PART 1. FINANCIAL INFORMATION

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Indollars in thousands, except par value and ~~per~~ share amounts)

(Unaudited)

	As of June 30,			As of December 31,			As of March 31,			As of December 31,
	2018			2017			2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	48,792		$	1,508		$	20,511		$	95,114
Accounts receivable, net	134,079			146,346			136,891			143,986
Inventories	66,439			69,138			70,036			67,690
Income taxes receivable	1,389			13,079			734			379
Other current assets	21,415			20,888			17,058			18,731
Total current assets	272,114			250,959			245,230			325,900

Non-current assets:
Property, plant and equipment, net	91,378			93,615			81,951			89,489
Goodwill	196,343			196,343			226,632			198,742
Other intangible assets, net	18,145			21,940			16,415			15,478
Deferred income taxes	74,897			68,126			69,738			65,635
Operating lease right-of-use assets							103,676			—
Other assets	11,482			9,440			8,392			7,766
Total assets	$	664,359		$	640,423		$	752,034		$	703,010

LIABILITIES AND SHAREHOLDERS’ DEFICIT
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt	$	10,384		$	4,336		$	8,677		$	8,583
Accounts payable	50,313			48,269			50,173			55,797
Accrued expenses and other current liabilities	54,258			66,308			53,311			51,783
Accrued compensation related costs	31,082			53,380			22,228			55,111
Current portion of operating lease liabilities							33,675			—
Total current liabilities	146,037			172,293			168,064			171,274

Long-term liabilities:
Long-term debt, less current portion	504,157			445,928			490,623			502,090
Operating lease liabilities							83,693			—
Other liabilities	49,465			50,253			40,259			51,570
Total liabilities	699,659			668,474			782,639			724,934

Commitments and contingencies (Note O)

Commitments and contingencies (Note R)
Shareholders’ deficit:
Common stock, $0.01 par value; 60,000,000 shares authorized; 36,992,892 shares issued and 36,850,071 shares outstanding in 2018, and 36,515,232 shares issued and 36,372,411 shares outstanding in 2017	370			365
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,413,845 shares issued and 37,271,024 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018							374			371
Additional paid-in capital	337,175			333,738			343,591			343,955
Accumulated other comprehensive loss	(1,928		)	(1,686		)	(7,461		)	(4,531		)
Accumulated deficit	(370,221		)	(359,772		)	(366,413		)	(361,023		)
Treasury stock, at cost; 142,821 shares at 2018 and 2017, respectively	(696		)	(696		)
Treasury stock, at cost; 142,821 shares at 2019 and 2018, respectively							(696		)	(696		)
Total shareholders’ deficit	(35,300		)	(28,051		)	(30,605		)	(21,924		)
Total liabilities and shareholders’ deficit	$	664,359		$	640,423		$	752,034		$	703,010

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

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~AND COMPREHENSIVE INCOME (LOSS)~~

(Indollars in thousands, except share and per share amounts)

(Unaudited)

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018

2017

2018

2017

Net revenues

$
266,966

$
263,386

$
500,961

$
497,067

Material costs

86,516

83,657

162,872

158,062

Personnel costs

89,554

87,831

175,662

175,786

Other operating costs

30,536

31,861

61,632

64,550

General and administrative expenses

26,523

25,227

52,159

50,613

Professional accounting and legal fees

4,236

8,521

9,082

21,171

Depreciation and amortization

9,272

9,825

18,602

19,962

Income from operations

20,329

16,464

20,952

6,923

Interest expense, net

7,317

14,091

19,580

28,100

Loss on extinguishment of debt

—

—

16,998

—

Non-service defined benefit plan expense

176

184

352

368

Income (loss) before income taxes

12,836

2,189

(15,978
)
(21,545
)
(Benefit) provision for income taxes

(92
)
552

(6,288
)
(5,448
)
Net income (loss)

$
12,928

$
1,637

$
(9,690
)
$
(16,097
)
Other comprehensive income (loss):

Unrealized gain on cash flow hedges (net of tax provision of $710 and $8 for the three and six months ended June 30, 2018, respectively)

$
2,314

$
—

$
24

$
—

Unrealized gain (loss) on defined benefit plan (net of tax benefit of $0 and $0 for the three months and $105 and $0 for the six months ended June 30, 2018 and 2017, respectively)

26

(17
)
(266
)
(34
)
Total other comprehensive income (loss)

2,340

(17
)
(242
)
(34
)
Comprehensive income (loss)

$
15,268

$
1,620

$
(9,932
)
$
(16,131
)

Per share data:

Basic earnings (loss) per share

$
0.35

$
0.05

$
(0.26
)
$
(0.44
)
Weighted average shares outstanding - basic

36,790,401

36,286,528

36,645,248

36,187,340

Diluted earnings (loss) per share

$
0.35

$
0.04

$
(0.26
)
$
(0.44
)
Weighted average shares outstanding - diluted

37,404,360

36,543,740

36,645,248

36,187,340

	For the Three Months Ended March 31,
	2019			2018
Net revenues	$	236,419		$	233,995
Material costs	78,377			76,356
Personnel costs	86,711			86,108
Other operating costs	33,555			31,096
General and administrative expenses	28,282			25,636
Professional accounting and legal fees	2,700			4,846
Depreciation and amortization	8,773			9,330
(Loss) income from operations	(1,979		)	623
Interest expense, net	8,538			12,263
Loss on extinguishment of debt	—			16,998
Non-service defined benefit plan expense	173			176
Loss before income taxes	(10,690		)	(28,814		)
Benefit for income taxes	(3,739		)	(6,196		)
Net loss	$	(6,951	)	$	(22,618	)

Basic and Diluted Per Common Share Data:
Basic and diluted loss per share	$	(0.19	)	$	(0.62	)
Weighted average shares used to compute basic and diluted earnings per common share	37,001,977			36,498,482

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

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(dollars in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2019			2018
Net loss	$	(6,951	)	$	(22,618	)

Other comprehensive loss:
Unrealized loss on cash flow hedges (net of tax benefit of $924 for three months ended March 31, 2019 and tax benefit of $702 for three months ended March 31, 2018)	$	(2,936	)	$	(2,290	)
Unrealized gain (loss) on defined benefit plan (net of tax provision of $2 for three months ended March 31, 2019 and tax benefit of $105 for three months ended March 31, 2018)	6			(292		)
Total other comprehensive loss	(2,930		)	(2,582		)
Comprehensive loss	$	(9,881	)	$	(25,200	)

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

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT

~~For the Six Months Ended June 30, 2018~~

(Indollars and share amounts in thousands)

(Unaudited)

	Common Shares, Balance	Common Stock, Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total			Common Shares, Balance	Common Stock, Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, December 31, 2017	36,372	$	365	$	333,738		$	(1,686	)	$	(359,772	)	$	(696	)	$	(28,051	)
Cumulative effect of a change in accounting for revenue recognition (Note A)	—	—		—			—			(759		)	—			(759		)
Balance, January 1, 2018	36,372	365		333,738			(1,686		)	(360,531		)	(696		)	(28,810		)
Balance, December 31, 2018																			36,921	$	371	$	343,955		$	(4,531	)	$	(361,023	)	$	(696	)	$	(21,924	)
Cumulative effect of a change in accounting for leases (Note A)																			—	—		—			—			1,561			—			1,561
Balance, January 1, 2019																			36,921	371		343,955			(4,531		)	(359,462		)	(696		)	(20,363		)
Net loss	—	—		—			—			(9,690		)	—			(9,690		)	—	—		—			—			(6,951		)	—			(6,951		)
Employee related equity activity:
Shares based compensation expense	—	—		5,905			—			—			—			5,905			—	—		3,265			—			—			—			3,265
Issuance of common stock upon vesting of restricted stock units	478	5		(5		)	—			—			—			—			350	3		(3		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(2,463		)	—			—			—			(2,463		)	—	—		(3,626		)	—			—			—			(3,626		)
Total other comprehensive loss	—	—		—			(242		)	—			—			(242		)	—	—		—			(2,930		)	—			—			(2,930		)
Balance, June 30, 2018	36,850	370		337,175			(1,928		)	(370,221		)	(696		)	(35,300		)

Balance, March 31, 2019																			37,271	$	374	$	343,591		$	(7,461	)	$	(366,413	)	$	(696	)	$	(30,605	)

	Common Shares, Balance	Common Stock, Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, December 31, 2017	36,372	$	365	$	333,738		$	(1,686	)	$	(359,772	)	$	(696	)	$	(28,051	)
Cumulative effect of a change in accounting for revenue recognition	—	—		—			—			(759		)	—			(759		)
Balance, January 1, 2018	36,372	365		333,738			(1,686		)	(360,531		)	(696		)	(28,810		)
Net loss	—	—		—			—			(22,618		)	—			(22,618		)
Shares based compensation expense	—	—		2,585			—			—			—			2,585
Issuance of common stock upon vesting of restricted stock units	372	4		(4		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(2,150		)	—			—			—			(2,150		)
Total other comprehensive loss	—	—		—			(2,582		)	—			—			(2,582		)
Balance, March 31, 2018	36,744	$	369	$	334,169		$	(4,268	)	$	(383,149	)	$	(696	)	$	(53,575	)

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

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Indollars in thousands)

(Unaudited)

For the Six Months Ended
June 30,

2018

2017

Cash flows from operating activities:

Net loss

$
(9,690
)
$
(16,097
)
Adjustments to reconcile net loss to net cash from operating activities:

Depreciation and amortization

18,602

19,962

(Benefit) provision for doubtful accounts

(602
)
4,517

Stock-based compensation expense

5,906

5,080

Deferred income taxes

(6,511
)
(5,548
)
Amortization of debt issuance costs

2,186

3,874

Loss on extinguishment of debt

16,998

—

Gain on sale and disposal of fixed assets

(1,349
)
(1,196
)
Changes in operating assets and liabilities (Note Q)

(8,632
)
(16,925
)
Net cash provided by (used in) operating activities

16,908

(6,333
)

Cash flows from investing activities:

Purchase of property, plant and equipment

(11,322
)
(6,433
)
Purchase of therapeutic program equipment leased to third parties under operating leases

(3,822
)
(1,333
)
Purchase of company-owned life insurance investment

(598
)
(555
)
Proceeds from sale of property, plant and equipment

1,682

3,216

Net cash used in investing activities

(14,060
)
(5,105
)

Cash flows from financing activities:

Borrowings under term loan, net of discount

500,204

—

Repayment of term loan

(431,875
)
(11,250
)
Borrowings under revolving credit agreement

3,000

110,000

Repayments under revolving credit agreement

(8,000
)
(85,000
)
Payment of employee taxes on stock-based compensation

(2,463
)
(1,339
)
Payment on seller notes

(1,765
)
(3,808
)
Payment of capital lease obligations

(682
)
(572
)
Payment of debt issuance costs

(6,487
)
(2,863
)
Payment of debt extinguishment costs

(8,436
)
—

Net cash provided by financing activities

43,496

5,168

Increase (decrease) in cash, cash equivalents and restricted cash

46,344

(6,270
)
Cash, cash equivalents and restricted cash, at beginning of period

4,779

9,412

Cash, cash equivalents and restricted cash, at end of period

$
51,123

$
3,142

	Six Months Ended June 30,				For the Three Months Ended March 31,
Reconciliation of Cash, Cash Equivalents and Restricted Cash	2018		2017
					2019			2018
Cash flow used in operating activities:
Net loss					$	(6,951	)	$	(22,618	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization					8,773			9,330
Amortization of right-of-use assets					9,161			—
Benefit for doubtful accounts					(20		)	(94		)
Stock-based compensation expense					3,265			2,585
Deferred income taxes					(3,749		)	(6,355		)
Amortization of debt discounts and issuance costs					375			1,701
Loss on extinguishment of debt					—			16,998
Gain on sale and disposal of fixed assets					(481		)	(594		)
Changes in operating assets and liabilities (Note T)					(43,173		)	(9,426		)
Net cash used in operating activities					(32,800		)	(8,473		)
Cash flows used in investing activities
Purchase of property, plant and equipment					(6,897		)	(4,388		)
Purchase of therapeutic program equipment leased to third parties under operating leases					(1,429		)	(2,034		)
Acquisitions, net of cash acquired					(27,679		)	—
Purchase of company-owned life insurance investment					—			(598		)
Proceeds from sale of property, plant and equipment					980			840
Net cash used in investing activities					(35,025		)	(6,180		)
Cash flows (used in) provided by financing activities
Borrowings under term loan, net of discount					—			501,467
Repayment of term loan					(1,263		)	(431,875		)
Borrowings under revolving credit agreement					—			3,000
Repayments under revolving credit agreement					—			(8,000		)
Payment of employee taxes on stock-based compensation					(3,626		)	(2,150		)
Payment on seller notes					(1,773		)	(1,749		)
Payment of financing lease obligations					(116		)	(364		)
Payment of debt issuance costs					—			(6,757		)
Payment of debt extinguishment costs					—			(8,436		)
Net cash (used in) provided by financing activities					(6,778		)	45,136
(Decrease) increase in cash, cash equivalents and restricted cash					(74,603		)	30,483
Cash, cash equivalents, and restricted cash, at beginning of period					95,114			4,779
Cash, cash equivalents, and restricted cash, at end of period					$	20,511		$	35,262

Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
Cash and cash equivalents, at beginning of period	$	1,508	$	7,157	$	95,114		$	1,508
Restricted cash, at beginning of period	3,271		2,255		—			3,271
Cash, cash equivalents, and restricted cash, at beginning of period	$	4,779	$	9,412	$	95,114		$	4,779

Cash and cash equivalents, at end of period	$	48,792	$	911	$	20,511		$	32,913
Restricted cash, at end of period	2,331		2,231		—			2,349
Cash, cash equivalents, and restricted cash, at end of period	$	51,123	$	3,142	$	20,511		$	35,262

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

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 ~~interim~~ 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, ~~2017~~2018 (the ~~“2017~~“2018 Form 10-K”), as previously filed with the Securities and Exchange Commission (“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 ~~period~~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 ~~2017~~2018 Form 10-K.

~~Reclassifications~~

We have reclassified certain amounts in the prior year consolidated financial statements to be consistent with the current year presentation. These relate to classifications within both the condensed consolidated statements of operations and condensed consolidated statement of cash flows; see “~~Adoption of New Accounting Standards~~~~” for additional information.~~

Recent Accounting Pronouncements Adopted

~~Adoption of New Accounting Standards~~Leases

~~On January 1, 2018, we adopted~~We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives. Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the ~~following:~~lease term, including any applicable rent holidays, beginning on the lease commencement date. We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases. Our leases may include variable payments for maintenance, which are expensed as incurred.

In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings. The therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided. These operating lease agreements are typically for twelve months and have a 30-day cancellation policy. We do not separate non-lease components, consisting primarily of training, for these leases.

·Effect of Adoption of ASC 842

We adopted Accounting Standards Update (“ASU”) No. ~~2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~2016-02, Leases (ASC 842), and related clarifying standards, ~~(“ASC 606”), on revenue recognition~~as of January 1, 2019, using the modified retrospective ~~method for all contracts in place at January 1, 2018.~~approach. This ~~new accounting~~approach allows us to apply the standard ~~outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition requirements. The core principle~~as of the revenue recognition standard is to require an entity to recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services as it transfers control to its customers.

The majority of our contracts are generally short term in nature. Revenue is recognized at the point of time when we transfer control of the good or service to the patient. Under ASC 606, estimated uncollectible amounts due from self-pay patients, as well as co-pays, co-insuranceadoption date and ~~deductibles owed to us by patients with insurance are generally considered implicit price concessions and are now presented as~~record a reduction of net revenue. Under prior guidance, these amounts were recognized as bad debt expense and were included in other operating costs. When estimating the variable consideration, we use historical collection experience to estimate amounts not expected to be collected. Conversely, subsequent changes in collectability due to a change in financial condition (i.e. bankruptcy) continues to be recognized as bad debt expense.

~~The adoption of this standard did not have a material impact on our results of operations. The cumulative effect of implementing this guidance resulted in an increase of $0.8 million~~cumulative-effect adjustment to the opening balance of ~~accumulated~~Accumulated deficit ~~from establishing~~at January 1, 2019. The new lease standard requires lessees to recognize a ~~contract~~right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of ~~$1.0 million for certain performance obligations that must be recognized over time~~short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and ~~an increase in deferred tax assets in~~recognize expenses on the ~~amount of $0.3 million - see “~~~~Revenue Recognition~~~~” below for additional information.~~

· ~~ASU No. 2016-18~~~~, Statement of Cash Flows (Topic 230): Restricted Cash~~ ~~and ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~ ~~in the~~consolidated statement of ~~cash flows~~income on a straight-line basis.

In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases. By electing the modified retrospective ~~basis. As a result of adoption:~~

· ~~Amounts generally described as restricted cash and restricted cash equivalents are now~~approach on adoption date, prior period results will continue to be presented ~~with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown~~under legacy guidance based on the ~~statement~~accounting standards originally in effect for such period. We have elected to keep leases with an initial term of ~~cash flows.~~

· ~~We added a reconciliation~~12 months or less off of ~~cash, cash equivalents,~~the balance sheet and ~~restricted cash to~~recognize those lease payments in the ~~condensed~~ consolidated statements of income on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease. The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.

The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability. As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term. Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur. We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases on small medical office locations.

The most significant impact of the new lease standard will be on the balance sheet, where values have been added for real estate operating leases, which increases both assets and liabilities. The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard. The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations. The impact of applying the new lease standard to our results of operations and cash ~~flows. Restricted cash balances are included~~flows is not significant.

Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ~~“Other Current Assets” in~~ASC 842. Accordingly, these leases have been reassessed as operating leases as of January 1, 2019. The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction. The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control. Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019. The resulting cumulative effect recognized at adoption to Accumulated deficit was $1.6 million, net of tax.

Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance ~~sheets - see Note G - “~~~~Other Current Assets and Other Assets~~.”sheet as of January 1, 2019 was as follows:

· ~~ASU No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. It was applied on a modified retrospective basis through a cumulative-effect adjustment directly to accumulated deficit as of the beginning of the period of adoption. As a result of adoption, there was no material impact on our condensed consolidated financial statements.

	December 31, 2018			Effects of			January 1, 2019
(in thousands)	As reported			adoption			After adoption
Assets
Other current assets	$	18,731		$	(3,987	)	$	14,744
Total current assets	325,900			(3,987		)	321,913
Property, plant and equipment, net	89,489			(8,068		)	81,421
Other intangible assets, net	15,478			(220		)	15,258
Deferred income taxes	65,635			(570		)	65,065
Operating lease right-of-use assets	—			103,378			103,378
Other assets	7,766			538			8,304
Total assets	703,010			91,071			794,081
Liabilities
Current liabilities:
Current portion of long-term debt	8,583			(619		)	7,964
Accrued expenses and other current liabilities	51,783			(1,352		)	50,431
Current portion of operating lease liabilities	—			33,393			33,393
Total current liabilities	171,274			31,422			202,696
Long-term liabilities:
Long-term debt, less current portion	502,090			(12,493		)	489,597
Operating lease liabilities	—			83,662			83,662
Other liabilities	51,570			(13,081		)	38,489
Total liabilities	724,934			89,510			814,444
Shareholders’ deficit:
Accumulated deficit	(361,023		)	1,561			(359,462		)
Total shareholders’ deficit	(21,924		)	1,561			(20,363		)
Total liabilities and shareholders’ deficit	$	703,010		$	91,071		$	794,081

· ~~ASU No. 2017-01~~~~, Business Combinations (Topic 805): Clarifying the Definition of a Business~~, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the guidance to any future acquisitions should they occur.

· ~~ASU No. 2017-09,~~ ~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting~~, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of the share-based payment awards to which an entity would be required to apply modification accounting underRecent Accounting Standards Codification (“ASC”) 718. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the guidance to any future changes to the terms or conditions of stock-based payment awards should they occur.

· ~~ASU No. 2017-07,~~ ~~Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,~~ which amends ASC Topic 715. The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost for an entity’s defined benefit pension and other postretirement plans. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement. The amendments in this update require that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside of income from operations. Accordingly, we have made certain reclassifications from “General and administrative expenses” to “Non-service pension expense” of $0.2 million and $0.2 million for the three months ended June 30, 2018 and 2017, respectively and $0.4 million and $0.4 million for the six months ended June 30, 2018 and 2017, respectively. Such reclassifications did not have a material effect on our consolidated statement of operations.

· ~~ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~. The objective of this new guidance is to improve the financial reporting of hedging relationships by, among other things, eliminating the requirement to separately measure and record hedge ineffectiveness. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. We adopted this guidance effective January 1, 2018. The adoption did not have a material impact on our condensed consolidated financial statements or disclosures.

~~New Accounting Standards Issued,~~Pronouncements, Not Yet Adopted

In ~~February 2018,~~June 2016, the Financial Accounting Standards Board (“FASB”) ~~issued ASU No. 2018-02,~~ ~~Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~ (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017, from accumulated other comprehensive income to retained earnings. This new standard is effective for us beginning January 1, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our condensed consolidated financial statements and the related disclosures.
~~In June 2016, the FASB~~ issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related clarifying standards, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This new standard is effective for us beginning December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our ~~condensed~~ consolidated financial statements and the related disclosures.

In ~~February 2016,~~August 2018, the FASB issued ASU No. ~~2016-02,~~2018-13, ~~Leases~~Fair Value Measurement (Topic ~~842)~~820)~~. The amendments in ASU 2016-02,~~, which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and ~~related clarifying standards, revise the accounting~~reasons for ~~leases. Under the new guidance, lessees will be required to recognize a lease liability~~transfers between Level 1 and ~~a right-of-use asset for all leases that extend beyond 12 months. The asset and liability will initially be measured at the present value~~Level 2 of the ~~lease payments.~~fair value hierarchy and the policy for timing of such transfers. The ~~new lease~~ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715). This ASU modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also ~~simplified the accounting~~clarifies disclosure requirements for ~~sale~~projected benefit and ~~leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.~~accumulated benefit obligations. The amendments in this ASU are effective for fiscal ~~year 2019~~years ending after December 15, 2020 and ~~will be applied using a cumulative effect adjustment transition approach at~~for interim periods therein with early adoption permitted. We are currently evaluating the effects that the adoption ~~date which includes a number~~ of ~~practical expedients for leases existing at, or entered into after, the adoption date. Early adoption is permitted. We~~this guidance will have not yet concluded how the new standard will impact our condensed consolidated financial statements. Nonetheless, we anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide retail locations that are not already included on our consolidated ~~balance sheet.~~financial statements and the related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 220). The ASU is intended to improve the recognition and measurement of financial instruments. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

~~Revenue Recognition~~NOTE B — EARNINGS PER SHARE

~~Effect~~Basic earnings per common share is computed using the weighted average number of ~~Adoption~~common shares outstanding during the period. Diluted earnings per common share is computed using the weighted average number of ~~ASC 606~~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 were zero as of March 31, 2019 and 208,510 as of March 31, 2018.

~~On January 1, 2018, we adopted ASC 606 using~~Our credit agreement restricts the ~~modified retrospective method applied~~payment of dividends or other distributions to ~~all contracts which were not completed~~our shareholders with respect to Hanger, Inc., or any of its subsidiaries.
The reconciliation of the numerators and denominators used to calculate basic and diluted net loss per share are as ~~of January 1, 2018. As a practical expedient, we adopted a portfolio approach in evaluating our sources of revenue for implications of adoption.~~follows:

For the Three Months Ended
March 31,

(in thousands except per share data)

2019

2018

Net loss

$
(6,951
)
$
(22,618
)

Weighted average shares outstanding - basic

37,001,977

36,498,482

Effect of potentially dilutive restricted stock units and options (1)

—

—

Weighted average shares outstanding - diluted

37,001,977

36,498,482

Basic and diluted loss per share

$
(0.19
)
$
(0.62
)
(1) In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amounts exclude potentially dilutive shares related to unvested restricted stock units and unexercised options. For the ~~modified retrospective method, results of operations for~~three months ended March 31, 2019, shares excluded were 889,093. For the ~~reporting periods after January 1,~~three months ended March 31, 2018, ~~are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605,~~ ~~Revenue Recognition~~ ~~(“ASC 605”).~~shares excluded were 537,497.
NOTE C — REVENUE RECOGNITION

We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Upon adoption of ASC 606, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2018 was as follows:

December 31, 2017

Effects of

January 1, 2018

(in thousands)

As reported

Adoption

After adoption

Assets

Deferred income taxes

$
68,126

$
268

$
68,394

Liabilities

Accrued expenses and other current liabilities

$
66,308

$
1,027

$
67,335

Shareholders’ Deficit

Accumulated deficit

$
(359,772
)
$
(759
)
$
(360,531
)
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated statement of operations and condensed consolidated balance sheet is as follows:

As of and for the Three Months Ended June 30, 2018

(in thousands)

As Reported

Effects of Adoption

Proforma balance
without the
adoption of
ASC 606

Condensed Consolidated Statement of Operations

Net revenues

$
266,966

$
1,322

$
268,288

Other operating costs

30,536

1,332

31,868

Income from operations

20,329

(10
)
20,319

Income (loss) before income taxes

12,836

(10
)
12,826

Net income (loss)

12,928

(10
)
12,918

Comprehensive income (loss)

15,268

(10
)
15,258

Condensed Consolidated Balance Sheet

Assets

Deferred income taxes

$
74,897

$
3

$
74,900

Total assets

664,359

3

664,362

Liabilities

Accrued expenses and other current liabilities

54,258

9

54,267

Total current liabilities

146,037

9

146,046

Total liabilities

699,659

9

699,668

Shareholders’ Deficit

Accumulated deficit

(370,221
)
(6
)
(370,227
)
Total shareholders’ deficit

(35,300
)
(6
)
(35,306
)

As of and for the Six Months Ended June 30, 2018

(in thousands)

As Reported

Effects of Adoption

Proforma balance
without the
adoption of
ASC 606

Condensed Consolidated Statement of Operations

Net revenues

$
500,961

$
2,220

$
503,181

Other operating costs

61,632

2,200

63,832

Income from operations

20,952

20

20,972

Income (loss) before income taxes

(15,978
)
20

(15,958
)
Net income (loss)

(9,690
)
20

(9,670
)
Comprehensive income (loss)

(9,932
)
20

(9,912
)

Condensed Consolidated Balance Sheet

Assets

Deferred income taxes

$
74,897

$
(273
)
$
74,624

Total assets

664,359

(273
)
664,086

Liabilities

Accrued expenses and other current liabilities

54,258

(1,048
)
53,210

Total current liabilities

146,037

(1,048
)
144,989

Total liabilities

699,659

(1,048
)
698,611

Shareholders’ Deficit

Accumulated deficit

(370,221
)
775

(369,446
)
Total shareholders’ deficit

(35,300
)
775

(34,525
)
The adoption of ASC 606 resulted in deferring $1.0 million of net revenue from our Patient Care segment as of June 30, 2018 and recognizing deferred revenue of $1.0 million from satisfying performance obligations from the previous period. Estimated uncollectible amounts due from self-pay patients for the three and six months ended June 30, 2018 were $1.3 million and $2.2 million, respectively, and are considered implicit price concessions under ASC 606 and are recorded as a reduction to net revenue.
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, and 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. As such, these adjustments do not relate to an inability to pay, but to contractual allowances, 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, that we filed or appealed the payor’s determination timely, on the basis of our coding, failure by certain classes of patients to pay their portion of a claim or other administrative issues which are considered as part of the transaction price and recorded as a reduction of revenues.
Our products and services are sold with a 90-day labor and 180-day warranty for fabricated components. Warranties are not considered a separate performance obligation. We estimate warranties based on historical trends and include them in accrued expenses and other current liabilities in the condensed consolidated balance sheet.
A portion of our O&P revenue comes from the provision of cranial devices. In addition to delivering the cranial device, there are patient follow up visits where we assist in treating the patient’s condition by adjusting or modifying the cranial device. We conclude that, for these devices, there are two performance obligations and use the expected cost plus margin approach to estimate for the standalone selling price of each performance obligation. The allocated portion associated with the patient’s receipt of the cranial device is recognized when the patient receives the device while the portion of revenue associated with the follow up visits is initially recorded as deferred revenue. On average, the cranial device follow up visits occur within 90 days after the patient receives the device and the deferred revenue is recognized on a straight line basis over this period.
Medicare and Medicaid regulations and the various agreements we have with other third party payors, including commercial healthcare payors under which these contractual adjustments and disallowed revenue are calculated, are complex and are subject to interpretation and adjustment and may include multiple reimbursement mechanisms for different types of services. Therefore, the particular O&P devices and related services authorized and provided, and the related reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates. Additionally, updated regulations and reimbursement schedules, and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. As a result, there is a reasonable possibility that recorded estimates could change and any related adjustments will be recorded as adjustments to net revenue when they become known.

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

For the Three Months Ended March 31,

(in thousands)

2018

2017

2018

2017

2019

2018

Patient Care Segment

Medicare

$
70,469

$
65,737

$
127,781

$
120,872

$
57,776

$
57,531

Medicaid

33,648

34,788

63,400

62,964

30,147

29,711

Commercial Insurance/Managed Care (excluding Medicare and Medicaid Managed Care)

77,621

80,631

148,432

155,053

Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)

70,218

70,582

Veterans Administration

20,904

18,814

37,547

34,340

18,322

16,731

Private Pay

15,516

16,251

29,505

30,629

14,138

13,952

Total

$
218,158

$
216,221

$
406,665

$
403,858

$
190,601

$
188,507

The impact to revenue related to prior period performance obligations was not material for the three months ended March 31, 2019.

Products & Services Segment
~~The adoption of ASC 606 did not have a material impact on our Product & Services segment.~~

Revenue in our Products & Services segment is derived from the distribution of O&P components and the leasing and sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.
Distribution services revenues are recognized when obligations under the terms of a contract with our customers are satisfied, which occurs with the transfer of control of our products. This occurs either upon shipment or delivery of goods, depending on whether the terms are FOB Origin or FOB Destination. Payment terms are typically between 30 to 90 days. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products to a customer (“transaction price”).
To the extent that the transaction price includes variable consideration, such as prompt payment discounts, list price discounts, rebates, and volume discounts, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available.
We reduce revenue by estimates of potential future product returns and other allowances. Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized. We make estimates of the amount of sales returns and allowances that will eventually be incurred. Management analyzes sales programs that are in effect, contractual arrangements, market acceptance and historical trends when evaluating the adequacy of sales returns and allowance accounts.
Therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided. Equipment sales revenue is recognized upon delivery, with any related services revenue deferred and recognized as the services are performed. Sales of consumables are recognized upon delivery.
In addition, we estimate amounts recorded to bad debt expense using historical trends and these are presented as a bad debt expense under the operating expense section of our condensed consolidated financial statements.

The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

(in thousands)

2018

2017

2018

2017

Products & Services Segment

Distribution services, net of intersegment revenue eliminations

$
34,684

$
31,967

$
66,035

$
62,590

Therapeutic solutions

14,124

15,198

28,261

30,619

Total

$
48,808

$
47,165

$
94,296

$
93,209

For the Three Months Ended March 31,

(in thousands)

2019

2018

Products & Services Segment

Distribution services, net of intersegment revenue eliminations

$
33,195

$
31,351

Therapeutic solutions

12,623

14,137

Total

$
45,818

$
45,488

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 were 54,467 and 119,881 for the three and six months ended June 30, 2018 and 449,602 and 312,790 for the three and six months ended June 30, 2017.
~~Our credit agreement restricts the payment of dividends or other distributions to our shareholders with respect to Hanger, Inc., or any of its subsidiaries.~~
~~The reconciliation of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:~~

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

(in thousands except per share data)

2018

2017

2018

2017

Net income (loss)

$
12,928

$
1,637

$
(9,690
)
$
(16,097
)

Weighted average shares outstanding - basic

36,790

36,287

36,645

36,187

Effect of potentially dilutive restricted stock units and options (1)

614

257

—

—

Weighted average shares outstanding - diluted

37,404

36,544

36,645

36,187

Basic income (loss) per share

$
0.35

$
0.05

$
(0.26
)
$
(0.44
)

Diluted income (loss) per share

$
0.35

$
0.04

$
(0.26
)
$
(0.44
)
(1) As we are recognizing a loss for the six months periods ended June 30, shares used to compute diluted per share amounts excludes 669,641 shares for 2018 and 330,195 shares for 2017 of potentially dilutive shares related to unvested restricted stock units and unexercised options in accordance with ASC 260 - Earnings Per Share.
~~NOTE C~~D — ACCOUNTS RECEIVABLE, NET

Accounts receivable, net ~~represent~~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. ~~Under ASC 606, our~~Our accounts ~~receivables~~receivable represent amounts outstanding from our gross billings, net of contractual discounts and other implicit price concessions including estimates for payor disallowances, sales returns, and patient non-payments.
Under both ASC 606 and ASC 605, disallowed revenue is considered an adjustment to the transaction price. However, upon adoption of ASC 606, estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are now presented as a reduction of net revenue. Under prior guidance, these amounts were recognized as bad debt expense in other operating expenses.

An allowance for doubtful accounts is also recorded for our Products & Services segment which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” Accounts receivable, net as of ~~June 30, 2018,~~March 31, 2019 and December 31, ~~2017~~2018 is comprised of the following:

As of June 30, 2018

As of December 31, 2017

(in thousands)

Patient Care

Products &
Services

Consolidated

Patient Care

Products &
Services

Consolidated

Accounts receivable, before allowances

$
173,268

$
25,316

$
198,584

$
193,150

$
23,494

$
216,644

Allowances for estimated implicit price concessions arising from:

Payor disallowances

(52,428
)
—

(52,428
)
(56,233
)
—

(56,233
)
Patient non-payments

(8,335
)
—

(8,335
)
—

—

—

Accounts receivable, gross

112,505

25,316

137,821

136,917

23,494

160,411

Allowance for doubtful accounts

—

(3,742
)
(3,742
)
(9,894
)
(4,171
)
(14,065
)
Accounts receivable, net

$
112,505

$
21,574

$
134,079

$
127,023

$
19,323

$
146,346

As of March 31, 2019

As of December 31, 2018

(in thousands)

Patient Care

Products &
Services

Consolidated

Patient Care

Products &
Services

Consolidated

Accounts receivable, before allowances

$
176,705

$
24,981

$
201,686

$
182,338

$
24,542

$
206,880

Allowances for estimated implicit price concessions arising from:

Payor disallowances

(55,385
)
—

(55,385
)
(53,378
)
—

(53,378
)
Patient non-payments

(7,245
)
—

(7,245
)
(7,244
)
—

(7,244
)
Accounts receivable, gross

114,075

24,981

139,056

121,716

24,542

146,258

Allowance for doubtful accounts

—

(2,165
)
(2,165
)
—

(2,272
)
(2,272
)
Accounts receivable, net

$
114,075

$
22,816

$
136,891

$
121,716

$
22,270

$
143,986

NOTE DE — INVENTORIES

Our inventories are comprised of the following:

As of March 31,

As of December 31,

(in thousands)

As of June 30, 2018

As of December 31, 2017

2019

2018

Raw materials

$
20,455

$
19,929

$
20,401

$
19,632

Work in process

12,125

8,996

12,711

9,278

Finished goods

33,859

40,213

36,924

38,780

Total inventories

$
66,439

$
69,138

$
70,036

$
67,690

NOTE EF — PROPERTY PLANT AND EQUIPMENT, NET

Property, plant, and equipment, net were comprised of the following:

As of March 31,

As of December 31,

(in thousands)

As of June 30, 2018

As of December 31, 2017

2019

2018

Land

$
644

$
644

$
634

$
644

Buildings

26,535

28,180

Buildings (1)

3,979

24,558

Furniture and fixtures

13,876

12,968

13,273

13,121

Machinery and equipment

27,405

26,838

26,568

27,452

Therapeutic program equipment leased to third parties under operating leases

29,355

31,100

Equipment leased to third parties under operating leases

29,402

30,093

Leasehold improvements

105,396

100,999

125,280

111,247

Computers and software

67,377

65,455

69,579

69,173

Total property, plant, and equipment, gross

270,588

266,184

268,715

276,288

Less: accumulated depreciation

(179,210
)
(172,569
)

(186,764
)
(186,799
)
Total property, plant, and equipment, net

$
91,378

$
93,615

$
81,951

$
89,489

(1) As discussed in Note A - “Organization and Summary of Significant Accounting Policies”, the new lease standard resulted in the removal of assets associated with build-to-suit leases.

Total depreciation expense was approximately $7.5 million and $7.4 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, respectively.
NOTE G — ACQUISTIONS
2019 Acquisition Activity
On January 28, 2019, we acquired all of the outstanding equity interests of an O&P business for a total aggregate purchase price of $32.5 million, of which $27.7 million was cash consideration, net of cash acquired, $4.5 million was issued in the form of notes to the shareholders at fair value, and ~~2017, respectively~~$0.3 million of estimated additional consideration expected to be paid in the second quarter of 2019. The notes to shareholders are unsecured and ~~$14.8 million~~payable in quarterly installments over a period of three years. The primary reason for the acquisition was to expand our continuum of patient care through the acquisition of high quality O&P providers in new geographic markets.
We accounted for this transaction under the acquisition method of accounting and ~~$15.1~~have reported the results of operations of the acquisition as of the date of the acquisition. The estimated fair values of intangible assets was based on an income approach utilizing primarily discounted cash flow techniques for non-compete agreements and 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 acquisition 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. The excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired was recorded 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 be deductible for federal income tax purposes.
Acquisition-related costs of $0.2 million for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 related to the acquisition are included in General and ~~2017, respectively.~~administrative expenses in our consolidated statement of operations.
We have not presented pro forma combined results for this acquisition because the impact on previously reported statements of operations would not have been material.
Purchase Price Allocation
The Company has performed a preliminary valuation analysis of the fair market value of the assets and liabilities acquired in the acquisition. The final purchase price allocation will be determined when we have completed and fully reviewed the detailed valuation and could differ materially from the preliminary allocation. The final allocation 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.
The aggregate purchase price of this acquisition was allocated on a preliminary basis as follows:

For the Three Months Ended

(in thousands)

March 31, 2019

Cash paid, net of cash acquired

$
27,679

Issuance of seller notes

4,451

Additional consideration (1)

345

Aggregate purchase price

32,475

Accounts receivable, net

3,318

Inventories

1,466

Customer relationships (Useful life of 3.0 years)

1,963

Non-compete agreements (Weighted average useful life of 4.9 years)

349

Other assets

329

Accounts payable

(1,191
)
Accrued expenses and other liabilities

(1,649
)
Net assets acquired

4,585

Goodwill

$
27,890

(1) Represents additional consideration payable to the seller in the second quarter of 2019, subject to agreement of certain tax elections with the seller.

2018 Acquisition Activity
In the fourth quarter of 2018, we acquired two O&P businesses for an aggregate purchase price of $3.1 million, net of cash acquired. These acquisitions were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction.
The aggregate purchase price for these acquisitions was allocated as follows:
(in thousands)

For The Year Ended
December 31, 2018

Cash paid, net of cash acquired

$
1,978

Issuance of seller notes

1,120

Aggregate purchase price

3,098

Accounts receivable, net

256

Inventories

302

Customer relationships (Weighted average useful life of 4.0 years)

260

Non-compete agreements (Weighted average useful life of 4.6 years)

214

Other assets

90

Accounts payable

(59
)
Accrued expenses and other liabilities

(364
)
Net assets acquired

699

Goodwill

$
2,399

NOTE FH — GOODWILL AND OTHER INTANGIBLE ASSETS

We assess goodwill and ~~indefinite lived~~indefinite-lived intangible assets for impairment annually on October 1st, and between annual tests if an event occurs, or circumstances change, that would ~~more likely than not~~more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

The ~~carrying value of~~following table summarizes the activity in goodwill ~~at June 30, 2018 and December 31, 2017 was $196.3 million and related to our Patient Care segment.~~for the periods indicated:

For the Three Months Ended March 31, 2019

Patient Care

Products & Services

Consolidated

(in thousands)

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

As of December 31, 2018

$
627,410

$
(428,668
)
198,742

$
139,299

$
(139,299
)
—

$
766,709

$
(567,967
)
198,742

Additions from acquisitions

27,890

—

27,890

—

—

—

27,890

—

27,890

As of March 31, 2019

$
655,300

$
(428,668
)
$
226,632

$
139,299

$
(139,299
)
$
—

$
794,599

$
(567,967
)
$
226,632

For the Year Ended December 31, 2018

Patient Care

Products & Services

Consolidated

(in thousands)

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

As of December 31, 2017

$
625,011

$
(428,668
)
$
196,343

$
139,299

$
(139,299
)
$
—

$
764,310

$
(567,967
)
$
196,343

Additions from acquisitions

2,399

—

2,399

—

—

—

2,399

—

2,399

As of December 31, 2018

$
627,410

$
(428,668
)
$
198,742

$
139,299

$
(139,299
)
$
—

$
766,709

$
(567,967
)
$
198,742

The balances related to intangible assets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows:

As of June 30, 2018

As of December 31, 2017

As of March 31, 2019

(in thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Accumulated
Impairment

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Accumulated
Impairment

Net
Carrying
Amount

Gross Carrying
Amount

Accumulated
Amortization

Accumulated
Impairment

Net Carrying
Amount

Customer lists

$
30,976

$
(21,914
)
$
—

$
9,062

$
36,439

$
(24,267
)
$
—

$
12,172

$
27,420

$
(19,443
)
$
—

$
7,977

Other intangible assets

15,005

(10,222
)
—

4,783

15,820

(10,352
)
—

5,468

Trade name

255

(132
)
—

123

Patents and other intangibles

9,238

(5,040
)
—

4,198

Definite-lived intangible assets

45,981

(32,136
)
—

13,845

52,259

(34,619
)
—

17,640

36,913

(24,615
)
—

12,298

Indefinite life - trade name

9,070

—

(4,770
)
4,300

9,070

—

(4,770
)
4,300

Indefinite-lived trade names

9,070

—

(4,953
)
4,117

Total other intangible assets

$
55,051

$
(32,136
)
$
(4,770
)
$
18,145

$
61,329

$
(34,619
)
$
(4,770
)
$
21,940

$
45,983

$
(24,615
)
$
(4,953
)
$
16,415

As of December 31, 2018

(in thousands)

Gross Carrying
Amount

Accumulated
Amortization

Accumulated
Impairment

Net Carrying
Amount

Customer lists

$
26,036

$
(19,051
)
$
—

$
6,985

Trade name

255

(125
)
—

130

Patents and other intangibles

9,391

(5,145
)
—

4,246

Definite-lived intangible assets

35,682

(24,321
)
—

11,361

Indefinite-lived trade names

9,070

—

(4,953
)
4,117

Total other intangible assets

$
44,752

$
(24,321
)
$
(4,953
)
$
15,478

Total intangible amortization expense was approximately ~~$1.8~~$1.2 million and ~~$2.4~~$2.0 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively and $3.8 million and $4.9 million for the six months ended June 30, 2018 and 2017,~~ respectively.
Estimated aggregate amortization expense for ~~definite lived~~definite-lived intangible assets for each of the next five years ended December 31st and thereafter is as follows:

(in thousands)

2018 (remainder of year)

$
2,944

2019

3,762

2020

3,509

2021

927

2022

860

Thereafter

1,843

Total

$
13,845

(in thousands)

2019 (remainder of the year)

$
3,652

2020

4,601

2021

1,118

2022

964

2023

855

Thereafter

1,108

Total

$
12,298

NOTE GI — OTHER CURRENT ASSETS AND OTHER ASSETS

Other current assets consist of the following:

As of March 31,

As of December 31,

(in thousands)

As of June 30, 2018

As of December 31, 2017

2019

2018

Non-trade receivables

$
8,130

$
7,668

$
8,561

$
7,848

Prepaid rent

4,410

4,248

657

4,442

Prepaid maintenance

2,805

3,134

3,554

3,330

Restricted cash

2,331

3,271

Prepaid insurance

1,124

271

1,723

258

Prepaid other

994

1,101

Prepaid purchase orders

934

998

Prepaid education and training

518

597

Prepaid benefits

901

368

117

157

Other

1,714

1,928

Total other current assets

$
21,415

$
20,888

$
17,058

$
18,731

Other assets consist of the following:

As of March 31,

As of December 31,

(in thousands)

As of June 30, 2018

As of December 31, 2017

2019

2018

Cash surrender value of company owned life insurance

$
3,003

$
2,340

$
3,045

$
2,918

Non-trade receivables

2,314

2,407

1,822

1,904

Surety bond

2,500

2,500

Deposits

2,141

2,193

1,753

1,698

Derivative asset

1,255

—

Surety bond collateral

1,000

1,000

Finance lease right-of-use assets

541

—

Other

269

—

231

246

Total other assets

$
11,482

$
9,440

$
8,392

$
7,766

NOTE HJ — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

Accrued expenses and other current liabilities consist of:

As of March 31,

As of December 31,

(in thousands)

As of June 30, 2018

As of December 31, 2017

2019

2018

Patient prepayments, deposits and refunds payable

$
25,242

$
30,194

$
24,187

$
24,563

Accrued professional fees

4,260

11,612

Insurance and self-insurance accruals

8,894

8,901

8,610

8,886

Accrued sales taxes and other taxes

6,055

6,335

7,283

6,810

Accrued professional fees

3,685

3,751

Education expenses

2,315

—

Derivative liability

1,222

—

1,205

724

Accrued interest payable

400

845

487

332

Other current liabilities

8,185

8,421

5,539

6,717

Total accrued expenses and other current liabilities

$
54,258

$
66,308

$
53,311

$
51,783

Other liabilities consist of:

As of March 31,

As of December 31,

(in thousands)

As of June 30, 2018

As of December 31, 2017

2019

2018

Supplemental executive retirement plan obligations

$
20,325

$
21,842

$
18,661

$
20,195

Long-term insurance accruals

9,620

9,531

8,437

8,713

Derivative liability

6,515

3,134

Unrecognized tax benefits, and related interest and penalties

5,523

5,458

Asset retirement obligations

1,113

980

Deferred tenant improvement allowances

8,363

7,361

—

8,570

Unrecognized tax benefits

5,337

5,219

Deferred rent

4,673

4,909

—

4,455

Other

1,147

1,391

10

65

Total other liabilities

$
49,465

$
50,253

$
40,259

$
51,570

NOTE IK — INCOME TAXES

We recorded a benefit from income tax of ~~$0.1~~$3.7 million and ~~a provision of $0.6~~$6.2 million for the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The effective tax rate was ~~(0.7)%~~35.0% and ~~25.2%~~21.5% for the three months ended ~~June 30,~~March 31, 2019 and 2018, and 2017, respectively. We recorded a benefit from income tax of $6.3 million and a benefit of $5.4 million for the six months ended June 30, 2018 and 2017, respectively. The effective tax rate was 39.4% and 25.3% for the six months ended June 30, 2018 and 2017, respectively.

The ~~decrease~~increase in the effective tax rate for the three months ended ~~June 30, 2018~~March 31, 2019 compared with the three months ended ~~June 30, 2017~~March 31, 2018 is primarily attributable to ~~the changes enacted by the Tax Act and~~ the change from the discrete method ~~for interim reporting used for~~in the three months ended March 31, 2018 to ~~using~~ the ~~annualized~~annual effective tax rate ~~method~~ for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019, an increased estimated annual income, and the windfall from stock-based compensation recorded as a discrete item during the period. Our effective tax rate for the three months ended ~~June 30, 2018~~March 31, 2019 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the windfall from stock-based compensation recorded as a discrete item during the period. Our effective tax rate for the three months ended June 30, 2017 differed from the federal statutory tax rate of 35% primarily due to non-deductible expenses and the windfall from stock-based compensation recorded as a discrete item during the period.
The increase in the income tax benefit for the six months ended June 30, 2018 compared with six months ended June 30, 2017 is largely driven by the increased estimated annual effective tax rate applied to the quarter, partially offset by decreased loss from continuing operations before taxes for the period. The increase in estimated annual effective tax rate was driven by increased estimated permanent differences and decreased estimated loss from continuing operations before taxes. Our effective tax rate for the six months ended June 30,March 31, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the shortfall from stock based compensation recorded as discrete item during the period. Our effective tax rate for the six months ended June 30, 2017 differed from the federal statutory tax rate of 35% primarily due to non-deductible expenses and the shortfall from stock basedstock-based compensation recorded as a discrete item during the period.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In the fourth quarter of 2017, we recorded a provisional amount of $35.0 million of tax expense related to re-measurement of our deferred tax assets and liabilities.
For the six months ended June 30, 2018, there were no significant adjustments to this amount although it remains provisional. Additional work is still necessary for a more detailed analysis of our deferred tax assets and liabilities. The future issuance of U.S. Treasury Regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimate. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
NOTE JL — ~~LONG-TERM DEBT~~LEASES

~~Long-term debt~~The information pertaining to leases on the condensed consolidated balance sheet is as follows:

As of March 31,

(in thousands)

Classification

2019

Assets

Operating lease right-of-use assets

Operating lease right-of-use assets

$
103,676

Finance lease right-of-use assets

Other assets

541

Total lease assets

$
104,217

Liabilities

Current

Operating

Current portion of operating lease liabilities

$
33,675

Finance

Current portion of long-term debt

246

Noncurrent

Operating

Operating lease liabilities

83,693

Finance

Long-term debt, less current portion

321

Total lease liabilities

$
117,935

The components of lease cost recognized in the condensed consolidated statement of operations are as follows:
(in thousands)

For the Three Months Ended
March 31, 2019

Operating lease cost

$
10,836

Finance lease cost

Amortization of right-of-use assets

75

Interest on lease liabilities

6

Sublease income

(33
)
Short-term lease cost

368

Variable lease cost

1,217

Total lease cost

$
12,469

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at March 31, 2019 are as follows:
(in thousands)

Finance
Leases

Operating
Leases

Total Leases

2019 (remainder of year)

$
206

$
29,609

$
29,815

2020

208

35,411

35,619

2021

136

26,294

26,430

2022

50

18,741

18,791

2023

2

12,019

12,021

2024

—

5,826

5,826

Thereafter

—

4,593

4,593

Total future minimum lease payments

602

132,493

133,095

Imputed interest

(35
)
(15,125
)
(15,160
)
Total

$
567

$
117,368

$
117,935

The lease term and discount rates are as follows:
For the Three Months Ended
March 31, 2019
Weighted average remaining lease term (years)
Operating leases
3.98
Finance leases
2.60
Weighted average discount rate
Operating leases
5.73
%
Finance leases
4.20
%
Supplemental cash flow information related to leases is as follows:
(in thousands)

For the Three Months Ended
March 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$
11,787

Operating cash flows from finance leases

6

Financing cash flows from finance leases

80

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

10,394

Finance leases

76

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at December 31, 2018 are as follows:
(in thousands)

Operating
Leases

Capital
Leases

2019

$
39,378

$
249

2020

29,641

175

2021

21,303

109

2022

14,479

28

2023

9,193

—

Thereafter

10,008

—

$
124,002

$
561

NOTE M — DEBT AND OTHER OBLIGATIONS
Debt consists of the following:

(in thousands)

As of June 30, 2018

As of December 31, 2017

Credit Agreement, dated March 6, 2018

Revolving credit facility

$
—

$
—

Term loan B

503,738

—

Prior Credit Agreement, dated August 1, 2016

Term loan B

—

280,000

Prior Credit Agreement, dated June 17, 2013

Revolving credit facility

—

5,000

Term loan

—

151,875

Seller notes

4,148

5,912

Financing leases and other

16,738

18,169

Total debt before unamortized discount and debt issuance costs

524,624

460,956

Unamortized discount and debt issuance costs, net

(10,083
)
(10,692
)
Total debt

514,541

450,264

Current portion of long-term debt

10,384

4,336

Long-term debt

$
504,157

$
445,928

As of March 31,

As of December 31,

(in thousands)

2019

2018

Debt:

Term Loan B

$
499,950

$
501,213

Seller notes

7,402

4,506

Financing leases and other

1,212

14,361

Total debt before unamortized discount and debt issuance costs

508,564

520,080

Unamortized discount and debt issuance costs, net

(9,264
)
(9,407
)
Total debt

$
499,300

$
510,673

Current portion of long-term debt:

Term Loan B

$
5,050

$
5,050

Seller notes

3,288

2,513

Financing leases and other

339

1,020

Total current portion of long-term debt

8,677

8,583

Long-term debt:

$
490,623

$
502,090

Refinancing of Credit Agreement and Term B Borrowings

On March 6, 2018, we entered into a ~~new~~ $605.0 million Senior Credit Facility (the “Credit Agreement”).
The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term ~~loan~~Loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025. Availability under the revolving credit facility is reduced by outstanding letters of credit, which were approximately ~~$5.9~~$5.2 million as of ~~June 30, 2018.~~March 31, 2019. We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility.

Net proceeds from our initial borrowings under the Credit Agreement, which totaled approximately $501.5 million, were used in part to repay in full all previously existing loans outstanding under our previous credit agreement and Term B credit agreement. Proceeds were also used to pay various transaction costs including fees paid to respective lenders and accrued and unpaid interest. The remainder of the proceeds are being used to provide ongoing working capital and capital for other general corporate purposes.
In connection with the Credit Agreement, we paid debt issuance costs of approximately $6.8 million. As part of the repayment of amounts outstanding under our prior credit agreements, we paid a call premium totaling approximately $8.4 million and expensed outstanding unamortized discount and debt issuance costs totaling approximately $8.6 million. The call premium and unamortized debt issuance costs on the prior credit agreements are included in “Loss on Extinguishment of Debt” in the condensed consolidated statements of operations for the six months ended June 30, 2018.
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, 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, 2018,~~March 31, 2019, the weighted average interest rate on outstanding borrowings under our Term ~~loan~~Loan B facility was approximately ~~5.4%~~6.0%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note LO - “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.

The Credit Agreement contains various restrictions and covenants, ~~including~~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 ~~make investments and pay dividends and other distributions.~~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 (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) of 5.00 to 1.00 for the fiscal ~~quarters~~quarter ended ~~June 30, 2018, September 30, 2018, December 31, 2018 and~~ March 31, 2019; 4.75 to 1.00 for the fiscal quarters ended June 30, 2019 through March 31, 2020; 4.50 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) 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. We were in compliance with all covenants at ~~June 30, 2018.~~March 31, 2019.

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.

Seller Notes
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 $0.3 million and $0.2 million as of March 31, 2019 and December 31, 2018, 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 2.00% to 3.00%. Principal and interest are payable in monthly, quarterly, or annual installments and mature through November 2023.
Scheduled maturities of debt at ~~June 30, 2018~~March 31, 2019 were as ~~follows (in thousands):~~follows:
2018 (remainder of year)

$
5,999

2019

8,356

2020

7,275

2021

5,936

2022

6,053

Thereafter

491,005

Total debt before unamortized discount and debt issuance costs, net

524,624

Unamortized discount and debt issuance costs, net

(10,083
)
Total debt

$
514,541

(in thousands)

2019 (remainder of year)

$
5,974

2020

8,220

2021

7,193

2022

5,849

2023

5,329

Thereafter

475,999

Total debt before unamortized discount and debt issuance costs, net

508,564

Unamortized discount and debt issuance costs, net

(9,264
)
Total debt

$
499,300

NOTE KN — FAIR VALUE MEASUREMENTS

~~Fair Value Measurements~~
We follow the authoritative guidance for financial assets and liabilities, which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The authoritative guidance requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be categorized, based on significant levels of inputs as follows:
~~Level 1 consists of securities for which there are quoted prices in active markets for identical securities;~~
Level 2 consists of securities for which observable inputs other than Level 1 inputs are used, such as quoted prices for similar securities in active markets or quoted prices for identical securities in less active markets and model-derived valuations for which the variables are derived from, or corroborated by, observable market data; and
~~Level 3 consists of securities for which there are no observable inputs to the valuation methodology that are significant to the measurement of the fair value.~~
~~The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.~~
Financial Instruments
We hold investments in money market funds which are measured at fair value on a recurring basis. As of June 30, 2018 and December 31, 2017, $2.3 million and $3.3 million, respectively, of money market funds which are restricted from general use are presented within “Other current assets.” The fair values of our money market funds are based on Level 1 observable market prices and are equivalent to one dollar per share. The carrying value of accounts receivable and accounts payable approximate their fair values based on the short-term nature of these instruments.

In March 2018, we refinanced our credit facilities with the Credit Agreement. The carrying value (excluding unamortized discounts and debt issuance costs of $9.3 million) of our outstanding term loan as of ~~June 30, 2018~~March 31, 2019 was ~~$503.7~~$500.0 million compared to its fair value of ~~$501.8~~$498.7 million. The carrying value of our outstanding term loan as of December 31, ~~2017~~2018 (excluding unamortized discounts and debt issuance costs of $9.4 million) was ~~$151.9~~$501.2 million compared to its fair value of ~~$149.4 million. The carrying value of our outstanding Term Loan B as of December 31, 2017 was $280.0 million compared to its fair value of $283.5~~$491.2 million. Our estimates of fair value are based on a discounted cash flow model and indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

As of ~~June 30,~~March 31, 2019 and December 31, 2018, we had no amounts outstanding on our revolving credit facility. The carrying value of the amount outstanding on our revolving credit facilities as of December 31, 2017 was $5.0 million compared to the fair value $4.9 million. Our estimates of fair value are based on a discounted cash flow model using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

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. The notional value outstanding as of March 31, 2019 was $312.5 million. The interest rate swap agreements are designated as cash flow hedges and are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement. See Note JM - “~~Long-Term~~ Debt” and Note LO - ““Derivative Financial ~~Instruments”~~Instruments” for further information.
The carrying value of our ~~outstanding subordinated promissory notes issued in connection with acquisitions (“~~Seller ~~Notes”)~~Notes as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 was ~~$4.1~~$7.4 million and ~~$5.9~~$4.5 million, respectively. We believe that the carrying value of the Seller Notes 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.

NOTE LO — DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to certain risks arising from both our business operations and economic conditions. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counter-party in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

~~During the three months ended June 30, 2018, such derivatives were used to hedge certain variable cash flows associated with existing variable-rate debt.~~ As of ~~June 30,~~March 31, 2019, our swaps had a notional value outstanding of $312.5 million. As of December 31, 2018, our swaps had a notional value outstanding of $325.0 million. ~~We had no swaps outstanding as of December 31, 2017.~~

~~Changes~~Change in Net ~~Gain or~~ Loss on Cash Flow Hedges ~~Included in~~Including Accumulated Other Comprehensive Loss

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss ~~(“AOCI”)~~ for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018:

(in thousands)

Cash Flow Hedges

Cash Flow Hedges

Balance as of March 31, 2018

$
2,290

Unrealized gain recognized in other comprehensive income (loss), net of tax

(1,618
)
Balance as of December 31, 2018

$
2,936

Unrealized loss recognized in other comprehensive loss, net of tax

3,151

Reclassification to interest expense, net

(696
)

(215
)
Balance as of June 30, 2018

$
(24
)
Balance as of March 31, 2019

$
5,872

Balance as of December 31, 2017

$
—

$
—

Unrealized loss recognized in other comprehensive income (loss), net of tax

920

Unrealized loss recognized in other comprehensive loss, net of tax

2,538

Reclassification to interest expense, net

(944
)

(248
)
Balance as of June 30, 2018

$
(24
)
Balance as of March 31, 2018

$
2,290

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017:~~2018:

As of June 30, 2018

As of December 31, 2017

(in thousands)

Assets

Liabilities

Assets

Liabilities

Derivatives designated as cash flow hedging instruments:

Accrued expenses and other current liabilities

$
—

$
1,222

$
—

$
—

Other assets

1,255

—

—

—

As of March 31, 2019

As of December 31, 2018

(in thousands)

Assets

Liabilities

Assets

Liabilities

Derivatives designated as cash flow hedging instruments:

Accrued expenses and other current liabilities

$
—

$
1,205

$
—

$
724

Other liabilities

—

6,515

—

3,134

NOTE MP — STOCK-BASED COMPENSATION

The Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”), as amended by our Board of Directors (the “Board”) in May 2018 authorizes the issuance of up to 2,625,000 shares of Common Stock, plus ~~(1)~~(i) the number of shares available for issuance under our prior equity incentive plan, the Hanger, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”), that had not been made subject to outstanding awards as of the effective date of the 2016 Plan and ~~(2)~~(ii) any shares that would have become available again for new grants under the terms of the 2010 Plan if such plan were still in effect.

We recognized a total of approximately $3.3 million and ~~$2.9~~$2.6 million, respectively, of stock-based compensation expense for the three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017 and a total of approximately $5.9 million and $5.1 million for the six months ended June 30, 2018 and 2017.~~2018. Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.
NOTE NQ — SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

Defined Benefit Supplemental Executive Retirement Plan

~~Our~~Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) ~~covers~~for certain senior ~~executives, is administered by us and~~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.

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 DB SERP’s change in net benefit cost and obligation during the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ is as follows:

Change in Benefit ~~Obligation~~Obligation:

(in thousands)

2018

2017

2019

2018

Benefit obligation as of March 31

$
19,158

$
19,745

Benefit obligation as of December 31, 2018 and 2017, respectively

$
18,927

$
20,793

Service cost

92

85

84

92

Interest cost

150

167

165

150

Payments

(12
)
(12
)

(1,877
)
(1,877
)
Benefit Obligation as of June 30

$
19,388

$
19,985

Benefit obligation as of December 31, 2017 and 2016, respectively

$
20,793

$
21,304

Service cost

184

170

Interest cost

300

334

Payments

(1,889
)
(1,823
)
Benefit obligation as of June 30

$
19,388

$
19,985

Benefit Obligation as of March 31

$
17,299

$
19,158

Amounts Recognized in the Condensed Consolidated Balance Sheets:

As of March 31,

As of December 31,

(in thousands)

June 30, 2018

December 31, 2017

2019

2018

Accrued expenses and other current liabilities

$
1,913

$
1,913

$
1,913

$
1,913

Other liabilities

17,474

18,880

15,386

17,014

Total accrued liabilities

$
19,387

$
20,793

$
17,299

$
18,927

Defined Contribution Supplemental Executive Retirement Plan

~~We have~~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 ~~(and~~with which we own an insurance ~~policy).~~policy.

As of ~~June 30,~~March 31, 2019 and December 31, 2018, ~~and 2017,~~ the estimated accumulated obligation benefit is ~~$2.7~~$3.1 million and ~~$2.3~~$3.0 million, respectively, of which ~~$2.5~~$3.0 million and ~~$2.1~~$2.4 million is funded and ~~$0.2~~$0.1 million and ~~$0.2~~$0.6 million is unfunded at ~~June 30,~~March 31, 2019 and December 31, 2018, ~~and 2017,~~ respectively.

In connection with the DC SERP benefit obligation, we maintain a company owned life insurance policy ~~which~~(“COLI”). The carrying value of the COLI is measured at its cash surrender value and is presented within “Other assets” in our consolidated balance sheets. See Note GI - “Other Current Assets and Other Assets” for additional information.
NOTE OR — COMMITMENTS AND CONTINGENCIES

~~Commitments~~
In April 2014, in connection with the settlement of a patent infringement dispute, our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), entered into a non-cancellable agreement to purchase a total of $4.5 million of prosthetic gel liners in five installments. We determined that a portion of the prosthetic gel liners should be reserved as excess and slow-moving inventory, and we accrued a liability and expensed $3.4 million in 2014. As of June 30, 2018, $1.0 million of the non-cancellable purchase commitment was outstanding and is due and payable by April of 2019. As of June 30, 2018, our reserve associated with the non-cancellable purchase commitment was $2.6 million.
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.

Legal Proceedings

Securities and Derivative Litigation

In November 2014, a securities class action complaint, City of Pontiac General Employees’ Retirement System v. Hanger, et al., C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.

On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint. On July 1, 2016, plaintiffs filed an amended complaint. On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit. On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim. On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. ~~Appellate briefing was completed on August 18, 2017 and the Court of Appeals held oral argument for the appeal on March 5, 2018.~~ On August 6, 2018, the Court of Appeals affirmed in part and reversed in part. The Court of Appeals affirmed the dismissal of the case against individual defendants Vinit Asar, our current President and Chief Executive Officer, and Thomas Kirk, our former President and Chief Executive Officer, but reversed the dismissal of the case against George McHenry, our former Chief Financial Officer, and Hanger, Inc. ~~The case has been remanded back~~On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals. On April 10, 2019 the Court of Appeals granted the petition for panel rehearing, withdrew its previous panel decision, and substituted a new panel decision in its place that affirmed the District Court’s dismissal with prejudice of all claims against all the defendants for failure to state a claim. Plaintiffs did not petition the Court of Appeals for a panel rehearing or a rehearing en banc. Should plaintiffs decide to continue the litigation, their sole remaining option is to petition the United States ~~District~~Supreme Court to review the new Fifth Circuit panel decision issued on April 10, 2019. The deadline for the Western District of Texas for further proceedings with respect to the remaining claims. We believe the remaining claims are without merit, and intend to continue to vigorously defend against these claims.such petition is July 9, 2019.

In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated into Judy v. Asar, et. al., Cause No. D-1-GN-15-000625. On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 459th Judicial District Court of Travis County, Texas.
The amended complaint in the consolidated derivative action names us and certain of our current and former officers and directors as defendants. It alleges claims for breach of fiduciary duty based, inter alia, on the defendants’ alleged failure to exercise good faith to ensure that we had in place adequate accounting and financial controls and that disclosures regarding our business, financial performance and internal controls were truthful and accurate. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief.

As disclosed in our Current Report on Form 8-K filed with the ~~SEC~~Securities and Exchange Commission (“SEC”) on June 6, 2016, the Board of Directors appointed a Special Litigation Committee of the Board (the “Special Committee”). The Board delegated to the Special Committee the authority to (1) determine whether it is in our best interests to pursue any of the allegations made
in the derivative cases filed in Texas state court (which cases were consolidated into the Judy case discussed above), (2) determine whether it is in our best interests to pursue any remedies against any of our current or former employees, officers or directors as a result of the conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation. The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests. In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue any of the claims in the Judy derivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.

On April 14, 2017, we filed a motion to dismiss the consolidated derivative action based on the resolution by the Special Committee that it is not in our best interest to pursue the derivative claims. Counsel for the derivative plaintiffs opposed that motion and moved to compel discovery. In a hearing held on June 12, 2017, the Travis County court denied plaintiffs’ motion to compel, and held that the motion to dismiss would be considered only after appropriate discovery was concluded.

The plaintiffs ~~have since~~subsequently subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, took the position that the full report is not discoverable under Texas law. Plaintiffs’ counsel filed a motion to compel the Special Committee’s counsel to produce the full report. We opposed the motion. On July 20, 2018, the Travis County court ruled that only a redacted version of the report is ~~discoverable.~~discoverable, and counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel. Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County court appointed a Special Master to review plaintiffs’ objections to the redacted report. On March 22, 2019, the Special Master submitted a report to the Travis County Court recommending that the Court order that the entire Special Committee report be produced. On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter. The Travis County Court scheduled a hearing for May 15, 2019 regarding our objection. Upon completion of discovery, we intend to file a motion to dismiss the consolidated derivative action.

Management intends to continue to vigorously defend against the ~~securities class action and the~~ shareholder derivative action. At this time, if the derivative action were to go to trial, we cannot predict how the ~~Courts will~~Travis County Court would rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Should we ultimately be found liable, the resulting damages could have a material adverse effect on our consolidated financial position, liquidity or our results of ~~our~~ operations.

Other Matters

From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, ~~including~~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 our operations.

We ~~are~~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.

~~Favorable Settlements~~
~~For the three months ended June 30, 2018, our results of operations and net income benefited from the favorable resolution of two matters.~~
On May 15, 2018, we received a net favorable settlement of $1.7 million in connection with our long standing damage claims relating to the “Deepwater Horizon” disaster, and the prior adverse effect which it had on our clinic operations along the Gulf Coast in April of 2010. We anticipate the receipt of no further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims. The benefit of this settlement has been recognized as a reduction to our general and administrative expenses for the three months and six months ended June 30, 2018.
On June 28, 2018, we entered into an agreement with the State of Delaware, and made payment, to satisfy all of the State’s abandoned or unclaimed property claims transactions represented within the period of January 1, 2001 through December 31, 2012 which were reportable through December 31, 2017 in the amount of $2.2 million. This agreed upon payment amount was
favorable by $0.5 million to the amount we had previously estimated for these liabilities and had the effect of reducing our general and administrative expenses by this amount for the quarter and year-to-date. Additionally, under the terms of the agreement, we were not required to pay interest on the previously un-remitted cumulative abandoned or unclaimed property relating to this twelve year period in the amount of $1.5 million, which had the effect of lowering our interest expense in the quarter and for the year-to-date periods ending June 30, 2018 by this accrued interest amount.
NOTE PS — SEGMENT AND RELATED INFORMATION

We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each operating segment’s income from operations. The operating segments are described further below:

Patient Care - This segment consists of ~~(i)~~ our owned and operated patient care ~~clinics, and (ii) our contracting and network management business.~~clinics. The patient care clinics provide services to design and fit O&P devices to patients. These clinics also instruct patients in the use, care and maintenance of the devices. The principal reimbursement sources for our services are:
·                  Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, ~~HMOs, PPOs,~~health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation, workers’ compensation programs, and similar sources;

·                  Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules with 10 regional pricing areas for prosthetics and orthotics and by state for durable medical equipment;

·                  Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

·                  U.S. Department of Veterans Affairs.

Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies. We partner with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers.

Products & Services - This segment consists of our distribution services business, which distributes and fabricates O&P products and components to sell to both the O&P industry and our own patient care clinics, and our therapeutic solutions business. The therapeutic solutions business provides and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training. This segment also develops emerging neuromuscular technologies for the O&P and rehabilitation markets.

Corporate & Other - This consists of corporate overhead and includes unallocated ~~expense~~expenses such as personnel costs, professional fees, and corporate offices expenses.

The accounting policies of the segments are the same as those described in Note BA - “Organization and Summary of Significant Accounting Policies” in our ~~2017~~2018 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.

Summarized financial information concerning our reporting segments is shown in the following tables.
Total assets for each of the segments has not materially changed from December 31, ~~2017.~~2018.

Patient Care

Products & Services

For the Three Months Ended
March 31,

For the Three Months Ended
March 31,

(in thousands)

Patient Care

Products &
Services

Corporate &
Other

Consolidating
Adjustments

Total

2019

2018

2019

2018

Three Months Ended June 30, 2018

Net revenue

Net revenues

Third party

$
218,158

$
48,808

$
—

$
—

$
266,966

$
190,601

$
188,507

$
45,818

$
45,488

Intersegments

—

49,835

—

(49,835
)
—

—

—

44,879

42,522

Total net revenue

218,158

98,643

—

(49,835
)
266,966

190,601

188,507

90,697

88,010

Material costs

Third party suppliers

59,989

26,527

—

—

86,516

53,355

52,175

25,022

24,181

Intersegments

5,920

43,915

—

(49,835
)
—

5,795

5,724

39,084

36,798

Total material costs

65,909

70,442

—

(49,835
)
86,516

59,150

57,899

64,106

60,979

Personnel expenses

76,792

12,762

—

—

89,554

73,709

73,613

13,002

12,495

Other expenses

35,439

5,483

20,373

—

61,295

37,433

35,004

6,948

6,155

Depreciation & amortization

4,998

2,503

1,771

—

9,272

4,552

4,898

2,543

2,502

Income (loss) from operations

35,020

7,453

(22,144
)
—

20,329

Interest expense, net

6,456

3,247

(2,386
)
—

7,317

Loss on extinguishment of debt

—

—

—

—

—

Non-service defined benefit plan expense

—

—

176

—

176

Income (loss) before income taxes

28,564

4,206

(19,934
)
—

12,836

Benefit for income taxes

—

—

(92
)
—

(92
)
Net income (loss)

$
28,564

$
4,206

$
(19,842
)
$
—

$
12,928

Segment income from operations

$
15,757

$
17,093

$
4,098

$
5,879

(in thousands)

Patient Care

Products &
Services

Corporate &
Other

Consolidating
Adjustments

Total

Three Months Ended June 30, 2017

Net revenue

Third Party

$
216,221

$
47,165

$
—

$
—

$
263,386

Intersegments

—

45,169

—

(45,169
)
—

Total net revenue

216,221

92,334

—

(45,169
)
263,386

Material costs

Third party suppliers

58,322

25,335

—

—

83,657

Intersegments

5,923

39,246

—

(45,169
)
—

Total material costs

64,245

64,581

—

(45,169
)
83,657

Personnel expenses

75,906

11,925

—

—

87,831

Other expenses

35,546

6,061

24,002

—

65,609

Depreciation & amortization

5,370

2,592

1,863

—

9,825

Income (loss) from operations

35,154

7,175

(25,865
)
—

16,464

Interest expense, net

8,124

3,300

2,667

—

14,091

Loss on extinguishment of debt

—

—

—

—

—

Non-service defined benefit plan expense

—

—

184

—

184

Income (loss) before income taxes

27,030

3,875

(28,716
)
—

2,189

Provision for income taxes

—

—

552

—

552

Net income (loss)

$
27,030

$
3,875

$
(29,268
)
$
—

$
1,637

(in thousands)

Patient Care

Products &
Services

Corporate &
Other

Consolidating
Adjustments

Total

Six Months Ended June 30, 2018

Net revenue

Third party

$
406,665

$
94,296

$
—

$
—

$
500,961

Intersegments

—

92,357

—

(92,357
)
—

Total net revenue

406,665

186,653

—

(92,357
)
500,961

Material costs

—

Third party suppliers

112,164

50,708

—

—

162,872

Intersegments

11,644

80,713

—

(92,357
)
—

Total material costs

123,808

131,421

—

(92,357
)
162,872

Personnel expenses

150,405

25,257

—

—

175,662

Other expenses

70,443

11,638

40,792

—

122,873

Depreciation & amortization

9,896

5,005

3,701

—

18,602

Income (loss) from operations

52,113

13,332

(44,493
)
—

20,952

Interest expense, net

14,445

6,512

(1,377
)
—

19,580

Loss on extinguishment of debt

—

—

16,998

—

16,998

Non-service defined benefit plan expense

—

—

352

—

352

Income (loss) before income taxes

37,668

6,820

(60,466
)
—

(15,978
)
Benefit for income taxes

—

—

(6,288
)
—

(6,288
)
Net income (loss)

$
37,668

$
6,820

$
(54,178
)
$
—

$
(9,690
)
A reconciliation of the total of the reportable segments’ income (loss) from operations to consolidated loss from operations is as follows:

(in thousands)

Patient Care

Products &
Services

Corporate &
Other

Consolidating
Adjustments

Total

Six Months Ended June 30, 2017

Net revenue

Third Party

$
403,858

$
93,209

$
—

$
—

$
497,067

Intersegments

—

86,369

—

(86,369
)
—

Total net revenue

403,858

179,578

—

(86,369
)
497,067

Material costs

—

Third party suppliers

108,933

49,129

—

—

158,062

Intersegments

11,745

74,624

—

(86,369
)
—

Total material costs

120,678

123,753

—

(86,369
)
158,062

Personnel expenses

151,421

24,365

—

—

175,786

Other expenses

71,262

12,955

52,117

—

136,334

Depreciation & amortization

10,799

5,262

3,901

—

19,962

Income (loss) from operations

49,698

13,243

(56,018
)
—

6,923

Interest expense, net

16,286

6,633

5,181

—

28,100

Loss on extinguishment of debt

—

—

—

—

—

Non-service defined benefit plan expense

—

—

368

—

368

Income (loss) before income taxes

33,412

6,610

(61,567
)
—

(21,545
)
Benefit for income taxes

—

—

(5,448
)
—

(5,448
)
Net income (loss)

$
33,412

$
6,610

$
(56,119
)
$
—

$
(16,097
)

For the Three Months Ended
March 31,

(in thousands)

2019

2018

(Loss) income from operations:

Patient Care

$
15,757

$
17,093

Products & Services

4,098

5,879

Corporate & other

(21,834
)
(22,349
)
(Loss) income from operations

(1,979
)
623

Interest expense, net

8,538

12,263

Loss on extinguishment of debt

—

16,998

Non-service defined benefit plan expense

173

176

Loss before income taxes

(10,690
)
(28,814
)
Benefit for income taxes

(3,739
)
(6,196
)
Net loss

$
(6,951
)
$
(22,618
)
A reconciliation of the reportable segment net revenue to consolidated net revenue is as follows:

For the Three Months Ended
March 31,

(in thousands)

2019

2018

Net revenues

Patient Care

$
190,601

$
188,507

Products & Services

90,697

88,010

Corporate & other

—

—

Consolidating adjustments

(44,879
)
(42,522
)
Consolidated net revenue

$
236,419

$
233,995

A reconciliation of the reportable segment material costs to consolidated material costs is as follows:

For the Three Months Ended
March 31,

(in thousands)

2019

2018

Material costs

Patient Care

$
59,150

$
57,899

Products & Services

64,106

60,979

Corporate & other

—

—

Consolidating adjustments

(44,879
)
(42,522
)
Consolidated material costs

$
78,377

$
76,356

NOTE QT — SUPPLEMENTAL CASH FLOW INFORMATION

Changes in operating assets and liabilities on cash flows from operating activities is as follows:

For the Six Months Ended
June 30,

For the Three Months Ended
March 31,

(in thousands)

2018

2017

2019

2018

Accounts receivable, net

$
13,029

$
5,061

$
10,395

$
19,425

Inventories

2,699

(4,113
)

(880
)
1,085

Other current assets

(119
)
947

Other current assets and other assets

(1,433
)
650

Income taxes

11,690

345

(355
)
12,255

Accounts payable

3,205

(1,267
)

(6,511
)
552

Accrued expenses and other current liabilities

(14,300
)
(8,488
)

492

(5,067
)
Accrued compensation related costs

(22,298
)
(6,234
)

(32,970
)
(35,789
)
Other liabilities

(2,538
)
(3,176
)

(1,829
)
(2,537
)
Operating lease liabilities

(10,082
)
—

Changes in operating assets and liabilities on cash flows from operating activities

$
(8,632
)
$
(16,925
)

$
(43,173
)
$
(9,426
)

The supplemental disclosure requirements for the statements of cash flows are as follows:

For the Six Months Ended
June 30,

For the Three Months Ended
March 31,

(in thousands)

2018

2017

2019

2018

Issuance of seller notes in connection with acquisitions

$
4,451

$
—

Additions to property, plant and equipment acquired through financing obligations

$
1,354

$
669

—

1,208

Retirements of financed property, plant and equipment and related obligations

2,246

135

—

2,246

Purchase of property, plant and equipment in accounts payable at period end

960

1,100

4,443

545

ITEM 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 judgments 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.

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, and any claims, investigations, or proceedings arising as a result, as well as our ability to remediate the material weaknesses in our internal control over financial reporting described in Item 4. “Controls and Procedures” contained elsewhere in this report, changes in the demand for our O&P products and services, uncertainties relating to the results of operations or our acquired O&P patient care clinics, our ability to enter into and derive benefits from managed-care contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health care industry, uncertainties inherent in investigations and legal proceedings, governmental policies affecting O&P operations, 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, ~~2017~~2018 (the ~~“2017~~“2018 Form 10-K”), 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 our 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 ~~2017~~2018 Form 10-K or by other unknown risks and uncertainties.
Effect of Delay in Financial Filings

As discussed in our 2018 Form 10-K, due to prior restatements and related issues, we were delayed in the preparation and filing of our financial statements in recent years. In connection with our efforts to restate our prior financial statements, remediate our material weaknesses, regain our timely filing status, and undertake related activities, we have incurred third party professional fees in excess of the amounts we estimate that we would have otherwise incurred. The estimated professional fees associated with these efforts are as follows:
(in thousands)

Balance to be Paid

For the Three Months Ended

Expensed

Paid

in Future Periods

March 31, 2018

$
3,700

$
(7,755
)
$
6,230

June 30, 2018

2,940

(5,938
)
3,232

September 30, 2018

2,230

(2,297
)
3,165

December 31, 2018

3,591

(3,561
)
3,195

March 31, 2019

1,649

(2,621
)
2,223

We currently estimate that during 2019, we will expend a total of $6.3 million in excess professional fees. We expect to continue to incur professional fees as we focus on the remediation of our continuing material weaknesses in internal controls over financial reporting. Due to the ongoing material weaknesses in our controls over financial reporting, we currently undertake additional substantive procedures to test and verify financial statement amounts in connection with the preparation of our financial statements.
~~Non-GAAP Measures~~Effect of Delay in Financial Filings

~~We refer~~As discussed in our 2018 Form 10-K, due to ~~certain financial measures~~prior restatements and ~~statistics that are not in accordance with accounting principles generally accepted~~related issues, we were delayed in the ~~United States~~preparation and filing of ~~America (“GAAP”). We utilize~~our financial statements in recent years. In connection with our efforts to restate our prior financial statements, remediate our material weaknesses, regain our timely filing status, and undertake related activities, we have incurred third party professional fees in excess of the amounts we estimate that we would have otherwise incurred. The estimated professional fees associated with 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 measures used in this Management’s Discussion and Analysisefforts are as follows:

~~Adjusted Gross Revenue and Disallowed Revenue~~ - “Adjusted gross revenue” reflects our gross billings after their adjustment to reflect estimated discounts established in our contracts with payors of health care claims. Pursuant to our contracts with payors, a portion of our adjusted gross billings may be disallowed based on factors including physician documentation, patient eligibility, plan design, prior authorization, timeliness of filings or appeal, coding selection, failure by certain patients to pay their portion of claims, computational errors associated with sequestration and other factors. We refer to these and other amounts as being “disallowed revenue” or “payor disallowances.” Our net revenue reflects adjusted gross revenue after reduction for the estimated aggregate amount of disallowed revenue for the applicable period. To facilitate analysis of the comparability of our results, we provide these non-GAAP measures due to the significant changes that we have experienced in recent years in disallowed revenue which are further discussed below.
~~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.
~~Overview~~
~~Business Overview~~
~~General~~
(in thousands)

Balance to be Paid

For the Three Months Ended

Expensed

Paid

in Future Periods

March 31, 2018

$
3,700

$
(7,755
)
$
6,230

June 30, 2018

2,940

(5,938
)
3,232

September 30, 2018

2,230

(2,297
)
3,165

December 31, 2018

3,591

(3,561
)
3,195

March 31, 2019

1,649

(2,621
)
2,223

We ~~are~~currently estimate that during 2019, we will expend a ~~leading national provider~~total of ~~products and services that assist~~$6.3 million in ~~enhancing or restoring the physical capabilities of patients with disabilities or injuries. Built~~excess professional fees. We expect to continue to incur professional fees as we focus on the ~~legacy~~remediation of ~~James Edward Hanger,~~our continuing material weaknesses in internal controls over financial reporting. Due to the ~~first amputee~~ongoing material weaknesses in our controls over financial reporting, we currently undertake additional substantive procedures to test and verify financial statement amounts in connection with the preparation of ~~the American Civil War, we and~~ our predecessor companies have provided O&P services for over 150 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.financial statements.

Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication and delivery of custom O&P devices through 680 patient care clinics and 109 satellite locations in 44 states and the District of Columbia as of June 30, 2018. 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 our therapeutic solutions businesses. As a leading provider of O&P products in the United States, we coordinate, through our distribution services business, the procurement and distribution of a broad catalog of O&P parts, componentry and devices to independent O&P providers nationwide. To facilitate speed and convenience, we deliver these products through our five distribution facilities that are located in Nevada, Georgia, Illinois, Pennsylvania and Texas. 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 4,000 skilled nursing and post-acute providers nationwide.
For the three and six months ended June 30, 2018, our net revenues were $267.0 million and $501.0 million, respectively, and we recorded net income of $12.9 million and a net loss of $9.7 million, respectively. For the three and six months ended June 30, 2017, our net revenues were $263.4 million and $497.1 million, respectively, and we recorded net income of $1.6 million and a net loss of $16.1 million, respectively.
~~Industry Overview~~
We estimate that approximately $4.1 billion is spent in the United States each year for orthotic and prosthetic products and services. We estimate that our Patient Care segment currently accounts for approximately 20% market share, providing a comprehensive portfolio of orthotic, prosthetic and post-operative solutions to patients in acute, post-acute and patient care clinic settings.
The traditional O&P patient care industry is highly fragmented and is characterized by local, independent O&P businesses. We do not believe that any single competitor accounts for more than 2% of the country’s total estimated O&P patient care 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 $1.7 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 and to our own patient care clinics. We estimate that our distribution sales account for approximately 8% 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 25% 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 1,500 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 its clinicians in the performance of their duties. Through this segment, we additionally provide network contracting services to independent providers of O&P through our “Linkia” business.
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 design 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 who 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. Frequently, our proprietary Insignia scanning system is used in the fabrication process. 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 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 disabled persons;~~
·                  Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons based upon financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and
·                  ~~the U.S. Department of Veterans Affairs.~~
We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be paid under the contract with the third party payor. These contracts usually have a stated term of one to three years. These contracts 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.
Government reimbursement is comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs. 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 (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 and Zone Program Integrity Contractor (“ZPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT and ZPIC audits are generally post-payment audits. The recently implemented TPE audits have replaced the previous Medicare Administrative Contractor (“MAC”) 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 O&P components to both independent customers and our own clinics in the Patient Care segment. SPS purchases, warehouses and distributes over 400,000 SKUs from more than 300 different manufacturers. Through our warehousing and distribution facilities in Nevada, Georgia, Illinois, Pennsylvania and Texas, we are able to deliver products to the vast majority of our customers in the United States within two business days. Through its SureFit subsidiary, SPS also manufactures and sells therapeutic footwear for diabetic patients in the podiatric market, and through its National Labs subsidiary it is a fabricator of O&P devices both for our patient care clinics and competitor clinics.
~~Our distribution services business 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.~~
Through our wholly-owned subsidiary, Accelerated Care Plus Corp., our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to post-acute care and rehabilitation providers. Our unique value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology,
evidence based clinical programs, and ongoing clinician education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We serve approximately 4,000 skilled nursing and post-acute providers nationwide.
Effect of Delay in Financial Filings

As discussed in our ~~2017~~2018 Form 10-K, due to prior restatements and related issues, we ~~had been~~were delayed in the preparation and filing of our financial statements in recent years. In connection with our efforts to restate our prior financial statements, remediate our material weaknesses, regain our timely filing status, and undertake related activities, we have incurred third party professional fees in excess of the amounts we estimate that we would have otherwise incurred. The estimated professional fees associated with these efforts are as follows:

~~(in thousands)~~

Balance to be Paid

For the Three Months Ended

Expensed

Paid

in Future Periods

March 31, 2017

$
11,537

$
14,766

$
19,672

June 30, 2017

7,567

13,765

13,474

September 30, 2017

6,839

6,430

13,883

December 31, 2017

6,358

9,956

10,285

March 31, 2018

3,700

7,755

6,230

June 30, 2018

2,940

5,938

3,232

(in thousands)

Balance to be Paid

For the Three Months Ended

Expensed

Paid

in Future Periods

March 31, 2018

$
3,700

$
(7,755
)
$
6,230

June 30, 2018

2,940

(5,938
)
3,232

September 30, 2018

2,230

(2,297
)
3,165

December 31, 2018

3,591

(3,561
)
3,195

March 31, 2019

1,649

(2,621
)
2,223

We currently estimate that during ~~2018,~~2019, we will expend a total of ~~$13.0~~$6.3 million in excess professional fees. We expect to continue to incur professional fees ~~with the primary purpose for future expenditures relating to our~~as we focus on the remediation of our continuing material weaknesses in internal controls over financial reporting. Due to the ongoing material weaknesses in our controls over financial reporting, we currently undertake additional substantive procedures to test and verify financial statement amounts in connection with the preparation of our financial statements.

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 measures used in this Management’s Discussion and Analysis are as follows:
Adjusted Gross Revenue and Disallowed Revenue - “Adjusted gross revenue” reflects our gross billings after their adjustment to reflect estimated discounts established in our contracts with payors of health care claims. Pursuant to our contracts with payors, a portion of our adjusted gross billings may be disallowed based on factors including physician documentation, patient eligibility, plan design, prior authorization, timeliness of filings or appeal, coding selection, failure by certain patients to pay their portion of claims, computational errors associated with sequestration, and other factors. We refer to these and other amounts as being “disallowed revenue” or “payor disallowances.” Our net revenue reflects adjusted gross revenue after reduction for the estimated aggregate amount of disallowed revenue for the applicable period. To facilitate analysis of the comparability of our results, we provide these non-GAAP measures due to the significant changes that we have experienced in recent years in disallowed revenue which are further discussed below.
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. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, we and our predecessor companies have provided O&P services for over 150 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.
Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication, and delivery of custom O&P devices through 697 patient care clinics and 104 satellite locations in 45 states and the District of Columbia as of March 31, 2019. 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 our therapeutic solutions businesses. As a leading provider of O&P products in the United States, we coordinate, through our distribution services business, the procurement and distribution of a broad catalog of O&P parts, componentry, and devices to independent O&P providers nationwide. To facilitate speed and convenience, we deliver these products through our five distribution facilities that are located in Nevada, Georgia, Illinois, Pennsylvania and Texas. 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 3,900 skilled nursing and post-acute providers nationwide.
For the three months ended March 31, 2019, our net revenues were $236.4 million and we recorded net loss of $7.0 million. For the three months ended March 31, 2018, our net revenues were $234.0 million and we recorded net loss of $22.6 million.
Industry Overview
We estimate that approximately $4.2 billion is spent in the United States each year for orthotic and prosthetic products and services. We estimate that our Patient Care segment currently accounts for approximately 20% of market share, providing a comprehensive portfolio of orthotic, prosthetic, and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.
The traditional O&P patient care industry is highly fragmented and is characterized by local, independent O&P businesses. We do not believe that any single competitor accounts for more than 2% of the country’s total estimated O&P patient care 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 $1.7 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 and to our own patient care clinics. We estimate that our distribution sales account for approximately 8% 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 1,500 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which are certified by either the American Board for Certification 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 its clinicians in the performance of their duties. Through this segment, we additionally provide network contracting services to independent providers of O&P.
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 design 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 who 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. Frequently, our proprietary Insignia scanning system is used in the fabrication process. 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, HMOs, 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 disabled persons;
·                  Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons based upon financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and
·                  the U.S. Department of Veterans Affairs.
We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be paid under the contract with the third party payor. These contracts usually have a stated term of one to three years. These contracts 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.
Government reimbursement is comprised of Medicare, Medicaid, and the U.S. Department of Veterans Affairs. 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 (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, and Zone Program Integrity Contractor (“ZPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, and ZPIC audits are generally post-payment audits. 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 O&P components to independent O&P clinics and other customers. Through our internal “supply chain” organization, we purchase, warehouse and distribute over 400,000 SKUs from more than 300 different manufacturers through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and distribution facilities in Nevada, Georgia, Illinois, Pennsylvania, and Texas, provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days. 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.
Our distribution services business 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.
Through our wholly-owned subsidiary, Accelerated Care Plus Corp., our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to post-acute care and 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 clinician education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We serve approximately 3,900 skilled nursing and post-acute providers nationwide.
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.~~U.S. Department of Veterans Affairs. Patient Care ~~constitutes 81.2%~~constituted 80.6% of our net revenue for ~~both~~ the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. Our remaining net revenue ~~is from~~was provided by our Products & Services segment which derives its net revenue 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 following is a summary of our net revenue by payor mix for the Patient Care segment expressed as a percentage of net revenues for the periods indicated:

For the Three Months Ended March 31,

2019

2018

Patient Care Segment

Medicare

30.3
%
30.5
%
Medicaid

15.8
%
15.8
%
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)

36.8
%
37.4
%
Veterans Administration

9.6
%
8.9
%
Private Pay

7.5
%
7.4
%
Total

100.0
%
100.0
%

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. ~~Traditionally, we have performed these tasks~~It is our belief the increased nationwide efforts to reduce health care costs has driven changes in ~~a manual fashion and on a decentralized basis. In recent years, due to~~industry trends with increases in payor pre-authorization processes, documentation requirements, pre-payment reviews and pre- and post-payment audits, our ability to successfully undertake these tasks using our traditional approach has become increasingly challenging. We believe these changes in industry trends have been brought about in part by increased nationwide efforts to reduce health care costs.

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, that we filed or appealed the payor’s determination
timely, on the basis of our coding, failure by certain classes of patients to pay their portion of a claim and 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. Due to the increasing demands of these processes, the level and capability of our staffing, as well as our material weaknesses and other considerations, our consolidated disallowed revenue and its relationship to consolidated adjusted gross revenue increased over historical levels to a peak level in 2014.
Commencing in late 2014 and continuing through today, we have taken a number of actions to ~~halt and reverse these~~manage disallowed revenue trends. These initiatives included: (i) the retention of consultants and creation of a central revenue cycle management function; (ii) addressing the issues identified in our 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. Through 2017, we saw significant improvements in these rates. While we intend to continue to work towards further improvements in our procedures through the use of technology within our clinic and revenue cycle functions, we do not currently foresee that future reductions in disallowed revenue will be as achievable or substantial as the improvements realized since 2014.

~~Under both ASC 606 and the previous revenue recognition guidance ASC 605,~~ ~~Revenue Recognition~~~~, disallowed~~Disallowed revenue is considered an adjustment to the transaction price. ~~However, upon adoption of ASC 606, estimated~~Estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are ~~now~~ presented as a reduction of net revenue. ~~Under prior guidance, these~~These amounts ~~were recognized as bad debt expense~~recorded in ~~other operating expenses.~~
~~Implicit price concessions such as payor disallowances and patient non-payments for~~net revenue within the Patient Care segment for the three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ are as follows:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

For the Three Months Ended March 31,

(dollars in thousands)

2018

2017

2018

2017

2019

2018

Net revenue

$
218,158

$
216,221

$
406,665

$
403,858

$
190,601

$
188,507

Estimated implicit price concessions arising from:

Payor disallowances

10,461

11,578

18,722

18,694

8,474

8,262

Patient non-payments

1,332

—

2,200

—

1,368

869

Adjusted gross revenue

$
229,951

$
227,799

$
427,587

$
422,552

$
200,443

$
197,638

Payor disallowances

$
10,461

$
11,578

$
18,722

$
18,694

$
8,474

$
8,262

Patient non-payments

1,332

—

2,200

—

1,368

869

Bad debt expense

—

2,481

—

4,284

Payor disallowances, patient non-payments and bad debt expense

$
11,793

$
14,059

$
20,922

$
22,978

Payor disallowances and patient non-payments

$
9,842

$
9,131

Payor disallowances %

4.5
%
5.1
%
4.4
%
4.4
%

4.2
%
4.2
%
Patient non-payments %

0.6
%
—
%
0.5
%
—
%

0.7
%
0.4
%
Bad debt expense %

—
%
1.1
%
—
%
1.0
%
Percent of adjusted gross revenue

5.1
%
6.2
%
4.9
%
5.4
%

4.9
%
4.6
%

~~Favorable Settlements~~Growth Rates and Earnings Effects

~~For~~Patient Care
During the three month period ending March 31, 2019, approximately 51% of our net revenue was derived from the provision of prosthetic devices to our patients. These devices have a significantly higher relative reimbursement as compared with the orthotic devices and other related prosthetic supplies that we provide patients. The volume of prosthetic patients we see from one period to the next varies greatly, and this has a significant effect on our relative rate of net revenue growth we experience. Additionally, with the exception of materials costs and certain incentive compensation amounts, our staffing levels, operating costs, lease costs, depreciation and amortization expenses, and interest costs, are essentially fixed in nature. As a result, increases or decreases in our revenue from one period to the next can have a significant effect on our comparative reporting earnings for those periods.
Products & Services
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2018, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in 2017, several of the larger independent O&P providers we served through the distribution of componentry encountered financial difficulties which resulted in our discontinuing distribution services to them. Generally, we believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care services 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.
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, began to discontinue 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. In 2019, we anticipate a further decline of approximately $5.0 million to $7.0 million in revenue from these services associated with customer discontinuances. Within this portion of our business, we have responded to these trends through increases in our marketing programs which convey the value we believe our services have to patients at SNFs and other adjacent health services provider markets.
Acquisitions
In the first three months ~~ended June 30,~~of 2019, we completed the acquisition of one business with 25 O&P clinics similar to those we operate through our Patient Care segment for an aggregate purchase price of $32.5 million. The purchase price consists of $27.7 million cash consideration, net of cash acquired, $4.5 million of unsecured notes issued to the sellers at fair value and $0.3 million of estimated additional consideration expected to be paid in the second quarter of 2019. In the last three months of 2018, we completed the acquisition of two O&P businesses for a combined purchase price of $3.1 million, of which $2.0 million was net cash consideration and $1.1 million was issued in an unsecured note to the seller. We do not believe these acquisitions undertaken in the first three months of 2019 and the last three months of 2018 have a material impact on our consolidated financial statements or our results ~~of operations and net income benefited~~ from ~~the favorable resolution of two matters.~~
On May 15, 2018, we received a net favorable settlement of $1.7 million in connection with our long standing damage claims relating to the “Deepwater Horizon” disaster, and the prior adverse effect which it had on our clinic operations along the Gulf Coast in April of 2010.operations. We ~~anticipate the receipt of~~made no further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims. The benefit of this settlement has been recognized as a reduction to our general and administrative expenses for the three months and six months ended June 30, 2018.
On June 28, 2018, we entered into an agreement with the State of Delaware, and made payment, to satisfy all of the State’s abandoned or unclaimed property claims transactions represented within the period of January 1, 2001 through December 31, 2012 which were reportable through December 31, 2017acquisitions in the ~~amount~~first nine months of $2.2 million. This agreed upon payment amount was favorable by $0.5 million to the amount we had previously estimated for these liabilities and had the effect of reducing our general and administrative expenses by this amount for the quarter and year-to-date. Additionally, under the terms of the agreement, we were not required to pay interest on the previously un-remitted cumulative abandoned or unclaimed property relating to this twelve year period in the amount of $1.5 million, which had the effect of lowering our interest expense in the quarter and for the year-to-date periods ending June 30, 2018 by this accrued interest amount.2018.

New System ~~Implementation~~Implementations

~~As discussed in our 2017 Form 10-K, in~~In recent years we have been undertaking the implementation of a new patient management and electronic health record system at our patient care clinics. AsIn the first quarter of ~~June 30, 2018,~~2019, we ~~have~~ completed this multi-year implementation. For the ~~installation of this system in approximately 83% of our clinic locations. We currently estimate that~~three month period ended March 31, 2019, we ~~will incur approximately $4.7~~expensed $0.8 million in training, travel and ~~other~~related implementation ~~expense in~~costs. For the years ended December 31, 2018 ~~related~~and 2017, we expensed $4.4 million and $4.3 million, respectively, for these implementation expenses. In future periods we intend to convert acquired clinics to this ~~implementation.~~system in the ordinary course of our business.

~~Acquisitions~~
~~We did not complete any acquisitions during~~During 2019, we intend to commence the ~~first half~~design, implementation planning and initial implementation of ~~2018. However,~~new financial and supply chain systems, and to invest in new servers and software that operate as a part of our technology infrastructure. During 2019, we currently ~~believe it is likely~~anticipate that we will ~~commence~~spend $3.5 million in operating expenses associated with the ~~acquisition of O&P clinics, which are similar to those~~new financial and supply chain systems and that we ~~operate through~~will incur $6.0 million in incremental capital expenditures associated with our ~~Patient Care segment, during~~investments in technology infrastructure. In 2020 and 2021, we currently expect to continue to incur operating expense for the ~~second half of 2018.~~financial and supply chain projects similar in amount to our 2019 expenses levels in connection with this implementation.

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 and earnings quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another, and, 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.

Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This ~~one week~~one-week 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. During the first ~~quarters~~quarter of ~~2018~~2019 and ~~2017,~~2018, we spent approximately $2.3 million and ~~$2.0~~$2.3 million, respectively, on travel and other costs associated with this ~~one week~~one-week 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 ~~one week~~ period in ~~which~~and around the timing of this event, ~~occurs,~~ which contributes to the lower seasonal revenue level we experience during the first quarter of each year.
Our first quarter cash flows from operations are also adversely affected as compared with other quarters due to the payment of our annual incentive compensation and 401(k) match during that period.
Critical Accounting Policies

We prepare our financial statements 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 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. These critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, 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.
Results of Operations

Our results of operations for the three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as ~~follows:~~follows (unaudited):

For the Three Months
Ended June 30,

Percent
Change

For the Three Months Ended
March 31,

Percent
Change (1)

(dollars in thousands)

2018

2017

2018 v 2017

2019

2018

2019 vs 2018

Net revenue

$
266,966

$
263,386

1.4
%
Net revenues

$
236,419

$
233,995

1.0
%
Material costs

86,516

83,657

3.4
%

78,377

76,356

2.6
%
Personnel costs

89,554

87,831

2.0
%

86,711

86,108

0.7
%
Other operating costs

30,536

31,861

(4.2
)%

33,555

31,096

7.9
%
General and administrative expenses

26,523

25,227

5.1
%

28,282

25,636

10.3
%
Professional accounting and legal fees

4,236

8,521

(50.3
)%

2,700

4,846

(44.3
)%
Depreciation and amortization

9,272

9,825

(5.6
)%

8,773

9,330

(6.0
)%
Operating expenses

246,637

246,922

(0.1
)%

238,398

233,372

2.2
%
Income from operations

20,329

16,464

23.5
%
(Loss) income from operations

(1,979
)
623

NM

Interest expense, net

7,317

14,091

(48.1
)%

8,538

12,263

(30.4
)%
Loss on extinguishment of debt

—

16,998

(100.0
)%
Non-service defined benefit plan expense

176

184

(4.3
)%

173

176

(1.7
)%
Income before income taxes

12,836

2,189

486.4
%
(Benefit) provision for income taxes

(92
)
552

(116.7
)%
Net income

$
12,928

$
1,637

689.7
%
Loss before income taxes

(10,690
)
(28,814
)
62.9
%
Benefit for income taxes

(3,739
)
(6,196
)
39.7
%
Net loss

$
(6,951
)
$
(22,618
)
69.3
%
(1) NM - Not Meaningful

During these periods, our operating expenses as a percentage of net revenue were as follows:

For the Three Months
Ended June 30,

2018

2017

Material costs

32.4
%
31.8
%
Personnel costs

33.5
%
33.3
%
Other operating costs

11.5
%
12.1
%
General and administrative expenses

9.9
%
9.6
%
Professional accounting and legal fees

1.6
%
3.2
%
Depreciation and amortization

3.5
%
3.7
%
Operating expenses

92.4
%
93.7
%

For the Three Months Ended
March 31,

2019

2018

Material costs

33.2
%
32.6
%
Personnel costs

36.7
%
36.8
%
Other operating costs

14.1
%
13.2
%
General and administrative expenses

12.0
%
11.0
%
Professional accounting and legal fees

1.1
%
2.1
%
Depreciation and amortization

3.7
%
4.0
%
Operating expenses

100.8
%
99.7
%

For the Three Months Ended ~~June 30, 2018~~March 31, 2019 Compared to the Three Months Ended ~~June 30, 2017~~March 31, 2018

Net revenue. Net revenue for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$267.0~~$236.4 million, an increase of ~~$3.6~~$2.4 million, or ~~1.4%~~1.0%, from ~~$263.4~~$234.0 million for the three months ended ~~June 30, 2017.~~March 31, 2018. Net revenue by operating segment, after elimination of intersegment activity, was as follows:

For the Three Months Ended June 30,

Percent

dollars in thousands)

2018

2017

Change

Change

Patient Care

$
218,158

$
216,221

$
1,937

0.9
%
Products & Services

48,808

47,165

1,643

3.5
%
Net revenue

$
266,966

$
263,386

$
3,580

1.4
%

For the Three Months Ended
March 31,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
190,601

$
188,507

$
2,094

1.1
%
Products & Services

45,818

45,488

330

0.7
%
Net revenue

$
236,419

$
233,995

$
2,424

1.0
%
Patient Care net revenue for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$218.2~~$190.6 million, an increase of ~~$1.9~~$2.1 million, or ~~0.9%~~1.1%, from ~~$216.2~~$188.5 million for the same period in the prior year. Net revenue from clinics acquired after March 31, 2018 was $4.8 million offset by $0.2 million of lower net revenue associated with clinic closures. Patient care revenue from ecommerce increased $0.6 million. Same clinic revenue ~~increased $3.7~~decreased $3.1 million for the three months ended ~~June 30, 2018~~March 31, 2019 compared to the same period in the prior year, reflecting ~~an increase~~a decrease in same clinic revenue of 0.1% on a per day basis.
Prosthetics constituted approximately 51% of ~~1.7%. This growth was offset by~~our total Patient Care revenue for the ~~effect of clinic closures which reflected decreased revenue of $0.5 million as compared with~~three months ended March 31, 2019 and 52% for the same period in 2018 excluding the ~~prior year. Net~~impact of acquisitions. Prosthetic revenue for the three months ended March 31, 2019 was ~~also negatively impacted as compared to~~0.7% lower, on a per day basis, than the same period in the prior year ~~by $1.3 million from~~excluding the ~~adoption~~impact of ~~the new revenue accounting standard on January 1, 2018.~~
~~Revenue growth during the quarter~~acquisitions. We believe this decrease in prosthetic revenues was primarily ~~the result~~due to timing of ~~growth in services to prosthetic patients. Prosthetic revenue constituted 54% of Patient Care’s revenue in the three months ended June 30, 2018 compared with 53%~~deliveries. Orthotics, shoes, inserts, and other products increased by 0.9% on a per day basis for the same ~~period in~~comparative periods excluding the ~~prior year. We believe an increased focus on the demonstration~~impact of ~~patient outcomes and related marketing initiatives contributed to this growth in prosthetic revenue.~~acquisitions.

Products & Services net revenue for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$48.8~~$45.8 million, an increase of ~~$1.6~~$0.3 million, or ~~3.5%~~0.7% from ~~$47.2~~$45.5 million for the same period in the prior year. This increase was comprised of ~~$2.7~~$1.8 million from the distribution of O&P componentry to independent providers ~~partially~~ offset by a ~~$1.1~~$1.5 million decrease in net revenue from therapeutic ~~services, which related~~solutions, as a result of continued net client cancellations. We anticipate moderation of near-term Products & Services segment growth due primarily to ~~client cancellations,~~a continuation of these therapeutic solutions revenue trends.

Material costs. Material costs for the three months ended ~~June 30, 2018~~March 31, 2019 were ~~$86.5~~$78.4 million, an increase of ~~$2.9~~$2.0 million or ~~3.4%~~2.6%, from ~~$83.7~~$76.4 million for the same period in the prior year. Total material costs as a percentage of net revenue increased to ~~32.4%~~33.2% in the three months ended March 31, 2019 from 32.6% in the three months ended March 31, 2018 ~~from 31.8% in 2017~~primarily due ~~primarily~~ to changes in our ~~Patient Care~~Product & Services segment ~~product~~business mix. Material costs by operating segment, after elimination of intersegment activity, were as follows:

For the Three Months Ended June 30,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
65,909

$
64,245

$
1,664

2.6
%
Products & Services

20,607

19,412

1,195

6.2
%
Material costs

$
86,516

$
83,657

$
2,859

3.4
%

For the Three Months Ended
March 31,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
59,150

$
57,899

$
1,251

2.2
%
Products & Services

19,227

18,457

770

4.2
%
Material costs

$
78,377

$
76,356

$
2,021

2.6
%
Patient Care material costs increased ~~$1.7~~$1.3 million, or ~~2.6%~~2.2%, for the three months ended ~~June 30, 2018~~March 31, 2019 compared to the same period in the prior ~~year. Excluding the $1.3 million effect on net revenue resulting from the adoption~~year as a result of ~~the new revenue accounting standard,~~acquisitions. Patient Care material costs as a percent of net revenue increased ~~slightly~~ to ~~30.0%~~31.0% in ~~2018~~the three months ended March 31, 2019 from ~~29.7%~~30.7% in ~~2017,~~the three months ended March 31, 2018, primarily due to increases in ~~the mix~~sales of ~~our business towards~~ higher-cost prosthetic ~~devices.~~devices when compared to orthotics.

Products & Services material costs increased ~~$1.2~~$0.8 million, or ~~6.2%~~4.2%, for the three months ended ~~June 30, 2018~~March 31, 2019 compared to the same period in the prior year. As a percent of net revenue, material costs ~~grew to 42.2%~~were 42.0% in the three months ended ~~June 30, 2018 from 41.2%~~March 31, 2019 as compared to 40.6% in the same period ~~2017.~~2018. The increase in material as a percent of net revenue was due to a change in business mix within the segment. For the three months ended March 31, 2019, distribution services was 72.4% of net revenue with 53.2% material costs as a percent of net revenue. For the three months ended March 31, 2018, distribution services was 68.9% of net revenue with a 53.3% material costs as a percent of net revenue. Therapeutic solutions, the other business in the Product & Services segment, had material costs as a percent of net revenue at 12.5% for both three months ended March 31, 2019 and 2018.

Personnel costs. Personnel costs for the three months ended ~~June 30, 2018~~March 31, 2019 were ~~$89.6~~$86.7 million, an increase of ~~$1.7~~$0.6 million, or ~~2.0%~~0.7%, from ~~$87.8~~$86.1 million for the same period in the prior year. Personnel costs by operating segment were as follows:

For the Three Months Ended June 30,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
76,792

$
75,906

$
886

1.2
%
Products & Services

12,762

11,925

837

7.0
%
Personnel costs

$
89,554

$
87,831

$
1,723

2.0
%

For the Three Months Ended March 31,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
73,709

$
73,613

$
96

0.1
%
Products & Services

13,002

12,495

507

4.1
%
Personnel costs

$
86,711

$
86,108

$
603

0.7
%

During 2018, annual employee salary increases were implemented effective in April 2018 as contrasted with June 2017 in the prior year. which contributed to a significant increase in salary expense when comparing the second quarter of 2018 with the second quarter of 2017. Personnel costs for the Patient Care segment were ~~$76.8~~$73.7 million for the three months ended ~~June 30, 2018,~~March 31, 2019, an increase of ~~$0.9~~$0.1 million, or ~~1.2%~~0.1%, from ~~$75.9~~$73.6 million for the same period in the prior year. Patient Care benefits expense increased $1.2 million from higher employee benefit claim costs and a $0.6 million increase in salary expense, partially offset by a $0.8 million decrease bonus and commissions. Personnel costs in the Products & Services segment increased $0.8 million, or 7.0% for the three months ended June 30, 2018 compared to the same period in the prior year. ~~Bonus~~The increase in Patient Care personnel costs during the three months ended March 31, 2019 was primarily related to an increase of $1.4 million in benefits expense relating to higher health claims experience and ~~commissions increased~~higher 401(k) match offset by $0.8 million lower salary expense and $0.5 million lower commission expense when compared to the three months ended March 31, 2018. Within General and Administrative expenses, as discussed below, the Patient Care segment also incurred an additional increase of $0.1 million in benefits expenses, for a total $1.5 million increase within this segment as compared with the prior year period.
Personnel costs in the Products & Services segment were $13.0 million for the three months ended March 31, 2019, an increase of $0.5 million compared to the same period in the prior year. Benefits expense increased ~~$0.2~~$0.3 million and salary expense increased ~~$0.1 million.~~$0.2 million for the three months ended March 31, 2019 as compared to the same period in the prior year.

Other operating costs. Other operating costs for the three months ended ~~June 30, 2018~~March 31, 2019 were ~~$30.5~~$33.6 million, ~~a decrease~~an increase of ~~$1.3~~$2.5 million, or ~~4.2%~~7.9%, from ~~$31.9~~$31.1 million for the same period in the prior year. ~~Bad debt~~Other operating expenses increased $1.1 million from higher sales and use tax and additional costs from the acquisition in January 2019. Rent expense ~~decreased $2.7~~increased an additional $0.6 million ~~primarily~~ from new, renewed, and acquired leases and $0.3 million as a result of the adoption of ~~the new revenue accounting standard under which certain~~ASC 842, further described in Note A — “Organization and Summary of these expenses were re-characterized as implicit price concessions within our Patient Care segment and are now reflected as an adjustment to net revenue. This decrease was partially offset by a $0.7 million increase inSignificant Accounting Policies”. In addition, professional fees ~~and a $0.7~~increased $0.5 million ~~increase~~for the three months ended March 31, 2019 due to investments made in ~~other operating costs.~~certain revenue cycle management initiatives.

General and administrative expenses. General and administrative expenses for the three months ended ~~June 30, 2018~~March 31, 2019 were ~~$26.5~~$28.3 million, an increase of ~~$1.3~~$2.6 million, or ~~5.1%~~10.3%, from ~~$25.2 million for~~ the same period in the prior year. This increase ~~included $1.2~~includes a $0.7 million ~~of professional expense relating primarily to growth~~increase in equity-based compensation and ~~other corporate initiatives, $0.9~~$0.3 million in ~~salary and other personnel-related costs, and $1.4 million in other expenses. Salary costs grew in part~~deferred compensation primarily due to ~~the change in timing of annual employee salary increases which were made effective in April of 2018 as compared with June~~an executive forfeiture in the prior ~~year. These increases were partially offset by a $1.7~~year period. Increases in general and administrative expenses also include approximately $0.6 million ~~favorable settlement in connection with our long standing claim relating~~related to ~~the “Deepwater Horizon” disaster~~new system implementations and acquisitions, $0.5 million in ~~connection~~temporary staffing to assist with ~~our favorable resolution of outstanding abandoned~~material weakness remediation, $0.3 million related to increase in franchise and ~~unclaimed property claims with the State of Delaware.~~other business taxes, and $0.2 million in benefits related to higher claim costs.

Professional accounting and legal fees. Professional accounting and legal fees for the three months ended ~~June 30, 2018~~March 31, 2019 were ~~$4.2~~$2.7 million, a decrease of ~~$4.3~~$2.1 million, or 44.3%, from ~~$8.5~~$4.8 million for the same period in the prior year. Advisory and other fees decreased ~~$4.7~~$2.1 million primarily due to decreased utilization of professional fees to assist in the remediation of our material weaknesses, to regain our timely filing status and ~~legal fees decreased $0.3 million offset, by a $0.7 million increase in audit~~to undertake related ~~fees.~~activities.

Depreciation and amortization. Depreciation and amortization for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$9.3~~$8.8 million, a decrease of $0.6 million, or ~~5.6%~~6.0%, from ~~$9.8~~$9.3 million for the same period in the prior year. ~~Fully amortized~~Amortization expense decreased $0.6 million when compared to the prior period as a result of certain intangible assets ~~decreased amortization $0.6 million.~~becoming fully amortized prior to the first quarter of 2019.

Interest expense, net. Interest expense for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$7.3~~$8.5 million, a decrease of ~~$6.8~~$3.7 million, or ~~48.1%~~30.4%, from ~~$14.1~~$12.3 million for the same period in the prior year. This decrease was primarily due to lower interest rates on outstanding borrowings arising from our debt refinancing in March 2018 and secondarily reflected a $1.5 million decrease related to our settlement of outstanding abandoned and unclaimed property claims with the State of Delaware in a manner that did not require us to pay interest we had accrued on long standing unpaid claim amounts.2018.
~~(Benefit) provision~~Benefit for income taxes. The benefit for income taxes for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~$0.1~~$3.7 million, or ~~(0.7)%~~35.0% of loss before income ~~from continuing operations before~~ taxes, compared to a ~~provision~~benefit of ~~$0.6~~$6.2 million, or ~~25.2%~~21.5% of ~~income~~loss before ~~taxes for the three months ended June 30, 2017. The effective tax rate in 2018 consists principally of the 21% federal statutory tax~~
~~rate and the rate impact from state~~ income taxes and permanent tax differences. The federal statutory tax rate in 2017 was 35%. The decrease in the effective tax rate for the three months ended June 30, 2018 compared with the three months ended June 30, 2017 is primarily attributable to the changes enacted by the Tax Act and the change from the discrete method for interim reporting used for the three months ended March 31, ~~2018 to using the annualized effective tax rate method for the six months ended June 30,~~ 2018.
~~Our results of operations for the six months ended June 30, 2018 and 2017 were as follows:~~

For the Six Months
Ended June 30,

Percent
Change

(dollars in thousands)

2018

2017

2018 v 2017

Net revenues

$
500,961

$
497,067

0.8
%
Material costs

162,872

158,062

3.0
%
Personnel costs

175,662

175,786

(0.1
)%
Other operating costs

61,632

64,550

(4.5
)%
General and administrative expenses

52,159

50,613

3.1
%
Professional accounting and legal fees

9,082

21,171

(57.1
)%
Depreciation and amortization

18,602

19,962

(6.8
)%
Operating Expenses

480,009

490,144

(2.1
)%
Income from operations

20,952

6,923

202.6
%
Interest expense, net

19,580

28,100

(30.3
)%
Loss on extinguishment of debt

16,998

—

100.0
%
Non-service defined benefit plan expense

352

368

(4.3
)%
Loss before income taxes

(15,978
)
(21,545
)
(25.8
)%
Benefit for income taxes

(6,288
)
(5,448
)
15.4
%
Net loss

$
(9,690
)
$
(16,097
)
(39.8
)%
~~During these periods, our operating expenses as a percentage of net revenue were as follows:~~

For the Six Months Ended
June 30,

2018

2017

Material costs

32.5
%
31.8
%
Personnel costs

35.1
%
35.4
%
Other operating costs

12.3
%
12.9
%
General and administrative expenses

10.4
%
10.2
%
Professional accounting and legal fees

1.8
%
4.3
%
Depreciation and amortization

3.7
%
4.0
%
Operating expenses

95.8
%
98.6
%
~~Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017~~
~~Net revenue~~. Net revenue for the six months ended June 30, 2018 was $501.0 million, an increase of $3.9 million, or 0.8%, from $497.1 million for the six months ended June 30, 2017. Net revenue by operating segment, after elimination of intersegment activity was as follows:

For the Six Months Ended June 30,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
406,665

$
403,858

$
2,807

0.7
%
Products & Services

94,296

93,209

1,087

1.2
%
Net revenue

$
500,961

$
497,067

$
3,894

0.8
%
Patient Care net revenue for the six months ended June 30, 2018 was $406.7 million, an increase of $2.8 million, or 0.7%, from $403.9 million for the same period in the prior year. Same clinic revenue increased $5.7 million reflecting an increase in same clinic revenue per day of 1.4%. This growth was partially offset by the effect of clinic closures which reflected decreased revenue of $0.7 million as compared with the same period in the prior year. Net revenue for the six months ended June 30, 2018 was also negatively impacted as compared to the same period in the prior year by $2.2 million from the adoption of the new revenue accounting standard on January 1, 2018.
Revenue growth for the year-to-date has primarily been the result of increased services to prosthetic patients, which was partially offset by revenue declines in orthotics, shoes and shoe inserts. Prosthetic revenue constituted 53% of Patient Care’s revenue in the first half of 2018 as compared with 51% for the same period in the prior year. We believe this growth in prosthetic revenue has been due in part to an increased focus on the demonstration of patient outcomes and related marketing initiatives. Decreases in shoes and shoe inserts relate generally to our de-emphasis of this lower margin category of care.
Products & Services net revenue for the six months ended June 30, 2018 was $94.3 million, an increase of $1.1 million, or 1.2% from $93.2 million for the same period in the prior year. Distribution of O&P componentry to independent providers increased $3.5 million partially offset by $2.4 million decrease in net revenue from therapeutic services, which related primarily to client cancellations.
~~Material costs~~. Material costs for the six months ended June 30, 2018 were $162.9 million, an increase of $4.8 million or 3.0%, from $158.1 million for the same period in the prior year. This underlying increase in cost of materials primarily related to changes in our Patient Care segment product mix, with total material costs as a percentage of net revenue increasing to 32.5% in 2018 from 31.8% in 2017. Material costs by operating segment, after elimination of intersegment activity, were as follows:

For the Six Months Ended June 30,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
123,808

$
120,678

$
3,130

2.6
%
Products & Services

39,064

37,384

1,680

4.5
%
Material costs

$
162,872

$
158,062

$
4,810

3.0
%
Patient Care material costs increased $3.1 million, or 2.6%, for the six months ended June 30, 2018 compared to the same period in the prior year. Excluding the $2.2 million effect on net revenue resulting from the adoption of the new revenue accounting standard, Patient Care material costs as a percent of revenue increased slightly to 30.3% in 2018 from 29.9% in 2017, primarily due to increases in the mix of our business towards higher-cost prosthetic devices.
Products & Services material costs increased $1.7 million, or 4.5%, for the six months ended June 30, 2018 compared to the same period in the prior year. Material costs increased to 41.4% as a percent of net revenue in the six months ended June 30, 2018 from 40.1% in the same period in 2017.
~~Personnel costs~~. Personnel costs for the six months ended June 30, 2018 were $175.7 million, relatively unchanged from $175.8 million for the same period in the prior year. Personnel costs by operating segment were as follows:

For the Six Months Ended June 30,

Percent

(dollars in thousands)

2018

2017

Change

Change

Patient Care

$
150,405

$
151,421

$
(1,016
)
(0.7
)%
Products & Services

25,257

24,365

892

3.7
%
Personnel costs

$
175,662

$
175,786

$
(124
)
(0.1
)%
Personnel costs for our Patient Care segment were $150.4 million for the six months ended June 30, 2018, a decrease of $1.0 million, or 0.7%, from $151.4 million for the same period in the prior year. Patient Care benefits expense decreased $1.4 million from lower claims, partially offset by a $1.3 million increase in salary expense and a $0.9 decrease in bonus and commissions. Personnel costs in the Products & Services segment increased $0.9 million. The 3.7% increase in personnel costs for the six months ended June 30, 2018 compared to the same period in the prior year included an increase of $0.6 million in salary expense, $0.6 million in compensation and other personnel related costs, partially offset by a $0.3 million decrease in benefits.
~~Other operating costs~~. Other operating costs for the six months ended June 30, 2018 were $61.6 million, a decrease of $2.9 million, or 4.5% from $64.6 million for the same period in the prior year. Bad debt expense decreased $5.1 million, primarily from the adoption of the new revenue accounting standard under which certain of these expenses were re-characterized as implicit price concessions within our Patient Care segment and are now reflected as an adjustment to net revenue. This decrease was partially offset by a $1.1 million increase in travel and education related expenses and a $1.1 million increase in other operating costs.
~~General and administrative expenses~~. General and administrative expenses for the six months ended June 30, 2018 were $52.2 million, an increase of $1.5 million, or 3.1%, from $50.6 million for the same period in the prior year. This increase included $1.4 million of professional expenses related primarily to growth revenue cycle and other corporate initiatives, and $2.3 million in other expenses. Increases in general and administrative expenses for the year-to-date period were partially offset by a $1.7 million favorable settlement in connection with our long standing claim relating to the “Deepwater Horizon” disaster, and $0.5 million in connection with our favorable resolution of outstanding abandoned and unclaimed property claims with the State of Delaware.
~~Professional accounting and legal fees~~. Professional accounting and legal fees for the six months ended June 30, 2018 were $9.1 million, a decrease of $12.1 million from $21.2 million for the same period in the prior year. Advisory and other fees decreased $9.4 million, audit related fees decreased $2.1 million and legal fees decreased $0.6 million.
~~Depreciation and amortization~~. Depreciation and amortization for the six months ended June 30, 2018 was $18.6 million, a decrease of $1.4 million, or 6.8%, from $20.0 million for the same period in the prior year. The decrease included lower amortization of $1.1 million as a result of fully amortized intangible assets and $0.3 million of lower therapeutic equipment depreciation.
~~Interest expense, net.~~ Interest expense for the six months ended June 30, 2018 was $19.6 million, a decrease of $8.5 million, or 30.3%, from $28.1 million for the same period in the prior year. This decrease related primarily to lower interest rates on outstanding borrowings arising from our debt refinancing in March 2018 and secondarily reflected a $1.5 million decrease related to our settlement of outstanding abandoned and unclaimed property claims with the State of Delaware in a manner that did not require us to pay interest we had accrued on long standing unpaid claim amounts.
~~Loss on extinguishment of debt.~~ ~~Debt extinguishment costs for the six months ended June 30, 2018 totaled $17.0 million and related to our debt refinancing on March 6, 2018 - see Note J - “~~~~Long-term Debt.~~”
~~Benefit for income taxes~~. The benefit for income taxes for the six months ended June 30, 2018 was $6.3 million, or 39.4% of loss from continuing operations before taxes, compared to a benefit of $5.4 million, or 25.3% of loss from before taxes for the six months ended June 30, 2017. The effective tax rate in ~~2018~~2019 consists principally of the 21% federal statutory tax rate and the rate impact from state income taxes and permanent tax differences. The ~~federal statutory tax rate in 2017 was 35%. The~~ increase in the ~~income~~effective tax ~~benefit was largely driven by~~rate for the ~~increased estimated~~three months ended March 31, 2019 compared with the same period in the prior year is primarily attributable to the change from the discrete method in the three months ended March 31, 2018 to the annual effective tax rate ~~applied to~~method in the ~~quarter, partially offset by~~three months ended March 31, 2019, an increased estimated annual income, a decreased loss ~~from continuing operations~~ before income taxes for the ~~period. The increase in estimated annual effective tax rate was driven by increased estimated permanent differences~~three months ended March 31, 2019 as compared to three months ended March 31, 2018, and ~~decreased estimated loss~~the windfall from ~~continuing operations before taxes.~~stock-based compensation recorded as a discrete item during the period.
Financial Condition, Liquidity, and Capital Resources

Liquidity

To provide cash for our operations and capital expenditures, our immediate source of liquidity is our cash and ~~investment balances~~cash equivalents and any amounts we have available for borrowing under our revolving credit facility. We refer to the sum of these two amounts as our “liquidity.”

At ~~June 30, 2018,~~March 31, 2019, we had total liquidity of ~~$142.9~~$115.3 million, which reflected ~~an increase~~a decrease of ~~$55.0~~$73.9 million from the ~~$87.9~~$189.2 million in liquidity we had as of December 31, ~~2017.~~2018. Our liquidity at ~~June 30, 2018~~March 31, 2019 was comprised of cash and cash equivalents of ~~$48.8~~$20.5 million and ~~$94.1~~$94.8 million in available borrowing capacity under our $100.0 million revolving credit facility. This ~~increase~~decrease in liquidity primarily relates ~~primarily~~ to the use of cash of $36.5 million for the payment of annual incentive bonus, tax payments on stock vesting, and the employer 401(k) matching contribution, $27.7 million for an acquisition consummated in January 2019, net ~~proceeds~~ of ~~$49.7~~cash acquired, a net reduction of $5.6 million ~~from~~of accounts payable, and the ~~refinancing~~remainder attributable to our operational results and changes in working capital.
As discussed in “Seasonality” above, the first quarter is our lowest revenue-producing quarter and, combined with the annual incentive bonus and 401(k) employer matching contributions discussed above, has historically resulted in a reduction in our liquidity during the first quarter of ~~our indebtedness on March 6, 2018.~~each year.

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 in our revolving credit facility.

Working Capital and Days Sales Outstanding

At ~~June 30, 2018,~~March 31, 2019, we had a working capital of ~~$126.1~~$77.2 million compared to working capital of ~~$78.7~~$154.6 million at December 31, ~~2017.~~2018. Our working capital ~~increased $47.4~~decreased $77.4 million in ~~2018 compared to 2017~~the three months ended March 31, 2019 due to ~~decreases~~a decrease in current assets of $80.6 million and a decrease in current liabilities of ~~$26.3 million and increases~~$3.2 million.
The decrease in current assets ~~of $21.2 million.~~
~~Our current liabilities decreased~~was primarily due to decreases in the accrued compensation related costs of $22.3 million, largely related to the payment of annual bonuses during the first quarter, a $7.4 million decrease in accrued professional fees offset by an increase in the current portion of long term debt of $6.0 million. When comparing these outflows to the prior period, we paid $16.3 million less in annual bonuses and 401(k) matching contributions in the first half of 2017 as compared to the amounts we paid in the first half of 2018. This was due to our relatively weaker performance for the year ended December 31, 2016 as compared to our performance for the year ended December 31, 2017.
~~Our current assets increased primarily due~~attributable to a ~~$47.3 million increase~~decrease in cash and cash equivalents ~~offset by~~of $74.6 million, a decrease of $12.3 million in net accounts receivable and a decrease of $11.7 million of income tax receivables. Cash received for income taxes was $11.7 million for the six months ended June 30, 2018, compared to $0.3 million for the same period in the prior year. We are anticipating only marginal pre-tax book profitability for the year, and expect to utilize net operating loss carryforwards to offset our tax provision such that we expect cash paid for Federal taxes in 2018 to be minimal. The decrease in accounts receivable, net of $7.1 million, and the reclassification of prepaid rent of $3.8 million to the Current portion of long-term debt upon adoption of ASC 842, historically recorded in Other current assets. The decrease in cash primarily relates to the ~~seasonality~~uses of ~~our business, whereby~~cash discussed in the liquidity section above. Further, as discussed in “Seasonality” above, due to the typical resetting of patient deductibles at year end, the fourth quarter ~~reflects~~is normally our highest revenue-producing quarter and the ~~highest seasonal quarter. This seasonality of revenue contributes directly to~~first quarter is our lowest, resulting in a ~~drop~~decline in ~~our~~ accounts receivable ~~balances after December 31st~~in the first quarter of ~~each~~the following year. The decreases were offset by an increase of $2.3 million in inventory, primarily related to acquisitions, and a $2.1 million increase in other current assets excluding the reclassification of prepaid rent upon adoption of ASC 842 discussed above.

The decrease in current liabilities was primarily attributable to the payment of $36.5 million for the distribution of the annual incentive bonus, tax payments on stock vesting, and the employer 401(k) matching contribution and a decrease in accounts payable of $5.6 million. The decrease was offset by the adoption of ASC 842 and additional operating lease liabilities assumed in the quarter, resulting in an increase of $33.7 million at March 31, 2019, an increase in Accrued compensation related costs of $3.6 million for current year activity, and $2.3 million in education expenses related to the education fair held in the first quarter of 2019.
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~~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, 2018,~~March 31, 2019, our DSO was 4552 days, which compares to a DSO of 4649 days as of ~~June 30, 2017. At December~~March 31, ~~2017,~~2018. One-time administrative billing changes and the impact of implementing our ~~DSO~~patient management and electronic health system in certain of our largest operating regions contributed to collection delays during the quarter, which we believe to be temporary. As of March 31, 2019, the implementation of the new patient management and electronic health record system was ~~46 days, which was unchanged from a DSO of 46 days reported as of December 31, 2016.~~complete.

Sources and Uses of Cash ~~in Six~~for the Three Months Ended ~~June 30, 2018~~March 31, 2019 Compared to ~~June 30, 2017~~March 31, 2018

~~Cash~~Net cash flows ~~from~~used in operating activities increased ~~$23.2~~$24.3 million to ~~an inflow of $16.9~~$32.8 million for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 from ~~a use of $6.3~~$8.5 million for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018. This was due primarily to the uses of cash and changes in working capital in ~~2018~~the three months ended March 31, 2019 as compared to ~~2017 which were~~the three months ended March 31, 2018 discussed in the Working Capital and Days Sales Outstanding section above.

Cash flows used in investing activities increased ~~$9.0~~$28.8 million to ~~$14.1~~$35.0 million for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 from ~~$5.1~~$6.2 million for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018. The increase in cash used in investing activities ~~included~~was due to $27.7 million in cash consideration for acquisitions, net of cash acquired, and a $2.5 ~~million decrease in proceeds of sale of property, plant and equipment, $4.9~~ million increase in purchases of property, plant and ~~equipment, and a $1.5 million increase in purchases of therapeutic program~~ equipment. We currently anticipate that we will expend an increased amount for capital expenditures in 2018 as compared with recent years. In addition to general increases in technology and leasehold improvements, we also plan to increase our purchase of therapy equipment for use in our Products & Services segment. We currently believe that our total capital expenditures related to property, plant and equipment, and therapeutic program equipment purchases will be approximately $30.0 to $35.0 million for the year ended December 31, 2018.
Cash flows provided by financing activities ~~increased $38.3~~decreased by $51.9 million to ~~$43.5~~a use of cash of $6.8 million for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 from ~~$5.2~~cash provided by financing activities of $45.1 million for the ~~six~~three months ended ~~June 30, 2017. This increase~~March 31, 2018. Cash flows provided by financing activities during the three months ended March 31, 2018 included ~~$49.6~~$49.4 million related to ~~our~~the refinancing of our indebtedness, ~~and $2.0~~including payment of $15.2 million ~~reduction~~ in ~~payments on seller notes and other contingent consideration, partially offset by $12.1 million of~~ debt issuance ~~costs,~~and extinguishment costs, ~~and fees and $1.2 million~~whereas in ~~employee stock based compensation and capital lease obligations.~~the three months ended March 31, 2019, cash flows used in debt financing activities was $1.3 million.

Effect of Indebtedness

~~Due to the then pending June 17, 2018, maturity of our previous credit agreement, on~~On March 6, 2018 we entered into the Credit Agreement in order to refinance our ~~indebtedness. These changes to our~~ indebtedness ~~are~~and is disclosed in Note JM - “~~Long-Term~~ Debt,” in the notes to the condensed consolidated financial statements ~~(unaudited)~~ elsewhere in this report. Our ~~new~~ indebtedness bears reduced rates of interest compared with those under our prior indebtedness, and as such interest expense is lower for the ~~year~~three months ended ~~December~~March 31, ~~2018, we anticipate that we will report interest expense of approximately $40.0 million~~2019 as compared ~~with~~to the ~~$57.7 million we reported~~same period in ~~2017.~~the prior year. Cash paid for interest totaled ~~$16.6~~$7.7 million and ~~$22.1~~$10.6 million for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

Scheduled maturities of debt as of ~~June 30, 2018~~March 31, 2019 were as ~~follows (in thousands):~~follows:

2018 (remainder of year)

$
5,999

2019

8,356

2020

7,275

2021

5,936

2022

6,053

Thereafter

491,005

Total debt before unamortized discount and debt issuance costs, net

524,624

Unamortized discount and debt issuance costs, net

(10,083
)
Total debt

$
514,541

(in thousands)

2019 (remainder of year)

$
5,974

2020

8,220

2021

7,193

2022

5,849

2023

5,329

Thereafter

475,999

Total debt before unamortized discount and debt issuance costs, net

508,564

Unamortized discount and debt issuance costs, net

(9,264
)
Total debt

$
499,300

Liquidity Outlook and Going Concern Evaluation

Our Credit Agreement has a term loan facility with ~~$505~~$500 million in principal outstanding at ~~June 30, 2018,~~March 31, 2019, due in quarterly principal installments equal to 0.25% of the original aggregate principal amount of $505 million, commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025 and a revolving credit facility with no borrowings and a maximum aggregate amount of availability of $100 million at ~~June 30, 2018~~March 31, 2019 that matures in March 2023. We currently believe that our anticipated operating trends ~~when coupled~~ with ~~anticipated decreases in our payments~~the level of ~~interest expense and professional fees,~~acquisitions anticipated will provide us with sufficient liquidity to meet our financial obligations during the coming twelve months.

ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires that we evaluate whether there is substantial doubt about our ability to meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to be issued. We have performed such an evaluation and, based on the results of that assessment, we are not aware of any relevant conditions or events that raise substantial doubt regarding our ability to continue as a going concern within one year of the date the financial statements are issued.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that may or could have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
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, 2018,~~March 31, 2019, we had a combined principal amount of ~~$503.7~~$500.0 million of variable rate debt and a notional amount of ~~$325.0~~$312.5 million of fixed to variable interest rate swap agreements. Based on our hedged and unhedged positions, a hypothetical increase or decrease in interest rates by 1.0% would impact our annual interest expense by ~~$1.8~~$1.9 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, 2018.~~March 31, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of ~~June 30, 2018 due to~~March 31, 2019 because of the material weaknesses in our internal control over financial reporting described in Item 9A ~~- “~~Controls and Procedures” of the Form 10-K for the year-ending December 31, 2018.
Although we have not fully remediated the material weaknesses described in our ~~Annual Report on~~ Form 10-K for the year ended December 31, ~~2017 (the “2017 10-K”)~~2018, we believe that we have made substantial progress on the remediation plans described in our 2018 Form 10-K, Item 9A Controls and Procedures.
The following remediation steps were taken by the Company during the quarter:
Inventory
We have implemented new controls related to the accurate valuation of Work In Process (“WIP”) Inventory. We have also improved controls to identify unusual trends, material inaccuracies in calculations and/or any potential updates needed to key inputs into the valuation of raw materials and WIP.
We have made improvements to controls in the areas of accounts payable; information technology general controls; revenue; and accounts receivable and are currently evaluating the design and operating effectiveness of these controls. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a period of time sufficient for management to conclude, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

~~As part~~With the exception of ~~the adoption of ASC 606, we are implementing~~ongoing remediation activities, there have been no material changes to our internal controls over financial reporting related to revenue recognition to ensure adequate evaluation of contracts and proper recording of revenue. Additionally, due to our ongoing remediation efforts of the aforementioned material weaknesses, additional changes to our internal control over financial reporting are likely to have occurred during the six months ended June 30, 2018. See Item 9A - “~~Controls and Procedures~~~~” in the 2017 10-K for additional information regarding our ongoing remediation efforts.~~reporting.

Therefore, in accordance with Rule 13a-15(d) of the Exchange Act, management, with the participation of our Chief Executive Officer and our Chief Financial Officer, determined ~~that elements of the~~there have been no material changes ~~listed above~~ to our internal control over financial reporting ~~occurred~~ during the ~~six months~~period ended ~~June 30, 2018 and have materially affected or are reasonably likely to materially affect our internal control over financial reporting.~~March 31, 2019.
PART II.                 OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Securities and Derivative Litigation

In November 2014, a securities class action complaint, City of Pontiac General Employees’ Retirement System v. Hanger, et al., C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.

On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint. On July 1, 2016, plaintiffs filed an amended complaint. On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit. On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim. On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. ~~Appellate briefing was completed on August 18, 2017 and the Court of Appeals held oral argument for the appeal on March 5, 2018.~~ On August 6, 2018, the Court of Appeals affirmed in part and reversed in part. The Court of Appeals affirmed the dismissal of the case against individual defendants Vinit Asar, our current President and Chief Executive Officer, and Thomas Kirk, our former President and Chief Executive Officer, but reversed the dismissal of the case against George McHenry, our former Chief Financial Officer, and Hanger, Inc. ~~The case has been remanded back~~On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals. On April 10, 2019 the Court of Appeals granted the petition for panel rehearing, withdrew its previous panel decision, and substituted a new panel decision in its place that affirmed the District Court’s dismissal with prejudice of all claims against all the defendants for failure to state a claim. Plaintiffs did not petition the Court of Appeals for a panel rehearing or a rehearing en banc. Should plaintiffs decide to continue the litigation, their sole remaining option is to petition the United States ~~District~~Supreme Court to review the new Fifth Circuit panel decision issued on April 10, 2019. The deadline for the Western District of Texas for further proceedings with respect to the remaining claims. We believe the remaining claims are without merit, and intend to continue to vigorously defend against these claims.such petition is July 9, 2019.

In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated into Judy v. Asar, et. al., Cause No. D-1-GN-15-000625. On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 459th Judicial District Court of Travis County, Texas.

The amended complaint in the consolidated derivative action names us and certain of our current and former officers and directors as defendants. It alleges claims for breach of fiduciary duty based, inter alia, on the defendants’ alleged failure to exercise good faith to ensure that we had in place adequate accounting and financial controls and that disclosures regarding our business, financial performance and internal controls were truthful and accurate. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief.

As disclosed in our Current Report on Form 8-K filed with the SEC on June 6, 2016, the Board of Directors appointed a Special Litigation Committee of the Board (the “Special Committee”). The Board delegated to the Special Committee the authority to (1) determine whether it is in our best interests to pursue any of the allegations made in the derivative cases filed in Texas state court (which cases were consolidated into the Judy case discussed above), (2) determine whether it is in our best interests to pursue any remedies against any of our current or former employees, officers or directors as a result of the conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation. The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests. In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue
any of the claims in the Judy derivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.

On April 14, 2017, we filed a motion to dismiss the consolidated derivative action based on the resolution by the Special Committee that it is not in our best interest to pursue the derivative claims. Counsel for the derivative plaintiffs opposed that motion and moved to compel discovery. In a hearing held on June 12, 2017, the Travis County court denied plaintiffs’ motion to compel, and held that the motion to dismiss would be considered only after appropriate discovery was concluded.

The plaintiffs ~~have since~~subsequently subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, took the position that the full report is not discoverable under Texas law. Plaintiffs’ counsel filed a motion to compel the Special Committee’s counsel to produce the report. We opposed the motion. On July 20, 2018, the Travis County court ruled that only a redacted version of the report is ~~discoverable.~~discoverable, and counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel. Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County court appointed a Special Master to review plaintiffs’ objections to the redacted report. On March 22, 2019, the Special Master submitted a report to the Travis County Court recommending that the Court order that the entire Special Committee report be produced. On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter. The Travis County Court scheduled a hearing for May 15, 2019 regarding our objection. Upon completion of discovery, we intend to file a motion to dismiss the consolidated derivative action.
Management intends to continue to vigorously defend against the ~~securities class action and the~~ shareholder derivative action. At this time, if the derivative action were to go to trial, we cannot predict how the ~~Courts~~Travis County Court will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Should we ultimately be found liable, the resulting damages could have a material adverse effect on our consolidated financial position, liquidity or our results of ~~our~~ operations.

Other Matters

From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our ~~business, including additional payments under business purchase agreements.~~business. 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 our operations.

We are 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 ~~condensed~~ consolidated financial statements.
ITEM 1A. RISK FACTORS

Our business and financial results are subject to numerous risks and uncertainties. The risk and uncertainties have not changed materially from those reported in Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, which are incorporated by reference. For additional information regarding risks and uncertainties, see the information provided under the header “Forward Looking Statements” contained in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There has been no share repurchase activity during the ~~quarter~~three months ended ~~June 30, 2018.~~March 31, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the ~~quarter~~three months ended ~~June 30, 2018.~~March 31, 2019.

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.
EXHIBITS INDEX

Exhibit
No.

Document
10.1
Amended and Restated Employment Agreement, dated as of March 19, 2019, by and between the Company and Vinit K. Asar. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on March 20, 2019.)*
10.2
Amended and Restated Employment Agreement, dated as of March 19, 2019, by and between the Company and Thomas E. Kiraly. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on March 20, 2019.)*
10.3
Amended and Restated Employment Agreement, dated as of March 19, 2019, by and between the Company and Samuel M. Liang. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company on March 20, 2019.)*
10.4
Amended and Restated Employment Agreement, dated as of March 19, 2019, by and between the Company and Thomas E. Hartman. (Incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Company on March 20, 2019.)*
31.1

Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
31.2

Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
32

Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
101.INS

XBRL Instance Document. (Filed herewith.)
101.SCH

XBRL Taxonomy Extension Schema. (Filed herewith.)
101.CAL

XBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LAB

XBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PRE

XBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEF

XBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)
*Management contract or compensatory plan
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 9, 2018~~May 8, 2019
By:
~~/s/~~ /s/ THOMAS E. KIRALY

Thomas E. Kiraly

Executive Vice President and Chief Financial Officer

Dated: ~~August 9, 2018~~May 8, 2019
By:
~~/s/~~ /s/ GABRIELLE B. ADAMS

Gabrielle B. Adams

Vice President and Chief Accounting Officer

4750

~~Title of class~~		~~Name of exchange on which registered~~
~~Common Stock, par value $0.01 per share~~		~~OTC Pink (operated by OTC Markets Group Inc.)~~

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, par value $0.01 per share		HNGR		New York Stock Exchange

Hanger, Inc.

Part I Financial Information
	Item 1. Condensed Consolidated Financial Statements (unaudited)	1
	Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations	2629
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	4144
	Item 4. Controls and Procedures	4245
Part II Other Information
	Item 1. Legal Proceedings	4346
	Item 1A. Risk Factors	4548
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4548
	Item 3. Defaults Upon Senior Securities	4548
	Item 4. Mine Safety Disclosures	4548
	Item 5. Other Information	4548
	Item 6. Exhibits	4548
Exhibits Index		4649
Signatures		4750

Delaware (State or other jurisdiction of incorporation or organization)		84-0904275 (I.R.S. Employer Identification No.)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Net revenues	$	266,966		$	263,386		$	500,961		$	497,067
Material costs	86,516			83,657			162,872			158,062
Personnel costs	89,554			87,831			175,662			175,786
Other operating costs	30,536			31,861			61,632			64,550
General and administrative expenses	26,523			25,227			52,159			50,613
Professional accounting and legal fees	4,236			8,521			9,082			21,171
Depreciation and amortization	9,272			9,825			18,602			19,962
Income from operations	20,329			16,464			20,952			6,923
Interest expense, net	7,317			14,091			19,580			28,100
Loss on extinguishment of debt	—			—			16,998			—
Non-service defined benefit plan expense	176			184			352			368
Income (loss) before income taxes	12,836			2,189			(15,978		)	(21,545		)
(Benefit) provision for income taxes	(92		)	552			(6,288		)	(5,448		)
Net income (loss)	$	12,928		$	1,637		$	(9,690	)	$	(16,097	)
Other comprehensive income (loss):
Unrealized gain on cash flow hedges (net of tax provision of $710 and $8 for the three and six months ended June 30, 2018, respectively)	$	2,314		$	—		$	24		$	—
Unrealized gain (loss) on defined benefit plan (net of tax benefit of $0 and $0 for the three months and $105 and $0 for the six months ended June 30, 2018 and 2017, respectively)	26			(17		)	(266		)	(34		)
Total other comprehensive income (loss)	2,340			(17		)	(242		)	(34		)
Comprehensive income (loss)	$	15,268		$	1,620		$	(9,932	)	$	(16,131	)

Per share data:
Basic earnings (loss) per share	$	0.35		$	0.05		$	(0.26	)	$	(0.44	)
Weighted average shares outstanding - basic	36,790,401			36,286,528			36,645,248			36,187,340
Diluted earnings (loss) per share	$	0.35		$	0.04		$	(0.26	)	$	(0.44	)
Weighted average shares outstanding - diluted	37,404,360			36,543,740			36,645,248			36,187,340

	For the Three Months Ended March 31,
(in thousands except per share data)	2019			2018
Net loss	$	(6,951	)	$	(22,618	)

Weighted average shares outstanding - basic	37,001,977			36,498,482
Effect of potentially dilutive restricted stock units and options (1)	—			—
Weighted average shares outstanding - diluted	37,001,977			36,498,482

Basic and diluted loss per share	$	(0.19	)	$	(0.62	)

	December 31, 2017			Effects of			January 1, 2018
(in thousands)	As reported			Adoption			After adoption
Assets
Deferred income taxes	$	68,126		$	268		$	68,394
Liabilities
Accrued expenses and other current liabilities	$	66,308		$	1,027		$	67,335
Shareholders’ Deficit
Accumulated deficit	$	(359,772	)	$	(759	)	$	(360,531	)

	As of and for the Three Months Ended June 30, 2018
(in thousands)	As Reported			Effects of Adoption			Proforma balance without the adoption of ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	266,966		$	1,322		$	268,288
Other operating costs	30,536			1,332			31,868
Income from operations	20,329			(10		)	20,319
Income (loss) before income taxes	12,836			(10		)	12,826
Net income (loss)	12,928			(10		)	12,918
Comprehensive income (loss)	15,268			(10		)	15,258

Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	74,897		$	3		$	74,900
Total assets	664,359			3			664,362
Liabilities
Accrued expenses and other current liabilities	54,258			9			54,267
Total current liabilities	146,037			9			146,046
Total liabilities	699,659			9			699,668
Shareholders’ Deficit
Accumulated deficit	(370,221		)	(6		)	(370,227		)
Total shareholders’ deficit	(35,300		)	(6		)	(35,306		)

	As of and for the Six Months Ended June 30, 2018
(in thousands)	As Reported			Effects of Adoption			Proforma balance without the adoption of ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	500,961		$	2,220		$	503,181
Other operating costs	61,632			2,200			63,832
Income from operations	20,952			20			20,972
Income (loss) before income taxes	(15,978		)	20			(15,958		)
Net income (loss)	(9,690		)	20			(9,670		)
Comprehensive income (loss)	(9,932		)	20			(9,912		)

Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	74,897		$	(273	)	$	74,624
Total assets	664,359			(273		)	664,086
Liabilities
Accrued expenses and other current liabilities	54,258			(1,048		)	53,210
Total current liabilities	146,037			(1,048		)	144,989
Total liabilities	699,659			(1,048		)	698,611
Shareholders’ Deficit
Accumulated deficit	(370,221		)	775			(369,446		)
Total shareholders’ deficit	(35,300		)	775			(34,525		)

	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
(in thousands)	2018		2017		2018		2017		2019		2018
Patient Care Segment
Medicare	$	70,469	$	65,737	$	127,781	$	120,872	$	57,776	$	57,531
Medicaid	33,648		34,788		63,400		62,964		30,147		29,711
Commercial Insurance/Managed Care (excluding Medicare and Medicaid Managed Care)	77,621		80,631		148,432		155,053
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)									70,218		70,582
Veterans Administration	20,904		18,814		37,547		34,340		18,322		16,731
Private Pay	15,516		16,251		29,505		30,629		14,138		13,952
Total	$	218,158	$	216,221	$	406,665	$	403,858	$	190,601	$	188,507

	As of June 30, 2018									As of December 31, 2017
(in thousands)	Patient Care			Products & Services			Consolidated			Patient Care			Products & Services			Consolidated
Accounts receivable, before allowances	$	173,268		$	25,316		$	198,584		$	193,150		$	23,494		$	216,644
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(52,428		)	—			(52,428		)	(56,233		)	—			(56,233		)
Patient non-payments	(8,335		)	—			(8,335		)	—			—			—
Accounts receivable, gross	112,505			25,316			137,821			136,917			23,494			160,411
Allowance for doubtful accounts	—			(3,742		)	(3,742		)	(9,894		)	(4,171		)	(14,065		)
Accounts receivable, net	$	112,505		$	21,574		$	134,079		$	127,023		$	19,323		$	146,346

	As of March 31, 2019									As of December 31, 2018
(in thousands)	Patient Care			Products & Services			Consolidated			Patient Care			Products & Services			Consolidated
Accounts receivable, before allowances	$	176,705		$	24,981		$	201,686		$	182,338		$	24,542		$	206,880
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(55,385		)	—			(55,385		)	(53,378		)	—			(53,378		)
Patient non-payments	(7,245		)	—			(7,245		)	(7,244		)	—			(7,244		)
Accounts receivable, gross	114,075			24,981			139,056			121,716			24,542			146,258
Allowance for doubtful accounts	—			(2,165		)	(2,165		)	—			(2,272		)	(2,272		)
Accounts receivable, net	$	114,075		$	22,816		$	136,891		$	121,716		$	22,270		$	143,986

	For the Three Months Ended
(in thousands)	March 31, 2019
Cash paid, net of cash acquired	$	27,679
Issuance of seller notes	4,451
Additional consideration (1)	345
Aggregate purchase price	32,475

Accounts receivable, net	3,318
Inventories	1,466
Customer relationships (Useful life of 3.0 years)	1,963
Non-compete agreements (Weighted average useful life of 4.9 years)	349
Other assets	329
Accounts payable	(1,191		)
Accrued expenses and other liabilities	(1,649		)
Net assets acquired	4,585
Goodwill	$	27,890

(in thousands)	For The Year Ended December 31, 2018
Cash paid, net of cash acquired	$	1,978
Issuance of seller notes	1,120
Aggregate purchase price	3,098

Accounts receivable, net	256
Inventories	302
Customer relationships (Weighted average useful life of 4.0 years)	260
Non-compete agreements (Weighted average useful life of 4.6 years)	214
Other assets	90
Accounts payable	(59		)
Accrued expenses and other liabilities	(364		)
Net assets acquired	699
Goodwill	$	2,399

	For the Three Months Ended March 31, 2019
	Patient Care							Products & Services							Consolidated
(in thousands)	Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net
As of December 31, 2018	$	627,410	$	(428,668	)	198,742		$	139,299	$	(139,299	)	—		$	766,709	$	(567,967	)	198,742
Additions from acquisitions	27,890		—			27,890		—		—			—		27,890		—			27,890
As of March 31, 2019	$	655,300	$	(428,668	)	$	226,632	$	139,299	$	(139,299	)	$	—	$	794,599	$	(567,967	)	$	226,632

	For the Year Ended December 31, 2018
	Patient Care							Products & Services							Consolidated
(in thousands)	Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net
As of December 31, 2017	$	625,011	$	(428,668	)	$	196,343	$	139,299	$	(139,299	)	$	—	$	764,310	$	(567,967	)	$	196,343
Additions from acquisitions	2,399		—			2,399		—		—			—		2,399		—			2,399
As of December 31, 2018	$	627,410	$	(428,668	)	$	198,742	$	139,299	$	(139,299	)	$	—	$	766,709	$	(567,967	)	$	198,742

	As of December 31, 2018
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer lists	$	26,036	$	(19,051	)	$	—		$	6,985
Trade name	255		(125		)	—			130
Patents and other intangibles	9,391		(5,145		)	—			4,246
Definite-lived intangible assets	35,682		(24,321		)	—			11,361
Indefinite-lived trade names	9,070		—			(4,953		)	4,117
Total other intangible assets	$	44,752	$	(24,321	)	$	(4,953	)	$	15,478

(in thousands)
2018 (remainder of year)	$	2,944
2019	3,762
2020	3,509
2021	927
2022	860
Thereafter	1,843
Total	$	13,845

(in thousands)
2019 (remainder of the year)	$	3,652
2020	4,601
2021	1,118
2022	964
2023	855
Thereafter	1,108
Total	$	12,298

		As of March 31,
(in thousands)	Classification	2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	103,676
Finance lease right-of-use assets	Other assets	541
Total lease assets		$	104,217
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	33,675
Finance	Current portion of long-term debt	246
Noncurrent
Operating	Operating lease liabilities	83,693
Finance	Long-term debt, less current portion	321
Total lease liabilities		$	117,935

(in thousands)	For the Three Months Ended March 31, 2019
Operating lease cost	$	10,836
Finance lease cost
Amortization of right-of-use assets	75
Interest on lease liabilities	6
Sublease income	(33		)
Short-term lease cost	368
Variable lease cost	1,217
Total lease cost	$	12,469

(in thousands)	Finance Leases			Operating Leases			Total Leases
2019 (remainder of year)	$	206		$	29,609		$	29,815
2020	208			35,411			35,619
2021	136			26,294			26,430
2022	50			18,741			18,791
2023	2			12,019			12,021
2024	—			5,826			5,826
Thereafter	—			4,593			4,593
Total future minimum lease payments	602			132,493			133,095
Imputed interest	(35		)	(15,125		)	(15,160		)
Total	$	567		$	117,368		$	117,935

	For the Three Months Ended March 31, 2019
Weighted average remaining lease term (years)
Operating leases	3.98
Finance leases	2.60
Weighted average discount rate
Operating leases	5.73	%
Finance leases	4.20	%

(in thousands)	For the Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,787
Operating cash flows from finance leases	6
Financing cash flows from finance leases	80
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	10,394
Finance leases	76

(in thousands)	Operating Leases		Capital Leases
2019	$	39,378	$	249
2020	29,641		175
2021	21,303		109
2022	14,479		28
2023	9,193		—
Thereafter	10,008		—
	$	124,002	$	561

2018 (remainder of year)	$	5,999
2019	8,356
2020	7,275
2021	5,936
2022	6,053
Thereafter	491,005
Total debt before unamortized discount and debt issuance costs, net	524,624
Unamortized discount and debt issuance costs, net	(10,083		)
Total debt	$	514,541

(in thousands)
2019 (remainder of year)	$	5,974
2020	8,220
2021	7,193
2022	5,849
2023	5,329
Thereafter	475,999
Total debt before unamortized discount and debt issuance costs, net	508,564
Unamortized discount and debt issuance costs, net	(9,264		)
Total debt	$	499,300

(in thousands)	Cash Flow Hedges			Cash Flow Hedges
Balance as of March 31, 2018	$	2,290
Unrealized gain recognized in other comprehensive income (loss), net of tax	(1,618		)
Balance as of December 31, 2018				$	2,936
Unrealized loss recognized in other comprehensive loss, net of tax				3,151
Reclassification to interest expense, net	(696		)	(215		)
Balance as of June 30, 2018	$	(24	)
Balance as of March 31, 2019				$	5,872

Balance as of December 31, 2017	$	—		$	—
Unrealized loss recognized in other comprehensive income (loss), net of tax	920
Unrealized loss recognized in other comprehensive loss, net of tax				2,538
Reclassification to interest expense, net	(944		)	(248		)
Balance as of June 30, 2018	$	(24	)
Balance as of March 31, 2018				$	2,290

(in thousands)						Balance to be Paid
For the Three Months Ended	Expensed		Paid			in Future Periods
March 31, 2018	$	3,700	$	(7,755	)	$	6,230
June 30, 2018	2,940		(5,938		)	3,232
September 30, 2018	2,230		(2,297		)	3,165
December 31, 2018	3,591		(3,561		)	3,195
March 31, 2019	1,649		(2,621		)	2,223

	For the Three Months Ended June 30,					Percent Change		For the Three Months Ended March 31,						Percent Change (1)
(dollars in thousands)	2018			2017		2018 v 2017		2019			2018			2019 vs 2018
Net revenue	$	266,966		$	263,386	1.4	%
Net revenues								$	236,419		$	233,995		1.0	%
Material costs	86,516			83,657		3.4	%	78,377			76,356			2.6	%
Personnel costs	89,554			87,831		2.0	%	86,711			86,108			0.7	%
Other operating costs	30,536			31,861		(4.2	)%	33,555			31,096			7.9	%
General and administrative expenses	26,523			25,227		5.1	%	28,282			25,636			10.3	%
Professional accounting and legal fees	4,236			8,521		(50.3	)%	2,700			4,846			(44.3	)%
Depreciation and amortization	9,272			9,825		(5.6	)%	8,773			9,330			(6.0	)%
Operating expenses	246,637			246,922		(0.1	)%	238,398			233,372			2.2	%
Income from operations	20,329			16,464		23.5	%
(Loss) income from operations								(1,979		)	623			NM
Interest expense, net	7,317			14,091		(48.1	)%	8,538			12,263			(30.4	)%
Loss on extinguishment of debt								—			16,998			(100.0	)%
Non-service defined benefit plan expense	176			184		(4.3	)%	173			176			(1.7	)%
Income before income taxes	12,836			2,189		486.4	%
(Benefit) provision for income taxes	(92		)	552		(116.7	)%
Net income	$	12,928		$	1,637	689.7	%
Loss before income taxes								(10,690		)	(28,814		)	62.9	%
Benefit for income taxes								(3,739		)	(6,196		)	39.7	%
Net loss								$	(6,951	)	$	(22,618	)	69.3	%

	For the Three Months Ended June 30,						Percent
dollars in thousands)	2018		2017		Change		Change
Patient Care	$	218,158	$	216,221	$	1,937	0.9	%
Products & Services	48,808		47,165		1,643		3.5	%
Net revenue	$	266,966	$	263,386	$	3,580	1.4	%

	For the Six Months Ended June 30,						Percent Change
(dollars in thousands)	2018			2017			2018 v 2017
Net revenues	$	500,961		$	497,067		0.8	%
Material costs	162,872			158,062			3.0	%
Personnel costs	175,662			175,786			(0.1	)%
Other operating costs	61,632			64,550			(4.5	)%
General and administrative expenses	52,159			50,613			3.1	%
Professional accounting and legal fees	9,082			21,171			(57.1	)%
Depreciation and amortization	18,602			19,962			(6.8	)%
Operating Expenses	480,009			490,144			(2.1	)%
Income from operations	20,952			6,923			202.6	%
Interest expense, net	19,580			28,100			(30.3	)%
Loss on extinguishment of debt	16,998			—			100.0	%
Non-service defined benefit plan expense	352			368			(4.3	)%
Loss before income taxes	(15,978		)	(21,545		)	(25.8	)%
Benefit for income taxes	(6,288		)	(5,448		)	15.4	%
Net loss	$	(9,690	)	$	(16,097	)	(39.8	)%

	For the Six Months Ended June 30,						Percent
(dollars in thousands)	2018		2017		Change		Change
Patient Care	$	406,665	$	403,858	$	2,807	0.7	%
Products & Services	94,296		93,209		1,087		1.2	%
Net revenue	$	500,961	$	497,067	$	3,894	0.8	%