Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~Yes~~⌧x No ◻o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧x No ◻o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ◻x

Accelerated filer ⌧o

Non-accelerated filer ◻o

Smaller reporting company ☐o

Emerging growth company ☐o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ⌧x

As of April 27, ~~2021,~~2022, the registrant had ~~38,541,339~~39,029,037 shares of its Common Stock outstanding.

~~Table of Contents~~

~~TABLE OF CONTENTS~~


~~Hanger, Inc.~~

TABLE OF CONTENTS

~~Table of Contents~~

PART 1.FINANCIALINFORMATION

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except par value and share amounts)

(Unaudited)

As of March 31,

As of December 31,

2021

2020
ASSETS

Current assets:

Cash and cash equivalents

$
70,316

$
144,602
Accounts receivable, net

118,162

128,596
Inventories

78,622

76,429
Income taxes receivable

12,863

12,888
Other current assets

15,489

12,357
Total current assets

295,452

374,872
Non-current assets:

Property, plant, and equipment, net

84,761

84,873
Goodwill

298,166

277,223
Other intangible assets, net

19,844

18,431
Deferred income taxes

55,482

54,877
Operating lease right-of-use assets

124,663

124,741
Other assets

16,204

15,734
Total assets

$
894,572

$
950,751
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt

$
11,064

$
10,085
Accounts payable

51,002

65,091
Accrued expenses and other current liabilities

62,491

62,861
Accrued compensation related costs

35,665

72,541
Current portion of operating lease liabilities

35,005

35,002
Total current liabilities

195,227

245,580
Long-term liabilities:

Long-term debt, less current portion

494,326

493,012
Operating lease liabilities

104,030

104,589
Other liabilities

51,745

56,593
Total liabilities

845,328

899,774
Commitments and contingencies (Note P)

Shareholders’ equity:

Common stock, $0.01 par value; 60,000,000 shares authorized; 38,715,640 shares issued and 38,572,819 shares outstanding at 2021, and 38,321,796 shares issued and 38,178,975 shares outstanding at 2020, respectively

387

383
Additional paid-in capital

364,524

365,503
Accumulated other comprehensive loss

(17,643)

(20,215)
Accumulated deficit

(297,328)

(293,998)
Treasury stock, at cost; 142,821 shares at 2021 and 2020, respectively

(696)

(696)
Total shareholders’ equity

49,244

50,977
Total liabilities and shareholders’ equity

$
894,572

$
950,751


	As of March 31,		As of December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	37,423	$	61,692
Accounts receivable, net	139,617		152,058
Inventories	83,288		87,462
Income taxes receivable	548		581
Other current assets	18,527		16,536
Total current assets	279,403		318,329
Non-current assets:
Property, plant, and equipment, net	80,906		82,434
Goodwill	367,914		363,554
Other intangible assets, net	25,032		25,892
Deferred income taxes	45,743		45,494
Operating lease right-of-use assets	141,820		144,491
Other assets	18,844		17,945
Total assets	$	959,662	$	998,139
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	13,535	$	14,938
Accounts payable	57,969		63,565
Accrued expenses and other current liabilities	58,391		60,399
Accrued compensation related costs	37,232		54,465
Current portion of operating lease liabilities	33,182		33,438
Total current liabilities	200,309		226,805
Long-term liabilities:
Long-term debt, less current portion	500,555		502,307
Operating lease liabilities	121,725		124,016
Other liabilities	28,520		34,840
Total liabilities	851,109		887,968
Commitments and contingencies (Note P)	0		0
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 39,204,040 shares issued and 39,061,219 shares outstanding at 2022, and 38,891,438 shares issued and 38,748,617 shares outstanding at 2021	392		389
Additional paid-in capital	373,092		373,644
Accumulated other comprehensive loss	(4,242)		(11,150)
Accumulated deficit	(259,993)		(252,016)
Treasury stock, at cost; 142,821 shares at both 2022 and 2021	(696)		(696)
Total shareholders’ equity	108,553		110,171
Total liabilities and shareholders’ equity	$	959,662	$	998,139

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

~~Table of Contents~~

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

For the Three Months Ended
March 31,

2021

2020
Net revenues

$
237,470

$
233,739
Material costs

75,170

77,241
Personnel costs

89,880

89,185
Other operating costs

31,460

35,886
General and administrative expenses

30,941

31,769
Depreciation and amortization

7,998

8,831
Income (loss) from operations

2,021

(9,173)
Interest expense, net

7,340

8,269
Non-service defined benefit plan expense

167

158
Loss before income taxes

(5,486)

(17,600)
Benefit for income taxes

(2,156)

(1,852)
Net loss

$
(3,330)

$
(15,748)

Basic and Diluted Per Common Share Data:

Basic and diluted loss per share

$
(0.09)

$
(0.42)
Weighted average shares used to compute basic and diluted earnings per common share

38,268,332

37,541,452


	For the Three Months Ended March 31,
	2022		2021
Net revenues	$	261,287	$	237,470
Material costs	85,592		75,170
Personnel costs	101,675		89,880
Other operating costs	36,168		31,498
General and administrative expenses	32,442		30,903
Depreciation and amortization	7,955		7,998
(Loss) income from operations	(2,545)		2,021
Interest expense, net	7,385		7,340
Non-service defined benefit plan expense	160		167
Loss before income taxes	(10,090)		(5,486)
Benefit for income taxes	(2,113)		(2,156)
Net loss	$	(7,977)	$	(3,330)

Basic and diluted per common share data:
Basic and diluted loss per share	$	(0.21)	$	(0.09)
Weighted average shares used to compute basic and diluted loss per share	38,802,420		38,268,332

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

~~Table of Contents~~

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(dollars in thousands)

(Unaudited)

For the Three Months Ended
March 31,

2021

2020
Net loss

$
(3,330)

$
(15,748)

Other comprehensive income (loss):

Unrealized gain (loss) on cash flow hedges, net of tax provision (benefit) of $796 and ($2,815), respectively

$
2,512

$
(8,902)
Unrealized gain on defined benefit plan, net of tax provision of $19 and $9, respectively

60

29
Total other comprehensive income (loss)

2,572

(8,873)
Comprehensive loss

$
(758)

$
(24,621)


	For the Three Months Ended March 31,
	2022		2021
Net loss	$	(7,977)	$	(3,330)

Other comprehensive income:
Unrealized gain on cash flow hedges, net of tax provision of $2,058 and $796, respectively	$	6,896	$	2,512
Unrealized gain on defined benefit plan, net of tax provision of $48 and $19, respectively	12		60
Total other comprehensive income	6,908		2,572
Comprehensive loss	$	(1,069)	$	(758)

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

~~Table of Contents~~

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY ~~(DEFICIT)~~

(dollars and share amounts in thousands)

(Unaudited)


	Common Shares	Common Shares, Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Treasury Stock		Total
Balance, December 31, 2021	38,749	$	389	$	373,644	$	(11,150)	$	(252,016)	$	(696)	$	110,171
Net loss	—	—		—		—		(7,977)		—		(7,977)
Share-based compensation expense	—	—		2,903		—		—		—		2,903
Issuance of common stock upon vesting of restricted stock units	324	3		(3)		—		—		—		—
Effect of shares withheld to cover taxes	—	—		(3,452)		—		—		—		(3,452)
Total other comprehensive income	—	—		—		6,908		—		—		6,908
Balance, March 31, 2022	39,073	$	392	$	373,092	$	(4,242)	$	(259,993)	$	(696)	$	108,553

Common

Accumulated

Common

Stock,

Additional

Other

Shares,

Par

Paid-in

Comprehensive

Accumulated

Treasury


Balance

Value

Capital

Loss

Deficit

Stock

Total
Balance, December 31, 2020

38,179

$
383

$
365,503

$
(20,215)

$
(293,998)

$
(696)

$
50,977
Net loss

—

—

—

—

(3,330)

—

(3,330)
Share-based compensation expense

—

—

3,179

—

—

—

3,179
Issuance in connection with the exercise of stock options

29

—

366

—

—

—

366
Issuance of common stock upon vesting of restricted stock units

365

4

(4)

—

—

—

—
Effect of shares withheld to cover taxes

—

—

(4,520)

—

—

—

(4,520)
Total other comprehensive income

—

—

—

2,572

—

—

2,572
Balance, March 31, 2021

38,573

$
387

$
364,524

$
(17,643)

$
(297,328)

$
(696)

$
49,244


	Common Shares	Common Shares, Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Treasury Stock		Total
Balance, December 31, 2020	38,179	$	383	$	365,503	$	(20,215)	$	(293,998)	$	(696)	$	50,977
Net loss	—	—		—		—		(3,330)		—		(3,330)
Share-based compensation expense	—	—		3,179		—		—		—		3,179
Issuance in connection with the exercise of stock options	29	—		366		—		—		—		366
Issuance of common stock upon vesting of restricted stock units	365	4		(4)		—		—		—		—
Effect of shares withheld to cover taxes	—	—		(4,520)		—		—		—		(4,520)
Total other comprehensive income	—	—		—		2,572		—		—		2,572
Balance, March 31, 2021	38,573	$	387	$	364,524	$	(17,643)	$	(297,328)	$	(696)	$	49,244

Common



Accumulated






Common

Stock,

Additional

Other

Shares,

Par

Paid-in

Comprehensive

Accumulated

Treasury


Balance

Value

Capital

Loss

Deficit

Stock

Total
Balance, December 31, 2019

37,460

$
376

$
354,326

$
(12,551)

$
(331,951)

$
(696)

$
9,504
Cumulative effect of a change in accounting for credit losses

—

—

—

—

(238)

—

(238)
Balance, January 1, 2020

37,460

376

354,326

(12,551)

(332,189)

(696)

9,266
Net loss

—

—

—

—

(15,748)

—

(15,748)
Share-based compensation expense

—

—

3,501

—

—

—

3,501
Issuance of common stock upon vesting of restricted stock units

354

4

(4)

—

—

—

—
Effect of shares withheld to cover taxes

—

—

(4,146)

—

—

—

(4,146)
Total other comprehensive loss

—

—

—

(8,873)

—

—

(8,873)
Balance, March 31, 2020

37,814

$
380

$
353,677

$
(21,424)

$
(347,937)

$
(696)

$
(16,000)

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

~~Table of Contents~~

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

For the Three Months Ended
March 31,

2021

2020
Cash flows used in operating activities:

Net loss

$
(3,330)

$
(15,748)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

7,998

8,831
(Benefit) provision for doubtful accounts

(211)

1,928
Share-based compensation expense

3,179

3,501
Deferred income taxes

(1,795)

3,476
Amortization of debt discounts and issuance costs

472

409
Gain on sale and disposal of fixed assets

(524)

(411)
Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable, net

11,093

28,229
Inventories

(1,437)

949
Other current assets and other assets

(3,492)

(3,989)
Income taxes

25

(5,303)
Accounts payable

(14,055)

(4,757)
Accrued expenses and other current liabilities

(1,299)

(385)
Accrued compensation related costs

(36,936)

(38,175)
Other liabilities

(1,576)

(1,153)
Operating lease liabilities, net of amortization of right-of-use assets

(478)

628
Changes in operating assets and liabilities:

(48,155)

(23,956)
Net cash used in operating activities

(42,366)

(21,970)
Cash flows used in investing activities:

Acquisitions, net of cash acquired

(19,377)

(26)
Purchase of property, plant, and equipment

(6,541)

(6,526)
Purchase of therapeutic program equipment leased to third parties under operating leases

(395)

(2,286)
Proceeds from sale of property, plant, and equipment

796

595
Purchase of company-owned life insurance investment

—

(250)
Net cash used in investing activities

(25,517)

(8,493)
Cash flows (used in) provided by financing activities:

Borrowings under revolving credit agreement

—

79,000
Payment of employee taxes on share-based compensation

(4,520)

(4,146)
Repayment of term loan

(1,263)

(1,263)
Payment on Seller Notes

(446)

(1,446)
Payments under vendor financing arrangements

(275)

—
Payments of financing lease obligations

(265)

(152)
Proceeds from the exercise of options

366

—
Net cash (used in) provided by financing activities

(6,403)

71,993
(Decrease) increase in cash and cash equivalents

(74,286)

41,530
Cash and cash equivalents at beginning of period

144,602

74,419
Cash and cash equivalents at end of period

$
70,316

$
115,949

Non-cash financing and investing activities:

Seller Notes and other non-cash consideration related to acquisitions

$
4,865

$
36
Purchase of property, plant, and equipment in accounts payable at period end

3,458

6,244
Right-of-use assets obtained in exchange for finance lease obligations

82

730


	For the Three Months Ended March 31,
	2022		2021
Cash flows used in operating activities:
Net loss	$	(7,977)	$	(3,330)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7,955		7,998
Benefit from doubtful accounts	(170)		(211)
Share-based compensation expense	2,903		3,179
Deferred income taxes	(2,466)		(1,795)
Amortization of debt discounts and issuance costs	518		472
Gain on sale and disposal of fixed assets	(228)		(524)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	12,845		11,093
Inventories	4,259		(1,437)
Other current assets and other assets	(2,540)		(3,492)
Income taxes	33		25
Accounts payable	(6,038)		(14,055)
Accrued expenses and other current liabilities	1,328		(1,299)
Accrued compensation related costs	(17,245)		(36,936)
Other liabilities	(1,598)		(1,576)
Operating lease liabilities, net of amortization of right-of-use assets	123		(478)
Changes in operating assets and liabilities:	(8,833)		(48,155)
Net cash used in operating activities	(8,298)		(42,366)
Cash flows used in investing activities:
Purchase of property, plant, and equipment	(4,003)		(6,541)
Acquisitions, net of cash acquired	(4,001)		(19,377)
Purchase of therapeutic program equipment leased to third parties under operating leases	(450)		(395)
Proceeds from sale of property, plant, and equipment	551		796
Net cash used in investing activities	(7,903)		(25,517)
Cash flows used in financing activities:
Payment of employee taxes on share-based compensation	(3,452)		(4,520)
Payment on Seller Notes	(3,087)		(446)
Repayment of term loan	(1,263)		(1,263)
Payments of financing lease obligations	(266)		(265)
Payments under vendor financing arrangements	—		(275)
Proceeds from the exercise of options	—		366
Net cash used in financing activities	(8,068)		(6,403)
Decrease in cash and cash equivalents	(24,269)		(74,286)
Cash and cash equivalents at beginning of period	61,692		144,602
Cash and cash equivalents at end of period	$	37,423	$	70,316

Non-cash financing and investing activities:


Purchase of property, plant, and equipment in accounts payable at period end	$	3,393	$	3,458
Seller Notes and other non-cash consideration related to acquisitions	978		4,865
Right-of-use assets obtained in exchange for finance lease obligations	—		82

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

~~Table of Contents~~

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 2 segments, Patient Care and Products & Services.

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~“2020~~“2021 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “SEC”).

In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position, and cash flows. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of those to be expected for the full year.

A detailed description of our significant accounting policies and management judgments is contained in our ~~2020~~2021 Form 10-K.

Reclassifications

We have reclassified certain amounts in the prior year condensed consolidated financial statements to be consistent with the current year presentation. These relate to immaterial classifications within expense line items in the condensed consolidated statements of operations.

Recent Developments Regarding COVID-19

We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”). The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition remain uncertain and difficult to predict. As a result of the COVID-19 pandemic, we believe that our patients are ~~deferring~~continuing to defer visits to our O&P clinics, as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. Nevertheless, the overall adverse impact of the COVID-19 pandemic on our business volumes has diminished and stabilized over time, and our patient appointment and other business volumes continue to gradually improve as the prevalence of the virus decreases and COVID-19 vaccines become more widely available and accepted. It remains possible that further outbreaks of COVID-19, including the spread of variants such as the Delta and Omicron variants, or reinstitution of restrictive measures by federal, state, and local governments could cause a recessionary environment impacting the healthcare industry generally, including the O&P industry. The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside ~~$178.0~~$203.5 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the ~~$178.0~~$203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.

~~Table~~During the full year of ~~Contents~~

~~During 2020,~~2021, we recognized a total benefit of ~~$24.0~~$1.1 million in our consolidated statement of operations within Other operating costs in our Patient Care segment for the grant proceeds we received under the CARES Act (“Grants”) from HHS. We accounted for the proceeds from the Grants by analogy to International Accounting Standard (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance and its principles surrounding the recognition of grants related to income. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We ~~recognized the benefit from~~are using the Grants ~~within Other operating costs in our Patient Care segment.~~

for their intended purpose, and are compliant to the reporting requirements set by the terms and conditions of the grant.

The CARES Act also ~~provides~~provided for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions ~~allow~~allowed us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We paid the first half in September 2021, and deferred ~~$11.8~~$5.9 million of payroll taxes within Accrued compensation related costs ~~and Other liabilities~~ in the condensed consolidated balance sheet as of March 31, ~~2021.~~

2022.

Recent Accounting Pronouncements, Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU, effective beginning on March 12, 2020, provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. We are currently evaluating the effects that the adoption of this guidance, and related clarifying standards, will have on our condensed consolidated financial statements and the related disclosures.

Note B — Earnings Per Share

Basic earnings per ~~common~~ share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per ~~common~~ 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~~loss per share computation were ~~3,471~~32,891 and 03,471 for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

Our Credit Agreement (as defined below) restricts the payment of dividends or other distributions to our shareholders by us or any of our subsidiaries. See Note K - “Debt and Other Obligations” within these condensed consolidated financial statements.

The reconciliation of the numerators and denominators used to calculate basic and diluted net income per share are as follows:


	For the Three Months Ended March 31,
(in thousands except share and per share amounts)	2022		2021
Net loss	$	(7,977)	$	(3,330)

Weighted average shares outstanding - basic	38,802,420		38,268,332
Effect of potentially dilutive restricted stock units and options (1)	—		—
Weighted average shares outstanding - diluted	38,802,420		38,268,332

Basic and diluted loss per share	$	(0.21)	$	(0.09)

(1)

For the Three Months Ended
March 31,
(in thousands except share and per share amounts)

2021

2020
Net loss

$
(3,330)

$
(15,748)

Weighted average shares outstanding - basic

38,268,332

37,541,452
Effect of potentially dilutive restricted stock units and options ⁽¹⁾

—

—
Weighted average shares outstanding - diluted

38,268,332

37,541,452

Basic and diluted loss per share

$
(0.09)

$
(0.42)

In accordance with

~~(1)~~

~~In accordance with~~ ASC 260 - Earnings Per Share~~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 three months ended March 31, 2021 and 2020, potentially dilutive shares of 906,116 and 983,884 shares used to compute diluted per share amounts exclude potentially dilutive shares related to unvested restricted stock units and unexercised options. For the three months ended March 31, 2022 and 2021, potentially dilutive shares of 490,081 and 906,116 shares, respectively, were excluded, ~~respectively,~~ as we were in a net loss position.

~~Table of Contents~~

Note C — Revenue Recognition

Patient Care Segment

Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs (the “VA”), or private or patient pay (“Private Pay”) individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three months ended March 31, ~~2021~~2022 and ~~2020:~~

For the Three Months Ended
March 31,
(in thousands)

2021

2020
Patient Care Segment




Medicare

$
57,335

$
61,725
Medicaid

34,048

30,828
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)

69,663

66,440
Veterans Administration

19,764

17,892
Private Pay

14,872

13,298
Total

$
195,682

$
190,183

2021:


	For the Three Months Ended March 31,
(in thousands)	2022		2021
Patient Care Segment
Medicare	$	65,854	$	57,335
Medicaid	39,272		34,048
Commercial insurance / managed care (excluding Medicare and Medicaid managed care)	77,343		69,663
VA	21,049		19,764
Private Pay	16,300		14,872
Total	$	219,818	$	195,682

The impact to revenue related to prior period performance obligations was not material for the three months ended March 31, ~~2021 and 2020.~~

2022 or 2021.

Products & Services Segment

Revenue in our Products & Services segment is derived from the distribution of O&P components and from therapeutic solutions which includes the leasing and sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.

The following table disaggregates revenue from contracts with customers in our ~~Product~~Products & Services segment for the three months ended March 31, ~~2021~~2022 and ~~2020:~~

For the Three Months Ended
March 31,
(in thousands)

2021

2020
Products & Services Segment



Distribution services, net of intersegment revenue eliminations

$
30,660

$
31,690
Therapeutic solutions

11,128

11,866
Total

$
41,788

$
43,556

2021:

For the Three Months Ended
March 31,
(in thousands) 2022 2021
Products & Services Segment
Distribution services, net of intersegment revenue eliminations $ 31,390 $ 30,660
Therapeutic solutions 10,079 11,128
Total $ 41,469 $ 41,788

Note D — Accounts Receivable, Net

Accounts receivable, net represents outstanding amounts we expect to collect from the transfer of our products and services. Principally, these amounts are comprised of receivables from Medicare, Medicaid, and commercial insurance plans. Our accounts receivable represent amounts outstanding from our gross charges, net of contractual discounts, sales returns, and other implicit price concessions including estimates for payor disallowances and patient non-payments.

~~Table of Contents~~

We are exposed to credit losses primarily through our accounts receivable. These receivables are short in nature because their due date varies between due upon receipt of invoice and 90 days. We assess our receivables, divide them into similar risk pools, and monitor our ongoing credit exposure through active review of our aging buckets. Our activities include timely account reconciliations, dispute resolution, and payment confirmations. We also employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

Our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current status of our patients and customers’ trade accounts receivable balances. We also ~~grouped~~group our receivables into similar risk pools to better measure the risks for each pool. After evaluating the risk for each pool, we have determined that additional credit loss risk ~~was~~is immaterial for the Patient Care segment. For the Products & Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” As of March 31, ~~2021,~~2022, we have considered the current and future economic and market conditions resulting in a decrease to the allowance for doubtful accounts by approximately ~~$0.2~~$0.1 million since December 31, ~~2020.~~

2021.

Accounts receivable, net as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021 is comprised of the following:


	As of March 31, 2022						As of December 31, 2021
(in thousands)	Patient Care		Products & Services		Consolidated		Patient Care		Products & Services		Consolidated
Gross charges before estimates for implicit price concessions	$	157,814	$	21,089	$	178,903	$	173,115	$	21,459	$	194,574
Less estimates for implicit price concessions:
Payor disallowances	(30,300)		—		(30,300)		(33,007)		—		(33,007)
Patient non-payments	(7,059)		—		(7,059)		(7,500)		—		(7,500)
Accounts receivable, gross	120,455		21,089		141,544		132,608		21,459		154,067
Allowance for doubtful accounts	—		(1,927)		(1,927)		—		(2,009)		(2,009)
Accounts receivable, net	$	120,455	$	19,162	$	139,617	$	132,608	$	19,450	$	152,058

As of March 31, 2021

As of December 31, 2020

Products &

Products &

(in thousands)

Patient Care

Services

Consolidated

Patient Care

Services

Consolidated
Gross charges before estimates for implicit price concessions

$
143,007

$
21,056

$
164,063

$
156,504

$
21,300

$
177,804
Less estimates for implicit price concessions:

Payor disallowances

(36,816)

—

(36,816)

(39,343)

—

(39,343)
Patient non-payments

(6,499)

—

(6,499)

(7,042)

—

(7,042)
Accounts receivable, gross

99,692

21,056

120,748

110,119

21,300

131,419
Allowance for doubtful accounts

—

(2,586)

(2,586)

—

(2,823)

(2,823)
Accounts receivable, net

$
99,692

$
18,470

$
118,162

$
110,119

$
18,477

$
128,596

Note E — Inventories

Our inventories are comprised of the following:

As of March 31,

As of December 31,
(in thousands)

2021

2020
Raw materials

$
20,251

$
19,716
Work in process

15,808

12,040
Finished goods

42,563

44,673
Total inventories

$
78,622

$
76,429

As of March 31, As of December 31,
(in thousands) 2022 2021
Raw materials $ 22,569 $ 22,759
Work in process 19,783 15,807
Finished goods 40,936 48,896
Total inventories $ 83,288 $ 87,462

Note F — Acquisitions

~~2021~~

2022 Acquisition Activity

In the first quarter of ~~2021,~~2022, we completed the ~~acquisitions~~acquisition of all the outstanding equity interests of ~~three O&P businesses and the assets of one~~an O&P business for total consideration of ~~$24.2~~$5.0 million, of which ~~$19.2~~$4.0 million was cash consideration, net of cash acquired, ~~$4.0~~and $1.0 million was issued in the form of notes to shareholders at fair ~~value, and $1.0 million in additional consideration.~~

value. The acquisition was completed with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of this high quality O&P provider. The acquisition was not material to our financial position, results of operations, or cash flows.

~~Table of Contents~~

We accounted for ~~these transactions~~this transaction under the acquisition method of accounting and have reported the results of operations of ~~each~~the acquisition as of the ~~respective dates~~date of the ~~acquisitions.~~acquisition. We based the estimated fair values of intangible assets on an income approach utilizing the excess earnings method for customer relationships. The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions. Other significant judgments used in the valuation of tangible assets acquired in the 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. We recorded the excess of the fair value of the consideration transferred in the ~~acquisitions~~acquisition over the fair value of net assets acquired as goodwill. The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce. We expect that substantially all of the ~~majority of Goodwill,~~goodwill, which has been assigned to our Patient Care reporting unit, will not be deductible for federal income tax purposes. ~~The amount of tax deductible Goodwill acquired in these transactions was not material.~~

We have not presented pro forma combined results for ~~these acquisitions~~this acquisition because the impact on previously reported statements of operations would not have been ~~material individually or in the aggregate.~~

material.

Purchase Price Allocation

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the ~~acquisitions.~~acquisition. The final purchase price ~~allocations~~allocation will be determined when we have completed and fully reviewed the detailed valuations ~~and~~which could differ materially from the preliminary allocations. The final ~~allocations~~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 ~~these acquisitions were~~this acquisition was allocated on a preliminary basis as follows:

(in thousands)

Cash paid, net of cash acquired

$
19,238
Issuance of Seller Notes at fair value

3,956
Additional consideration, net

998
Aggregate purchase price

24,192

Accounts receivable

805
Inventories

756
Customer relationships (Weighted average useful life of 5.0 years)

2,460
Other assets and liabilities, net

(589)
Net assets acquired

3,432
Goodwill

$
20,760

~~Right-of-use~~


(in thousands)
Cash paid, net of cash acquired	$	4,001
Issuance of Seller Notes at fair value	981
Aggregate purchase price	4,982

Accounts receivable	310
Inventories	85
Customer relationships (Weighted average useful life of 5.0 years)	500
Non-compete agreements (Weighted average useful life of 5.0 years)	243
Other assets and liabilities, net	(103)
Net assets acquired	1,035
Goodwill	$	3,947

Right-of-use assets and lease liabilities related to operating leases recognized in connection with the ~~acquisitions~~acquisition completed ~~during~~for the three months ended March 31, ~~2021~~2022 were ~~$1.5~~$0.4 million.

During the second quarter of 2022 to date, we completed the acquisition of 1 O&P business for a total purchase price of $3.2 million. Total consideration transferred for this acquisition is comprised of $2.4 million in cash consideration and $0.8 million in the form of notes to shareholders at fair value. Due to the proximity in time of this transaction to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the acquisition. Acquisition-related expenses related to this transaction were not material.

In March 2022, we entered into a definitive share purchase agreement in connection with the acquisition of 1 O&P business for a total purchase price of approximately $9.0 million. Due to the proximity in time of this transaction to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed in this acquisition. Acquisition-related expenses were not material for this transaction.

~~Table of Contents~~

~~2020~~2021 Acquisition Activity

During ~~2020,~~2021, we completed the following acquisitions of O&P clinics ~~none~~with the intention of ~~which~~expanding the geographic footprint of our patient care offerings through the acquisition of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash ~~flows:~~

flows.

•

●

In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.2 million at fair value, of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Total payments of $4.0 million under the deferred payment obligation are due in annual installments beginning in the ~~fourth year~~ following the acquisition and for three years thereafter. Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of this high quality O&P provider.

In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of 3 O&P businesses and the assets of 1 O&P business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form of notes to shareholders at fair value, and $1.0 million in additional consideration.

●

In the fourth quarter of 2020, we completed the acquisitions of all the outstanding equity interests of four O&P businesses for total consideration of $7.1 million, of which $4.9 million was cash consideration, net of cash acquired, $1.9 million was issued in the form of notes to shareholders at fair value, and $0.3 million in additional consideration.

•

In the second quarter of 2021, we completed the acquisitions of all the outstanding equity interests of 2 O&P businesses for total consideration of $21.0 million, of which $16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to shareholders at fair value, and $0.1 million in additional consideration.

•In the third quarter of 2021, we completed the acquisitions of all the outstanding equity interests of 3 O&P businesses and the assets of 1 O&P business for total consideration of $6.2 million, of which $3.9 million was cash consideration, net of cash acquired, $1.5 million was issued in the form of notes to shareholders at fair value, and $0.8 million in additional consideration.

•In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of 8 O&P businesses for total consideration of $53.1 million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair value.

Acquisition-related costs are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the year ended December 31, 2021 were $2.1 million, which includes those costs for transactions that were in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the year ended December 31, 2021 were $1.6 million.

The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:

(in thousands)

Cash paid, net of cash acquired

$
21,709
Issuance of Seller Notes at fair value

23,766
Deferred payment obligation at fair value

3,468
Additional consideration, net

4,319
Aggregate purchase price

53,262

Accounts receivable

4,224
Inventories

2,276
Customer relationships (Weighted average useful life of 5.0 years)

6,358
Non-compete agreements (Weighted average useful life of 5.0 years)

200
Other assets and liabilities, net

(4,561)
Net assets acquired

8,497
Goodwill

$
44,765

~~Right-of-use~~


(in thousands)
Cash paid, net of cash acquired	$	79,927
Issuance of Seller Notes at fair value	22,706
Additional consideration, net	1,925
Aggregate purchase price	104,558

Accounts receivable	6,569
Inventories	4,683
Customer relationships (Weighted average useful life of 5.0 years)	11,745
Non-compete agreements (Weighted average useful life of 5.0 years)	558
Other assets and liabilities, net	(5,121)
Net assets acquired	18,434
Goodwill	$	86,124

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, ~~2020~~2021 were ~~$5.5~~$8.9 million.

Note G — Goodwill and Other Intangible Assets

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

~~Table of Contents~~

The following table summarizes the activity in goodwill of the Patient Care operating segment for the ~~periods~~period indicated:


	For the Three Months Ended March 31, 2022
(in thousands)	Goodwill, Gross		Accumulated Impairment		Goodwill, Net
As of December 31, 2021	$	792,222	$	(428,668)	$	363,554
Additions from acquisitions	3,947		—		3,947
Measurement period adjustments (1)	413		—		413
As of March 31, 2022	$	796,582	$	(428,668)	$	367,914

(1)

For the Three Months Ended March 31, 2021

Goodwill,

Accumulated

Goodwill,
(in thousands)

Gross

Impairment

Net
As of December 31, 2020

$
705,891

$
(428,668)

$
277,223
Additions from acquisitions

20,760

—

20,760
Measurement period adjustments ⁽¹⁾

183

—

183
As of March 31, 2021

$
726,834

$
(428,668)

$
298,166

~~(1)~~

Measurement period adjustments ~~increasing goodwill~~ relate to 2021 acquisitions ~~in the prior year of approximately $0.2 million and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.~~

For the Year Ended December 31, 2020

Goodwill,

Accumulated

Goodwill,
(in thousands)

Gross

Impairment

Net
As of December 31, 2019

$
660,912

$
(428,668)

$
232,244
Additions from acquisitions

45,144

—

45,144
Measurement period adjustments ⁽¹⁾

(165)

—

(165)
As of December 31, 2020

$
705,891

$
(428,668)

$
277,223

~~(1)~~

Measurement period adjustments reducing goodwill relate to acquisitions in the current and prior year of approximately $0.2 million and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

~~As of December 31, 2017, goodwill~~ of approximately ~~$139.3~~$0.4 million ~~within~~and are primarily attributable to adjustments to the ~~Products and Services operating segment was impaired in full.~~

preliminary allocations of acquired assets.

The balances related to intangible assets as of March 31, ~~2021 and December 31, 2020~~2022 are as follows:

As of March 31, 2021

Gross

Carrying

Accumulated

Accumulated

Net Carrying
(in thousands)

Amount

Amortization

Impairment

Amount
Customer lists

$
19,339

$
(6,712)

$
—

$
12,627
Trade name

255

(183)

—

72
Patents and other intangibles

8,994

(5,966)

—

3,028
Definite-lived intangible assets

28,588

(12,861)

—

15,727
Indefinite-lived trade name

9,070

—

(4,953)

4,117
Total other intangible assets

$
37,658

$
(12,861)

$
(4,953)

$
19,844

As of December 31, 2020

Gross

Carrying

Accumulated

Accumulated

Net Carrying
(in thousands)

Amount

Amortization

Impairment

Amount
Customer lists

$
16,879

$
(5,845)

$
—

$
11,034
Trade name

255

(176)

—

79
Patents and other intangibles

9,011

(5,810)

—

3,201
Definite-lived intangible assets

26,145

(11,831)

—

14,314
Indefinite-lived trade name

9,070

—

(4,953)

4,117
Total other intangible assets

$
35,215

$
(11,831)

$
(4,953)

$
18,431


	As of March 31, 2022
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Accumulated Impairment		Net Carrying Amount
Customer lists	$	29,124	$	(11,364)	$	—	$	17,760
Trade name	255		(208)		—		47
Patents and other intangibles	9,815		(6,707)		—		3,108
Definite-lived intangible assets	39,194		(18,279)		—		20,915
Indefinite-lived trade name	9,070		—		(4,953)		4,117
Total other intangible assets	$	48,264	$	(18,279)	$	(4,953)	$	25,032

Amortization expense related to other intangible assets was approximately ~~$1.0~~$1.6 million and ~~$1.4~~$1.0 million for the three months ended March 31, 2022 and 2021, ~~and 2020.~~

respectively.

~~Table of Contents~~

~~Estimated aggregate amortization expense for definite-lived intangible assets for each of the next five years ended December 31, and thereafter is as follows:~~

(in thousands)

2021 (remainder of the year)

$
3,290
2022

4,319
2023

4,076
2024

2,586
2025

1,397
Thereafter

59
Total

$
15,727

Note H — Other Current Assets and Other Assets

Other current assets consist of the following:

As of March 31,

As of December 31,
(in thousands)

2021

2020
Non-trade receivables

$
6,411

$
6,063
Prepaid maintenance

4,057

2,942
Prepaid insurance

2,424

266
Other prepaid assets

2,597

3,086
Total other current assets

$
15,489

$
12,357


	As of March 31,		As of December 31,
(in thousands)	2022		2021
Non-trade receivables	$	6,291	$	7,725
Prepaid maintenance	4,781		4,553
Prepaid insurance	2,397		510
Other prepaid assets	5,058		3,748
Total other current assets	$	18,527	$	16,536

Other assets consist of the following:


	As of March 31,		As of December 31,
(in thousands)	2022		2021
Implementation costs for cloud computing arrangements	$	6,301	$	6,459
Cash surrender value of company-owned life insurance	4,235		4,471
Finance lease right-of-use assets	2,536		2,732
Deposits	2,214		2,178
Non-trade receivables	1,583		1,172
Other	1,975		933
Total other assets	$	18,844	$	17,945

As of March 31,

As of December 31,
(in thousands)

2021

2020
Implementation costs for cloud computing arrangements

$
5,187

$
4,811
Cash surrender value of company-owned life insurance

4,159

3,973
Finance lease right-of-use assets

2,906

3,016
Deposits

2,156

2,144
Non-trade receivables

1,310

1,274
Other

486

516
Total other assets

$
16,204

$
15,734

Note I — 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)

2021

2020
Patient prepayments, deposits, and refunds payable

$
25,823

$
27,195
Accrued sales taxes and other taxes

9,837

9,863
Insurance and self-insurance accruals

7,912

7,651
Derivative liability

7,585

7,686
Accrued professional fees

916

1,016
Accrued interest payable

542

440
Other current liabilities

9,876

9,010
Total

$
62,491

$
62,861


	As of March 31,		As of December 31,
(in thousands)	2022		2021
Patient prepayments, deposits, and refunds payable	$	28,992	$	26,475
Insurance and self-insurance accruals	9,296		8,943
Accrued sales taxes and other taxes	7,900		7,803
Derivative liability	2,698		6,425
Accrued professional fees	710		750
Accrued interest payable	723		707
Other current liabilities	8,072		9,296
Total	$	58,391	$	60,399

~~Table of Contents~~

Other liabilities consist of:

As of March 31,

As of December 31,
(in thousands)

2021

2020
Supplemental executive retirement plan obligations

$
20,133

$
21,503
Derivative liability

11,182

14,388
Long-term insurance accruals

7,444

7,326
Deferred payroll taxes

5,918

5,918
Unrecognized tax benefits

5,050

5,465
Other

2,018

1,993
Total

$
51,745

$
56,593

As of March 31, As of December 31,
(in thousands) 2022 2021
Supplemental executive retirement plan obligations $ 19,018 $ 20,779
Long-term insurance accruals 7,264 7,112
Derivative liability — 4,664
Other 2,238 2,285
Total $ 28,520 $ 34,840

Note J — Income Taxes

We recorded a benefit for income taxes of ~~$2.2~~$2.1 million and ~~$1.9~~$2.2 million for the three months ended March 31, 2022 and 2021, ~~and March 31, 2020.~~respectively. The effective tax rate was ~~39.3%~~20.9% and ~~10.5%~~39.3% for the three months ended March 31, 2022 and 2021, ~~and March 31, 2020,~~ respectively.

The ~~increase~~decrease in the effective tax rate for the three months ended March 31, ~~2021~~2022 compared with the three months ended March 31, ~~2020~~2021 is primarily attributable to a ~~higher estimated annual~~decrease in pre-tax book income, ~~impacted less proportionally by~~ nondeductible permanent items, and a windfall for the three months ended March 31, 2021 as compared to a shortfall for the ~~prior period.~~three months ended March 31, 2022. Our effective tax rate for the three months ended March 31, 2022 is similar to the federal statutory tax rate of 21%, but the difference consists primarily of research and development credits offset by non-deductible expenses and shortfall from share-based compensation. Our effective tax rate for the three months ended March 31, 2021 differed from the federal statutory tax rate of 21% primarily due to research and development credits, non-deductible expenses, and windfall from share-based compensation. Our effective tax rate for the three months ended March 31, 2020 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and windfall from share-based compensation.

For the year ~~ended~~ending December 31, ~~2020,~~2022, we ~~completed~~estimate a ~~formal study to identify qualifying~~ research and development ~~expenses resulting in the recognition~~tax credit of ~~Federal tax benefits of $2.2~~$2.7 million, net of tax ~~reserves, related to 2020 and $6.1 million, net of tax reserves, related to prior years.~~reserves. We ~~recorded~~record the tax benefit, ~~before~~net of tax reserves, as a deferred tax asset. For the year ended December 31, 2021, we ~~estimate a Federal~~recognized research and development tax ~~benefit~~credits of ~~$3.0~~$4.3 million, net of tax reserves.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation, as well as the provision to carryback net operating losses to five preceding years. ~~ASC 740, Income Taxes~~, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. As a result of the CARES Act provisions, for the year ended December 31, 2020, we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by $17.2 million as of December 31, 2020.

~~Table of Contents~~

Note K — Debt and Other Obligations

Debt consists of the following:

As of March 31,

As of December 31,
(in thousands)

2021

2020
Debt:

Term Loan B

$
489,850

$
491,113
Seller Notes

14,876

11,510
Deferred payment obligation

4,000

4,000
Finance lease liabilities and other

3,712

3,869
Total debt before unamortized discount and debt issuance costs

512,438

510,492
Unamortized discount and debt issuance costs, net

(7,048)

(7,395)
Total debt

$
505,390

$
503,097

Current portion of long-term debt:

Term Loan B

$
5,050

$
5,050
Seller Notes

5,043

4,060
Finance lease liabilities and other

971

975
Total current portion of long-term debt

11,064

10,085
Long-term debt

$
494,326

$
493,012

~~Refinancing of~~

As of March 31, As of December 31,
(in thousands) 2022 2021
Debt:
Term Loan B $ 484,800 $ 486,063
Seller Notes 27,725 29,812
Deferred payment obligation 4,000 4,000
Finance lease liabilities and other 3,097 3,344
Total debt before unamortized discount and debt issuance costs 519,622 523,219
Unamortized discount and debt issuance costs, net (5,532) (5,974)
Total debt $ 514,090 $ 517,245
Current portion of long-term debt:
Term Loan B $ 5,050 $ 5,050
Seller Notes 7,595 8,969
Finance lease liabilities and other 890 919
Total current portion of long-term debt 13,535 14,938
Long-term debt $ 500,555 $ 502,307

Credit Agreement and Term B Borrowings

As of March ~~6, 2018,~~31, 2022, we ~~entered into~~have a ~~new $605.0 million~~ Senior Credit Facility (the “Credit Agreement”)~~. The Credit Agreement~~ which 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 B facility with $484.8 million outstanding which is due in quarterly principal installments ~~commencing June 29, 2018,~~ with all remaining outstanding principal due at maturity in March ~~2025.~~2025 and (ii) a revolving credit facility with an availability of $135.0 million which matures on November 23, 2026 (subject to a springing maturity if the term loans outstanding under the Credit Agreement are not repaid prior to the date that is 91 days prior to the stated maturity thereof). Availability under the revolving credit facility is reduced by outstanding letters of credit, which were ~~approximately~~ $5.2 million as of March 31, 2021. 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 commitments2022, resulting 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.

~~We had~~ approximately ~~$94.8~~$129.8 million in available borrowing ~~capacity under our $100.0 million revolving credit facility as of March 31, 2021.~~

capacity.

Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.

Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, subject to a LIBOR interest rate floor of 0.00% per annum, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. For the three months ended March 31, ~~2021,~~2022, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 3.6%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note M –- “Derivative Financial Instruments.”

~~Table of Contents~~

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~~and its amendments contain various restrictions and covenants, including: (i) requirements that we maintain certain financial ratios at prescribed levels, (ii) a prohibition on payment of dividends and other distributions and

(iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry. The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit ~~Agreement (some of which were amended in May 2020 by the Amendment (as defined and described below)):~~Agreement: (i) a maximum consolidated first lien net leverage ratio (“Net Leverage Ratio”) (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) ~~of 4.50~~shall be up to (a) 5.00 to 1.00 for the fiscal quarters ending March 31, 2022, June 30, 2022, and September 30, 2022 and (b) 4.75 to 1.00 for the fiscal quarter ~~ended March~~ending December 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;~~thereafter, (ii) permit, at our election and ~~(ii)~~up to 3 times during the term of the Credit Agreement, the maximum allowable leverage ratio for covenant purposes to be temporarily increased by an additional 0.50 to 1.00 for 4 consecutive fiscal quarters in connection with certain material acquisitions, and (iii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.

The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency, or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) upon acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the lenders’ request, during the continuance of any other event of default.

In May 2020, we entered into an amendment to the Credit Agreement (the “Amendment”) that provided for, amongst other things, an increase in the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarter ended March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter. In addition, the Amendment changed the definition of EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the COVID-19 pandemic. Borrowings under the revolving credit facility will bear interest at a variable rate equal to the greater of LIBOR or 1%, plus 3.75%. In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries’ ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed with the proceeds of an equity offering, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. We capitalized debt issuance costs of $0.2 million in connection with the Amendment, which were recorded in Other assets.

We were in compliance with all covenants at March 31, ~~2021.~~

2022.

Seller Notes and the Deferred Payment Obligation

We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of $0.8 million and $0.9 million as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from ~~2.70%~~2.50% to 3.00%. Principal and interest are payable in quarterly or annual installments and mature through ~~February~~November 2026.

~~Table of Contents~~

Amounts due under the deferred payment obligation to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized discount of ~~$0.5~~$0.4 million as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The deferred payment obligation was measured at its estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due in annual installments beginning in 2024 and for three years thereafter.

~~Scheduled Maturities of Total Debt~~

~~Scheduled maturities of debt at March 31, 2021 were as follows:~~

(in thousands)

2021 (remainder of year)

$
8,273
2022

10,040
2023

9,641
2024

8,979
2025

473,009
Thereafter

2,496
Total debt before unamortized discount and debt issuance costs, net

512,438
Unamortized discount and debt issuance costs, net

(7,048)
Total debt

$
505,390

Note L — Fair Value Measurements

Financial Instruments

The carrying value of our outstanding term loan as of March 31, ~~2021~~2022 (excluding unamortized discounts and debt issuance costs of ~~$6.1~~$4.7 million) was ~~$489.9~~$484.8 million compared to its fair value of ~~$488.0~~$477.5 million. The carrying value of our outstanding term loan as of December 31, ~~2020~~2021 (excluding unamortized discounts and debt issuance costs of ~~$6.5~~$5.1 million) was ~~$491.1~~$486.1 million compared to its fair value of ~~$489.9~~$484.8 million. Our estimates of fair value are based on a discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

We have interest rate swap agreements designated as cash flow hedges ~~and~~which are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement. See Note K - “Debt and Other Obligations”and Note M - “Derivative Financial Instruments”for further information.

We believe that the carrying value of the Seller Notes and the deferred payment obligation approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement. The carrying value of our outstanding Seller Notes and the deferred payment obligation issued in connection with past acquisitions as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$18.0~~$30.9 million and ~~$14.6~~$32.9 million, net of unamortized discounts of $0.8 million and $0.9 million, respectively.

Note M — Derivative Financial Instruments

Cash Flow Hedges of Interest Rate Risk

In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024. As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, our swaps had a notional value outstanding of $275.0 million and $287.5 million, ~~and $300.0 million,~~ respectively.

~~Table of Contents~~

Change in Net Loss on Cash Flow Hedges ~~Including~~Included in Accumulated Other Comprehensive ~~Income (Loss)~~

Loss

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively:


(in thousands)			Cash Flow Hedges
Balance as of December 31, 2021			$	(8,504)
Unrealized gain recognized in other comprehensive income before reclassifications, net of tax			5,020
Reclassification to interest expense, net of tax			1,876
Balance as of March 31, 2022			$	(1,608)

Balance as of December 31, 2020			$	(16,771)
Unrealized gain recognized in other comprehensive loss before reclassifications, net of tax			529		~~529~~
Reclassification to interest expense, net of tax			1,983		~~1,983~~
Balance as of March 31, 2021			$	(14,259)

~~Balance as of December 31, 2019~~	$	~~(10,137)~~
~~Unrealized loss recognized in other comprehensive loss, net of tax~~		~~(9,773)~~
~~Reclassification to interest expense, net~~		~~871~~
~~Balance as of March 31, 2020~~	$	~~(19,039)~~

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of March 31, ~~2021~~2022 and December 31, ~~2020:~~

As of March 31, 2021

As of December 31, 2020
(in thousands)

Assets

Liabilities

Assets

Liabilities
Derivatives designated as cash flow hedging instruments:








Accrued expenses and other current liabilities

$
—

$
7,585

$
—

$
7,686
Other liabilities

—

11,182

—

14,388

2021:

As of March 31, 2022 As of December 31, 2021
(in thousands) Assets Liabilities Assets Liabilities
Derivatives designated as cash flow hedging instruments:
Other assets $ 563 $ — $ — $ —
Accrued expenses and other current liabilities — 2,698 — 6,425
Other liabilities — — — 4,664

Note N — Share-Based Compensation

On May 17, 2019, the shareholders approved the Hanger, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan authorizes the issuance of (a) up to 2,025,000 shares of Common Stock, plus (b) 243,611 shares available for issuance under the Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”). Upon approval of the 2019 Plan, the 2016 Plan was no longer available for future awards.

On May 19, 2017, the Board of Directors approved the Hanger, Inc. Special Equity Plan (the “Special Equity Plan”). The Special Equity Plan authorized up to 1.5 million shares of Common Stock and operates completely independent from our 2016 Omnibus Incentive Plan. All awards under the Special Equity Plan were made on May 19, 2017, which consisted of 0.8 million stock options and 0.3 million performance-based stock awards. No further grants of awards will be authorized or issued under the Special Equity Plan.

As of March 31, ~~2021,~~2022, there were ~~1,459,779~~1,609,030 unvested restricted stock awards outstanding. This was comprised of ~~1,058,024~~1,166,910 employee service-based awards with a weighted average grant date fair value of ~~$21.26~~$20.65 per share, ~~331,132~~392,764 employee performance-based awards with a weighted average grant date fair value of ~~$21.51~~$20.57 per share, and ~~70,623~~49,356 director service-based awards with a weighted average grant date value of ~~$17.07~~$25.53 per share. As of March 31, ~~2021,~~2022, there were ~~487,264~~275,783 outstanding options exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of ~~5.3~~4.8 years.

We recognized ~~a total of~~ approximately ~~$3.2~~$2.9 million and ~~$3.5~~$3.2 million of share-based compensation expense for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

~~Table of Contents~~

Note O — Supplemental Executive Retirement Plans

Defined Benefit Supplemental Executive Retirement Plan

Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives. The DB SERP, which we administer, calls for 15 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 change in net benefit cost and obligation during the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 is as follows:


Change in Benefit Obligation:
(in thousands)	2022		2021
Benefit obligation as of December 31, 2021 and 2020, respectively	$	17,935	$	19,746
Service cost	116		123
Interest cost	99		87
Payments	(1,877)		(1,877)
Benefit obligation as of March 31	$	16,273	$	18,079

~~Change in Benefit Obligation:~~


Amounts Recognized in the Condensed Consolidated Balance Sheets:
	As of March 31,		As of December 31,
(in thousands)	2022		2021
Current accrued expenses and other current liabilities	$	1,913	$	1,913
Non-current other liabilities	14,360		16,022
Total accrued liabilities	$	16,273	$	17,935

(in thousands)

2021

2020
Benefit obligation as of December 31, 2020 and 2019, respectively

$
19,746

$
19,214
Service cost

123

98
Interest cost

87

121
Payments

(1,877)

(1,877)
Benefit obligation as of March 31

$
18,079

$
17,556

~~Amounts Recognized in the Condensed Consolidated Balance Sheets:~~

As of March 31,

As of December 31,
(in thousands)

2021

2020
Current accrued expenses and other current liabilities

$
1,913

$
1,913
Non-current other liabilities

16,166

17,833
Total accrued liabilities

$
18,079

$
19,746

Defined Contribution Supplemental Executive Retirement Plan

In 2013, we established a defined contribution plan (“DC SERP”) that covers certain of our senior executives. Each participant is given a notional account to manage his or her annual distributions and allocate the funds among various investment options (e.g., mutual funds). These accounts are tracking accounts only for the purpose of calculating the participant’s benefit. The participant does not have ownership of the underlying mutual funds. When a participant initiates or changes the allocation of his or her notional account, we will generally make an allocation of our investments to match those chosen by the participant. While the allocation of our sub accounts is generally intended to mirror the participant’s account records (i.e., the distributions and gains or losses on those funds), the employee does not have legal ownership of any funds until payout upon retirement. The underlying investments are owned by the insurance company with which we own an insurance policy.

As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the estimated accumulated benefit obligation ~~benefit~~ is ~~$4.9~~$4.7 million and ~~$4.5~~$4.8 million, of which ~~$4.7~~$4.5 million and ~~$4.0~~$4.1 million is funded and $0.2 million and ~~$0.5~~$0.6 million is unfunded at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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

~~Table of Contents~~

Note P — Commitments and Contingencies

Guarantees and Indemnification

In the ordinary course of our business, we may enter into service agreements with service providers in which we agree to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement. We have reviewed our existing contracts containing indemnification or clauses of guarantees and do not believe that our liability under such agreements is material.

Other Matters

From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, and are also subject to additional payments under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on our consolidated financial position, liquidity or results of ~~our~~ operations.

We operate in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities. No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on our consolidated financial statements.

Note Q — Segment and Related Information

We have identified 2 operating segments and both performance evaluation and resource allocation decisions are determined based on each segment’s income from operations. The operating segments are described further below.

Patient Care —- This segment consists of (i) our owned and operated patient care clinics, and (ii) our contracting and network management business. 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, 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 persons with disabilities, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules (generally with either 10 regional pricing areas or state level prices) for prosthetics and orthotics and by state for durable medical equipment (DMEPOS);

•

●

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

●

~~the VA.~~

•

•the VA.

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 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 leases and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.

~~Table of Contents~~

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

The accounting policies of the segments are the same as those described in Note A - “Organization and Summary of Significant Accounting Policies”in our ~~2020~~2021 Form 10-K.

Intersegment revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care segment. The sales are priced at the cost of the related materials plus overhead.

Summarized financial information concerning our ~~reporting~~reportable segments is shown in the following tables. Total assets for each of the segments has not materially changed from December 31, ~~2020.~~

2021.


	Patient Care				Products & Services
	For the Three Months Ended March 31,				For the Three Months Ended March 31,
(in thousands)	2022		2021		2022		2021
Net revenues
Third party	$	219,818	$	195,682	$	41,469	$	41,788
Intersegments	—		—		54,675		47,047
Total net revenues	219,818		195,682		96,144		88,835
Material costs
Third party suppliers	59,918		51,617		25,674		23,553
Intersegments	11,058		8,305		43,617		38,742
Total material costs	70,976		59,922		69,291		62,295
Personnel expenses	86,409		75,754		15,266		14,126
Other expenses	40,696		36,141		7,057		5,803
Depreciation & amortization	4,744		4,815		2,023		1,935
Segment income from operations	$	16,993	$	19,050	$	2,507	$	4,676

Patient Care

Products & Services

For the Three Months Ended

For the Three Months Ended

March 31,

March 31,
(in thousands)

2021

2020

2021

2020
Net revenues

Third party

$
195,682

$
190,183

$
41,788

$
43,556
Intersegments

—

—

47,047

46,022
Total net revenues

195,682

190,183

88,835

89,578
Material costs

Third party suppliers

51,617

53,124

23,553

24,117
Intersegments

8,305

6,553

38,742

39,469
Total material costs

59,922

59,677

62,295

63,586
Personnel expenses

75,754

76,345

14,126

12,840
Other expenses

36,141

38,148

5,803

8,320
Depreciation & amortization

4,815

4,476

1,935

2,752
Segment income from operations

$
19,050

$
11,537

$
4,676

$
2,080

A reconciliation of the total of the reportable segments’ income from operations to consolidated net loss is as follows:

For the Three Months Ended
March 31,
(in thousands)

2021

2020
Income (loss) from operations

Patient Care

$
19,050

$
11,537
Products & Services

4,676

2,080
Corporate & other

(21,705)

(22,790)
Income (loss) from operations

2,021

(9,173)
Interest expense, net

7,340

8,269
Non-service defined benefit plan expense

167

158
Loss before income taxes

(5,486)

(17,600)
Benefit for income taxes

(2,156)

(1,852)
Net loss

$
(3,330)

$
(15,748)


	For the Three Months Ended March 31,
(in thousands)	2022		2021
(Loss) income from operations
Patient Care	$	16,993	$	19,050
Products & Services	2,507		4,676
Corporate & other	(22,045)		(21,705)
(Loss) income from operations	(2,545)		2,021
Interest expense, net	7,385		7,340
Non-service defined benefit plan expense	160		167
Loss before income taxes	(10,090)		(5,486)
Benefit for income taxes	(2,113)		(2,156)
Net loss	$	(7,977)	$	(3,330)

~~Table of Contents~~

A reconciliation of the reportable segments’ net revenues to consolidated net revenues is as follows:

For the Three Months Ended
March 31,
(in thousands)

2021

2020
Net revenues

Patient Care

$
195,682

$
190,183
Products & Services

88,835

89,578
Corporate & other

—

—
Consolidating adjustments

(47,047)

(46,022)
Consolidated net revenues

$
237,470

$
233,739


	For the Three Months Ended March 31,
(in thousands)	2022		2021
Net revenues
Patient Care	$	219,818	$	195,682
Products & Services	96,144		88,835
Corporate & other	—		—
Consolidating adjustments	(54,675)		(47,047)
Consolidated net revenues	$	261,287	$	237,470

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

For the Three Months Ended
March 31,
(in thousands)

2021

2020
Material costs

Patient Care

$
59,922

$
59,677
Products & Services

62,295

63,586
Corporate & other

—

—
Consolidating adjustments

(47,047)

(46,022)
Consolidated material costs

$
75,170

$
77,241

~~Note R — Subsequent Events~~

In April 2021, we entered into a definitive share purchase agreement in connection with the acquisition of an O&P business for a total purchase price of $22.0 million. Due to the proximity of this transaction to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed in this acquisition.

~~In April 2021, we recognized an additional $0.7 million in proceeds received from grants under the CARES Act.~~


	For the Three Months Ended March 31,
(in thousands)	2022		2021
Material costs
Patient Care	$	70,976	$	59,922
Products & Services	69,291		62,295
Corporate & other	—		—
Consolidating adjustments	(54,675)		(47,047)
Consolidated material costs	$	85,592	$	75,170

~~Table of Contents~~

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 assumptions are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports.

These statements involve risks, estimates, assumptions, and uncertainties that could cause actual results to differ materially from those expressed in these statements and elsewhere in this report. These uncertainties include, but are not limited to, contractual, inflationary, and other general cost increases, including with regard to costs of labor, raw materials, and freight; labor shortages and increased turnover in our employee base; the financial and business impacts of the COVID-19 pandemic on our operations and the operations of our customers, suppliers, governmental and private ~~payers,~~payors, and others in the healthcare industry and beyond; federal laws governing the health care industry; governmental policies affecting O&P operations, including with respect to reimbursement; failure to successfully implement a new enterprise resource planning system or other disruptions to information technology systems; the inability to successfully execute our acquisition strategy, including integration of recently acquired O&P clinics into our existing business; changes in the demand for our O&P products and services, including additional competition in the O&P services market; disruptions to our supply chain; our ability to enter into and derive benefits from managed-care contracts; our ability to successfully attract and retain qualified O&P clinicians; and other risks and uncertainties generally affecting the health care industry.

Readers are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. “Risk Factors”, contained in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~“2020~~“2021 Form 10-K”), as well as those described in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained therein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition, and results of operations may be affected by the risks set forth in Item 1A. “Risk Factors”, contained in our ~~2020~~2021 Form 10-K, in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, or by other unknown risks and uncertainties.

Non-GAAP Measures

We refer to certain financial measures and statistics that are not in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We utilize these non-GAAP measures in order to evaluate the underlying factors that affect our business performance and trends. These non-GAAP measures should not be considered in isolation and should not be considered superior to, or as a substitute for, financial measures calculated in accordance with GAAP. We have defined and provided a reconciliation of these non-GAAP measures to their most comparable GAAP measures. The non-GAAP measure used in this Management’s Discussion and Analysis is as follows:

Same Clinic Revenues Per Day - measures the year-over-year change in revenue from clinics that have been open a full calendar year or more. Examples of clinics not included in the same center population are closures and acquisitions. Day-adjusted growth normalizes sales for the number of days a clinic was open in each comparable period.

~~Table of Contents~~

Business Overview

General

We are a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries, and we and our predecessor companies have provided O&P services for nearly 160 years. We provide O&P services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments - Patient Care and Products & Services.

Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in ~~the~~comprehensive, outcomes-based design, fabrication, and delivery of custom O&P devices through ~~718~~757 patient care clinics and ~~107~~118 satellite locations in 4647 states, ~~and~~ the District of Columbia, and the U.S. Virgin Islands as of March 31, ~~2021.~~2022. We also provide payor network contracting services to other O&P providers through this segment.

Our Products & Services segment is comprised of our distribution services and therapeutic solutions businesses. As a leading provider of O&P products in the United States, we engage in the distribution of a broad catalog of branded and private label O&P ~~parts, componentry,~~devices, products, and ~~devices~~components to independent O&P providers nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately ~~3,900~~4,000 skilled nursing and post-acute providers nationwide.

For the three months ended March 31, 2022, our net revenues were $261.3 million and we recorded a net loss of $8.0 million. For the three months ended March 31, 2021, our net revenues were $237.5 million and we recorded a net loss of $3.3 million. ~~For the three months ended March 31, 2020, our net revenues were $233.7 million and we recorded net loss of $15.7 million.~~

Industry Overview

We estimate that approximately $4.3 billion is spent in the United States each year for prescription-based O&P products and services through O&P clinics. We believe our Patient Care segment currently accounts for approximately ~~21%~~24% of the market, providing a comprehensive portfolio of orthotic, prosthetic, and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.

The O&P patient care services market in the United States is highly fragmented and is characterized by regional and local independent O&P businesses operated predominantly by independent operators, but also including two O&P product manufacturers with substantial international patient care services operations. We do not believe that any single competitor accounts for 2%2.5% or more of the nation’s total estimated O&P clinic revenues.

The industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of O&P devices. We anticipate that the demand for O&P services will continue to grow as the nation’s population increases, and as a result of several trends, including the aging of the U.S. population, there will be an increase in the prevalence of disease-related disability and the demand for new and advanced devices. We believe the typical replacement time for prosthetic devices is three to five years, while the typical replacement time for orthotic devices varies, depending on the device.

We estimate that approximately $1.8 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components, devices, and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P services. We estimate that our distribution sales account for approximately 9%7% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).

We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be approximately $150 million annually. We currently provide these products and services to approximately ~~24%~~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.

~~Table of Contents~~

Business Description

Patient Care

Our Patient Care segment employs approximately ~~1,600~~1,650 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which are certified by either the American Board for Certification (“ABC”) or the Board of Certification of Orthotists and Prosthetists, which are the two boards that certify O&P clinicians. To facilitate timely service to our patients, we also employ technicians, fitters, and other ancillary providers to assist our clinicians in the performance of their duties. Through this segment, we additionally provide network contracting services to independent providers of O&P.

Patients are typically referred to Hanger Clinic by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the selection of an orthotic or prosthetic device to meet the patient’s needs. O&P devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process, and lower the cost of rehabilitation.

Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs. When fabricating a device, our clinicians ascertain the specific requirements, componentry, and measurements necessary for the construction of the device. Custom devices are constructed using componentry provided by a variety of third party manufacturers ~~who~~that specialize in O&P, coupled with sockets and other elements that are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs. Our clinicians and technicians typically utilize castings, electronic scans, and other techniques to fabricate items that are specialized for the patient. After fabricating the device, a fitting process is undertaken and adjustments are made to ensure the achievement of proper alignment, fit, and patient comfort. The fitting process often involves several stages to successfully achieve desired functional and cosmetic results.

Given the differing physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic, and other needs of each individual patient, each fabricated prosthesis and orthosis is customized for each particular patient. These custom devices are commonly fabricated at one of our regional or national fabrication facilities.

We have earned a reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability and can significantly enhance the rehabilitation process. We utilize multiple scanning and imaging technologies in the fabrication process, depending on the patient’s individual needs, including our proprietary Insignia scanning system. The Insignia system scans the patient and produces an accurate computer-generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.

In recent years, we have established a centralized revenue cycle management organization that assists our clinics in pre-authorization, patient eligibility, denial management, collections, payor audit coordination, and other accounts receivable processes.

The principal reimbursement sources for our services are:

●

Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, 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 persons with disabilities;~~

●

~~the VA.~~

•Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators, and similar sources;

•Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with disabilities;

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

•the U.S. Department of Veterans Affairs (the “VA”).

~~Table of Contents~~

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

Government reimbursement is comprised of Medicare, Medicaid, and the VA. These payors set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each year based on the Consumer Price Index for All Urban Consumers (“CPI-U”) unless Congress acts to change or eliminate the adjustment. The CPI-U is adjusted further by an efficiency factor known as the “Productivity Adjustment” or the “Multi-Factor Productivity Adjustment” in order to determine the final rate adjustment each year. There can be no assurance that future adjustments will not reduce reimbursements for O&P services and products from these sources.

We, and the O&P industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits, Supplemental Medical Review Contractor (“SMRC”) audits, and Unified Program Integrity Contractor (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, and SMRC audits are generally post-payment audits. UPIC audits can be both pre- or post-payment audits, with a majority currently pre-payment. TPE audits replaced the previous Medicare Administrative Contractor audits. Adverse post-payment audit determinations generally require Hanger to reimburse Medicare for payments previously made, while adverse pre-payment audit determinations generally result in the denial of payment. In either case, we can request a redetermination or appeal, if we believe the adverse determination is unwarranted, which can take an extensive period of time to resolve, currently up to six years or more.

Products & Services

Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we distribute ~~O&P~~branded and private label devices, products, and components to independent O&P clinics and other customers. Through our wholly-owned subsidiary, Accelerated Care Plus Corp. (“ACP”), our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute rehabilitation providers. Our value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence-based clinical programs, and ongoing consultative education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We currently serve approximately ~~3,900~~4,000 skilled nursing and post-acute providers nationwide. Through our SureFit subsidiary, we also manufacture and sell therapeutic footwear for diabetic patients in the podiatric market. We also operate the Hanger Fabrication Network, which fabricates custom O&P devices for our patient care clinics, as well as for independent O&P clinics.

Through our internal “supply chain” organization, we purchase, warehouse, and distribute over ~~475,000~~350,000 active SKUs from ~~more than 300~~approximately 750 different ~~manufacturers~~suppliers through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and distribution facilities in Nevada, Georgia, Illinois, 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. ~~The~~In January 2022, we announced plans to close the warehouse and distribution ~~facility we formerly operated~~facilities in ~~Pennsylvania ceased~~Illinois and Texas in the second quarter of 2022, consolidating their operations ~~in September 2020.~~

into our Georgia and Nevada facilities.

Our supply chain organization enables us to:

●

~~centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;~~

●

~~better manage our patient care clinic inventory levels and improve inventory turns;~~

●

~~improve inventory quality control;~~

●

~~encourage our patient care clinics to use the most clinically appropriate products; and~~

●

~~coordinate new product development efforts with key vendors.~~

•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.

~~Table of Contents~~

Effects of the COVID-19 Pandemic

~~Beginning~~

We began to see a reduction in business volumes as a result of the COVID-19 pandemic starting in the last weeks of March ~~2020, our business volumes began to be adversely affected by the COVID-19 pandemic.~~2020. As federal, state, and local authorities implemented social distancing and suppression measures to respond to an increasing number of nationwide COVID-19 infections, we experienced a decrease in our patient appointments and general business volumes. In response, during the last week of March 2020, we made certain changes to our operations, implemented a broad number of cost reduction measures, and delayed certain capital investment projects. Although our business volumes have shown gradual improvement from their initial significant decline in ~~mid- 2020,~~mid-2020, the adverse impact of the COVID-19 pandemic on our business has continued ~~through the first quarter of 2021.~~into 2022. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic ~~including temporary cost reduction measures largely in place during the second and third quarters of 2020,~~ may not be indicative of future financial and operational performance. The volume effects and our operating responses are discussed further in this section, and the effects of COVID-19 on our financial condition isare discussed in the “Financial Condition, Liquidity and Capital Resources” section below.

Our results of operations for any quarter during the COVID-19 pandemic may not be indicative of results of operations that may be achieved for a subsequent quarter or the full year, and may not be similar to results of operations experienced in prior years.

Effect on Business Volumes

Patient appointments in our clinics during the first quarter of ~~2021 declined~~2022 increased by approximately 3%5% as compared to the corresponding period in ~~2020.~~2021. During the quarter, our prosthetics and orthotics day-adjusted sales, excluding acquisitions, increased by ~~approximately 1.0% and 1.9% respectively, with same clinic revenues increasing by 1.4%~~6.9% on a per day basis, when compared to the same period in the prior year. As of the end of March 2021, we re-opened all of our patient care clinics, although 38 clinics were open for reduced hours or by appointment only. We believe the generally more acute nature of conditions that lead to the need for prosthetics and orthotics, the patient age demographics and the relatively greater impact that the absence of access to these devices can have on a patient’s daily life were the primary reasons that have led to the graduated improvement in our business results. Billings for componentry delivered to independent providers of orthotics and prosthetics by our distribution services business remained flat during the first quarter of 2021, as compared to the same period in 2020. Due to significant geographic product mix and timing differences, there can be no assurance that these volumes or billing amounts will be reflective of our future results and are solely provided for the purposes of giving context to the magnitude of the effect of the COVID-19 pandemic on our business during the periods impacted by the COVID-19 pandemic.

In the early months of 2021, vaccines for combating COVID-19 were ~~authorized~~approved by the US Food and Drug Administration, and the US government ~~commenced~~began a phased roll ~~out of these vaccines.~~out. However, the initial quantities of the vaccines were limited, and the US government prioritized distribution to front-line health care workers and other essential workers, followed by individual populations that ~~are~~were most susceptible to the severe effects of COVID-19. ~~Given~~The lack of achievement of broad immunity coupled with an increase in infections caused by variants contributed to an increase in the ~~continuing impact of restrictions to mitigate the spread~~duration and effect of COVID-19 on our business volumes and ~~unknown challenges with regards~~staffing shortages. Specifically, we experienced increased employee absences, particularly due to the ~~effectiveness, distribution,~~more recent Omicron variant’s effect in December of 2021 and ~~acceptance~~January of ~~COVID-19 vaccines,~~2022. We believe our business volumes have been inhibited primarily by reduced medical procedures due to surgical constraints, reduced referral volumes from in-patient and out-patient providers due to decreases in their volumes and the effect of COVID related protocols on their businesses, patient hesitancy to seek care during the pandemic, and increased patient mortality. Additionally, we believe that ~~the~~our patient volumes have been affected by our own labor constraints in technical and administrative positions, employee absences related to COVID-19, ~~pandemic will continue to affect~~as well as decreases in our ~~business volumes in 2021 when compared to pre- pandemic levels.~~

sales of off-the-shelf orthotic devices.

Nevertheless, the overall adverse impact of the COVID-19 pandemic on our business volumes has diminished and stabilized over time, and while our patient appointment and other business volumes ~~continue~~have improved, they have not reached the levels experienced prior to ~~gradually improve as~~ the prevalence of the virus decreases and COVID-19 vaccines become more widely available. Additionally, we believe that if a patient is initially unable or unwilling to come to one of our clinics to receive their prosthetic or orthotic device, then their ultimate need for that device is not likely to change, and we could accordingly have some favorable volume recovery effect in future periods as the impacts of the COVID-19 pandemic subsides.

pandemic.

Operating, ~~and~~ Cost Reduction, and Other Responses

Throughout the periods affected by the COVID-19 pandemic, given that our services are considered essential, we have continued to operate our businesses. However, due to the risks posed to our clinicians, other employees, and patients, we ~~have~~ made certain changes to our operating practices in order to promote safety and to minimize the risk of virus transmission. These ~~have~~ included the implementation of certain patient screening protocols and the relocation of certain administrative and support personnel to a “work at home” environment.

~~Table of Contents~~

~~As a result of the COVID-19 pandemic, we found it necessary to reduce~~We recommenced our personnel costs in response to significant decreases in business volumes. Commencing at the start of April 2020, personnel cost reductions were implemented through (i) an average 32% decrease in the salaries of all of our exempt employees, the percentage of which varied from lower amounts for lower salaried employees up to reduction amounts ranging from 47% to 100% for our senior leadership team; (ii) the furloughing of certain employees on a voluntary and involuntary basis; (iii) the reduction of work hours for non-exempt employees; (iv) modification of bonus, commission, and other variable incentive plans; (v) the reduction of overtime expenses; (vi) the elimination of certain open positions; (vii) a reduction in the use of contract employees, and (viii) the temporary suspension of certain auto allowances. During the period April 2020 through September 2020, salaries were gradually reinstated, with full reinstatement of all exempt employees’ salaries being effective on September 19, 2020. We believe this approach allowed us to retain as many employees as possible to preserve the experience, culture, and patient service capabilities of our workforce for periods subsequent to the COVID-19 pandemic.

~~In addition to these reductions in operating expenses, we temporarily delayed the~~ implementation of ~~our~~ supply chain and financial systems, further discussed in the “New Systems Implementations” ~~section.~~section, in the second quarter of 2021, after we elected to temporarily delay these activities in 2020 as part of our efforts to preserve liquidity. We also ~~suspended construction of our new fabrication facility in Tempe, Arizona, and other projects related to the reconfiguration of our distribution facilities. We~~ resumed construction of the ~~Tempe,~~Phoenix, Arizona fabrication facility in the first quarter of 2021, and ~~anticipate that we will recommence~~recommenced activities related to the ~~remaining activities~~reconfiguration of our distribution facilities in the second quarter of ~~2021. These~~2021, after they were suspended in 2020.

While it is not yet a requirement that all Hanger employees be vaccinated, we are strongly encouraging it. As a policy, we adhere to federal, state, and local regulations which increasingly require certain employees, particularly those who provide healthcare services, to be vaccinated. We are closely monitoring the evolving and growing requirements to ensure we are continuing to take the appropriate actions to ~~delay activities during 2020 will correspondingly delay~~ensure our ~~achievement~~impacted employees are compliant.

Despite the effects of the COVID-19 pandemic on our business volumes, for the foreseeable future, we currently believe that our cash flows from operations and retained cash and cash equivalent balances are sufficient to enable us to fund our operations, capital expenditures and other financial ~~benefits expected from them into future periods.~~

obligations as they become due. Please refer to the “Financial Condition, Liquidity and Capital Resources” section below for a discussion of our liquidity position.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside ~~$178.0~~$203.5 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and ~~Medicaid- enrolled~~Medicaid-enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the COVID-19 pandemic, such as lost revenues attributable to canceled procedures, as well as to provide support for health-care related expenses. In April 2020, ~~HHS~~the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the ~~$178.0~~$203.5 billion appropriation. These are grants, rather than loans, to healthcare providers, and will not need to be repaid.

During ~~2020,~~the full year of 2021, we recognized a total benefit of ~~$24.0~~$1.1 million in our consolidated statement of operations within Other operating costs for the ~~grant proceeds~~Grants we received ~~under~~from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment.

The CARES Act ~~from HHS. In April~~also provided for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allowed us to defer half of such payroll taxes until December 2021 ~~we received approximately $0.7~~and the remaining half until December 2022. We paid the first half in September 2021, and deferred the remaining $5.9 million of payroll taxes within Accrued compensation related costs in ~~additional grant proceeds under~~ the ~~CARES Act from HHS.~~

condensed consolidated balance sheet as of March 31, 2022.

Other Products & Services Performance Considerations

As discussed in our ~~2020~~2021 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, ~~several of the larger independent O&P providers~~ we served through the distribution of componentry encountered financial difficulties during the three months ended March 31, 2021, which resulted in our discontinuing distribution services to these customers. Generally, wegenerally believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care segment and, depending on their ability to adapt to the increased claims documentation standards that have emerged in our industry, this may either limit the rate of growth of some of our customers, or otherwise affect the rate of growth we experience in our distribution of O&P componentry to independent providers. In certain circumstances, we may pursue acquisition of inventory in advance to preserve pricing to offset inflation and potential supply chain constraints. During future periods, in addition to the adverse effects of the COVID-19 pandemic discussed above, we currently believe our rate of revenue growth in this segment may decrease as we choose to limit the extent to which we distribute certain low margin orthotic products. Additionally, to the extent that we acquire independent O&P providers who are pre-existing customers of our distribution services, our revenue growth in this segment would be adversely affected as we would no longer recognize external revenue from the components we provide them.

Within our Products & Services segment, in addition to our distribution of products, we provide therapeutic equipment and services to patients at SNFs and other healthcare provider locations. Since 2016, a number of our clients, including several of our larger SNF clients, have been discontinuing their use of our therapeutic services. We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities. As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations. Within this portion of our business, we have and continue to respond to these historical trends through the expansion of our products and services offerings.

~~Table of Contents~~

Reimbursement Trends

In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid, and the VA. The following is a summary of our payor mix, expressed as an approximate percentage of net revenues for the periods indicated:

For the Three Months Ended
March 31,


2021

2020

Medicare

29.3
%
32.5
%
Medicaid

17.4
%
16.2
%
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)

35.6
%
34.9
%
Veterans Administration

10.1
%
9.4
%
Private Pay

7.6
%
7.0
%
Patient Care

100.0
%
100.0
%


	For the Three Months Ended March 31,
	2022		2021
Medicare	30.0	%	29.3	%
Medicaid	17.9	%	17.4	%
Commercial insurance / managed care (excluding Medicare and Medicaid managed care)	35.2	%	35.6	%
VA	9.6	%	10.1	%
Private Pay	7.3	%	7.6	%
Patient Care	100.0	%	100.0	%

Patient Care constituted ~~82.4%~~84.1% and ~~81.4%~~82.4% of our net revenues for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Our remaining net revenues were provided by our Products & Services segment which derives its net revenues from commercial transactions with independent O&P providers, healthcare facilities, and other customers. In contrast to net revenues from our Patient Care segment, payment for these products and services are not directly subject to third party reimbursement from health care payors.

The amount of our reimbursement varies based on the nature of the O&P device we fabricate for our patients. Given the particular physical weight and size characteristics, location of injury or amputation, capability for physical activity, and mobility, cosmetic, and other needs of each individual patient, each fabricated prostheses and orthoses is customized for each particular patient. The nature of this customization and the manner by which our claims submissions are reviewed by payors makes our reimbursement process administratively difficult.

To receive reimbursement for our work, we must ensure that our clinical, administrative, and billing personnel receive and verify certain medical and health plan information, record detailed documentation regarding the services we provide, and accurately and timely perform a number of claims submission and related administrative tasks. It is our belief the increased nationwide efforts to reduce health care costs has driven changes in industry trends with increases in payor pre-authorization processes, documentation requirements, pre-payment reviews, and pre- and post-payment audits, and our ability to successfully undertake these tasks using our traditional approach has become increasingly challenging.

For example, the Medicare contractor for Pricing, Data Analysis and Coding (referred to as “PDAC”) ~~recently~~has announced verification requirements and code changes that has reduced the reimbursement level for certain prosthetic feet, and the VA is in the process of reassessing the method it uses to determine reimbursement levels for O&P services and products provided under certain miscellaneous codes.

A measure of our effectiveness in securing reimbursement for our services can be found in the degree to which payors ultimately disallow payment of our claims. Payors can deny claims due to their determination that a physician who referred a patient to us did not sufficiently document that a device was medically necessary or clearly establish the ambulatory ~~(or”activity”~~(or “activity”) level of a patient. Claims can also be denied based on our failure to ensure that a patient was currently eligible under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, or that we filed or appealed the payor’s determination timely, as well as on the basis of our coding, failure by certain classes of patients to pay their portion of a claim, or for various other reasons. If any portion of, or administrative factor within, our claim is found by the payor to be lacking, then the entirety of the claim amount may be denied reimbursement.

~~Table of Contents~~

In recent years, we have taken a number of actions to manage payor disallowance trends. These initiatives included: (i) the creation of a ~~central~~centralized revenue cycle management function; (ii) the implementation of a patient management and electronic health record system; and (iii) the establishment of new clinic-level procedures and training regarding the collection of supporting documentation and the importance of diligence in our claims submission processes.

Payor disallowances is considered an adjustment to the transaction price. Estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are presented as a reduction of net revenues. These amounts recorded in net revenues within the Patient Care segment for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 are as follows:

For the Three Months Ended
March 31,

(dollars in thousands)

2021

2020

Gross charges

$
201,452

$
199,953

Less estimated implicit price concessions arising from:

Payor disallowances

4,514

8,075

Patient non-payments

1,256

1,695

Payor disallowances and patient non-payments

5,770

9,770

Net revenues

$
195,682

$
190,183

Payor disallowances

$
4,514

$
8,075

Patient non-payments

1,256

1,695

Payor disallowances and patient non-payments

$
5,770

$
9,770

Payor disallowances %

2.3
%

4.0
%
Patient non-payments %

0.6
%

0.9
%
Percent of gross charges

2.9
%

4.9
%

~~Payor~~


	For the Three Months Ended March 31,
(dollars in thousands)	2022			2021
Gross charges	$	229,922		$	201,452
Less estimated implicit price concessions arising from:
Payor disallowances	8,386			4,514
Patient non-payments	1,718			1,256
Payor disallowances and patient non-payments	10,104			5,770
Net revenues	$	219,818		$	195,682

Payor disallowances	$	8,386		$	4,514
Patient non-payments	1,718			1,256
Payor disallowances and patient non-payments	$	10,104		$	5,770

Payor disallowances %	3.6		%	2.3		%
Patient non-payments %	0.8		%	0.6		%
Percent of gross charges	4.4		%	2.9		%

Included in the results above, are clinics that have been recently acquired. Acquired clinics typically continue to operate on their legacy systems for the first 90 to 180 day before they are fully integrated over to Hanger’s systems and related processes. While operating on their legacy systems, the rate of payor disallowances and patient non-payments ~~as percentage~~run higher than the rates experienced on Hanger’s systems. Excluding the acquisitions on legacy systems for the three months ended March 31, 2022 and March 31, 2021, the percent of ~~gross charges both decreased significantly in the first quarter as compared with the first quarter of the prior year. During 2020~~payor disallowances and ~~the first quarter of~~patient non-payments would have been 3.7% and 2.4%, respectively.

During 2021, we benefited from reductions in claims denials and increases in our rates of ~~collection.~~collection compared to prior periods. This has been due to a variety of factors, including increases in our revenue cycle management staffing and an increased focus on collections and liquidity during a period of reduced business volumes, a possible temporary relaxing of payor review procedures during the COVID-19 pandemic, the benefit of CARES Act funds on the ability of patients to pay their portion of claims and other factors relating to our pre-authorization and documentation procedures for devices. ~~We do~~

Acquisitions

In the first quarter of 2022, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $5.0 million, of which $4.0 million was cash consideration, net of cash acquired, and $1.0 million was issued in the form of notes to shareholders at fair value.

During the second quarter of 2022 to date, we completed the acquisition of one O&P business for a total purchase price of $3.2 million. Total consideration transferred for this acquisition is comprised of $2.4 million in cash consideration and $0.8 million in the form of notes to shareholders at fair value. Due to the proximity in time of this transaction to the filing of this Form 10-Q, it is not ~~believe~~practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the acquisition. Acquisition-related expenses related to this ~~favorable trend will necessarily be sustainable~~transaction were not material.

In March 2022, we entered into a definitive share purchase agreement in ~~future periods as~~connection with the ~~COVID-19 pandemic subsides~~acquisition of one O&P business for a total purchase price of approximately $9.0 million. Due to the proximity in time of this transaction to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed in this acquisition. Acquisition-related expenses were not material for this transaction.

During 2021, we completed the following acquisitions of O&P clinics with the intention of expanding the geographic footprint of our patient ~~volumes and resulting revenues increase.~~

care offerings through the acquisition of these high quality O&P providers. None of the acquisitions were individually material to our financial position, results of operations, or cash flows.

•

~~Acquisitions~~

In the first quarter of 2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $24.2 million, of which $19.2 million was cash consideration, net of cash acquired, $4.0 million was issued in the form of notes to shareholders at fair value, and $1.0 million in additional consideration.

~~Table~~•In the second quarter of ~~Contents~~

~~During 2020,~~2021, we completed the ~~following~~ acquisitions of all the outstanding equity interests of two O&P ~~clinics, none~~businesses for total consideration of $21.0 million, of which ~~were individually material~~$16.0 million was cash consideration, net of cash acquired, $4.9 million was issued in the form of notes to ~~our financial position, results~~shareholders at fair value, and $0.1 million in additional consideration.

•In the third quarter of ~~operations, or~~2021, we completed the acquisitions of all the outstanding equity interests of three O&P businesses and the assets of one O&P business for total consideration of $6.2 million, of which $3.9 million was cash ~~flows:~~

consideration, net of cash acquired, $1.5 million was issued in the form of notes to shareholders at fair value, and $0.8 million in additional consideration.

•

●

In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.2 million at fair value, of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Total payments of $4.0 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter. Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of this high quality O&P provider.

In the fourth quarter of 2021, we completed the acquisitions of all the outstanding equity interests of eight O&P businesses for total consideration of $53.1 million, of which $40.8 million was cash consideration, net of cash acquired, and $12.3 million was issued in the form of notes to shareholders at fair value.

Acquisition-related costs are included in general and administrative expenses in our condensed consolidated statements of operations. Total acquisition-related costs incurred during the three ~~month period~~months ended March 31, ~~2021~~2022 were ~~$0.4~~$0.3 million, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for ~~acquisitions~~the acquisition completed during the three ~~month period~~months ended March 31, ~~2021~~2022 were ~~$0.2~~$0.1 million. Total acquisition-related costs incurred during the year ended December 31, ~~2020~~2021 were ~~$0.9~~$2.1 million, which includes those costs for transactions that ~~are~~were in progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the year ended December 31, ~~2020~~2021 were ~~$0.6~~$1.6 million.

New Systems Implementations

During 2019, we commenced the design, planning, and initial implementation of new financial and supply chain systems (“New Systems Implementations”), and planned to invest in new servers and software that operate as a part of our technology infrastructure.

~~As discussed~~ We recommenced our New Systems Implementations activities in the ~~“Effects~~second quarter of 2021, and transitioned our corporate financial systems to the ~~COVID-19 Pandemic” section,~~Oracle Cloud Financials platform in the third quarter of 2021, after we elected in 2020 to temporarily delay our New Systems Implementations as part of our efforts to preserve liquidity. ~~We recommenced these activities in the second quarter of 2021.~~

In connection with our ~~new financial and supply chain systems,~~New Systems Implementations, for the three ~~month period~~months ended March 31, ~~2021~~2022 and ~~March 31, 2020,~~2021, we expensed ~~$0.6~~$0.4 million and ~~$0.9~~$0.6 million, respectively. For the year ended December 31, ~~2020,~~2021, we expensed ~~$2.6~~$5.2 million. We currently anticipate that we will spend ~~$5.6~~approximately $3 million to $5 million for the full year ~~2021~~2022 on these systems.

As of March 31, ~~2021,~~2022, we capitalized ~~$5.5~~$6.9 million of implementation costs for cloud computing arrangements, net of accumulated amortization, and recorded in ~~other~~Other current assets and ~~other~~Other assets in the condensed consolidated balance sheet.

Personnel

~~Personnel~~

While we have traditionally been able to recruit and retain adequate staffing to operate and support our business, our ability to support growth is dependent on our ability to add new personnel. Nevertheless, as ~~many~~are other employers, ~~are experiencing,~~ we are currently finding it difficult to recruit and retain personnel in certain positions, including clinic front office administrative, distribution center, and fabrication center technician positions. WeIn certain cases, we have also found it necessary to make individual market adjustments for clinical and professional staff to attract or retain them. Our inability to successfully recruit and maintain staffing levels for these positions has and could continue to introduce some constraints on our ability to achieve our revenue growth objectives. In cases where we have open clinic administrative or technician positions, or these positions are filled with inexperienced or new personnel, our clinicians find it necessary to augment the activities performed by these roles, which can slow the speed of our patient service.

In order to attract and retain personnel, we may find it necessary to further increase wages in these ~~areas~~areas. Additionally, when coupled with the generally fixed nature of our reimbursement arrangements, increases in ~~coming quarters if we find that we are unable~~our personnel costs caused by current inflation conditions may put increasing pressure on our ability to ~~attract a sufficient number of personnel.~~

maintain or increase our margins. Please refer to Part II, Item 1A. “Risk Factors” contained in our 2021 Form 10-K.

~~Table of Contents~~

Seasonality

~~Seasonality~~

We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year. The first quarter is normally our lowest relative net revenue quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another. Due to the general fulfillment by patients of their health plan co-payments and deductible requirements towards the year’s end, our fourth quarter is normally our highest revenue producing quarter. However, historical seasonality patterns have been impacted by the COVID-19 pandemic and may not be reflective of our prospective financial results ~~and~~of operations. Please refer to the “Effects of the COVID-19 Pandemic” section for further discussion.

Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This event is conducted to assist our clinicians in maintaining their training and certification requirements and to facilitate a national meeting with our clinical leaders. We also invite manufacturers of the componentry for the devices we fabricate to these annual events so they can demonstrate their products and otherwise assist in our training process. Due to the COVID-19 pandemic, ~~we conducted our first virtual education fair~~the in-person event was cancelled in Q1 2022, and the event was held virtually in 2021. We anticipate resuming an in-person event in 2023. During the three months ended March 31, 2021, ~~and 2020~~ we spent $0.3 ~~million and $2.3~~ million on travel and other costs associated with this ~~event, respectively.~~event. In addition to the costs we incur associated with this annual event, we also lose the productivity of a significant portion of our clinicians during the period in which this event occurs, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.

Critical Accounting Policies

and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon the condensed consolidated financial statements that have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions, and disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to fairly present, in all material respects, our operating results, and financial position. We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

•

●

~~Revenue recognition~~

Revenue recognition

●

~~Accounts receivable, net~~

•

●

~~Inventories~~

Accounts receivable, net

●

~~Business combinations~~

•

●

~~Goodwill and other intangible assets, net~~

Inventories

●

~~Income taxes~~

•

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~~Critical accounting policies and estimates are described in ~~more detail in~~ our ~~2020~~2021 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note A - “Organization and Summary of Significant

Accounting Policies”contained within these condensed consolidated financial statements.

There have been no material updates to those critical accounting policies and estimates as contained in the 2021 Form 10-K.

Reclassifications

~~Table of Contents~~

Results of Operations

Our results of operations for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 were as follows (unaudited):


	For the Three Months Ended March 31,				Percent Change (1)
(dollars in thousands)	2022		2021		2022 vs 2021
Net revenues	$	261,287	$	237,470	10.0	%
Material costs	85,592		75,170		13.9	%
Personnel costs	101,675		89,880		13.1	%
Other operating costs	36,168		31,498		14.8	%
General and administrative expenses	32,442		30,903		5.0	%
Depreciation and amortization	7,955		7,998		(0.5)	%
Operating expenses	263,832		235,449		12.1	%
(Loss) income from operations	(2,545)		2,021		NM
Interest expense, net	7,385		7,340		0.6	%
Non-service defined benefit plan expense	160		167		(4.2)	%
Loss before income taxes	(10,090)		(5,486)		(83.9)	%
Benefit for income taxes	(2,113)		(2,156)		2.0	%
Net loss	$	(7,977)	$	(3,330)	(139.5)	%

(1)

For the Three Months Ended


March 31,

Percent Change

(dollars in thousands)

2021

2020

2021 vs 2020

Net revenues

$
237,470

$
233,739

1.6
%
Material costs

75,170

77,241

(2.7)
%
Personnel costs

89,880

89,185

0.8
%
Other operating costs

31,460

35,886

(12.3)
%
General and administrative expenses

30,941

31,769

(2.6)
%
Depreciation and amortization

7,998

8,831

(9.4)
%
Operating expenses

235,449

242,912

(3.1)
%
Income (loss) from operations

2,021

(9,173)

122.0
%
Interest expense, net

7,340

8,269

(11.2)
%
Non-service defined benefit plan expense

167

158

5.7
%
Loss before income taxes

(5,486)

(17,600)

68.8
%
Benefit for income taxes

(2,156)

(1,852)

(16.4)
%
Net loss

$
(3,330)

$
(15,748)

78.9
%

NM - Not Meaningful

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

For the Three Months Ended
March 31,


2021

2020

Material costs

31.7
%
33.0
%
Personnel costs

37.8
%
38.2
%
Other operating costs

13.2
%
15.3
%
General and administrative expenses

13.0
%
13.6
%
Depreciation and amortization

3.4
%
3.8
%
Operating expenses

99.1
%
103.9
%


	For the Three Months Ended March 31,
	2022		2021
Material costs	32.8	%	31.7	%
Personnel costs	38.9	%	37.8	%
Other operating costs	13.9	%	13.2	%
General and administrative expenses	12.4	%	13.0	%
Depreciation and amortization	3.0	%	3.4	%
Operating expenses	101.0	%	99.1	%

Three Months Ended March 31, ~~2021~~2022 Compared to the Three Months Ended March 31, ~~2020~~

2021

Relevance of First Quarter Results to Comparative and Future Periods. As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter of 2020, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend ~~which~~that continued ~~throughout 2020 and~~ into ~~2021.~~2022. The effects of this public health emergency on our revenues and earnings ~~in the three months ended March 31, 2021~~ impacted the comparison to our historical financial results. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic ~~including temporary cost reduction measures largely in place during the second and third quarters of 2020,~~ may not be indicative of future financial and operational performance. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.

~~Table of Contents~~

Net revenues. Net revenues for the three months ended March 31, ~~2021~~2022 were ~~$237.5~~$261.3 million, an increase of ~~$3.7~~$23.8 million, or ~~1.6%~~10.0%, from ~~$233.7~~$237.5 million for the three months ended March 31, ~~2020.~~2021. Net revenues by operating segment, after elimination of intersegment activity, were as follows:

For the Three Months Ended



March 31,

Percent

(dollars in thousands)

2021

2020

Change

Change

Patient Care

$
195,682

$
190,183

$
5,499

2.9
%
Products & Services

41,788

43,556

(1,768)

(4.1)
%
Net revenues

$
237,470

$
233,739

$
3,731

1.6
%


	For the Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2022		2021
Patient Care	$	219,818	$	195,682	$	24,136	12.3	%
Products & Services	41,469		41,788		(319)		(0.8)	%
Net revenues	$	261,287	$	237,470	$	23,817	10.0	%

Patient Care net revenues for the three months ended March 31, ~~2021~~2022 were ~~$195.7~~$219.8 million, an increase of ~~$5.5~~$24.1 million, or ~~2.9%~~12.3%, from ~~$190.2~~$195.7 million for the same period in the prior year. Same clinic revenues ~~decreased $3.3~~increased $13.2 million for the three months ended March 31, ~~2021. However,~~2022 compared to the same period in the prior year, reflecting an increase of 6.9% on a ~~day-adjusted basis, excluding acquisitions, same clinic revenues increased~~per-day basis. This increase is driven primarily by ~~1.4%, as there were two fewer business days~~volume and mix with a smaller increase in ~~the first quarter of 2021 as compared to 2020.~~rate. Net revenues from acquired clinics ~~and consolidations~~ increased ~~$9.0~~$11.2 million, and revenues from consolidations and other services decreased ~~$0.2~~$0.3 million.

Net revenue growth was adversely affected during the period by an increase in the relative rate of disallowed and patient non-payment revenue. As discussed in “Reimbursement Trends” above, these items constituted 4.4% of gross charges in the three month period ended March 31, 2022 compared to 2.9% for the three month period ended March 31, 2021. During the past twelve month period, disallowed and patient non-payment amounts have been 4.3% of gross charges, and as such, we believe the level reported in the first quarter to be more indicative of current trends.

Prosthetics constituted approximately ~~52%~~52.1% of our total Patient Care revenues for the three months ended March 31, ~~2021~~2022 and ~~2020,~~51.7% for the same period in 2021, excluding the impact of acquisitions. Prosthetic revenues for the three months ended March 31, ~~2021~~2022 were ~~1.0%~~7.7% higher, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions. Orthotics, shoes, inserts, and other products increased by ~~1.9%~~5.9% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions. Revenue growth in the quarter was benefited by decreases in disallowance and patient non-payment rates as compared to the prior year period, please refer to the “Reimbursement Trends” section above for a discussion of these favorable trends. Revenues in the latter half of March 2020 were adversely affected due to a decline in patient appointment volumes as a result of the onset of the COVID-19 pandemic, governmental suppression measures implemented in response to the COVID-19 pandemic, and other factors impacting our business volumes discussed in the “Effects of the COVID-19 Pandemic” section.

Products & Services net revenues for the three months ended March 31, ~~2021~~2022 were ~~$41.8~~$41.5 million, a decrease of ~~$1.8~~$0.3 million, or ~~4.1%~~0.8% from the same period in the prior year. This was primarily attributable to a decrease in net revenues from therapeutic solutions of $1.0 million, or ~~3.3%~~9.4% primarily as a result of historical customer lease cancellations and discounts, partially offset by lease installations. The decrease is partially offset by an increase of $0.7 million, or 2.4%, in the distribution of O&P componentry to independent providers in the period stemming primarily from ~~there being two fewer business days~~lower volumes in the ~~first quarter~~same period of 2021 due to the COVID-19 pandemic, as ~~compared with that of 2020. Within our distribution services, decreases~~discussed in ~~revenue associated with~~ the discontinuance of providing certain off-the-shelf orthotics to podiatry distributors and reductions in revenue associated with our acquisition of independent orthotics and prosthetic providers were offset by increases in volumes to new customers and the expansion of sales to existing customers of additional componentry items added to our product offerings. In addition, net revenues from therapeutic solutions decreased $0.8 million, or 6.2%, primarily as a result“Effects of the ~~impact of historical customer lease cancellations and discounts.~~

COVID-19 Pandemic” section above.

Material costs. Material costs for the three months ended March 31, ~~2021~~2022 were ~~$75.2~~$85.6 million, ~~a decrease~~an increase of ~~$2.1~~$10.4 million or ~~2.7%~~13.9%, from the same period in the prior year. Total material costs as a percentage of net revenues ~~decreased~~increased to 32.8% in the three months ended March 31, 2022 from 31.7% in the three months ended March 31, 2021 ~~from 33.0% in the three months ended March 31, 2020~~ primarily due to ~~changes~~freight, acquisitions, and use of third-party fabricators. While we have not experienced significant inflation in our ~~Product & Services segment business and product mix.~~material costs during the current quarter, we believe the effect of inflation may increase during the remainder of 2022. Material costs by operating segment, after elimination of intersegment activity, were as follows:

For the Three Months Ended


March 31,

Percent

(dollars in thousands)

2021

2020

Change

Change

Patient Care

$
59,922

$
59,677

$
245

0.4
%
Products & Services

15,248

17,564

(2,316)

(13.2)
%
Material costs

$
75,170

$
77,241

$
(2,071)

(2.7)
%


	For the Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2022		2021
Patient Care	$	70,976	$	59,922	$	11,054	18.4	%
Products & Services	14,616		15,248		(632)		(4.1)	%
Material costs	$	85,592	$	75,170	$	10,422	13.9	%

Patient Care material costs increased ~~$0.2~~$11.1 million, or ~~0.4%~~18.4%, for the three months ended March 31, ~~2021~~2022 compared to the same period in the prior year as a result of the ~~reduction~~increase in segment net sales, ~~offset by~~ additional costs as a result of our acquisitions, freight, and ~~changes~~increase in our use of third-party fabricators. At the ~~segment product mix.~~start of the first quarter, we were unsuccessful in opening our new fabrication facility in Phoenix, Arizona as we had planned, and this was a contributing factor to our increased use of higher cost third-party fabricators to meet our patient delivery needs. We were able to open this facility later during the first quarter and our use of third party fabricators has decreased. Freight cost increases have primarily related to increased fuel

surcharges and higher container costs. We currently anticipate that higher freight costs will continue to affect our material costs in future periods. Patient Care material costs as a percent of segment net revenues ~~decreased~~increased to 32.3% for the three months ended March 31, 2022 from 30.6% for the three months ended March 31, ~~2021 from 31.4% for the three months ended March 31, 2020.~~

2021.

~~Table of Contents~~

Products & Services material costs decreased ~~$2.3~~$0.6 million, or ~~13.2%~~4.1%, for the three months ended March 31, ~~2021~~2022 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were ~~36.5%~~35.2% for the three months ended March 31, ~~2021~~2022 as compared to ~~40.3%~~36.5% in the same period of ~~2020.~~2021. The decrease in cost of materials as a percent of segment net revenues was primarily due to ~~cost savings related to certain supply chain initiatives and a change in business volume and~~ product mix within the segment.

However, in a similar fashion to our Patient Care segment, increases in freight costs have also affected our material costs and margin in this segment, as we rebill only a portion of our freight costs to our third party customers.

Personnel costs. Personnel costs for the three months ended March 31, ~~2021~~2022 were ~~$89.9~~$101.7 million, an increase of ~~$0.7~~$11.8 million, or ~~0.8%~~13.1%, from ~~$89.2~~$89.9 million for the same period in the prior year. Personnel costs by operating segment were as follows:

For the Three Months Ended




March 31,

Percent

(dollars in thousands)

2021

2020

Change

Change

Patient Care

$
75,754

$
76,345

$
(591)

(0.8)
%
Products & Services

14,126

12,840

1,286

10.0
%
Personnel costs

$
89,880

$
89,185

$
695

0.8
%


	For the Three Months Ended March 31,				Change		Percent Change
(dollars in thousands)	2022		2021
Patient Care	$	86,409	$	75,754	$	10,655	14.1	%
Products & Services	15,266		14,126		1,140		8.1	%
Personnel costs	$	101,675	$	89,880	$	11,795	13.1	%

Personnel costs for the Patient Care segment were ~~$75.8~~$86.4 million for the three months ended March 31, ~~2021, a decrease~~2022, an increase of ~~$0.6~~$10.7 million, or ~~0.8%~~14.1%, from ~~$76.3~~$75.8 million in the same period of the prior year. The ~~decrease~~increase in Patient Care personnel costs during the three months ended March 31, ~~2021~~2022 was primarily related to ~~the release of the vacation accrual of $0.9 million, as well as decreases~~an increase in salary expense of ~~$0.2~~$7.6 million ~~commissions of $0.2 million, and payroll taxes of $0.1 million. These decreases were offset by an increase of $0.7 million in benefits and an increase in variable~~from the three months ended March 31, 2021. Additionally, incentive compensation and other personnel ~~costs of $0.1~~expenses increased $1.3 million, commissions increased $0.8 million, payroll taxes increased $0.5 million, and benefits increased $0.5 million compared to the three months ended March 31, ~~2020.~~

2021.

Personnel costs in the Products & Services segment were ~~$14.1~~$15.3 million for the three months ended March 31, ~~2021,~~2022, an increase of ~~$1.3~~$1.1 million compared to the same period in the prior year. ~~Salary~~The increase is primarily related to an increase in salary expense ~~increased $0.5~~of $1.4 million ~~and bonus,~~from the three months ended March 31, 2021. Bonus, commissions, benefits, and other personnel cost ~~increased $0.8~~decreased $0.3 million for the three months ended March 31, ~~2021~~2022 compared to the same period in the prior year.

Other operating costs. Other operating costs for the three months ended March 31, ~~2021~~2022 were ~~$31.5~~$36.2 million, ~~a decrease~~an increase of ~~$4.4~~$4.7 million, or ~~12.3%~~14.8%, from ~~$35.9~~$31.5 million for the same period in the prior year. ~~Travel,~~Rent, utilities, occupancy, and office expenses increased $1.8 million, travel increased $1.0 million, professional ~~education,~~fees increased $0.7 million, and other expenses ~~decreased $4.4~~increased $1.2 million due to cost mitigation efforts as a result of the COVID-19 pandemic, and bad debt expense decreased $2.1 million primarily due to favorable collection experience. During the quarter we benefited by $2.0 million in travel and professional education expenses through conducting our annual provider meeting and education event as a “virtual” event. In future years, we currently believe that this first quarter meeting will be conducted as it has in prior years, as a physical meeting, and these expenses will resume in those periods. The decreases were offset by a $1.5 million increase in other expenses and a $0.6 million increase in rent expense from new, renewed, and acquired leases as compared to the same period in the prior year.

General and administrative expenses. General and administrative expenses for the three months ended March 31, ~~2021~~2022 were ~~$30.9~~$32.4 million, ~~a decrease~~an increase of ~~$0.8~~$1.5 million, or ~~2.6%~~5.0%, from the same period in the prior year. ~~Professional accounting and legal fees decreased $1.5~~The increase is the result of a $0.9 million ~~primarily due to targeted efforts to remediate material weaknesses~~increase in ~~our internal controls over financial reporting that occurred~~salary expense, $0.8 million increase in ~~the three months ended March 31, 2020 that did not recur in the same period of 2021, and salary and~~ other expenses, ~~decreased $0.7~~and $0.1 million ~~as compared to the same period in the prior year. The decreases were offset by an~~ increase in incentive compensation and other personnel costs, ~~of $1.4~~partially offset by a $0.3 million decrease in equity-based compensation compared to the three months ended March 31, ~~2020.~~

2021.

Depreciation and amortization. Depreciation and amortization for ~~the~~both three months ended March 31, 2022 and March 31, 2021 was $8.0 million. Amortization expense increased $0.6 million ~~a decrease of $0.8 million, or 9.4%, from the same period in the prior year. Depreciation~~and depreciation expense decreased $0.6 ~~million and amortization expense decreased $0.2~~ million when compared to the same period in the prior year.

Interest expense, net. Interest expense for the three months ended March 31, ~~2021 decreased 11.2%~~2022 increased 0.6% to ~~$7.3~~$7.4 million from ~~$8.3~~$7.3 million for the same period in the prior year.

~~Table of Contents~~

Benefit for income taxes. The benefit for income taxes for the three months ended March 31, ~~2021~~2022 was ~~$2.2~~$2.1 million, or ~~39.3%~~20.9% of loss before income taxes, compared to a benefit of ~~$1.9~~$2.2 million, or ~~10.5%~~39.3% of loss before income taxes for the three months ended March 31, ~~2020.~~2021. The ~~effective tax rate for the three months ended March 31, 2021 consisted principally of the 21% federal statutory tax rate, research and development credits, and permanent tax differences. The increase~~decrease in the effective tax rate for the three months ended March 31, ~~2021~~2022 compared with the three months ended March 31, ~~2020~~2021 is primarily attributable to a ~~higher estimated annual~~decrease in pre-tax book income, ~~impacted less proportionally by~~ nondeductible permanent items, and a windfall for the three months ended March 31, 2021 as compared to a shortfall for the ~~prior period.~~

three months ended March 31, 2022.

Our effective tax rate for the three months ended March 31, 2022 is similar to the federal statutory tax rate of 21%, but the difference consists primarily of research and development credits offset by non-deductible expenses and shortfall from share-based compensation.Our effective tax rate for the three months ended March 31, 2021 differed from the federal statutory tax rate of 21% primarily due to research and development credits, non-deductible expenses, and windfall from share-based compensation.

We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. As of March 31, ~~2021,~~2022, our valuation allowance was approximately $2.1 million.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation, as well as the provision to carryback net operating losses to five preceding years. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. As a result of the CARES Act provisions, for the year ended December 31, 2020, we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by $17.2 million as of December 31, 2020.

Financial Condition, Liquidity, and Capital Resources

Liquidity

Our cash and cash equivalents, and any amounts we have available for borrowing under our revolving credit facility, are immediately available to provide cash for our operations and capital expenditures. We refer to the sum of these two amounts as our “liquidity.”

At March 31, ~~2021,~~2022, we had total liquidity of ~~$165.1~~$167.2 million, which reflected a decrease of ~~$74.3~~$23.8 million from the ~~$239.4~~$191.0 million in liquidity we had as of December 31, ~~2020.~~2021. Our liquidity at March 31, ~~2021~~2022 was comprised of cash and cash equivalents of ~~$70.3~~$37.4 million and ~~$94.8~~$129.8 million in available borrowing capacity under our ~~$100.0~~$135.0 million revolving credit facility. This decrease in liquidity primarily related to a decrease in cash of ~~$74.3~~$24.3 million, comprised of net cash used in operations of ~~$42.4~~$8.3 million, capital expenditures of $3.9 million, net of proceeds from sale of property, plant and equipment, cash paid for acquisitions, net of cash acquired, of ~~$19.4 million, capital expenditures of $6.9~~$4.0 million, and net cash used in financing activities of ~~$6.4~~$8.1 million. ~~Due to the seasonality of our business and our payment of annual incentive compensation and related compensatory items, we usually experience significant first quarter uses of cash in operations.~~

On a comparable period basis, our liquidity of $165.1 million as of March 31, 2021 reflected an increase of $33.3 million as compared with the liquidity of $131.8 million reported as of March 31, 2020.

Our Credit Agreement contains customary representations and warranties, as well as financial covenants, including that we maintain compliance with certain leverage and interest coverage ratios. If we are not compliant with our debt covenants in any period, absent a waiver or amendment of our Credit Agreement, we may be unable to access funds under our revolving credit facility. Due to the additional borrowings under our revolving credit facility in March 2020, which were repaid in full during the third quarter of 2020, and in anticipation of the potential economic impact of the COVID-19 pandemic, we entered into an amendment to the Credit Agreement that provided for, among other things, increases in the allowable level of indebtedness we may carry relative to our earnings, changes in the definition of EBITDA used to compute certain financial ratios, certain restrictions regarding investments and payments we may make until the completion of the first quarter of 2021 and increases in the interest costs associated with borrowings under our revolving credit facility. We were in compliance with our debt covenants as of March 31, ~~2021.~~

2022.

~~Table of Contents~~

For additional ~~discussion,~~information, please refer to the Liquidity Outlooksection below.

Working Capital and Days Sales Outstanding

At March 31, ~~2021,~~2022, we had working capital of ~~$100.2~~$79.1 million compared to working capital of ~~$129.3~~$91.5 million at December 31, ~~2020.~~2021. Our working capital decreased ~~$29.0~~$12.4 million during the three months ended March 31, ~~2021~~2022 due to a decrease in current assets of ~~$79.4~~$38.9 million, partially offset by a decrease in current liabilities of ~~$50.4~~$26.5 million.

The decrease in current assets of ~~$79.4~~$38.9 million was primarily attributable to a decrease in Cash and cash equivalents of ~~$74.3~~$24.3 million discussed in the “Liquidity”section above, ~~and~~ a decrease in Accounts receivable, net of ~~$10.4~~$12.4 million, and a decrease in Inventories of approximately $4.2 million. ~~The~~These decreases were offset by an increase of approximately ~~$3.1~~$2.0 million in Other current ~~assets and Inventories of $2.2 million.~~

assets.

The decrease in current liabilities of ~~$50.4~~$26.5 million was primarily attributable to a net decrease in accrued incentive compensation related costs of ~~$36.9~~$17.2 million, primarily due to the payment of ~~$42.9~~$26.4 million in annual incentive compensation and the employer 401(k) matching contribution made during the first quarter of the year. The remainder of the decrease is

primarily attributable to a decrease of ~~$14.1~~$5.6 million in Accounts ~~payable.~~

payable, of $2.3 million in Accrued expenses and other current liabilities and of $1.4 million in Current portion of long-term debt.

Days sales outstanding (“DSO”) is a calculation that approximates the average number of days between the billing for our services and the date of our receipt of payment, which we estimate using a 90-day rolling period of net revenue. This computation can provide a relative measure of the effectiveness of our billing and collections activities. Clinics acquired during the past 90-day period are excluded from the calculation. As of March 31, ~~2021,~~2022, our DSO was 4548 days, ~~which compares favorably~~compared to a DSO of 5045 days as of March 31, ~~2020.~~2021. The ~~reduction~~increase is partially attributable to ~~improved collections experience~~a larger increase in net revenue relative to accounts receivable due to the ~~targeted efforts~~2022 Medicare rate increase, as well as the impact of ~~our centralized revenue cycle management function.~~

acquisitions completed in the fourth quarter of 2021.

Sources and Uses of Cash for the Three Months Ended March 31, ~~2021~~2022 Compared to March 31, ~~2020~~

2021

Net cash flows used in operating activities ~~increased $20.4~~decreased $34.1 million to $8.3 million for the three months ended March 31, 2022 from $42.4 million for the three months ended March 31, ~~2021 from net cash~~2021. The most significant decreases were due to $19.7 million in Accrued compensation related costs and $8.0 million in Accounts payable.

Cash flows used in ~~operating~~investing activities ~~of $22.0~~decreased $17.6 million to $7.9 million for the three months ended March 31, 2020. The comparative increase in operating cash flows is primarily attributable to a combination of lower revenues and the acceleration of cash collections of Accounts receivable of $17.1 million, when compared to the same periods in the prior year. This is consistent with the decline in DSO2022, from 50 days as of March 31, 2020 to 45 days as of March 31, 2021. The remaining increase in cash used from operating activities primarily related to cash used in the satisfaction of Accounts payable of $9.3 million and changes in Inventories of $2.4 million, partially offset by an increase in income of $12.4 million during the quarter.

~~Cash flows used in investing activities increased $17.0 million to~~ $25.5 million for the three months ended March 31, ~~2021, from $8.5 million for the three months ended March 31, 2020.~~2021. The ~~increase~~decrease in cash used in investing activities was due to ~~an increase~~a decrease of ~~$19.4~~$15.4 million in cash paid for acquisitions, net of cash acquired, ~~partially offset by $1.9~~and $2.2 million less in capital ~~expenditures.~~

expenditures, net of proceeds from sale of property, plant and equipment.

Cash flows used in financing activities ~~decreased~~were $8.1 million for the three months ended March 31, 2022, as compared to cash used in financing activities of $6.4 million for the three months ended March 31, ~~2021, from cash provided by financing activities of $72.0 million for the three months ended March 31, 2020.~~2021. The ~~decrease~~increase in cash used in financing activities is primarily due to ~~$79.0~~an increase in payments on Seller Notes of $2.6 million, ~~in proceeds from borrowings under our revolving credit facility in March 2020,~~ offset by ~~the net effect~~a decrease in payment of employee taxes on share-based compensation and other activities of ~~$0.6~~$0.9 million.

Effect of Indebtedness

As of March ~~6, 2018,~~31, 2022, we ~~entered into~~have a ~~$605.0 million~~Senior Credit ~~Agreement,~~Facility (the “Credit Agreement”) which 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 B facility with $484.8 million outstanding which is due in quarterly principal installments ~~commencing June 29, 2018,~~ with all remaining outstanding principal due at maturity in March ~~2025.~~2025 and (ii) a revolving credit facility with an availability of $135.0 million which matures on November 23, 2026 (subject to a springing maturity if the term loans outstanding under the Existing Credit Agreement are not repaid prior to the date that is 91 days prior to the stated maturity thereof). Availability under the revolving credit facility is reduced by outstanding letters of credit, which were $5.2 million as of March 31, 2022, resulting in approximately $129.8 million in available borrowing capacity. For additional discussion surrounding the Credit Agreement, see Note K - “Debt and Other Obligations,” in the notes to the condensed consolidated financial statements contained elsewhere in this report. Cash paid for interest totaled ~~$6.6~~$6.5 million and ~~$7.5~~$6.6 million for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

~~Table of Contents~~

In May 2020, we entered into an amendment to the Credit Agreement (the “Amendment”) that provided for, amongst other things, an increase in the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarter ended March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter. In addition, the Amendment changed the definition of EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the COVID-19 pandemic. Borrowings under the revolving credit facility will bear interest at a variable rate equal to the greater of LIBOR or 1.00%, plus 3.75%. In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries’ ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions if we do not maintain certain leverage and liquidity thresholds. During the fourth quarter of 2020, we recommenced our acquisition of O&P providers.

~~Scheduled maturities of debt as of March 31, 2021 were as follows:~~

(in thousands)

2021 (remainder of year )

$
8,273
2022

10,040
2023

9,641
2024

8,979
2025

473,009
Thereafter

2,496
Total debt before unamortized discount and debt issuance costs, net

512,438
Unamortized discount and debt issuance costs, net

(7,048)
Total debt

$
505,390

Liquidity Outlook

Our Credit Agreement has a term loan facility with $489.9 million in principal outstanding at March 31, 2021, due in quarterly principal installments equal to 0.25% of the original aggregate principal amount of $505.0 million, with all remaining outstanding principal due at maturity in March 2025, and, as of March 31, 2021, a revolving credit facility with no borrowings and available borrowing capacity of $94.8 million that matures in March 2023.

Our primary sources of liquidity are cash and cash equivalents, and available borrowings under our revolving credit facility. Due to the economic and social activity impacts outlined in the “Effects of the COVID-19 Pandemic” section above, we expect the continuing disruption to have an unfavorable impact on our operations, financial condition, and results of operations. While the duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments which cannot be predicted with certainty, we believe that our existing sources of liquidity, when combined with our operating cash flows and other measures taken to enhance our liquidity position and cost structure, will continue to allow us to finance our operations for the foreseeable future. Please refer to the “Effects of the COVID-19 Pandemic” section above for additional discussion.

Our primary future cash requirements, as discussed in our 2021 Form 10-K, will be for acquisitions of O&P providers, debt payments, capital expenditures, payment of deferred payroll taxes as discussed in the “Effects of the COVID-19 Pandemic” section above, and to fund operations. We expect to continue to invest in capital expenditures, and in deferred cloud implementation expenditures, in connection with our planned reconfiguration of distribution facilities and our related implementation of supply chain and financial systems. We anticipate that we will continue to pursue acquisitions and other growth initiatives that we expect to provide value to our shareholders. ~~We expect~~Additionally, as business volumes return to more

typical pre-pandemic levels, it is likely that we will experience a natural corresponding increase in our investment in working capital.

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

~~CARES Act~~

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $178.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $178.0 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

~~Table of Contents~~

During 2020, we recognized a total benefit of $24.0 million in our condensed consolidated statement of operations within Other operating costs Grants from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment. In April 2021, we recognized an additional $0.7 million in proceeds received from grants under the CARES Act.

The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We deferred $11.8 million of payroll taxes within Accrued compensation related costs and Other liabilities in the condensed consolidated balance sheet as of March 31, 2021.

~~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 March 31, ~~2021,~~2022, we had a combined principal amount of ~~$489.9~~$484.8 million of variable rate debt under our Term Loan B and revolving credit facility and a notional amount of ~~$287.5~~$275.0 million of fixed to variable interest rate swap agreements. Based on our hedged and unhedged positions, a hypothetical increase orin interest rates of 1.0% would impact our annual interest expense by $2.1 million and a decrease in interest rates of 1.0% would impact our annual interest expense by ~~$2.5~~$1.0 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 March 31, ~~2021.~~2022. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, ~~2021.~~

2022.

Changes in Internal Control over Financial Reporting

~~There have been no material changes~~

We are implementing an enterprise resource planning (“ERP”) system using a phased approach, and transitioned from our prior corporate financial systems to the new ERP system in the third quarter of 2021. In connection with the implementation, we modified the design and documentation of certain internal control processes and procedures as necessary. We will continue to evaluate each phase’s effect on our internal controls over financial ~~reporting during the period ended March 31, 2021.~~

~~Therefore, in~~reporting.

In accordance with Rule 13a-15(d) of the Exchange Act and with the participation of our Chief Executive Officer and our Chief Financial Officer, management determined there have been no material changes to our internal control over financial reporting during the three month period ended March 31, ~~2021.~~

2022.

~~Table of Contents~~

PART II.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Not applicable.

ITEM 1A.RISK FACTORS

Not applicable.

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

There has been no share repurchase activity during the three months ended March 31, ~~2021.~~

2022.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the three months ended March 31, ~~2021.~~

2022.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None to report.

ITEM 6.EXHIBITS

The documents in the accompanying Exhibits Index are filed, furnished, or incorporated by reference as part of this report and such Exhibits Index is incorporated herein by reference.

~~Table of Contents~~

EXHIBITS INDEX

Exhibit No.

Document

10.1

Supplemental Executive Retirement Plan, as amended and restated effective May 1, 2013.

~~Exhibit~~
~~No.~~

31.1

~~Document~~

~~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.)

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.)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.)

~~Table of Contents~~

SIGNATURES

~~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: May ~~5, 2021~~ 4, 2022	By:		/s/ THOMAS E. KIRALY
				Thomas E. Kiraly
				Executive Vice President and
				Chief Financial Officer
				(Principal Financial Officer)

Dated: May ~~5, 2021~~ 4, 2022		By:		/s/ GABRIELLE B. ADAMS
				Gabrielle B. Adams
				Vice President and Chief Accounting Officer
				(Principal Accounting Officer)


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


10910 Domain Drive, Suite 300,, Austin,, TX		~~78758~~
(Address of principal executive offices)	78758	(Zip Code)


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’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations	23 21
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	39 37
	Item 4. Controls and Procedures	39 37
Part II Other Information
	Item 1. Legal Proceedings	40 38
	Item 1A. Risk Factors	40 38
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40 38
	Item 3. Defaults Upon Senior Securities	40 38
	Item 4. Mine Safety Disclosures	40 38
	Item 5. Other Information	40 38
	Item 6. Exhibits	40 38
Exhibits Index	41	39
Signatures	42	40

	☒
x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	As of March 31,		As of December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	70,316	$	144,602
Accounts receivable, net		118,162		128,596
Inventories		78,622		76,429
Income taxes receivable		12,863		12,888
Other current assets		15,489		12,357
Total current assets		295,452		374,872
Non-current assets:
Property, plant, and equipment, net		84,761		84,873
Goodwill		298,166		277,223
Other intangible assets, net		19,844		18,431
Deferred income taxes		55,482		54,877
Operating lease right-of-use assets		124,663		124,741
Other assets		16,204		15,734
Total assets	$	894,572	$	950,751
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	11,064	$	10,085
Accounts payable		51,002		65,091
Accrued expenses and other current liabilities		62,491		62,861
Accrued compensation related costs		35,665		72,541
Current portion of operating lease liabilities		35,005		35,002
Total current liabilities		195,227		245,580
Long-term liabilities:
Long-term debt, less current portion		494,326		493,012
Operating lease liabilities		104,030		104,589
Other liabilities		51,745		56,593
Total liabilities		845,328		899,774
Commitments and contingencies (Note P)
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 38,715,640 shares issued and 38,572,819 shares outstanding at 2021, and 38,321,796 shares issued and 38,178,975 shares outstanding at 2020, respectively		387		383
Additional paid-in capital		364,524		365,503
Accumulated other comprehensive loss		(17,643)		(20,215)
Accumulated deficit		(297,328)		(293,998)
Treasury stock, at cost; 142,821 shares at 2021 and 2020, respectively		(696)		(696)
Total shareholders’ equity		49,244		50,977
Total liabilities and shareholders’ equity	$	894,572	$	950,751


		Common				Accumulated
	Common	Stock,		Additional		Other
	Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury
	Balance	Value		Capital		Loss		Deficit		Stock		Total
Balance, December 31, 2020	38,179	$	383	$	365,503	$	(20,215)	$	(293,998)	$	(696)	$	50,977
Net loss	—		—		—		—		(3,330)		—		(3,330)
Share-based compensation expense	—		—		3,179		—		—		—		3,179
Issuance in connection with the exercise of stock options	29		—		366		—		—		—		366
Issuance of common stock upon vesting of restricted stock units	365		4		(4)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(4,520)		—		—		—		(4,520)
Total other comprehensive income	—		—		—		2,572		—		—		2,572
Balance, March 31, 2021	38,573	$	387	$	364,524	$	(17,643)	$	(297,328)	$	(696)	$	49,244


	For the Three Months Ended March 31,
(in thousands except share and per share amounts)	2021		2020
Net loss	$	(3,330)	$	(15,748)

Weighted average shares outstanding - basic		38,268,332		37,541,452
Effect of potentially dilutive restricted stock units and options ⁽¹⁾		—		—
Weighted average shares outstanding - diluted		38,268,332		37,541,452

Basic and diluted loss per share	$	(0.09)	$	(0.42)


	As of March 31, 2021						As of December 31, 2020
			Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Gross charges before estimates for implicit price concessions	$	143,007	$	21,056	$	164,063	$	156,504	$	21,300	$	177,804
Less estimates for implicit price concessions:
Payor disallowances		(36,816)		—		(36,816)		(39,343)		—		(39,343)
Patient non-payments		(6,499)		—		(6,499)		(7,042)		—		(7,042)
Accounts receivable, gross		99,692		21,056		120,748		110,119		21,300		131,419
Allowance for doubtful accounts		—		(2,586)		(2,586)		—		(2,823)		(2,823)
Accounts receivable, net	$	99,692	$	18,470	$	118,162	$	110,119	$	18,477	$	128,596


(in thousands)
Cash paid, net of cash acquired	$	19,238
Issuance of Seller Notes at fair value		3,956
Additional consideration, net		998
Aggregate purchase price		24,192

Accounts receivable		805
Inventories		756
Customer relationships (Weighted average useful life of 5.0 years)		2,460
Other assets and liabilities, net		(589)
Net assets acquired		3,432
Goodwill	$	20,760


(in thousands)
Cash paid, net of cash acquired	$	21,709
Issuance of Seller Notes at fair value		23,766
Deferred payment obligation at fair value		3,468
Additional consideration, net		4,319
Aggregate purchase price		53,262

Accounts receivable		4,224
Inventories		2,276
Customer relationships (Weighted average useful life of 5.0 years)		6,358
Non-compete agreements (Weighted average useful life of 5.0 years)		200
Other assets and liabilities, net		(4,561)
Net assets acquired		8,497
Goodwill	$	44,765


	For the Three Months Ended March 31, 2021
	Goodwill,		Accumulated		Goodwill,
(in thousands)	Gross		Impairment		Net
As of December 31, 2020	$	705,891	$	(428,668)	$	277,223
Additions from acquisitions		20,760		—		20,760
Measurement period adjustments ⁽¹⁾		183		—		183
As of March 31, 2021	$	726,834	$	(428,668)	$	298,166


	As of March 31, 2021
	Gross
	Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	19,339	$	(6,712)	$	—	$	12,627
Trade name		255		(183)		—		72
Patents and other intangibles		8,994		(5,966)		—		3,028
Definite-lived intangible assets		28,588		(12,861)		—		15,727
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	37,658	$	(12,861)	$	(4,953)	$	19,844


(in thousands)
2021 (remainder of the year)	$	3,290
2022		4,319
2023		4,076
2024		2,586
2025		1,397
Thereafter		59
Total	$	15,727


(in thousands)
2021 (remainder of year)	$	8,273
2022		10,040
2023		9,641
2024		8,979
2025		473,009
Thereafter		2,496
Total debt before unamortized discount and debt issuance costs, net		512,438
Unamortized discount and debt issuance costs, net		(7,048)
Total debt	$	505,390


	Patient Care				Products & Services
	For the Three Months Ended				For the Three Months Ended
	March 31,				March 31,
(in thousands)	2021		2020		2021		2020
Net revenues
Third party	$	195,682	$	190,183	$	41,788	$	43,556
Intersegments		—		—		47,047		46,022
Total net revenues		195,682		190,183		88,835		89,578
Material costs
Third party suppliers		51,617		53,124		23,553		24,117
Intersegments		8,305		6,553		38,742		39,469
Total material costs		59,922		59,677		62,295		63,586
Personnel expenses		75,754		76,345		14,126		12,840
Other expenses		36,141		38,148		5,803		8,320
Depreciation & amortization		4,815		4,476		1,935		2,752
Segment income from operations	$	19,050	$	11,537	$	4,676	$	2,080


	For the Three Months Ended
	March 31,				Percent Change
(dollars in thousands)	2021		2020		2021 vs 2020
Net revenues	$	237,470	$	233,739	1.6	%
Material costs		75,170		77,241	(2.7)	%
Personnel costs		89,880		89,185	0.8	%
Other operating costs		31,460		35,886	(12.3)	%
General and administrative expenses		30,941		31,769	(2.6)	%
Depreciation and amortization		7,998		8,831	(9.4)	%
Operating expenses		235,449		242,912	(3.1)	%
Income (loss) from operations		2,021		(9,173)	122.0	%
Interest expense, net		7,340		8,269	(11.2)	%
Non-service defined benefit plan expense		167		158	5.7	%
Loss before income taxes		(5,486)		(17,600)	68.8	%
Benefit for income taxes		(2,156)		(1,852)	(16.4)	%
Net loss	$	(3,330)	$	(15,748)	78.9	%


		For the Three Months Ended
	March 31,						Percent
(dollars in thousands)	2021		2020		Change		Change
Patient Care	$	195,682	$	190,183	$	5,499	2.9	%
Products & Services		41,788		43,556		(1,768)	(4.1)	%
Net revenues	$	237,470	$	233,739	$	3,731	1.6	%


(in thousands)
2021 (remainder of year )	$	8,273
2022		10,040
2023		9,641
2024		8,979
2025		473,009
Thereafter		2,496
Total debt before unamortized discount and debt issuance costs, net		512,438
Unamortized discount and debt issuance costs, net		(7,048)
Total debt	$	505,390

For the quarterly period ended March 31, 2022

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to