summary of our payor mix, expressed as an approximate percentage of net revenues for the periods indicated:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2022202120222021
Medicare31.2 %31.4 %30.7 %30.4 %
Medicaid18.6 %18.5 %18.3 %18.0 %
Commercial insurance / managed care (excluding Medicare and Medicaid managed care)33.4 %33.7 %34.2 %34.6 %
VA9.6 %9.1 %9.6 %9.6 %
Private Pay7.2 %7.3 %7.2 %7.4 %
Patient Care100.0 %100.0 %100.0 %100.0 %
Patient Care constituted 85.1% and 84.7% of our net revenues for the three and six months ended June 30, 2022 and 84.3% and 83.4% for the three and six months ended June 30, 2021. Our remaining net revenues were provided by our Products & Services segment which derives its net revenues from commercial transactions with independent O&P providers, healthcare facilities, and other customers. In contrast to net revenues from our Patient Care segment, payment for these products and services are not directly subject to third party reimbursement from health care payors.
The amount of our reimbursement varies based on the nature of the O&P device we fabricate for our patients. Given the particular physical weight and size characteristics, location of injury or amputation, capability for physical activity, and mobility, cosmetic, and other needs of each individual patient, each fabricated prostheses and orthoses is customized for each particular patient. The nature of this customization and the manner by which our claims submissions are reviewed by payors makes our reimbursement process administratively difficult.
To receive reimbursement for our work, we must ensure that our clinical, administrative, and billing personnel receive and verify certain medical and health plan information, record detailed documentation regarding the services we provide, and accurately and timely perform a number of claims submission and related administrative tasks. It is our belief the increased nationwide efforts to reduce health care costs has driven changes in industry trends with increases in payor pre-authorization processes, documentation requirements, pre-payment reviews, and pre- and post-payment audits, and our ability to successfully undertake these tasks using our traditional approach has become increasingly challenging. For example, the Medicare contractor for Pricing, Data Analysis and Coding (referred to as “PDAC”) has announced verification requirements and code changes that has reduced the reimbursement level for certain prosthetic feet, and the VA is in the process of reassessing the method it uses to determine reimbursement levels for O&P services and products provided under certain miscellaneous codes.
A measure of our effectiveness in securing reimbursement for our services can be found in the degree to which payors ultimately disallow payment of our claims. Payors can deny claims due to their determination that a physician who referred a patient to us did not sufficiently document that a device was medically necessary or clearly establish the ambulatory (or “activity”) level of a patient. Claims can also be denied based on our failure to ensure that a patient was currently eligible under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, or that we filed or appealed the payor’s determination timely, as well as on the basis of our coding, failure by certain classes of patients to pay their portion of a claim, or for various other reasons. If any portion of, or administrative factor within, our claim is found by the payor to be lacking, then the entirety of the claim amount may be denied reimbursement.
In recent years, we have taken a number of actions to manage payor disallowance trends. These initiatives included: (i) the creation of a centralized revenue cycle management function; (ii) the implementation of a patient management and electronic health record system; and (iii) the establishment of new clinic-level procedures and training regarding the collection of supporting documentation and the importance of diligence in our claims submission processes.
30


Payor disallowances is considered an adjustment to the transaction price. Estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are presented as a reduction of net revenues. These amounts recorded in net revenues within the Patient Care segment for the three and six months ended June 30, 2022 and 2021 are as follows:
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Gross charges$277,870 $245,196 $507,792 $446,648 
Less estimated implicit price concessions arising from:
Payor disallowances10,385 6,802 18,770 11,316 
Patient non-payments1,815 1,607 3,534 2,863 
Payor disallowances and patient non-payments12,200 8,409 22,304 14,179 
Net revenues$265,670 $236,787 $485,488 $432,469 
Payor disallowances$10,385 $6,802 $18,770 $11,316 
Patient non-payments1,815 1,607 3,534 2,863 
Payor disallowances and patient non-payments$12,200 $8,409 $22,304 $14,179 
Payor disallowances %3.7 %2.8 %3.7 %2.5 %
Patient non-payments %0.7 %0.6 %0.7 %0.7 %
Percent of gross charges4.4 %3.4 %4.4 %3.2 %
Included in the results above, are clinics that have been recently acquired. Acquired clinics typically continue to operate on their legacy systems for the first 90 to 180 day before they are fully integrated over to Hanger’s systems and related processes. While operating on their legacy systems, the rate of payor disallowances and patient non-payments run higher than the rates experienced on Hanger’s systems. Excluding acquisitions since 2020, the percent of payor disallowances and patient non-payments would have been 4.0% and 3.8% for the three and six months ended June 30, 2022, respectively, and 3.2% and 2.8% for the three and six months ended June 30, 2021, respectively.
During 2021, we benefited from reductions in claims denials and increases in our rates of collection compared to prior periods. This has been due to a variety of factors, including increases in our revenue cycle management staffing and an increased focus on collections and liquidity during a period of reduced business volumes, a possible temporary relaxing of payor review procedures during the COVID-19 pandemic, the benefit of CARES Act funds on the ability of patients to pay their portion of claims and other factors relating to our pre-authorization and documentation procedures for devices.
Acquisitions
During 2022, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through the acquisitions of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash flows.
In the first quarter of 2022, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $5.0 million, of which $4.0 million was cash consideration, net of cash acquired, and $1.0 million was issued in the form of notes to shareholders at fair value.
In the second quarter of 2022, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $11.7 million, of which $8.5 million was cash consideration, net of cash acquired, and $3.2 million was issued in the form of notes to shareholders at fair value.

During the third quarter of 2022 to date, we completed the acquisitions of two O&P businesses for a total purchase price of $8.1 million. Total consideration transferred for these acquisitions is comprised of $6.3 million in cash consideration and
31


$1.8 million in the form of notes to shareholders at fair value. Due to the proximity in time of these transactions to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the acquisitions. Acquisition-related expenses related to these transactions were not material.
During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash flows.
In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form of notes to shareholders at fair value, and $1.0 million in additional consideration.
In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of two O&P businesses for total consideration of $21.0 million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value, and $0.1 million in additional consideration.
In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of notes to shareholders at fair value, and $0.8 million in additional consideration.
In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1 million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair value.
Acquisition-related costs associated with Hanger’s acquisition of O&P businesses are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the three and six months ended June 30, 2022 were $0.3 million and $0.6 million, respectively, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the three and six months ended June 30, 2022 were $0.2 million and $0.3 million, respectively. Total acquisition-related costs incurred during the year ended December 31, 2021 were $2.1 million, which includes those costs for transactions that were in progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the year ended December 31, 2021 were $1.6 million.
New Systems Implementations
During 2019, we commenced the design, planning, and initial implementation of new financial and supply chain systems (“New Systems Implementations”), and planned to invest in new servers and software that operate as a part of our technology infrastructure. We recommenced our New Systems Implementations activities in the second quarter of 2021, and transitioned our corporate financial systems to the Oracle Cloud Financials platform in the third quarter of 2021, after we elected in 2020 to temporarily delay our New Systems Implementations as part of our efforts to preserve liquidity.
In connection with our New Systems Implementations, for the three and six months ended June 30, 2022, we expensed $0.4 million and $0.8 million, respectively, and for the three and six months ended June 30, 2021, we expensed $1.7 million and $2.3 million, respectively. For the year ended December 31, 2021, we expensed $5.2 million. We currently anticipate that we will spend approximately $3 million to $5 million for the full year 2022 on these systems.
As of June 30, 2022, we capitalized $6.8 million of implementation costs for cloud computing arrangements, net of accumulated amortization, and recorded in Other current assets and Other assets in the condensed consolidated balance sheet.
32


Personnel

While we have traditionally been able to recruit and retain adequate staffing to operate and support our business, our ability to support growth is dependent on our ability to add new personnel. Nevertheless, as are other employers, we are currently finding it difficult to recruit and retain personnel in certain positions, including clinic front office administrative, distribution center, and fabrication center technician positions. In certain cases, we have also found it necessary to make individual market adjustments for clinical and professional staff to attract or retain them. Our inability to successfully recruit and maintain staffing levels for these positions has and could continue to introduce some constraints on our ability to achieve our revenue growth objectives. In cases where we have open clinic administrative or technician positions, or these positions are filled with inexperienced or new personnel, our clinicians find it necessary to augment the activities performed by these roles, which can slow the speed of our patient service.
In order to attract and retain personnel, we may find it necessary to further increase wages in these areas. Additionally, when coupled with the generally fixed nature of our reimbursement arrangements, increases in our personnel costs caused by current inflation conditions may put increasing pressure on our ability to maintain or increase our margins. Please refer to Part II, Item 1A. “Risk Factors” contained in our 2021 Form 10-K.
Seasonality
We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year. The first quarter is normally our lowest relative net revenue quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another. Due to the general fulfillment by patients of their health plan co-payments and deductible requirements towards the year’s end, our fourth quarter is normally our highest revenue producing quarter. However, historical seasonality patterns have been impacted by the COVID-19 pandemic and may not be reflective of our prospective financial results of operations. Please refer to the “Effects of the COVID-19 Pandemic” section for further discussion.
Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This event is conducted to assist our clinicians in maintaining their training and certification requirements and to facilitate a national meeting with our clinical leaders. We also invite manufacturers of the componentry for the devices we fabricate to these annual events so they can demonstrate their products and otherwise assist in our training process. Due to the COVID-19 pandemic, the in-person event was cancelled in the first quarter of 2022, and the event was held virtually in 2021. We anticipate resuming an in-person event in 2023. During the three months ended March 31, 2021, we spent $0.3 million on travel and other costs associated with this event. In addition to the costs we incur associated with this annual event, we also lose the productivity of a significant portion of our clinicians during the period in which this event occurs, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.
33


Critical Accounting Policies and Estimates
Our analysis and discussion of our financial condition and results of operations is based upon the condensed consolidated financial statements that have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions, and disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to fairly present, in all material respects, our operating results, and financial position. We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
Revenue recognition
Accounts receivable, net
Inventories
Business combinations
Goodwill and other intangible assets, net
Income taxes
The use of different estimates, assumptions, or judgments could have a material effect on reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period. Critical accounting policies and estimates are described in our 2021 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note A - “Organization and Summary of Significant Accounting Policies” contained within these condensed consolidated financial statements. There have been no material updates to those critical accounting policies and estimates as contained in the 2021 Form 10-K.
Reclassifications
We have reclassified certain amounts in the prior year condensed consolidated financial statements to be consistent with the current year presentation. These relate to immaterial classifications within expense line items in the condensed consolidated statements of operations.
34


Results of Operations
Our results of operations for the three months ended June 30, 2022 and 2021 were as follows (unaudited):
For the Three Months Ended
June 30,
Percent
Change
(dollars in thousands)202220212022 vs 2021
Net revenues$312,033 $280,819 11.1 %
Material costs98,433 89,271 10.3 %
Personnel costs110,275 97,549 13.0 %
Other operating costs38,970 32,788 18.9 %
General and administrative expenses35,444 33,110 7.0 %
Depreciation and amortization8,124 8,007 1.5 %
Operating expenses291,246 260,725 11.7 %
Income from operations20,787 20,094 3.4 %
Interest expense, net7,524 7,152 5.2 %
Non-service defined benefit plan expense160 167 (4.2)%
Income before income taxes13,103 12,775 2.6 %
Provision for income taxes2,986 2,616 14.1 %
Net income$10,117 $10,159 (0.4)%
During these periods, our operating expenses as a percentage of net revenues were as follows:
For the Three Months Ended
June 30,
20222021
Material costs31.5 %31.8 %
Personnel costs35.3 %34.7 %
Other operating costs12.5 %11.6 %
General and administrative expenses11.4 %11.8 %
Depreciation and amortization2.6 %2.9 %
Operating expenses93.3 %92.8 %
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Relevance of Second Quarter Results to Comparative and Future Periods. As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter of 2020, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend that continued into 2022. The effects of this public health emergency on our revenues and earnings impacted the comparison to our historical financial results. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic may not be indicative of future financial and operational performance. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.
35


Net revenues. Net revenues for the three months ended June 30, 2022 were $312.0 million, an increase of $31.2 million, or 11.1%, from $280.8 million for the three months ended June 30, 2021. Net revenues by operating segment, after elimination of intersegment activity, were as follows:
For the Three Months Ended
June 30,
ChangePercent
Change
(dollars in thousands)20222021
Patient Care$265,670 $236,787 $28,883 12.2 %
Products & Services46,363 44,032 2,331 5.3 %
Net revenues$312,033 $280,819 $31,214 11.1 %
Patient Care net revenues for the three months ended June 30, 2022 were $265.7 million, an increase of $28.9 million, or 12.2%, from $236.8 million for the same period in the prior year. Same clinic revenues increased $14.2 million for the three months ended June 30, 2022 compared to the same period in the prior year, reflecting an increase of 6.2% on a per-day basis. This increase is driven primarily by a 3.6% increase in rate with a smaller increase of 3.3% in volume and mix. The increase is partially offset by a 0.7% increase in disallowed revenue. Net revenues from acquired clinics increased $13.7 million, and revenues from consolidations and other services increased $0.9 million.
Net revenue growth was adversely affected during the period by an increase in the relative rate of disallowed and patient non-payment revenue. As discussed in “Reimbursement Trends” above, these items constituted 4.4% of gross charges in the three month period ended June 30, 2022 compared to 3.4% for the three month period ended June 30, 2021. During the past twelve month period, disallowed and patient non-payment amounts have been 4.2% of gross charges, and as such, we believe the level reported in the second quarter to be more indicative of current trends.
Prosthetics constituted approximately 55.1% of our total Patient Care revenues for the three months ended June 30, 2022 and 53.7% for the same period in 2021, excluding the impact of acquisitions. Prosthetic revenues for the three months ended June 30, 2022 were 8.9% higher, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions. Orthotics, shoes, inserts, and other products increased by 3.0% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions.
Products & Services net revenues for the three months ended June 30, 2022 were $46.4 million, an increase of $2.3 million, or 5.3% from the same period in the prior year. This was primarily attributable to an increase of $2.7 million, or 8.1%, in the distribution of O&P componentry to independent providers in the period stemming primarily from lower volumes in the same period of 2021 due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19 Pandemic” section above. The increase is partially offset by a decrease in net revenues from therapeutic solutions of $0.4 million, or 3.5% primarily as a result of historical customer lease cancellations and discounts, partially offset by lease installations.
Material costs. Material costs for the three months ended June 30, 2022 were $98.4 million, an increase of $9.2 million or 10.3%, from the same period in the prior year. Total material costs as a percentage of net revenues for the three months ended June 30, 2022 was 31.5% compared to 31.8% for the three months ended June 30, 2021. While we have not experienced significant inflation in our material costs during the current quarter, we believe the effect of inflation may increase during the remainder of 2022. Material costs by operating segment, after elimination of intersegment activity, were as follows:
For the Three Months Ended
June 30,
ChangePercent
Change
(dollars in thousands)20222021
Patient Care$82,085 $71,717 $10,368 14.5 %
Products & Services16,348 17,554 (1,206)(6.9)%
Material costs$98,433 $89,271 $9,162 10.3 %
36


Patient Care material costs increased $10.4 million, or 14.5%, for the three months ended June 30, 2022 compared to the same period in the prior year as a result of the increase in segment net sales, additional costs as a result of our acquisitions, and freight. Freight cost increases have primarily related to increased fuel surcharges and higher container costs. We currently anticipate that higher freight costs will continue to affect our material costs in future periods. Patient Care material costs as a percent of segment net revenues increased to 30.9% for the three months ended June 30, 2022 from 30.3% for the three months ended June 30, 2021.
Products & Services material costs decreased $1.2 million, or 6.9%, for the three months ended June 30, 2022 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were 35.3% for the three months ended June 30, 2022 as compared to 39.9% in the same period of 2021. The decrease in cost of materials as a percent of segment net revenues was primarily due to product mix within the segment. However, in a similar fashion to our Patient Care segment, increases in freight costs have also affected our material costs and margin in this segment, as we rebill only a portion of our freight costs to our third party customers.
Personnel costs. Personnel costs for the three months ended June 30, 2022 were $110.3 million, an increase of $12.7 million, or 13.0%, from $97.5 million for the same period in the prior year. Personnel costs by operating segment were as follows:
For the Three Months Ended
June 30,
ChangePercent
Change
(dollars in thousands)20222021
Patient Care$93,838 $83,198 $10,640 12.8 %
Products & Services16,437 14,351 2,086 14.5 %
Personnel costs$110,275 $97,549 $12,726 13.0 %
Personnel costs for the Patient Care segment were $93.8 million for the three months ended June 30, 2022, an increase of $10.6 million, or 12.8%, from $83.2 million in the same period of the prior year. The increase in Patient Care personnel costs during the three months ended June 30, 2022 was primarily related to an increase in salary expense of $7.8 million from the three months ended June 30, 2021. Additionally, incentive compensation, benefits, and other personnel expenses increased $1.4 million, commissions increased $0.8 million, and payroll taxes increased $0.6 million compared to the three months ended June 30, 2021.
Personnel costs in the Products & Services segment were $16.4 million for the three months ended June 30, 2022, an increase of $2.1 million compared to the same period in the prior year. The increase is primarily related to an increase in salary expense of $1.6 million from the three months ended June 30, 2021. Additionally, bonus, commissions, benefits, and other personnel cost increased $0.5 million for the three months ended June 30, 2022 compared to the same period in the prior year.
Other operating costs. Other operating costs for the three months ended June 30, 2022 were $39.0 million, an increase of $6.2 million, or 18.9%, from $32.8 million for the same period in the prior year. The increase is primarily related to an increase in rent, utilities, occupancy, and office expenses of $2.1 million from the three months ended June 30, 2021. Additionally, expenses related to a California wage and hour litigation settlement increased $1.3 million, travel increased $0.8 million, professional fees increased $0.3 million, bad debt expense increased $0.2 million, and other expenses increased $1.5 million as compared to the same period in the prior year.
General and administrative expenses. General and administrative expenses for the three months ended June 30, 2022 were $35.4 million, an increase of $2.3 million, or 7.0%, from the same period in the prior year. The increase is the result of a $1.3 million increase in severance expense, a $0.8 million increase in salary expense, and a $0.5 million increase in other expenses, partially offset by a $0.3 million decrease in incentive compensation and other personnel costs compared to the three months ended June 30, 2021.
Depreciation and amortization. Depreciation and amortization for the three months ended June 30, 2022 were $8.1 million, an increase of $0.1 million, or 1.5% from the same period in the prior year. Amortization expense increased $0.5 million and depreciation expense decreased $0.4 million when compared to the same period in the prior year.
Interest expense, net. Interest expense for the three months ended June 30, 2022 increased 5.2% to $7.5 million from $7.2 million for the same period in the prior year.
37


Provision for income taxes. The provision for income taxes for the three months ended June 30, 2022 was $3.0 million, or 22.8% of income before income taxes, compared to a provision of $2.6 million, or 20.5% of income before income taxes for the three months ended June 30, 2021. The increase in the effective tax rate for the three months ended June 30, 2022 compared with the three months ended June 30, 2021 is primarily attributable to a windfall from share-based compensation for the three months ended June 30, 2021 compared to a shortfall from share-based compensation for the three months ended June 30, 2022. Our effective tax rate for the three months ended June 30, 2022 is similar to the federal statutory tax rate of 21%, but the difference consists primarily of research and development credits offset by non-deductible expenses and shortfall from share-based compensation. Our effective tax rate for the three months ended June 30, 2021 differed from the federal statutory tax rate of 21% primarily due to research and development credits, non-deductible expenses, and windfall from share-based compensation.
We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. As of June 30, 2022, our valuation allowance was approximately $2.1 million.
For the year ending December 31, 2022, we estimate a research and development tax credit of $2.7 million, net of tax reserves. We record the tax benefit, net of tax reserves, as a deferred tax asset. For the year ended December 31, 2021, we recognized research and development tax credits of $4.3 million, net of tax reserves.
Our results of operations for the six months ended June 30, 2022 and 2021 were as follows (unaudited):
For the Six Months Ended
June 30,
Percent
Change
(dollars in thousands)202220212022 vs 2021
Net revenues$573,320 $518,289 10.6 %
Material costs184,025 164,441 11.9 %
Personnel costs211,950 187,429 13.1 %
Other operating costs75,138 64,286 16.9 %
General and administrative expenses67,886 64,013 6.1 %
Depreciation and amortization16,079 16,005 0.5 %
Operating expenses555,078 496,174 11.9 %
Income from operations18,242 22,115 (17.5)%
Interest expense, net14,909 14,492 2.9 %
Non-service defined benefit plan expense320 334 (4.2)%
Income before income taxes3,013 7,289 (58.7)%
Provision for income taxes873 460 89.8 %
Net income$2,140 $6,829 (68.7)%
During these periods, our operating expenses as a percentage of net revenues were as follows:
For the Six Months Ended
June 30,
20222021
Material costs32.1 %31.7 %
Personnel costs37.0 %36.2 %
Other operating costs13.1 %12.3 %
General and administrative expenses11.8 %12.4 %
Depreciation and amortization2.8 %3.1 %
Operating expenses96.8 %95.7 %
38


Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Relevance of Six Months Ended Results to Comparative and Future Periods. As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter of 2020, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend that continued into 2022. The effects of this public health emergency on our revenues and earnings impacted the comparison to our historical financial results. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic may not be indicative of future financial and operational performance. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.
Net revenues. Net revenues for the six months ended June 30, 2022 were $573.3 million, an increase of $55.0 million, or 10.6%, from $518.3 million for the six months ended June 30, 2021. Net revenues by operating segment, after elimination of intersegment activity, were as follows:
For the Six Months Ended
June 30,
ChangePercent
Change
(dollars in thousands)20222021
Patient Care$485,488 $432,469 $53,019 12.3 %
Products & Services87,832 85,820 2,012 2.3 %
Net revenues$573,320 $518,289 $55,031 10.6 %
Patient Care net revenues for the six months ended June 30, 2022 were $485.5 million, an increase of $53.0 million, or 12.3%, from $432.5 million for the same period in the prior year. Same clinic revenues increased $27.4 million for the six months ended June 30, 2022 compared to the same period in the prior year, reflecting an increase of 6.5% on a per-day basis. Net revenues from acquired clinics increased $24.9 million, and revenues from consolidations and other services increased $0.7 million.
Prosthetics constituted approximately 53.7% of our total Patient Care revenues for the six months ended June 30, 2022 and 52.7% for the same period in 2021, excluding the impact of acquisitions. Prosthetic revenues for the six months ended June 30, 2022 were 8.4% higher, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions. Orthotics, shoes, inserts, and other products increased by 4.3% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions.
Products & Services net revenues for the six months ended June 30, 2022 were $87.8 million, an increase of $2.0 million, or 2.3% from the same period in the prior year. This was primarily attributable to an increase of $3.4 million, or 5.4%, in the distribution of O&P componentry in the period to independent providers stemming primarily from lower volumes in the same period of 2021 due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19 Pandemic” section above. The increase is partially offset by a decrease in net revenues from therapeutic solutions of $1.4 million, or 6.5% primarily as a result of historical customer lease cancellations and discounts, partially offset by lease installations.
Material costs. Material costs for the six months ended June 30, 2022 were $184.0 million, an increase of $19.6 million or 11.9%, from the same period in the prior year. Total material costs as a percentage of net revenues increased to 32.1% in the six months ended June 30, 2022 from 31.7% in the six months ended June 30, 2021 due to changes in our Patient Care segment business as discussed further below. While we have not experienced significant inflation in our material costs during the current year, we believe the effect of inflation may increase during the remainder of 2022. Material costs by operating segment, after elimination of intersegment activity, were as follows:
For the Six Months Ended
June 30,
ChangePercent
Change
(dollars in thousands)20222021
Patient Care$153,061 $131,639 $21,422 16.3 %
Products & Services30,964 32,802 (1,838)(5.6)%
Material costs$184,025 $164,441 $19,584 11.9 %
39


Patient Care material costs increased $21.4 million, or 16.3%, for the six months ended June 30, 2022 compared to the same period in the prior year as a result of the increase in segment net sales, additional costs as a result of our acquisitions, freight, and increase in our use of third-party fabricators. Freight cost increases have primarily related to increased fuel surcharges and higher container costs. We currently anticipate that higher freight costs will continue to affect our material costs in future periods. Patient Care material costs as a percent of segment net revenues increased to 31.5% for the six months ended June 30, 2022 from 30.4% for the six months ended June 30, 2021.
Products & Services material costs decreased $1.8 million, or 5.6%, for the six months ended June 30, 2022 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were 35.3% for the six months ended June 30, 2022 as compared to 38.2% in the same period of 2021. The decrease in material costs as a percent of segment net revenues was due to a change in business and product mix within the segment as well as cost savings related to certain supply chain initiatives.
Personnel costs. Personnel costs for the six months ended June 30, 2022 were $212.0 million, an increase of $24.5 million, or 13.1%, from $187.4 million for the same period in the prior year. Personnel costs by operating segment were as follows:
For the Six Months Ended
June 30,
ChangePercent
Change
(dollars in thousands)20222021
Patient Care$180,247 $158,952 $21,295 13.4 %
Products & Services31,703 28,477 3,226 11.3 %
Personnel costs$211,950 $187,429 $24,521 13.1 %
Personnel costs for the Patient Care segment were $180.2 million for the six months ended June 30, 2022, an increase of $21.3 million, or 13.4%, from $159.0 million for the same period in the prior year. The increase in Patient Care personnel costs during the six months ended June 30, 2022 was primarily related to an increase in salary expense of $15.4 million from the six months ended June 30, 2021. Additionally, incentive compensation and other personnel costs increased $1.8 million, commissions increased $1.6 million, benefits increased $1.4 million, and payroll taxes increased $1.1 million compared to the six months ended June 30, 2021.
Personnel costs in the Products & Services segment were $31.7 million for the six months ended June 30, 2022, an increase of $3.2 million compared to the same period in the prior year. The increase is primarily related to an increase in salary expense of $3.0 million from the six months ended June 30, 2021. Additionally, other personnel cost increased $0.4 million. Bonus and commissions decreased $0.2 million for the six months ended June 30, 2022 compared to the same period in the prior year.
Other operating costs. Other operating costs for the six months ended June 30, 2022 were $75.1 million, an increase of $10.9 million, or 16.9%, from $64.3 million for the same period in the prior year. Rent, utilities, occupancy, and office expenses increased $4.7 million, travel increased $1.8 million, expenses related to a California wage and hour litigation settlement increased $1.3 million, professional education and professional fees increased $1.2 million, other expenses increased $1.7 million, and bad debt expense increased $0.2 million as compared to the same period in the prior year.
General and administrative expenses. General and administrative expenses for the six months ended June 30, 2022 were $67.9 million, an increase of $3.9 million, or 6.1%, from the same period in the prior year. The increase is the result of a $1.8 million increase in salary expense, a $1.2 million increase in severance expense, and a $1.3 million increase in other expenses, partially offset by a $0.4 million decrease in equity-based compensation compared to the six months ended June 30, 2021.
Depreciation and amortization. Depreciation and amortization for the six months ended June 30, 2022 was $16.1 million, an increase of $0.1 million, or 0.5%, from the same period in the prior year. Amortization expense increased $1.1 million and depreciation expense decreased $1.0 million when compared to the same period in the prior year.
Interest expense, net. Interest expense for the six months ended June 30, 2022 increased 2.9% to $14.9 million from $14.5 million for the same period in the prior year.
40


Provision for income taxes. The provision for income taxes for the six months ended June 30, 2022 was $0.9 million, or 29.0% of income before income taxes, compared to a provision of $0.5 million, or 6.3% of income before income taxes for the six months ended June 30, 2021. The increase in the effective tax rate for the six months ended June 30, 2022 compared with the six months ended June 30, 2021 is primarily attributable to a windfall from share-based compensation for the six months ended June 30, 2021 compared to a shortfall from share-based compensation for the six months ended June 30, 2022. Our effective tax rate for the six months ended June 30, 2022 differed from the federal statutory tax rate of 21% primarily due to research and development credits, non-deductible expenses, and a shortfall from share-based compensation.
We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. As of June 30, 2022, our valuation allowance approximated $2.1 million.
For the year ending December 31, 2022, we estimate a research and development tax credit of $2.7 million, net of tax reserves. We record the tax benefit, net of tax reserves, as a deferred tax asset. For the year ended December 31, 2021, we recognized research and development tax credits of $4.3 million, net of tax reserves.
Financial Condition, Liquidity, and Capital Resources
Liquidity
Our cash and cash equivalents, and any amounts we have available for borrowing under our revolving credit facility, are immediately available to provide cash for our operations and capital expenditures. We refer to the sum of these two amounts as our “liquidity.”
At June 30, 2022, we had total liquidity of $154.2 million, which reflected a decrease of $36.8 million from the $191.0 million in liquidity we had as of December 31, 2021. Our liquidity at June 30, 2022 was comprised of cash and cash equivalents of $24.4 million and $129.8 million in available borrowing capacity under our $135.0 million revolving credit facility. This decrease in liquidity primarily related to a decrease in cash of $37.3 million, comprised of net cash from operations of $30.9 million, capital expenditures of $10.6 million, cash paid for acquisitions, net of cash acquired, of $12.5 million, and net cash used in financing activities of $45.2 million. In June 2022, we made a prepayment of $33.7 million in borrowings under the Credit Agreement.
Our Credit Agreement contains customary representations and warranties, as well as financial covenants, including that we maintain compliance with certain leverage and interest coverage ratios. If we are not compliant with our debt covenants in any period, absent a waiver or amendment of our Credit Agreement, we may be unable to access funds under our revolving credit facility. We were in compliance with our debt covenants as of June 30, 2022.
For additional information, please refer to the Liquidity Outlook section below.
Working Capital and Days Sales Outstanding
At June 30, 2022, we had working capital of $52.4 million compared to working capital of $91.5 million at December 31, 2021. Our working capital decreased $39.2 million during the six months ended June 30, 2022 due to a decrease in current assets of $35.4 million and an increase in current liabilities of $3.8 million.
The decrease in current assets of $35.4 million was primarily attributable to a decrease in Cash and cash equivalents of $37.3 million discussed in the “Liquidity” section above, a decrease in Accounts receivable, net of $1.2 million, and a decrease in Income taxes receivable of $0.6 million. These decreases were offset by an increase of approximately $3.1 million in Other current assets and an increase in Inventories of approximately $0.6 million.
The increase in current liabilities of $3.8 million was primarily attributable to an increase in Accounts payable of $4.1 million. The remainder of the increase is primarily attributable to an increase of accrued incentive compensation related costs of $2.3 million, an increase in Current portion of operating lease liabilities of $0.9 million, and an increase of $0.7 million in Current portion of long-term debt, partially offset by a decrease in Accrued expenses and other current liabilities of $4.2 million.
41


Days sales outstanding (“DSO”) is a calculation that approximates the average number of days between the billing for our services and the date of our receipt of payment, which we estimate using a 90-day rolling period of net revenue. This computation can provide a relative measure of the effectiveness of our billing and collections activities. Clinics acquired during the past 90-day period are excluded from the calculation. As of June 30, 2022, our DSO was 44 days, compared to a DSO of 40 days as of June 30, 2021. The increase is partially attributable to a larger increase in net revenue relative to accounts receivable, as well as the impact of acquisitions completed in the fourth quarter of 2021.
Sources and Uses of Cash for the Six Months Ended June 30, 2022 Compared to June 30, 2021
Net cash flows from operating activities were $30.9 million for the six months ended June 30, 2022, while net cash flows used in operating activities were $9.3 million for the six months ended June 30, 2021. The most significant decreases were due to $23.7 million in Accrued compensation related costs and $11.2 million in Accounts payable.
Cash flows used in investing activities decreased $25.2 million to $23.1 million for the six months ended June 30, 2022, from $48.2 million for the six months ended June 30, 2021. The decrease in cash used in investing activities was due to a decrease of $22.9 million in cash paid for acquisitions, net of cash acquired, and $2.3 million less in capital expenditures, net of proceeds from sale of property, plant and equipment.
Cash flows used in financing activities were $45.2 million for the six months ended June 30, 2022, as compared to cash used in financing activities of $10.9 million for the six months ended June 30, 2021. The increase in cash used in financing activities is primarily due to an increase in payments on outstanding debt and Seller Notes of $36.5 million, offset by a decrease in payment of employee taxes on share-based compensation, payments under vendor financing arrangements and other activities of $2.2 million.
Effect of Indebtedness
As of June 30, 2022, we have a Senior Credit Facility (the “Credit Agreement”) which provides for (i) a Term Loan B facility with $449.8 million outstanding which is due in quarterly principal installments with all remaining outstanding principal due at maturity in March 2025 and (ii) a revolving credit facility with an availability of $135.0 million which matures on November 23, 2026 (subject to a springing maturity if the term loans outstanding under the Credit Agreement are not repaid prior to the date that is 91 days prior to the stated maturity thereof). In June 2022, we made a prepayment of $33.7 million in borrowings under the Credit Agreement. Availability under the revolving credit facility is reduced by outstanding letters of credit, which were $5.2 million as of June 30, 2022, resulting in approximately $129.8 million in available borrowing capacity. For additional discussion surrounding the Credit Agreement, see Note K - “Debt and Other Obligations,” in the notes to the condensed consolidated financial statements contained elsewhere in this report. Cash paid for interest totaled $13.2 million and $13.0 million for the six months ended June 30, 2022 and 2021, respectively.
Liquidity Outlook
Our primary sources of liquidity are cash and cash equivalents, and available borrowings under our revolving credit facility. Due to the economic and social activity impacts outlined in the “Effects of the COVID-19 Pandemic” section above, we expect the continuing disruption to have an unfavorable impact on our operations, financial condition, and results of operations. While the duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments which cannot be predicted with certainty, we believe that our existing sources of liquidity, when combined with our operating cash flows and other measures taken to enhance our liquidity position and cost structure, will continue to allow us to finance our operations for the foreseeable future. Please refer to the “Effects of the COVID-19 Pandemic” section above for additional discussion.
Our primary future cash requirements, as discussed in our 2021 Form 10-K, will be for acquisitions of O&P providers, debt payments, capital expenditures, payment of deferred payroll taxes as discussed in the “Effects of the COVID-19 Pandemic” section above, and to fund operations. We expect to continue to invest in capital expenditures, and in deferred cloud implementation expenditures, in connection with our planned reconfiguration of distribution facilities and our related implementation of supply chain and financial systems. We anticipate that we will continue to pursue acquisitions and other growth initiatives that we expect to provide value to our shareholders. Additionally, as business volumes return to more typical pre-pandemic levels, it is likely that we will experience a natural corresponding increase in our investment in working capital.
42


With these factors in mind, we continue to anticipate we will generate positive operating cash flows that, together with our retained cash and revolving credit facility, will allow us to invest in acquisitions and other growth opportunities to provide value to our shareholders. From time to time, we may seek additional funding through the issuance of debt or equity securities to provide additional liquidity to fund acquisitions aligned with our strategic priorities and for other general corporate purposes.
43


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future financial results are subject to a variety of risks, including interest rate risk. Our interest expense is sensitive to changes in market interest rates. To manage the impact of the interest rate risk associated with our Credit Agreement, we enter into interest rate swaps from time to time, effectively converting a portion of the cash flows related to variable-rate debt into fixed-rate cash flows.
As of June 30, 2022, we had a combined principal amount of $449.8 million of variable rate debt under our Term Loan B and revolving credit facility and a notional amount of $275.0 million of fixed to variable interest rate swap agreements. Based on our hedged and unhedged positions, a hypothetical increase or decrease in interest rates of 1.0% would impact our annual interest expense by $1.7 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and effectiveness of our disclosure controls and procedures as of June 30, 2022. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
We are implementing an enterprise resource planning (“ERP”) system using a phased approach, and transitioned from our prior corporate financial systems to the new ERP system in the third quarter of 2021. In connection with the implementation, we modified the design and documentation of certain internal control processes and procedures as necessary. We will continue to evaluate each phase’s effect on our internal controls over financial reporting.
In accordance with Rule 13a-15(d) of the Exchange Act and with the participation of our Chief Executive Officer and our Chief Financial Officer, management determined there have been no material changes to our internal control over financial reporting during the three month period ended June 30, 2022.

44


PART II.    OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or results of operations. We have also identified the following additional risk factors, which supplement those discussed in our Form 10-K:
Risk Factors related to the Proposed Merger

The proposed Merger is subject to approval of our stockholders as well as the satisfaction of other closing conditions, including government approvals, some or all of which may not be satisfied or completed within the expected timeframe, if at all.

Completion of the Merger is subject to a number of closing conditions, including obtaining the approval of our stockholders, the expiration or termination of any waiting period (and any extension thereof) applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the receipt of other similar approvals. We can provide no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, even if all required approvals can be obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or the timing of the completion of the Merger. Certain of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, if applicable). Any adverse consequence of the pending Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

Each party’s obligation to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to customary materiality qualifications) and compliance in all material respects with the covenants and agreements contained in the Merger Agreement as of the closing of the Merger, including, with respect to us, covenants to conduct our business and operations in the ordinary course of business consistent with past practice and to not engage in certain kinds of material transactions prior to closing. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, in connection with a change in the recommendation of our Board of Directors to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). Further, although there is no financing condition in the Merger Agreement, Parent has obtained equity and debt financing commitments, which it will use to consummate the transactions in accordance with the Merger Agreement. The obligations of the financing parties are subject to a number of customary conditions that must be satisfied prior to the completion of the Merger. As a result, we cannot assure you that the Merger will be completed, even if our stockholders approve the Merger, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected time frame.

We may not complete the proposed Merger within the time frame we anticipate or at all, which could have an adverse effect on our stock price as well as our business, financial results and/or operations.
The proposed Merger may not be completed within the expected timeframe, or at all, as a result of various factors and conditions, some of which may be beyond our control. If the Merger is not completed for any reason, including as a result of our stockholders failing to adopt the Merger Agreement, then our stockholders will not receive any payment for their shares of our common stock in connection with the Merger. Instead, we will remain a public company, our common stock will continue to be listed and traded on the New York Stock Exchange and registered under the Exchange Act of 1934, as amended, and we will be required to continue to file periodic reports with the SEC. Moreover, our ongoing business may be materially adversely affected, and we would be subject to risks, including the following:

we may experience negative reactions from the financial markets, including negative impacts on our stock price, and it is uncertain when, if ever, the price of the shares would return to the prices at which the shares currently trade;
we may experience negative publicity, which could have an adverse effect on our ongoing operations including, but not limited to, retaining and attracting employees, customers, partners, suppliers and others with whom we do business;
45


we will still be required to pay certain significant costs relating to the Merger, such as legal, accounting, financial advisory, printing and other professional services fees, which may relate to activities that we would not have undertaken other than in connection with the Merger;
we may be required to pay a cash termination fee to Parent, as required under the Merger Agreement under certain circumstances;
while the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to engage in certain kinds of material transactions, which could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially adversely affect our business, results of operations and financial condition;
matters relating to the Merger require substantial commitments of time and resources by our management, which could result in the distraction of management from ongoing business operations and pursuing other opportunities that could have been beneficial to us; and
we may commit significant time and resources to defending against litigation related to the Merger.
If the Merger is not consummated, the risks described above may materialize, and they may have a material adverse effect on our business operations, financial results and stock price, particularly to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed.

We will be subject to various business uncertainties while the Merger is pending that may cause disruption.

Our efforts to complete the Merger could cause disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the Merger will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the Merger is pending because employees may experience uncertainty about their roles following the Merger. A substantial amount of our management’s and key employees’ attention is being directed toward the completion of the Merger and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with existing and potential customers, patients and suppliers. For example, customers, patients, suppliers and other third parties may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to or termination of existing business relationships could adversely affect our revenue, earnings and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

The Merger Agreement may be terminated under various circumstances, including in connection with a superior proposal, and we would incur fees and expenses in connection with such termination.

Under the terms of the Merger Agreement, we may be required to pay Parent a termination fee under specified conditions, including in the event Parent terminates the Merger Agreement before receipt of our stockholders’ approval due to a change in recommendation by our Board of Directors, in the event we terminate the Merger Agreement to enter into a Superior Proposal, or in the event we enter into an alternative transaction within twelve months of termination of the Merger Agreement in certain circumstances and the alternative transaction is consummated. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could discourage a third party from making a competing acquisition proposal, including a proposal that would be more favorable to our stockholders than the Merger.

We have incurred, and will continue to incur, direct and indirect costs as a result of the Merger.

We have incurred, and will continue to incur, significant costs and expenses, including regulatory costs, fees for professional services and other transaction costs in connection with the Merger, for which we will have received little or no benefit if the Merger is not completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger.

Litigation challenging the Merger Agreement may be costly, distract management’s attention from the day-to-day operations of the business, and could prevent the Merger from being consummated within the expected timeframe or at all.
46



Lawsuits may be filed against us, our Board of Directors or other parties to the Merger Agreement, challenging our acquisition by Parent and/ or making other claims in connection therewith. Such lawsuits may be brought by our stockholders and may seek, among other things, to enjoin consummation of the Merger. One of the conditions to the consummation of the Merger is that the consummation of the Merger is not restrained, enjoined or prohibited by any law or order that is continuing and remains in effect of a court of competent jurisdiction or any other governmental entity. As such, if the plaintiffs in such potential lawsuits are successful in obtaining an injunction prohibiting the defendants from completing the Merger on the agreed upon terms, then such injunction may prevent the Merger from becoming effective, or from becoming effective within the expected timeframe. Regardless of the outcome of any litigation related to the Merger, such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There has been no share repurchase activity during the three months ended June 30, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities during the three months ended June 30, 2022.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None to report.
ITEM 6. EXHIBITS
The documents in the accompanying Exhibits Index are filed, furnished, or incorporated by reference as part of this report and such Exhibits Index is incorporated herein by reference.
47


EXHIBITS INDEX
Exhibit No.Document
2.1
31.1
31.2
32
101.INSXBRL Instance Document. (Filed herewith.)
101.SCHXBRL Taxonomy Extension Schema. (Filed herewith.)
101.CALXBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LABXBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PREXBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEFXBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.)



48


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 HANGER, INC.
  
Dated: August 8, 2022By:/s/ THOMAS E. KIRALY
 Thomas E. Kiraly
 Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: August 8, 2022By:/s/ GABRIELLE B. ADAMS
 Gabrielle B. Adams
Vice President and Chief Accounting Officer
 (Principal Accounting Officer)
49