Table of $0.3 million and $0.5 million for the three and six months ended June 30, 2019 related to the acquisition are included in General and administrative expenses in our consolidated statement of operations.Contents

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

~~Purchase Price Allocation~~

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisitions. The final purchase price allocations will be determined when we have completed and fully reviewed the detailed valuations and could differ materially from the preliminary allocations. The final allocations may include changes in allocations of acquired intangible assets as well as goodwill and other changes to assets and liabilities including deferred taxes. The estimated useful lives of acquired intangible assets are also preliminary.

~~The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows (in thousands):~~

Cash paid, net of cash acquired

$
27,916

Issuance of seller notes at fair value

4,686

Additional consideration (1)

659

Aggregate purchase price

33,261

Accounts receivable, net

3,561

Inventories

1,558

Customer relationships (Useful life of 3.0 years)

2,368

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

349

Other assets

413

Accounts payable

(1,264
)
Accrued expenses and other liabilities

(1,714
)
Net assets acquired

5,271

Goodwill

$
27,990

~~(1)~~ ~~Represents additional consideration that we anticipate will be payable to the seller in the third quarter of 2019, subject to agreement of certain tax elections with the seller.~~

~~2018 Acquisition Activity~~

In the fourth quarter of 2018, we acquired two O&P businesses for an aggregate purchase price of $3.1 million, net of cash acquired. These acquisitions were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction.

The aggregate purchase price for these acquisitions was allocated as ~~follows (in thousands):~~follows:

Cash paid, net of cash acquired

$
1,978

Issuance of seller notes

1,120

Aggregate purchase price

3,098

Accounts receivable, net

256

Inventories

302

Customer relationships (Weighted average useful life of 4.0 years)

260

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

214

Other assets

90

Accounts payable

(59
)
Accrued expenses and other liabilities

(364
)
Net assets acquired

699

Goodwill

$
2,399

(in thousands)
Cash paid, net of cash acquired	$	35,909
Issuance of seller notes at fair value		7,835
Additional consideration, net⁽¹⁾		626
Aggregate purchase price		44,370

Accounts receivable		4,128
Inventories		2,081
Customer relationships (Weighted average useful life of 4.7 years)		7,038
Non-compete agreements (Weighted average useful life of 4.9 years)		350
Other assets and liabilities, net		(2,983	)
Net assets acquired		10,614
Goodwill	$	33,756

⁽¹⁾Approximately $0.7 million of additional consideration represents payments made during the third quarter related to certain tax elections with the seller, offset by an immaterial amount of favorable working capital adjustments.

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2019 was $5.2 million.

Note H — Goodwill and Other Intangible Assets

We assess goodwill and indefinite-lived intangible assets for impairment annually onas 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. As a result of our 2019 goodwill impairment test, we concluded that our Patient Care reporting unit fair value was substantially in excess of its carrying value. On a quarterly or as-needed basis, we are required to assess whether a triggering event has occurred requiring an interim test of goodwill impairment. The Company considered current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on the Patient Care reporting unit. Factors included in the Company's interim assessment included the current and historical market capitalization, current forecasts, and the amount of headroom in the previous tests of goodwill impairment. As a result of our interim assessment, management concluded that a triggering event has not occurred.

The following table summarizes the activity in goodwill for the periods indicated:

For the Six Months Ended June 30, 2019

Patient Care

Products & Services

Consolidated

(in thousands)

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

As of December 31, 2018

$
627,410

$
(428,668
)
198,742

$
139,299

$
(139,299
)
—

$
766,709

$
(567,967
)
198,742

Additions from acquisitions

27,961

—

27,961

—

—

—

27,961

—

27,961

Measurement period adjustments

29

—

29

—

—

—

29

—

29

As of June 30, 2019

$
655,400

$
(428,668
)
$
226,732

$
139,299

$
(139,299
)
$
—

$
794,699

$
(567,967
)
$
226,732

	For the Three Months Ended March 31, 2020
	Patient Care							Products & Services							Consolidated
(in thousands)	Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net
As of December 31, 2019	$	660,912	$	(428,668	)	$	232,244	$	139,299	$	(139,299	)	$	—	$	800,211	$	(567,967	)	$	232,244
Measurement period adjustments		10		—			10		—		—			—		10		—			10
As of March 31, 2020	$	660,922	$	(428,668	)	$	232,254	$	139,299	$	(139,299	)	$	—	$	800,221	$	(567,967	)	$	232,254

For the Year Ended December 31, 2018

Patient Care

Products & Services

Consolidated

(in thousands)

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

Goodwill,
Gross

Accumulated
Impairment

Goodwill,
Net

As of December 31, 2017

$
625,011

$
(428,668
)
$
196,343

$
139,299

$
(139,299
)
$
—

$
764,310

$
(567,967
)
$
196,343

Additions from acquisitions

2,399

—

2,399

—

—

—

2,399

—

2,399

As of December 31, 2018

$
627,410

$
(428,668
)
$
198,742

$
139,299

$
(139,299
)
$
—

$
766,709

$
(567,967
)
$
198,742

Table of Contents

	For the Year Ended December 31, 2019
	Patient Care									Products & Services								Consolidated
(in thousands)	Goodwill, Gross			Accumulated Impairment			Goodwill, Net			Goodwill, Gross		Accumulated Impairment			Goodwill, Net			Goodwill, Gross			Accumulated Impairment			Goodwill, Net
As of December 31, 2018	$	627,410		$	(428,668	)	$	198,742		$	139,299	$	(139,299	)	$	—		$	766,709		$	(567,967	)	$	198,742
Additions from acquisitions		35,926			—			35,926			—		—			—	��		35,926			—			35,926
Measurement period adjustments⁽¹⁾		(2,424	)		—			(2,424	)		—		—			—			(2,424	)		—			(2,424	)
As of December 31, 2019	$	660,912		$	(428,668	)	$	232,244		$	139,299	$	(139,299	)	$	—		$	800,211		$	(567,967	)	$	232,244

⁽¹⁾Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.1 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

The balances related to intangible assets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are as follows:

	As of June 30, 2019										As of March 31, 2020
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer lists	$	27,825	$	(20,311	)	$	—		$	7,514	$	32,772	$	(23,925	)	$	—		$	8,847
Trade name	255		(138		)	—			117			255		(157	)		—			98
Patents and other intangibles	9,238		(5,216		)	—			4,022			8,810		(5,286	)		—			3,524
Definite-lived intangible assets	37,318		(25,665		)	—			11,653			41,837		(29,368	)		—			12,469
Indefinite-lived trade names	9,070		—			(4,953		)	4,117
Indefinite-lived trade name												9,070		—			(4,953	)		4,117
Total other intangible assets	$	46,388	$	(25,665	)	$	(4,953	)	$	15,770	$	50,907	$	(29,368	)	$	(4,953	)	$	16,586

	As of December 31, 2018										As of December 31, 2019
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer lists	$	26,036	$	(19,051	)	$	—		$	6,985	$	32,772	$	(22,726	)	$	—		$	10,046
Trade name	255		(125		)	—			130			255		(151	)		—			104
Patents and other intangibles	9,391		(5,145		)	—			4,246			9,188		(5,503	)		—			3,685
Definite-lived intangible assets	35,682		(24,321		)	—			11,361			42,215		(28,380	)		—			13,835
Indefinite-lived trade names	9,070		—			(4,953		)	4,117
Indefinite-lived trade name												9,070		—			(4,953	)		4,117
Total other intangible assets	$	44,752	$	(24,321	)	$	(4,953	)	$	15,478	$	51,285	$	(28,380	)	$	(4,953	)	$	17,952

~~Total~~Amortization expense related to other intangible ~~amortization expense~~assets was approximately ~~$1.1~~$1.4 million and ~~$2.4~~$1.2 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and $1.8 million and $3.8 million for the three and six months ended June 30, 2018.~~respectively.

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

(in thousands)
2019 (remainder of the year)	$	2,235
2020	4,211
2020 (remainder of the year)			$	3,816
2021	1,628			2,575
2022	1,556			2,508
2023	914			2,264
2024				781
Thereafter	1,109			525
Total	$	11,653	$	12,469

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Note I — Other Current Assets and Other Assets

Other current assets consist of the following:

	As of June 30,		As of December 31,		As of March 31,		As of December 31,
(in thousands)	2019		2018		2020		2019
Non-trade receivables	$	5,674	$	7,848	$	7,108	$	6,711
Prepaid maintenance	4,016		3,330			3,614		2,767
Prepaid other	1,666		1,101
Prepaid insurance	1,217		258			2,333		264
Prepaid purchase orders	890		998
Prepaid rent	773		4,442
Prepaid education and training	586		597
Other	66		157
Other prepaid assets						2,614		3,931
Total other current assets	$	14,888	$	18,731	$	15,669	$	13,673

Other assets consist of the following:

	As of June 30,		As of December 31,		As of March 31,		As of December 31,
(in thousands)	2019		2018		2020		2019
Implementation costs for cloud computing arrangements					$	3,989	$	1,964
Cash surrender value of company-owned life insurance	$	3,027	$	2,918		3,410		3,253
Non-trade receivables	1,903		1,904			2,266		2,398
Finance lease right-of-use assets						2,082		1,488
Deposits	1,828		1,698			2,046		1,893
Finance lease right-of-use assets	614		—
Surety bond collateral	—		1,000
Other	217		246			387		309
Total other assets	$	7,589	$	7,766	$	14,180	$	11,305

Note J — Accrued Expenses and Other Current Liabilities and Other Liabilities

Accrued expenses and other current liabilities consist of:

As of June 30,

As of December 31,

(in thousands)

2019

2018

Patient prepayments, deposits and refunds payable

$
25,006

$
24,563

Insurance and self-insurance accruals

8,330

8,886

Accrued sales taxes and other taxes

8,195

6,810

Derivative liability

2,805

724

Accrued professional fees

1,339

3,751

Accrued interest payable

501

332

Other current liabilities

6,931

6,717

Total accrued expenses and other current liabilities

$
53,107

$
51,783

	As of March 31,		As of December 31,
(in thousands)	2020		2019
Patient prepayments, deposits, and refunds payable	$	24,457	$	24,183
Accrued sales taxes and other taxes		8,324		8,543
Insurance and self-insurance accruals		7,976		8,033
Derivative liability		7,177		3,516
Accrued professional fees		1,974		2,533
Accrued interest payable		463		266
Other current liabilities		7,874		8,751
Total	$	58,245	$	55,825

Other liabilities consist of:

	As of June 30,		As of December 31,		As of March 31,		As of December 31,
(in thousands)	2019		2018		2020		2019
Supplemental executive retirement plan obligations	$	18,865	$	20,195	$	19,213	$	20,851
Derivative liability	11,078		3,134			17,877		9,821
Long-term insurance accruals	8,393		8,713			7,562		7,424
Unrecognized tax benefits, and related interest and penalties	5,407		5,458
Deferred tenant improvement allowances	—		8,570
Deferred rent	—		4,455
Unrecognized tax benefits						5,350		5,296
Other	2,290		1,045			2,410		2,412
Total other liabilities	$	46,033	$	51,570
Total					$	52,412	$	45,804

Table of Contents

Note K — Income Taxes

We recorded a provision for income taxes of $4.4 million and $0.7 million for the three and six months ended June 30, 2019. The effective tax rate was 30.5% and 18.0% for the three and six months ended June 30, 2019. We recorded a benefit for income taxes of ~~$0.1~~$1.9 million and ~~$6.3~~$3.7 million for the three ~~and six~~ months ended ~~June 30, 2018.~~March 31, 2020 and March 31, 2019, respectively. The effective tax rate was ~~(0.7)%~~10.5% and ~~39.4%~~35.0% for the three ~~and six~~ months ended ~~June 30, 2018.~~March 31, 2020 and 2019, respectively.

The ~~increase~~decrease in the effective tax rate for the three months ended ~~June 30, 2019~~March 31, 2020 compared with the three months ended ~~June 30, 2018~~March 31, 2019 is primarily attributable to a lower estimated pre-tax income impacted more proportionally by nondeductible permanent items for the ~~change~~three months ended March 31, 2020 as compared to ~~the annualized effective tax rate method from the discrete method used during~~ the prior period, as well as an ~~increased estimated annual pre-tax book income, and~~increase in the windfall from ~~stock-based compensation during the period.~~share-based compensation. Our effective tax rate for the three months ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ differed from the federal statutory tax rate of 21% primarily due to non-deductible ~~expenses and the windfall from stock-based compensation during the period.~~expenses.

The ~~decrease~~CARES Act was signed into law on March 27, 2020. The CARES Act includes various income tax provisions that affect the Company, for which we have recorded $5.4 million to deferred taxes in the ~~effective tax rate for~~current quarter. We continue to examine other aspects of the ~~six months ended June 30, 2019 compared with the six months ended June 30, 2018 is primarily attributable~~CARES Act to an increased estimated annual income, an increase in pre-tax book income for the six months ended June 30, 2019, and the windfall from stock-based compensation during the period. Our effective tax rate for the six months ended June 30, 2019 and June 30, 2018 differed from the federal statutory tax rate of 21% primarily due to the windfall and shortfall from stock based compensation expense in the respective periods, as well as non-deductible expenses.

~~Note L — Leases~~determine whether other benefits are available.

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

(in thousands)

Classification

As of June 30, 2019

Assets

Operating lease right-of-use assets

Operating lease right-of-use assets

$
104,632

Finance lease right-of-use assets

Other assets

614

Total lease assets

$
105,246

Liabilities

Current

Operating

Current portion of operating lease liabilities

$
30,592

Finance

Current portion of long-term debt

259

Noncurrent

Operating

Operating lease liabilities

85,046

Finance

Long-term debt, less current portion

368

Total lease liabilities

$
116,265

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

(in thousands)

For the Three Months Ended
June 30, 2019

For the Six Months Ended
June 30, 2019

Operating lease cost

$
10,794

$
21,630

Finance lease cost

Amortization of right-of-use assets

75

150

Interest on lease liabilities

6

12

Sublease income

(46
)
(79
)
Short-term lease cost

222

414

Variable lease cost

1,813

3,030
��
Total lease cost

$
12,864

$
25,157

~~Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at June 30, 2019 are as follows:~~

(in thousands)

Finance
Leases

Operating
Leases

Total Leases

2019 (remainder of year)

$
150

$
15,873

$
16,023

2020

244

38,090

38,334

2021

172

28,788

28,960

2022

86

20,890

20,976

2023

14

13,711

13,725

2024

—

7,287

7,287

Thereafter

—

6,210

6,210

Total future minimum lease payments

666

130,849

131,515

Imputed interest

(39
)
(15,211
)
(15,250
)
Total

$
627

$
115,638

$
116,265

~~The lease term and discount rates are as follows:~~

	~~For the Six Months Ended~~ ~~June 30, 2019~~
~~Weighted average remaining lease term (years)~~
~~Operating leases~~	~~3.94~~
~~Finance leases~~	~~2.72~~
~~Weighted average discount rate~~
~~Operating leases~~	~~5.69~~	%
~~Finance leases~~	~~4.25~~	%

~~Supplemental cash flow information related to leases is as follows:~~

(in thousands)

For the Six Months Ended
June 30, 2019

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

Operating cash flows from operating leases

$
22,704

Operating cash flows from finance leases

12

Financing cash flows from finance leases

156

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

Operating leases

19,699

Finance leases

209

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

(in thousands)

Operating
Leases

Capital
Leases

2019

$
39,378

$
249

2020

29,641

175

2021

21,303

109

2022

14,479

28

2023

9,193

—

Thereafter

10,008

—

$
124,002

$
561

Note ML — Debt and Other Obligations

Debt consists of the following:

	As of June 30,			As of December 31,			As of March 31,			As of December 31,
(in thousands)	2019			2018			2020			2019
Debt:
Term Loan B	$	498,688		$	501,213		$	494,900		$	496,163
Revolving credit facility								79,000			—
Seller notes	7,264			4,506				7,594			9,005
Financing leases and other	1,231			14,361
Finance lease liabilities and other								2,867			2,033
Total debt before unamortized discount and debt issuance costs	507,183			520,080				584,361			507,201
Unamortized discount and debt issuance costs, net	(8,873		)	(9,407		)		(7,933	)		(8,328	)
Total debt	$	498,310		$	510,673		$	576,428		$	498,873

Current portion of long-term debt:
Term Loan B	$	5,050		$	5,050		$	5,050		$	5,050
Seller notes	3,186			2,513				2,210			3,175
Financing leases and other	412			1,020
Finance lease liabilities and other								666			527
Total current portion of long-term debt	8,648			8,583				7,926			8,752
Long-term debt:	$	489,662		$	502,090
Long-term debt							$	568,502		$	490,121

Table of Contents

Refinancing of Credit Agreement and Term B Borrowings

On March 6, 2018, we entered into a $605.0 million Senior Credit Facility (the “Credit Agreement”). The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term Loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025. Availability under the revolving credit facility is reduced by outstanding letters of credit, which were approximately $5.2 million as of ~~June 30, 2019.~~March 31, 2020. We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility.

In March 2020, we borrowed $79.0 million under our revolving credit facility, which is due in March 2023. We had approximately $15.8 million in available borrowing capacity under our $100.0 million revolving credit facility as of March 31, 2020.

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

Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. For the three months ended ~~June 30, 2019,~~March 31, 2020, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately ~~6.0%~~5.3%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note ON - “~~Derivative~~“Derivative Financial ~~Instruments~~.Instruments.”

We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such letter of credit.

The Credit Agreement contains various restrictions and covenants, including: 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:~~Agreement (some of which were amended in May 2020 by the Amendment (as defined and described below)): (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 ~~5.00~~4.75 to 1.00 for the fiscal quarter ended ~~March 31, 2019; 4.75 to 1.00 for the fiscal quarters ended June 30, 2019 through~~ March 31, 2020; 4.50 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for

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the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter. We were in compliance with all covenants at ~~June 30, 2019.~~March 31, 2020.

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 to the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarters ended June 30, 2020 through 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.

Seller Notes

We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of ~~$0.3 million and $0.2~~$0.4 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from ~~2.00%~~2.50% to 3.00%. Principal and interest are payable in ~~monthly,~~ quarterly or annual installments and mature through ~~May~~October 2024.

Scheduled Maturities of Total Debt

Scheduled maturities of debt at ~~June 30, 2019~~March 31, 2020 were as follows:

(in thousands)
2019 (remainder of year)	$	4,194
2020	8,335
2020 (remainder of year)				$	6,223
2021	7,276				8,266
2022	5,946				6,955
2023	5,380				85,449
2024					6,190
Thereafter	476,052				471,278
Total debt before unamortized discount and debt issuance costs, net	507,183				584,361
Unamortized discount and debt issuance costs, net	(8,873		)		(7,933	)
Total debt	$	498,310		$	576,428

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Note NM — Fair Value Measurements

Financial Instruments

In March 2018, we refinanced our credit facilities with the Credit Agreement. The carrying value of our outstanding term loan as of March 31, 2020 (excluding unamortized discounts and debt issuance costs of ~~$8.9~~$7.9 million) ~~of our outstanding term loan as of June 30, 2019~~ was ~~$498.7~~$494.9 million compared to its fair value of ~~$497.4~~$420.7 million. The carrying value of our outstanding term loan as of December 31, ~~2018~~2019 (excluding unamortized discounts and debt issuance costs of ~~$9.4~~$8.3 million) was ~~$501.2~~$496.2 million compared to its fair value of ~~$491.2~~$497.4 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.

~~As of June 30, 2019 and December 31, 2018, we had no amounts outstanding on our revolving credit facility.~~

~~In March 2018, we entered into~~The Company has interest rate swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024. The notional value outstanding as of June 30, 2019 was $312.5 million. The interest rate swap agreements are designated as cash flow hedges and are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement. See Note ML - “~~Debt~~”“Debt and Other Obligations” and Note ON - “~~Derivative~~“Derivative Financial ~~Instruments~~”Instruments” for further information.

The carrying value of our outstanding Seller Notes issued in connection with acquisitions as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was ~~$7.3~~$7.6 million and ~~$4.5~~$9.0 million, respectively. We believe that the carrying value of the Seller Notes approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement.

Note ON — Derivative Financial Instruments

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

Cash Flow Hedges of Interest Rate Risk

~~Our objectives in using~~In March 2018, we entered into interest rate ~~derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate~~swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recordedmature on ~~our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.~~

March 6, 2024. As of ~~June 30,~~March 31, 2020 and December 31, 2019, our swaps had a notional value outstanding of $312.5 million. ~~As of December 31, 2018, our swaps had a notional value outstanding of $325.0 million.~~

Change in Net Loss on Cash Flow Hedges Including Accumulated Other Comprehensive Loss

The following table presents the activity of cash flow hedges included in accumulated other comprehensive ~~(loss) income~~loss for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and June 30, 2018:~~respectively:

(in thousands)	Cash Flow Hedges			Cash Flow Hedges
Balance as of March 31, 2019	$	5,872
Balance as of December 31, 2019				$	(10,137	)
Unrealized loss recognized in other comprehensive loss, net of tax	4,775				(9,773	)
Reclassification to interest expense, net	(87		)		871
Balance as of June 30, 2019	$	10,560
Balance as of March 31, 2020				$	(19,039	)

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

~~The following table presents the activity~~

Table of ~~cash flow hedges included in accumulated other comprehensive (loss) income for the six months ended June 30, 2019 and June 30, 2018:~~Contents

(in thousands)

Cash Flow Hedges

Balance as of December 31, 2018

$
2,936

Unrealized loss recognized in other comprehensive income, net of tax

7,926

Reclassification to interest expense, net

(302
)
Balance as of June 30, 2019

$
10,560

Balance as of December 31, 2017

$
—

Unrealized loss recognized in other comprehensive loss, net of tax

920

Reclassification to interest expense, net

(944
)
Balance as of June 30, 2018

$
(24
)

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

	As of June 30, 2019				As of December 31, 2018				As of March 31, 2020				As of December 31, 2019
(in thousands)	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	2,805	$	—	$	724	$	—	$	7,177	$	—	$	3,516
Other liabilities	—		11,078		—		3,134			—		17,877		—		9,821

Note PO — ~~Stock~~-~~Based~~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, ~~our~~the 2016 Plan was no longer available for future awards.

As of March 31, 2020, there were 1,817,290 unvested restricted stock awards outstanding. This was comprised of 1,132,313 employee service-based awards with a weighted average grant date fair value of $19.21 per share, 629,225 employee performance-based awards with a weighted average grant date fair value of $19.08 per share, and 55,752 director service-based awards with a weighted average grant date value of $20.10 per share. As of March 31, 2020, there were 523,105 outstanding options not-yet exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 7.1 years.

We recognized a total of approximately ~~$3.4~~$3.5 million and ~~$6.7~~$3.3 million of ~~stock-based~~share-based compensation expense for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and a total approximately $3.3 million and $5.9 million for the three and six months ended June 30, 2018. Stock~~respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

Note QP — Supplemental Executive Retirement Plans

Defined Benefit Supplemental Executive Retirement Plan

Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives. The DB SERP, which we administer, calls for fifteen annual payments upon retirement with the payment amount based on years of service and final average salary. Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates, and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.

We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The ~~DB SERP’s~~ change in net benefit cost and obligation during the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ is as follows:

Change in Benefit Obligation:
(in thousands)	2020			2019
Benefit obligation as of December 31, 2019 and 2018, respectively	$	19,214		$	18,927
Service cost		98			84
Interest cost		121			165
Payments		(1,877	)		(1,877	)
Benefit obligation as of March 31	$	17,556		$	17,299

~~Change in Benefit Obligation:~~

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(in thousands)

2019

2018

Benefit obligation as of March 31

$
17,299

$
19,158

Service cost

84

92

Interest cost

164

150

Payments

(12
)
(12
)
Benefit obligation as of June 30

$
17,535

$
19,388

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

$
18,927

$
20,793

Service cost

168

184

Interest cost

329

300

Payments

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

$
17,535

$
19,388

Amounts Recognized in the Condensed Consolidated Balance Sheets:

	As of June 30,		As of December 31,		As of March 31,		As of December 31,
(in thousands)	2019		2018		2020		2019
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities	15,622		17,014
Current accrued expenses and other current liabilities					$	1,913	$	1,913
Non-current other liabilities						15,643		17,301
Total accrued liabilities	$	17,535	$	18,927	$	17,556	$	19,214

Defined Contribution Supplemental Executive Retirement Plan

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

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the estimated accumulated obligation benefit is ~~$3.2~~$3.9 million, of which $3.7 million and ~~$3.0 million, respectively, of which $2.9 million and $2.4~~$3.3 million is funded and ~~$0.3~~$0.2 million and $0.6 million is unfunded at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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”~~other assets in our condensed consolidated balance sheets. See Note I - “~~Other~~“Other Current Assets and Other ~~Assets~~”Assets” for additional information.

Note RQ — 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.

Legal Proceedings

~~Securities and~~ Derivative Litigation

~~In November 2014, a securities class action complaint,~~ ~~City of Pontiac General Employees’ Retirement System v. Hanger, et al.~~, C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.

On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint. On July 1, 2016, plaintiffs filed an amended complaint. On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit. On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim. On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. On August 6, 2018, the Court of Appeals affirmed in part and reversed in part. The Court of Appeals affirmed the dismissal of the case against individual defendants Vinit Asar, our current President and Chief Executive Officer, and Thomas Kirk, our former President and Chief Executive Officer, but reversed the dismissal of the case against George McHenry, our former Chief Financial Officer, and Hanger, Inc. On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals. On April 10, 2019, the Court of Appeals granted the petition for panel rehearing, withdrew its previous panel decision, and substituted a new panel decision in its place that affirmed the District Court’s dismissal with prejudice of all claims against all the defendants for failure to state a claim. Plaintiffs did not petition the Court of Appeals for a panel rehearing or a rehearing en banc, and did not file a writ of certiorari with the United States Supreme Court. Therefore, the April 10, 2019 Court of Appeals ruling affirming the dismissal of all claims with prejudice against all defendants is now final.

In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated intoJudy v. Asar, et. al.,Cause No. ~~D-1-GN-15-000625.~~ D-1-GN-15-000625.On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the ~~459th~~345th Judicial District Court of Travis County, Texas.

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

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court (which cases were consolidated into theJudycase discussed above), (2) determine whether it is in our best interests to

pursue any remedies against any of our current or former employees, officers, or directors as a result of the conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation. The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests. In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue any of the claims in theJudyderivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.

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

The plaintiffs subsequently subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, took the position that the full report is not discoverable under Texas law. Plaintiffs’ counsel filed a motion to compel the Special Committee’s counsel to produce the ~~full~~ report. We opposed the motion. On July 20, 2018, the Travis County court ruled that only a redacted version of the report is discoverable, and counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel. Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County court appointed a Special Master to review plaintiffs’ objections to the redacted report. On March 22, 2019, the Special Master submitted a report to the Travis County court recommending that the court order that the entire Special Committee report be produced. On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter. On June 25, 2019, the Travis County court rejected the recommendation of the Special Master, and instead ordered that only a limited additional portion of the Special Committee report should be unredacted. On July 10, 2019, the updated redacted Special Committee report was provided to plaintiffs through their counsel. ~~Upon completion~~

In late October 2019, a non-binding agreement in principle was reached by the parties to settle the consolidated derivative action, the parties entered into a definitive settlement agreement in late December 2019, and in January 2020 the Travis County court issued an order providing preliminary approval of ~~discovery, we intend~~the settlement and ordering that notice of the settlement be made to ~~file a motion to dismiss~~the Company’s shareholders. On March 10, 2020, the Travis County court issued an order providing final approval of the settlement and dismissing with prejudice the consolidated derivative action.

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

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.

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Note SR — Segment and Related Information

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

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

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

· ~~U.S. Department of Veterans Affairs.~~

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

Corporate & Other - This consists of corporate overhead and includes unallocated expense 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~~“Organization and Summary of Significant Accounting ~~Policies~~”Policies” in our ~~2018~~2019 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.

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Summarized financial information concerning our reporting segments is shown in the following tables. Total assets for each of the segments has not materially changed from December 31, ~~2018.~~2019.

	Patient Care				Products & Services				Patient Care				Products & Services
	For the Three Months Ended June 30,				For the Three Months Ended June 30,				For the Three Months Ended March 31,				For the Three Months Ended March 31,
(in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Net revenues
Third party	$	231,168	$	218,158	$	49,930	$	48,808	$	190,183	$	190,601	$	43,556	$	45,818
Intersegments	—		—		51,696		49,835			—		—		46,022		44,879
Total net revenues	231,168		218,158		101,626		98,643			190,183		190,601		89,578		90,697
Material costs
Third party suppliers	62,948		59,989		28,451		26,527			53,124		53,355		24,117		25,022
Intersegments	6,189		5,920		45,507		43,915			6,553		5,795		39,469		39,084
Total material costs	69,137		65,909		73,958		70,442			59,677		59,150		63,586		64,106
Personnel expenses	78,419		76,792		13,071		12,762			76,345		73,709		12,840		13,002
Other expenses	37,336		35,439		7,077		5,483			38,148		37,433		8,320		6,948
Depreciation & amortization	4,502		4,998		2,596		2,503			4,476		4,552		2,752		2,543
Segment income from operations	$	41,774	$	35,020	$	4,924	$	7,453	$	11,537	$	15,757	$	2,080	$	4,098

Patient Care

Products & Services

For the Six Months Ended
June 30,

For the Six Months Ended
June 30,

(in thousands)

2019

2018

2019

2018

Net revenues

Third party

$
421,769

$
406,665

$
95,748

$
94,296

Intersegments

—

—

96,575

92,357

Total net revenues

421,769

406,665

192,323

186,653

Material costs

Third party suppliers

116,303

112,164

53,473

50,708

Intersegments

11,984

11,644

84,591

80,713

Total material costs

128,287

123,808

138,064

131,421

Personnel expenses

152,128

150,405

26,073

25,257

Other expenses

74,769

70,443

14,025

11,638

Depreciation & amortization

9,054

9,896

5,139

5,005

Segment income from operations

$
57,531

$
52,113

$
9,022

$
13,332

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
(in thousands)	2019			2018			2019			2018			2020			2019
Income from operations:
Loss from operations
Patient Care	$	41,774		$	35,020		$	57,531		$	52,113		$	11,537		$	15,757
Products & Services	4,924			7,453			9,022			13,332				2,080			4,098
Corporate & other	(23,595		)	(22,144		)	(45,429		)	(44,493		)		(22,790	)		(21,834	)
Income from operations	23,103			20,329			21,124			20,952
Loss from operations														(9,173	)		(1,979	)
Interest expense, net	8,481			7,317			17,019			19,580				8,269			8,538
Loss on extinguishment of debt	—			—			—			16,998
Non-service defined benefit plan expense	173			176			346			352				158			173
Income (loss) before income taxes	14,449			12,836			3,759			(15,978		)
Provision (benefit) for income taxes	4,414			(92		)	675			(6,288		)
Net income (loss)	$	10,035		$	12,928		$	3,084		$	(9,690	)
Loss before income taxes														(17,600	)		(10,690	)
Benefit for income taxes														(1,852	)		(3,739	)
Net loss													$	(15,748	)	$	(6,951	)

A reconciliation of the reportable segment net ~~revenue~~srevenues to consolidated net revenues is as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
(in thousands)	2019			2018			2019			2018			2020			2019
Net revenues
Patient Care	$	231,168		$	218,158		$	421,769		$	406,665		$	190,183		$	190,601
Products & Services	101,626			98,643			192,323			186,653				89,578			90,697
Corporate & other	—			—			—			—				—			—
Consolidating adjustments	(51,696		)	(49,835		)	(96,575		)	(92,357		)		(46,022	)		(44,879	)
Consolidated net revenues	$	281,098		$	266,966		$	517,517		$	500,961		$	233,739		$	236,419

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

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

(in thousands)

2019

2018

2019

2018

Material costs

Patient Care

$
69,137

$
65,909

$
128,287

$
123,808

Products & Services

73,958

70,442

138,064

131,421

Corporate & other

—

—

—

—

Consolidating adjustments

(51,696
)
(49,835
)
(96,575
)
(92,357
)
Consolidated material costs

$
91,399

$
86,516

$
169,776

$
162,872

~~Note T — Supplemental Cash Flow Information~~

	For the Three Months Ended March 31,
(in thousands)	2020			2019
Material costs
Patient Care	$	59,677		$	59,150
Products & Services		63,586			64,106
Corporate & other		—			—
Consolidating adjustments		(46,022	)		(44,879	)
Consolidated material costs	$	77,241		$	78,377

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

For the Six Months Ended
June 30,

(in thousands)

2019

2018

Accounts receivable, net

$
(1,010
)
$
13,029

Inventories

(1,862
)
2,699

Other current assets and other assets

(1,100
)
(119
)
Income taxes

(1,339
)
11,690

Accounts payable

(3,208
)
3,205

Accrued expenses and other current liabilities

(2,778
)
(14,300
)
Accrued compensation related costs

(17,901
)
(22,298
)
Other liabilities

(1,871
)
(2,538
)
Operating lease liabilities

(19,179
)
—

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

$
(50,248
)
$
(8,632
)

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

For the Six Months Ended
June 30,

(in thousands)

2019

2018

Additional consideration and issuance of seller notes in connection with acquisitions

$
5,345

$
—

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

3,437

960

Purchase of property, plant and equipment through vendor financing

2,200

—

Additions to property, plant and equipment acquired through financing obligations

—

1,354

Retirements of financed property, plant and equipment and related obligations

—

2,246

Note US — Subsequent Events

In ~~July 2019,~~April 2020, we completed the ~~acquisitions~~acquisition of ~~two orthotic and prosthetic businesses~~an O&P business for a total purchase price of ~~$3.4~~$50.4 million. The total consideration transferred in the acquisition is composed of $20.0 million ~~of which $3.0 million was~~in cash consideration, ~~and $0.4~~$22.4 million ~~was issued~~ in the form of ~~a note~~notes to the shareholders, $7.6 million in liabilities and deferred payment obligations to certain shareholders or employees of the acquired business, and $0.4 million in other adjustments to the purchase price. Of the $22.4 million notes issued to the former ~~shareholder. The note is~~shareholders, approximately $18.4 million of the notes are payable in ~~quarterly~~a lump sum payment due in October 2020 and the remaining $4.0 million of the notes are payable in annual installments over a period of ~~five years.~~three years on the anniversary date of the acquisition. Of the $7.6 million in deferred payment obligations, approximately $3.6 million will be paid in October 2020 and the remaining balance of $4.0 million is due in annual installments beginning in the fourth year following the acquisition and for three years thereafter. Acquisition-related expenses incurred during the three months ended March 31, 2020 related to this acquisition were not material. Due to the proximity of ~~the completion of the acquisitions~~these transactions to the filing of this ~~Form~~form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets ~~purchased~~acquired and liabilities assumed in the ~~transactions.~~

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

In April 2020, the Company received $15.8 million in government grants under the CARES Act (the “Grant”) to compensate for health-care related expenses and lost revenues associated with the COVID-19 pandemic. The terms and conditions of the Grant require the Company to certify the proceeds received under the Grant are for health-care related expenses or lost revenues attributable to the COVID-19 pandemic, as well as certain administrative reporting requirements related to the use of proceeds from the Grant.

In May 2020, the Company entered into an amendment to the Credit Agreement as described in Note L - “Debt and Other Obligations”.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This report contains statements that are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as “believe,” “expect,” “project,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts” or similar words. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. We believe these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports.

These statements involve risks, estimates, assumptions, and uncertainties that could cause actual results to differ materially from those expressed in these statements and elsewhere in this ~~report,~~report. These uncertainties include, but are not limited to, the financial and ~~any claims, investigations,~~business impacts of the COVID-19 pandemic on our operations and the operations of our customers, suppliers, governmental and private payers 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 ~~proceedings arising as a result, as well as~~other disruptions to information technology systems; the inability to successfully execute our ~~ability to remediate the material weaknesses in~~acquisition strategy, including integration of recently acquired O&P clinics into our ~~internal control over financial reporting described in Item 4. “Controls and Procedures” contained elsewhere in this report,~~existing business; changes in the demand for our O&P products and services, ~~uncertainties relating~~including additional competition in the O&P services market; disruptions to ~~the results of operations or~~ our ~~acquired O&P patient care clinics,~~supply chain; our ability to enter into and derive benefits from managed-care ~~contracts,~~contracts; our ability to successfully attract and retain qualified O&P ~~clinicians, federal laws governing the health care industry, uncertainties inherent in investigations and legal proceedings, governmental policies affecting O&P operations,~~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, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”), and in 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 ~~our~~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 ~~2018~~2019 Form 10-K and in this Quarterly Report on Form 10-Q, or by other unknown risks and uncertainties.

~~Effect of Delay in Financial Filings~~

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

Balance to be Paid

For the Three Months Ended

Expensed

Paid

in Future Periods

March 31, 2018

3,700

(7,755
)
6,230

June 30, 2018

2,940

(5,938
)
3,232

September 30, 2018

2,230

(2,297
)
3,165

December 31, 2018

3,591

(3,561
)
3,195

March 31, 2019

1,649

(2,621
)
2,223

June 30, 2019

1,745

(2,016
)
1,952

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

Non-GAAP Measures

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

~~Adjusted Gross Revenue and Disallowed Revenue~~ ~~- “Adjusted gross revenue” reflects our gross billings after their adjustment to reflect estimated discounts established in our contracts with payors~~

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

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

Business Overview

General

We are a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, we and our predecessor companies have provided O&P services for over 150 years. We provide O&P services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments - Patient Care and Products & Services.

Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication, and delivery of custom O&P devices through ~~696~~694 patient care clinics and ~~109~~110 satellite locations in 4546 states and the District of Columbia as of ~~June 30, 2019.~~March 31, 2020. We also provide payor network contracting services to other O&P providers through this segment.

Our Products & Services segment is comprised of our distribution services and our therapeutic solutions businesses. As a leading provider of O&P products in the United States, we ~~coordinate, through our distribution services business,~~engage in the ~~procurement and~~ distribution of a broad catalog of O&P parts, componentry, and devices to independent O&P providers nationwide. ~~To facilitate speed and convenience, we deliver these products through our five distribution facilities that are located in Nevada, Georgia, Illinois, Pennsylvania and Texas.~~ The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately ~~4,100~~4,000 skilled nursing and post-acute providers nationwide.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020, our net revenues were $233.7 million and we recorded net loss of $15.7 million. For the three months ended March 31, 2019, our net revenues were ~~$281.1~~$236.4 million ~~and $517.5 million, respectively,~~ and we recorded net income of $10.0 million and $3.1 million, respectively. For the three and six months ended June 30, 2018, our net revenues were $267.0 million and $501.0 million, respectively, and we recorded net income of $12.9 million and a net loss of ~~$9.7 million, respectively.~~$7.0 million.

Industry Overview

We estimate that approximately ~~$4.2~~$4.3 billion is spent in the United States each year for prescription-based O&P products and ~~services.~~services through O&P clinics. We ~~estimate that~~believe our Patient Care segment currently accounts for approximately ~~20%~~21% of the market, ~~share,~~ providing a comprehensive portfolio of orthotic, prosthetic, and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.

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

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

We estimate that approximately $1.7 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components, devices, and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P services and tosupplies our own patient care clinics. We estimate that our distribution sales account for approximately 8% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).

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We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be approximately $150 million annually. We currently provide these products and services to approximately 25% of the estimated 15,000 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs, and training within the broader post-acute rehabilitation markets to be approximately $400 million annually. We do not currently provide a meaningful amount of products and services to this broader market.

Business Description

Patient Care

Our Patient Care segment employs approximately ~~1,500~~1,550 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which are certified by either the American Board for Certification or the Board of Certification of Orthotists and Prosthetists, which are the two boards that certify O&P clinicians. To facilitate timely service to our patients, we also employ technicians, fitters, and other ancillary providers to assist 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 specialize in O&P, coupled with sockets and other elements that are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs. Our clinicians and technicians typically utilize castings, electronic scans, and other techniques to fabricate items that are specialized for the patient. After fabricating the device, a fitting process is undertaken and adjustments are made to ensure the achievement of proper alignment, fit, and patient comfort. The fitting process often involves several stages to successfully achieve desired functional and cosmetic results.

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

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

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

The principal reimbursement sources for our services are:

Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators, and similar sources;

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Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain ~~disabled persons;~~

persons with disabilities;

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

the U.S. Department of Veterans Affairs.

We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be ~~paid under the contract with the third party payor.~~reimbursed for our services. These contracts usually have a stated term of one to three ~~years. These contracts~~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 ~~U.S. Department of Veterans Affairs.~~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 ~~(the~~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, ~~and~~ Zone Program Integrity Contractor (“ZPIC”) audits, Supplemental Medical Review Contractor (“SMRC”) audits, and Universal Payment Identification Code (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, ZPIC, and ~~ZPIC~~SMRC audits are generally post-payment audits. UPIC audits can be both pre- or post-payment audits, with a majority currently being 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 components to independent O&P clinics and other customers. Through our ~~internal “supply chain” organization, we purchase, warehouse,~~wholly-owned subsidiary, Accelerated Care Plus Corp., our therapeutic solutions business is a leading provider of rehabilitation technologies and ~~distribute over 450,000 SKUs from more than 300 different manufacturers through SPS or directly~~integrated clinical programs to ~~our own clinics within our Patient Care segment.~~skilled nursing and post-acute rehabilitation providers. Our ~~warehousing and distribution facilities in Nevada, Georgia, Illinois, Pennsylvania, and Texas,~~value proposition is to provide ~~us with the ability to deliver products to the vast majority of~~ our customers ~~in the United States within two business days.~~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 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 450,000 SKUs from more than 300 different manufacturers through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and

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distribution ~~services~~facilities in Nevada, Georgia, Illinois, Pennsylvania, and Texas provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days.

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.

Effects of the COVID-19 Pandemic

~~Through~~Beginning in the last weeks of March 2020, our ~~wholly-owned subsidiary, Accelerated~~business volumes began to be adversely affected by the COVID-19 pandemic. 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. These adverse volume effects further expanded during April 2020. 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 paused certain capital investment projects. These volume effects and our operating responses are discussed further in this section, and the effects of COVID-19 on our financial condition is discussed in the “Financial Condition, Liquidity and Capital Resources” section below.

Effect on Business Volumes

During the month of April 2020, patient appointment volumes in our Patient Care ~~Plus Corp.~~clinics decreased by approximately 40% as compared with the same period in 2019. The Company's billings for these appointments decreased by a lessor amount due in part to the delivery of completed prosthetic and orthotic devices to patients who had been initially evaluated and had devices fabricated during the first quarter. The degree of decrease has varied greatly across the different regions in which we operate. As of the end of April 2020, we had temporarily closed 27 patient care clinics and another 179 clinics were open for reduced hours or by appointment only. Billings for componentry delivered to independent providers of orthotics and prosthetics by the Company's distribution services business decreased by approximately 40% as well during the month of April 2020. Our business volumes associated with therapeutic solutions have also been adversely affected due to access restrictions our skilled nursing facility clients have implemented at their facilities in response to the COVID-19 pandemic. Due to significant geographic product mix and timing differences, there can be no assurance that these volumes or billing amounts will be reflective of the Company's results for the second quarter as a whole, and are solely provided for the purposes of giving context to the magnitude of the effect of the COVID-19 pandemic on the Company's business during April 2020.

Given that the development of a clearly effective medical treatment approach for treating COVID-19 does not appear imminent and that the vast majority of the general population of the United States has not developed natural immunity, we believe that the adverse effects of the COVID-19 pandemic will continue to affect our business volumes for the duration of 2020, and possibly into 2021. These adverse effects will primarily be the result of likely continuing governmental measures to suppress the virus to address periods and locations of virus re-emergence, the adverse economic consequences to our patients, and the general lack of normalcy in the willingness of individuals to engage in activities that might increase their likelihood of their exposure to the virus.

Nevertheless, we do believe that the overall adverse impact will diminish, and our patient appointment and other business volumes will gradually improve as the prevalence of the virus decreases and social distancing, masking and testing measures become more routine, and the perception of infection risks subside. 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, as a result of their infection, then their

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ultimate need for that device is not likely to change, and that we could accordingly have some favorable volume recovery effect in future periods as the impacts of the COVID-19 pandemic subsides.

Operating and Cost Reduction Responses

Throughout the periods affected by the COVID-19 pandemic, given that our services to the disabled are considered essential services, we have endeavored to continue 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. We have also changed the operating days and hours of certain of our clinics to adapt to changes in patient volumes.

Normally, only our material costs and portions of our incentive compensation expenses vary directly with changes in our business volumes from one period to the next. This has been due in part to our general practice of maintaining full time staffing levels for clinicians and non-exempt employees in our clinic and support operations. This operating practice has been necessitated by our desire to provide high levels of accessibility and service to our patients.

As a result of the COVID-19 pandemic, we have found it necessary to reduce 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 varies to 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) decreases in bonus, commission, and other variable incentive costs; (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. We have communicated to our employees that reductions of exempt employee salaries could continue for up to a six month period ending on October 2, 2020 of this year. Our decision to reduce employee wages rather than to implement a more permanent reduction in force was based on our desire 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. Our preference has been to collectively share in the financial hardships caused by the COVID-19 pandemic rather than to subject portions of our workforce to the full financial burden. We have not implemented reductions to employee benefits, nor do we currently intend to suspend the Company’s annual employer 401(k) match for 2020 which we would typically expect to pay in March of 2021.

We have undertaken other reductions to our other operating expenses; however, our largest category of operating expense, rent, utilities, and facilities maintenance, and which amounted to $16.2 million in the first quarter, will be difficult to meaningfully reduce in the near term.

Excluding reductions in componentry costs, which we believe will vary in a corresponding fashion with decreases in revenue, we currently estimate that these cost reduction measures will provide savings in the approximate range of $75 million to $80 million in operating expenses for the six month period ending September 30, 2020.

In addition to these reductions in operating expenses, we have elected to temporarily suspend our Supply Chain and Financial Systems implementations. We have not currently set a date for recommencement of this systems initiative, but we currently believe it is likely that the project will not recommence until at least early next year. We have also suspended construction of our new fabrication facility in Tempe, Arizona, and other projects related to the reconfiguration of our distribution facilities. These delays will correspondingly push our achievement of the financial benefits expected from them into future periods.

We believe these and other related measures will reduce our capital expenditures for the full year, which are comprised of purchases of property, plant and equipment, as well as therapeutic program equipment, to the approximate range of $30 million to $35 million, which compares to the approximately $45 million we originally planned to expend in 2020.

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While we have endeavored to rapidly reduce our expenses in response to decreases in patient and business volumes, given that a substantial portion of our operating expenses are nevertheless fixed in nature, and the ongoing interest costs associated with our indebtedness, we do not currently believe we will fully offset the adverse earnings effect associated with lost revenue during the second quarter. Nevertheless, as discussed in the “Financial Condition, Liquidity and Capital Resources” section below, we do believe that our operating expense and capital project reductions, when accompanied by additional cash sources, cost mitigation and liquidity management strategies, will enable us to maintain positive liquidity throughout the remainder of 2020 and subsequent future periods.

Other Products & Services Performance Considerations

As discussed in our 2019 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 quarter which resulted in our discontinuing distribution services to them. Generally, we believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care 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. 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 ~~solutions~~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, ~~is a leading provider~~we have and continue to respond to these historical trends through the expansion of ~~rehabilitation technologies~~our products and integrated clinical programs to post-acute care and rehabilitation providers. Our value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence based clinical programs, and ongoing clinician education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We currently serve approximately 4,100 skilled nursing and post-acute providers nationwide.offerings.

Reimbursement Trends

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

	For the Three Months Ended March 31,
	2020			2019
Medicare		32.5	%		30.3	%
Medicaid		16.2	%		15.8	%
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		34.9	%		36.8	%
Veterans Administration		9.4	%		9.6	%
Private Pay		7.0	%		7.5	%
Patient Care		100.0	%		100.0	%

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Patient Care constituted ~~82.2%~~81.4% and ~~81.5%~~80.6% of our net ~~revenue~~revenues for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 81.7% and 81.2% for the three and six months ended June 30, 2018.~~respectively. Our remaining net ~~revenue was~~revenues were provided by our Products & Services segment which derives its net ~~revenue~~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 following is a summary of our net revenue by payor mix for the Patient Care segment expressed as a percentage of net revenues for the periods indicated:~~

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2019

2018

2019

2018

Patient Care Segment

Medicare

32.7
%
32.3
%
31.6
%
31.4
%
Medicaid

16.2
%
15.4
%
16.0
%
15.6
%
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)

34.1
%
35.6
%
35.3
%
36.5
%
Veterans Administration

9.7
%
9.6
%
9.7
%
9.2
%
Private Pay

7.3
%
7.1
%
7.4
%
7.3
%
Total

100.0
%
100.0
%
100.0
%
100.0
%

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

To receive reimbursement for our work, we must ensure that our clinical, administrative, and billing personnel receive and verify certain medical and health plan information, record detailed documentation regarding the services we provide, and accurately and timely perform a number of claims submission and related administrative tasks. 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. We believe these changes in industry trends have been brought about in part by increased nationwide efforts to reduce health care costs.

A measure of our effectiveness in securing reimbursement for our services can be found in the degree to which payors ultimately disallow payment of our claims. Payors can deny claims due to their determination that a physician who referred a patient to us did not sufficiently document that a device was medically necessary or clearly establish the ambulatory (or “activity”) level of a patient. Claims can also be denied based on our failure to ensure that a patient was currently eligible under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, 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.

Commencing in late 2014 and continuing through today, we have taken a number of actions to manage disallowed revenue trends. These initiatives included: (i) the creation of a central revenue cycle management function; (ii) ~~addressing~~ the resolution of issues identified in our patient management and electronic health record system; and (iii) the establishment of new clinic-level procedures and training regarding the collection of supporting documentation and the importance of diligence in our claims submission processes.

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Disallowed revenue 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 ~~revenue.~~revenues. These amounts recorded in net revenues within the Patient Care segment for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ are as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
(dollars in thousands)	2019			2018			2019			2018			2020			2019
Net revenues	$	231,168		$	218,158		$	421,769		$	406,665
Estimated implicit price concessions arising from:
Gross charges													$	199,953		$	200,443
Less estimated implicit price concessions arising from:
Payor disallowances	9,784			10,461			18,258			18,722				8,075			8,474
Patient non-payments	3,306			1,332			4,674			2,200				1,695			1,368
Adjusted gross revenues	$	244,258		$	229,951		$	444,701		$	427,587
Payor disallowances and patient non-payments													$	9,770		$	9,842
Net revenues													$	190,183		$	190,601

Payor disallowances	$	9,784		$	10,461		$	18,258		$	18,722		$	8,075		$	8,474
Patient non-payments	3,306			1,332			4,674			2,200				1,695			1,368
Payor disallowances and patient non-payments	$	13,090		$	11,793		$	22,932		$	20,922		$	9,770		$	9,842

Payor disallowances %	4.0		%	4.5		%	4.1		%	4.4		%		4.0	%		4.2	%
Patient non-payments %	1.4		%	0.6		%	1.1		%	0.5		%		0.9	%		0.7	%
Percent of adjusted gross revenues	5.4		%	5.1		%	5.2		%	4.9		%
Percent of gross charges														4.9	%		4.9	%

~~Growth Rates and Earnings Effects~~Acquisitions

~~Patient Care~~We did not complete any acquisitions during the first quarter of 2020.

During 2019, we completed the ~~three and six month periods ending June 30, 2019, approximately 55% and 53%~~following acquisitions of ~~our net revenues~~O&P clinics, none of which were ~~derived from the provision of prosthetic devices~~individually material to our ~~patients. These devices have a significantly higher relative reimbursement as compared with the orthotic devices and other related prosthetic supplies that we provide patients. The volume~~financial position, results of prosthetic patients we see from one period to the next varies greatly, and this has a significant effect on our relative rate of net revenue growth we experience. Additionally, with the exception of materials costs and certain incentive compensation amounts, our staffing levels, operating costs, lease costs, depreciation and amortization expenses, and interest costs are essentially fixed in nature. As a result, increasesoperations, or ~~decreases in our revenue from one period to the next can have a significant effect on our comparative reported earnings for those periods.~~

~~Products & Services~~cash flows:

~~As discussed in our 2018 Form 10-K, under Item 7, “~~~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~”, in 2017, several of the larger independent O&P providers we served through the distribution of componentry encountered financial difficulties which resulted in our discontinuing distribution services to them. Generally, we believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care services and, depending on their ability to adapt to the increased claims documentation standards that have emerged in our industry, this may either limit the rate of growth of some of our customers, or otherwise affect the rate of growth we experience in our distribution of O&P componentry to independent providers. 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, began to discontinue their use of our therapeutic services. We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities. As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations. In 2019, we anticipate a further decline of approximately $5.0 million to $7.0 million in revenue from these services associated with customer discontinuances. Within this portion of our business, we have responded to these trends through increases in our marketing programs which convey the value we believe our services provide to patients at SNFs and other adjacent health services provider markets.

~~Acquisitions~~

In the ~~three months ending June~~first quarter of 2019, we completed the acquisition of ~~one~~all the outstanding equity interests of an O&P business ~~with three~~for total consideration of $32.8 million, of which $27.7 million was cash consideration, net of cash acquired, $4.4 million was issued in the form of notes to shareholders at fair value, and $0.7 million was additional consideration.

In the second quarter of 2019, we completed the acquisition of all the outstanding equity interests of an O&P ~~clinics similar to those we operate through our Patient Care segment~~business for ~~an aggregate purchase price~~total consideration of $0.5 ~~million. The purchase price consisted~~million, of which $0.2 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of ~~unsecured~~ notes ~~issued~~ to ~~the sellers~~shareholders at fair value.

In the ~~first three months~~third quarter of 2019, we completed the acquisition of all the outstanding equity interests of one ~~business with 25~~ O&P ~~clinics~~business and acquired the assets of another O&P business for ~~an aggregate purchase price~~total consideration of ~~$32.8 million. The purchase price consisted of $27.7 million cash consideration, net of cash acquired, $4.4~~$3.3 million, of ~~unsecured notes issued to the sellers at fair value, and $0.7~~which $3.0 million ~~of estimated additional consideration expected to be paid in the third quarter of 2019.~~

~~In the last three months of 2018, we completed the acquisition of two O&P businesses for an aggregate purchase price of $3.1 million. The purchase price consisted of $2.0 million in~~was cash consideration, net of cash acquired, and ~~$1.1~~$0.3 million was issued in ~~unsecured~~the form of notes to ~~the seller. We made no acquisitions in the first nine months of 2018.~~

shareholders at fair value.

~~New System Implementations~~

In ~~recent years, we have been undertaking the implementation of a new patient management and electronic health record system at our patient care clinics. In the first~~fourth quarter of 2019, we completed ~~this multi-year implementation. For~~ the ~~three month period ended March 31, 2019, we expensed $0.8~~acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business for total consideration of $7.8 million, of which $5.0 million was cash consideration, net of cash acquired, and $2.8 million was issued in ~~training, travel,~~the form of notes to shareholders at fair value.

Acquisition-related costs are included in general and ~~related implementation costs. For~~administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred during the ~~years~~year ended December 31, ~~2018~~2019 were $1.5 million, which includes those costs for transactions that are in progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the year ended December 31, 2019 were $1.0 million.

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In response to the expected economic impact of the COVID-19 pandemic, we have implemented certain cost mitigation and ~~2017, we expensed $4.4 million and $4.3 million, respectively, for these implementation expenses. As we undertake~~liquidity management strategies, including the temporary delay of our acquisitions of ~~independent~~ O&P providers, ~~we intend~~subject to ~~convert these acquired clinics to this system~~certain conditions and thresholds in the ~~ordinary course of~~first amendment to our ~~business.~~Credit Agreement entered into in May 2020. Refer to the “Financial Condition, Liquidity and Capital Resources” section for additional discussion.

New Systems Implementations

During 2019, we ~~have~~ commenced the design, ~~implementation~~ planning, and initial implementation of new financial and supply chain systems (“New Systems Implementations”), and ~~plan~~planned to invest in new servers and software that operate as a part of our technology infrastructure. ~~During 2019, in~~In connection with our new financial and supply chain systems, for the ~~six~~three months ended ~~June 30,~~March 31, 2020, we have expensed $0.9 million and for the year ended December 31, 2019, we have expensed ~~$1.5~~$2.9 million.

As discussed in the “Effects of the COVID-19 Pandemic” section, we have elected to temporarily delay our New Systems Implementations as part of our efforts to preserve liquidity. We have not set a date for recommencement of these systems initiatives, but currently believe it likely that the project will not recommence until at least early next year. This delay will correspondingly push our achievement of the financial benefits expected from the New Systems Implementations into subsequent periods.

As of March 31, 2020, we capitalized $4.1 million of implementation costs for cloud computing arrangements, net of accumulated amortization, and recorded in other current assets and other assets in the consolidated balance sheet.

Effect of Delay in Financial Filings

As discussed in our 2019 Form 10-K, due to prior restatements and related issues, we were delayed in the preparation and filing of our financial statements in recent years. In connection with our efforts to restate our prior financial statements, remediate our material weaknesses, regain our timely filing status, and undertake related activities, we have incurred third party professional fees in excess of the amounts we estimate that we would have otherwise incurred. The estimated professional fees associated with these efforts are as follows (in thousands):

						Balance to be Paid
For the Three Months Ended	Expensed		Paid			in Future Periods
March 31, 2019		1,649		(2,621	)		2,223
June 30, 2019		1,745		(2,016	)		1,952
September 30, 2019		2,136		(2,168	)		1,920
December 31, 2019		3,018		(2,451	)		2,487
March 31, 2020		1,639		(2,819	)		1,307

During the first quarter, of 2020 we incurred approximately $1.6 million in excess professional fees in connection with the completion of our remediation activities related to our material weaknesses. Given that we completed the remediation of our material weaknesses in financial statement controls effective with the filing of our 2019 Form 10-K, we do not currently anticipate that we will spend $3.8 million for the full year. We are additionally incurring increased capital expenditures in connection with improvements to our systems’ infrastructure. In 2020 and 2021, we currently expect to continue to incur operating expense for the financial and supply chain projects of approximately $5.0 million in each year in connection with this implementation, and to incur further ~~significant cash outlays and capital expenditures~~excess third party professional fees for these purposes in ~~connection with our supply chain, financial systems and technology infrastructure initiatives.~~future periods.

Seasonality

We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year. The first quarter is normally our lowest relative net revenue ~~and earnings~~ quarter, followed by the second and third quarters, which are somewhat higher and consistent with one ~~another, and, due~~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.

Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This one-week 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

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these annual events so they can demonstrate their products and otherwise assist in our training process. During the first ~~quarters~~quarter of ~~2019~~2020 and ~~2018,~~2019, we spent approximately $2.3 million in each of these two years, on travel and other costs associated with this one-week event. In addition to the costs we incur associated with this annual event, we also lose the productivity of a significant portion of our clinicians during the one-week period in ~~and around the timing of~~which this event occurs, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.

Critical Accounting Policies

~~We prepare~~Our analysis and discussion of our financial condition and results of operations is based upon the 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 consolidated financial statements:

Revenue recognition

Accounts receivable, net

Inventories

Business combinations

Goodwill and other intangible assets, net

Income taxes

· ~~Income taxes~~

The use of different estimates, assumptions, or judgments could have a material effect on reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period. These critical accounting policies are described in more detail in our ~~2018~~2019 Form 10-K, under Item 7, “~~Management’s~~“Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~”Operations” and in Note A - “~~Organization~~“Organization and Summary of Significant Accounting ~~Policies~~”Policies” contained within these condensed consolidated financial statements.

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Results of Operations

Our results of operations for the three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows (unaudited):

For the Three Months Ended
June 30,

Percent
Change (1)

(dollars in thousands)

2019

2018

2019 vs 2018

Net revenues

$
281,098

$
266,966

5.3
%
Material costs

91,399

86,516

5.6
%
Personnel costs

91,490

89,554

2.2
%
Other operating costs

33,741

30,536

10.5
%
General and administrative expenses

29,358

26,523

10.7
%
Professional accounting and legal fees

3,247

4,236

(23.3
)%
Depreciation and amortization

8,760

9,272

(5.5
)%
Operating expenses

257,995

246,637

4.6
%
Income from operations

23,103

20,329

13.6
%
Interest expense, net

8,481

7,317

15.9
%
Loss on extinguishment of debt

—

—

—

Non-service defined benefit plan expense

173

176

(1.7
)%
Income before income taxes

14,449

12,836

12.6
%
Provision (benefit) for income taxes

4,414

(92
)
NM

Net income

$
10,035

$
12,928

(22.4
)%

~~(1)~~ ~~NM - Not Meaningful~~

	For the Three Months Ended March 31,						Percent Change
(dollars in thousands)	2020			2019			2020 vs 2019
Net revenues	$	233,739		$	236,419			(1.1	)%
Material costs		77,241			78,377			(1.4	)%
Personnel costs		89,185			86,711			2.9	%
Other operating costs		35,886			33,555			6.9	%
General and administrative expenses		28,373			28,282			0.3	%
Professional accounting and legal fees		3,396			2,700			25.8	%
Depreciation and amortization		8,831			8,773			0.7	%
Operating expenses		242,912			238,398			1.9	%
Loss from operations		(9,173	)		(1,979	)		(363.5	)%
Interest expense, net		8,269			8,538			(3.2	)%
Non-service defined benefit plan expense		158			173			(8.7	)%
Loss before income taxes		(17,600	)		(10,690	)		(64.6	)%
Benefit for income taxes		(1,852	)		(3,739	)		50.5	%
Net loss	$	(15,748	)	$	(6,951	)		(126.6	)%

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

	For the Three Months Ended June 30,				For the Three Months Ended March 31,
	2019		2018		2020			2019
Material costs	32.5	%	32.4	%		33.0	%		33.2	%
Personnel costs	32.5	%	33.5	%		38.2	%		36.7	%
Other operating costs	12.1	%	11.5	%		15.3	%		14.1	%
General and administrative expenses	10.4	%	9.9	%		12.1	%		12.0	%
Professional accounting and legal fees	1.2	%	1.6	%		1.5	%		1.1	%
Depreciation and amortization	3.1	%	3.5	%		3.8	%		3.7	%
Operating expenses	91.8	%	92.4	%		103.9	%		100.8	%

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For the Three Months Ended ~~June 30, 2019~~March 31, 2020 Compared to the Three Months Ended ~~June 30, 2018~~March 31, 2019

Relevance of First Quarter Results to Future Periods.As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter the Company's revenues and operating results began to be adversely affected by the COVID-19 pandemic. The effects of this public health emergency on our revenues and earnings will likely cause our financial results for prospective quarters to differ in an adverse manner from the results reported for the first quarter and for comparative prior year quarters. Our discussion in this section relates to our actual first quarter results. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.

Net ~~revenue~~revenues. Net ~~revenue~~revenues for the three months ended ~~June 30, 2019 was $281.1~~March 31, 2020 were $233.7 million, ~~an increase~~a decrease of ~~$14.1~~$2.7 million, or ~~5.3%~~1.1%, from ~~$267.0~~$236.4 million for the three months ended ~~June 30, 2018.~~March 31, 2019. Net ~~revenue by operating segment, after elimination of intersegment activity, was as follows:~~

For the Three Months Ended
June 30,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
231,168

$
218,158

$
13,010

6.0
%
Products & Services

49,930

48,808

1,122

2.3
%
Net revenues

$
281,098

$
266,966

$
14,132

5.3
%

Patient Care net revenue for the three months ended June 30, 2019 was $231.2 million, an increase of $13.0 million, or 6.0%, from $218.2 million for the same period in the prior year. Same clinic revenue increased $6.5 million for the three months ended June 30, 2019 compared to the same period in the prior year, reflecting an increase of 3.0% on a per-day basis. Net revenue from acquired clinics was $5.8 million and growth from non-comparable clinics and other services was $0.7 million.

Prosthetics constituted approximately 55.0% of our total Patient Care revenue for the three months ended June 30, 2019 and 54.3% for the same period in 2018 excluding the impact of acquisitions. Prosthetic revenue for the three months ended June 30, 2019 was 4.3% higher, on a per-day basis, than the same period in the prior year excluding the impact of acquisitions. Prosthetics revenue growth during the quarter benefited from the timing of patient deliveries, which generally shifted from the first quarter into the second quarter when compared with the same periods in the prior year. We believe that a change in the timing of our annual first quarter clinician education conference within the first quarter and harsh weather in certain regions of the country contributed to this shift. Orthotics, shoes, inserts, and other products increased by 1.6% on a per-day basis for the same comparative periods excluding the impact of acquisitions.

Products & Services net revenue for the three months ended June 30, 2019 was $49.9 million, an increase of $1.1 million, or 2.3% from $48.8 million for the same period in the prior year. This increase was comprised of $3.0 million, or 8.6%, growth from the distribution of O&P componentry to independent providers as the result of new products added to the portfolio, offset by a $1.9 million, or 13.1%, decrease in net revenue from therapeutic solutions as a result of continued net client cancellations. In future periods, we anticipate moderation of near-term Products & Services segment growth due primarily to a continuation of these therapeutic solutions revenue trends.

~~Material costs~~. Material costs for the three months ended June 30, 2019 were $91.4 million, an increase of $4.9 million or 5.6%, from $86.5 million for the same period in the prior year. Total material costs as a percentage of net revenue increased to 32.5% in the three months ended June 30, 2019 from 32.4% in the three months ended June 30, 2018 primarily due to changes in our Product & Services segment business mix. Material costsrevenues by operating segment, after elimination of intersegment activity, were as follows:

	For the Three Months Ended June 30,						Percent		For the Three Months Ended March 31,							Percent
(dollars in thousands)	2019		2018		Change		Change		2020		2019		Change			Change
Patient Care	$	69,137	$	65,909	$	3,228	4.9	%	$	190,183	$	190,601	$	(418	)		(0.2	)%
Products & Services	22,262		20,607		1,655		8.0	%		43,556		45,818		(2,262	)		(4.9	)%
Material costs	$	91,399	$	86,516	$	4,883	5.6	%
Net revenues									$	233,739	$	236,419	$	(2,680	)		(1.1	)%

Patient Care ~~material costs increased $3.2 million, or 4.9%,~~net revenues for the three months ended ~~June 30, 2019 compared to the same period in the prior year as~~March 31, 2020 were $190.2 million, a ~~result~~decrease of acquisitions. Patient Care material costs as a percent of segment net revenue decreased to 29.9% in the three months ended June 30, 2019 from 30.2% in the three months ended June 30, 2018, primarily due to increases in reimbursement rates on stable componentry costs.

~~Products & Services material costs increased $1.7~~$0.4 million, or 8.0%, for the three months ended June 30, 2019 compared to the same period in the prior year. As a percent of net revenue in the Products & Services segment, material costs were 44.6% in the three months ended June 30, 2019 as compared to 42.2% in the same period 2018. The increase in material as a percent of segment net revenue was due to a change in distribution customer and business mix within the segment.

~~Personnel costs~~~~. Personnel costs for the three months ended June 30, 2019 were $91.5 million, an increase of $1.9 million, or 2.2%~~0.2%, from ~~$89.6~~$190.6 million for the same period in the prior year. ~~Personnel costs by operating segment were as follows:~~

For the Three Months Ended
June 30,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
78,419

$
76,792

$
1,627

2.1
%
Products & Services

13,071

12,762

309

2.4
%
Personnel costs

$
91,490

$
89,554

$
1,936

2.2
%

~~Personnel costs for the Patient Care segment were $78.4~~Same clinic revenues decreased $3.0 million for the three months ended June 30, 2019, an increase of $1.6 million, or 2.1%, from $76.8 million compared to the same period in the prior year. The increase in Patient Care personnel costs during the three months ended June 30, 2019 was primarily related to an increase in salary expense of $0.7 million, an increase in bonus of $0.7 million, and an increase in payroll taxes of $0.2 million when compared to the three months ended June 30, 2018.

Personnel costs in the Products & Services segment were $13.1 million for the three months ended June 30, 2019, an increase of $0.3 million compared to the same period in the prior year. Salary expense increased $0.3 million for the three months ended June 30, 2019 as compared to the same period in the prior year as the result of the transfer of personnel between segments.

~~Other operating costs~~. Other operating costs for the three months ended June 30, 2019 were $33.7 million, an increase of $3.2 million, or 10.5%, from $30.5 million for the same period in the prior year. Bad debt expense increased $0.8 million due to recoveries in the same period of the prior year, rent expense increased $0.6 million from new, renewed, and acquired leases, other occupancy costs increased $0.6 million from higher sales and use tax, professional fees increased $0.5 million due to investments made in certain revenue cycle management initiatives, and other expenses increased $0.7 million as compared to the same period in the prior year.

~~General and administrative expenses~~. General and administrative expenses for the three months ended June 30, 2019 were $29.4 million, an increase of $2.8 million, or 10.7%, from the same period in the prior year. This includes a $2.0 million increase in other expenses, largely due to favorable settlements of $2.2 million in the prior year. Salary expense increased $0.7 million and benefits expense increased $0.6 million, and advertising & selling and other expenses decreased $0.5 million as compared to the same period in the prior year.

~~Professional accounting and legal fees~~. Professional accounting and legal fees for the three months ended June 30, 2019 were $3.2 million, a decrease of $1.0 million, or 23.3%, from $4.2 million for the same period in the prior year primarily due to decreased utilization of professional fees to assist in the remediation of our material weaknesses, to regain our timely filing status with the SEC, and to undertake related activities.

~~Depreciation and amortization~~. Depreciation and amortization for the three months ended June 30, 2019 was $8.8 million, a decrease of $0.5 million, or 5.5%, from $9.3 million for the same period in the prior year. Amortization expense decreased $0.8 million when compared to the prior period as a result of certain intangible assets becoming fully amortized prior to the second quarter of 2019.

~~Interest expense, net.~~ Interest expense for the three months ended June 30, 2019 was $8.5 million, an increase of $1.2 million, or 15.9%, from $7.3 million for the same period in the prior year. This change is due to a decrease of $1.5 million in the prior year related to our settlement of outstanding abandoned and unclaimed property claims with the State of Delaware in a manner that did not require us to pay interest we had accrued on long standing unpaid claim amounts. The offsetting decrease was primarily due to lower interest rates on outstanding borrowings arising from our debt refinancing in March ~~2018.~~

~~Provision (benefit) for income taxes~~. The provision for income taxes for the three months ended June 30, 2019 was $4.4 million, or 30.5% of income before income taxes, compared to a benefit of $0.1 million, or (0.7)% of income before income taxes for the three months ended June 30, 2018. The effective tax rate in 2019 consists principally of the 21% federal statutory tax rate, the rate impact from state income taxes, the windfall from stock-based compensation, and permanent tax differences. The increase in the effective tax rate for the three months ended June 30, 2019 compared with the three months ended June 30, 2018 is primarily attributable to the change from the discrete method for interim reporting used during the prior period to using the annualized effective tax rate method in the three months ended June 30, 2018, an increased estimated annual income, and the windfall from stock-based compensation recorded as a discrete item during the period.

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

For the Six Months Ended
June 30,

Percent
Change (1)

(dollars in thousands)

2019

2018

2019 vs 2018

Net revenues

$
517,517

$
500,961

3.3
%
Material costs

169,776

162,872

4.2
%
Personnel costs

178,201

175,662

1.4
%
Other operating costs

67,296

61,632

9.2
%
General and administrative expenses

57,640

52,159

10.5
%
Professional accounting and legal fees

5,947

9,082

(34.5
)%
Depreciation and amortization

17,533

18,602

(5.7
)%
Operating expenses

496,393

480,009

3.4
%
(Loss) income from operations

21,124

20,952

0.8
%
Interest expense, net

17,019

19,580

(13.1
)%
Loss on extinguishment of debt

—

16,998

(100.0
)%
Non-service defined benefit plan expense

346

352

(1.7
)%
(Loss) income before income taxes

3,759

(15,978
)
NM

Benefit for income taxes

675

(6,288
)
NM

Net (loss) income

$
3,084

$
(9,690
)
NM

~~(1)~~ ~~NM - Not Meaningful~~

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

For the Six Months Ended
June 30,

2019

2018

Material costs

32.8
%
32.5
%
Personnel costs

34.4
%
35.1
%
Other operating costs

13.1
%
12.3
%
General and administrative expenses

11.1
%
10.4
%
Professional accounting and legal fees

1.1
%
1.8
%
Depreciation and amortization

3.4
%
3.7
%
Operating expenses

95.9
%
95.8
%

~~For the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018~~

~~Net revenue~~. Net revenue for the six months ended June 30, 2019 was $517.5 million, an increase of $16.6 million, or 3.3%, from $501.0 million for the six months ended June 30, 2018. Net revenue by operating segment, after elimination of intersegment activity, was as follows:

For the Six Months Ended
June 30,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
421,769

$
406,665

$
15,104

3.7
%
Products & Services

95,748

94,296

1,452

1.5
%
Net revenues

$
517,517

$
500,961

$
16,556

3.3
%

Patient Care net revenue for the six months ended June 30, 2019 was $421.8 million, an increase of $15.1 million, or 3.7%, from $406.7 million for the same period in the prior year. Net revenue from acquired clinics was $10.6 million. Same clinic revenue increased $3.3 million for the six months ended June 30, 201931, 2020 compared to the same period in the prior year, reflecting ~~an increase in same clinic revenue~~a decrease of ~~1.6%~~3.2% on a per-day basis. ~~Patient care revenue~~Net revenues from acquired clinics and consolidations increased $2.9 million, and revenues from other services ~~and non-comparable clinics contributed to $1.2 million in growth.~~decreased $0.3 million.

Prosthetics constituted approximately ~~53.2%~~52% of our total Patient Care ~~revenue~~revenues for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~53.0%~~51% for the same period in ~~2018,~~2019, excluding the impact of acquisitions. Prosthetic ~~revenue~~revenues for the ~~six~~three months ended ~~June 30, 2019 was 2.0% higher,~~March 31, 2020 were 0.6% lower, 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~~decreased by ~~1.2%~~5.7% on a per-day basis ~~for~~compared to those of the same comparative prior periods, excluding the impact of acquisitions. Revenues were adversely affected during the quarter due to patient appointment cancellations during the last weeks of March in response to governmental suppression measures implemented in response to the COVID-19 pandemic. These cancellations resulted in an increase in the number of completed devices held in work-in-process at the end of the first quarter of 2020 as compared with the first quarter of the prior year.

Products & Services net ~~revenue~~revenues for the ~~six~~three months ended ~~June 30, 2019 was $95.7~~March 31, 2020 were $43.6 million, ~~an increase~~a decrease of ~~$1.5~~$2.3 million, or ~~1.5%,~~4.9% from ~~$94.3 million for~~ the same period in the prior year. This ~~increase~~decrease was comprised of ~~$4.8~~a $0.8 million, or 6.0%, decrease in net revenues from therapeutic solutions, primarily as a result of the impact of historical customer lease cancellations, partially offset by lease installations in the first quarter of 2020 and a $1.5 million, or 4.5%, decrease from the distribution of O&P componentry to independent providers as the result of ~~new products added~~lower volumes due to the ~~portfolio, offset~~COVID-19 pandemic, further discussed in the “Effects of the COVID-19 Pandemic” section above.

In the latter half of March 2020, our business volumes began to be adversely affected by ~~a $3.4 million decrease~~the COVID-19 pandemic. We believe that the decline in net ~~revenue from therapeutic solutions as~~revenues during the three months ended March 31, 2020 is primarily due to state and local government restrictions, social distancing and suppression measures adopted by our patients and customers, and deferral of elective surgical procedures, which resulted in a ~~result~~decline in physician referrals and cancellation of ~~continued net client cancellations. We anticipate moderation~~patient appointments. These adverse volume effects have extended into April 2020. For additional discussion, refer to the “Effects of ~~near-term Products & Services segment growth due primarily to a continuation of these therapeutic solutions revenue trends.~~the COVID-19 Pandemic” section.

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Material costs. Material costs for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were ~~$169.8~~$77.2 million, ~~an increase~~a decrease of ~~$6.9~~$1.1 million or ~~4.2%~~1.4%, from ~~$162.9 million for~~ the same period in the prior year. Total material costs as a percentage of net ~~revenue increased~~revenues decreased to ~~32.8%~~33.0% in the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 from ~~32.5%~~33.2% in the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 primarily due to changes in our Product & Services segment business and product mix. Material costs by operating segment, after elimination of intersegment activity, were as follows:

For the Six Months Ended
June 30,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
128,287

$
123,808

$
4,479

3.6
%
Products & Services

41,489

39,064

2,425

6.2
%
Material costs

$
169,776

$
162,872

$
6,904

4.2
%

	For the Three Months Ended March 31,							Percent
(dollars in thousands)	2020		2019		Change			Change
Patient Care	$	59,677	$	59,150	$	527			0.9	%
Products & Services		17,564		19,227		(1,663	)		(8.6	)%
Material costs	$	77,241	$	78,377	$	(1,136	)		(1.4	)%

Patient Care material costs increased ~~$4.5~~$0.5 million, or ~~3.6%~~0.9%, for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in the prior year as a result of ~~acquisitions.~~our acquisitions and changes in the segment product mix. Patient Care material costs as a percent of segment net ~~revenue is 30.4%~~revenues increased to 31.4% for the ~~six~~three months ended ~~June 30, 2019 and 30.3%~~March 31, 2020 from 31.0% for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019.

Products & Services material costs ~~increased $2.4~~decreased $1.7 million, or ~~6.2%~~8.6%, for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in the prior year. As a percent of net ~~revenue~~revenues in the Products & Services segment, material costs were ~~43.3% in~~40.3% for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 as compared to ~~41.4%~~42.0% in the same period ~~2018.~~of 2019. The ~~increase~~decrease in material ~~costs~~ as a ~~percentage~~percent of segment net ~~revenue~~revenues was due to a change in ~~the distribution customer~~business and ~~business~~product mix within the segment.

Personnel costs. Personnel costs for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were ~~$178.2~~$89.2 million, an increase of $2.5 million, or ~~1.4%~~2.9%, from ~~$175.7~~$86.7 million for the same period in the prior year. Personnel costs by operating segment were as follows:

For the Six Months Ended
June 30,

Percent

(dollars in thousands)

2019

2018

Change

Change

Patient Care

$
152,128

$
150,405

$
1,723

1.1
%
Products & Services

26,073

25,257

816

3.2
%
Personnel costs

$
178,201

$
175,662

$
2,539

1.4
%

	For the Three Months Ended March 31,							Percent
(dollars in thousands)	2020		2019		Change			Change
Patient Care	$	76,345	$	73,709	$	2,636			3.6	%
Products & Services		12,840		13,002		(162	)		(1.2	)%
Personnel costs	$	89,185	$	86,711	$	2,474			2.9	%

Personnel costs for the Patient Care segment were ~~$152.1~~$76.3 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, an increase of ~~$1.7~~$2.6 million, or ~~1.1%~~3.6%, from ~~$150.4~~$73.7 million compared to the same period in the prior year. The increase in Patient Care personnel costs during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was primarily related to an increase in salary expense of ~~$1.3~~$3.0 million ~~in benefits expense relating~~due to ~~higher health claims experience~~merit increases and ~~higher 401(k) match, an increase of $0.8 million in bonus expense,~~acquisitions, and an increase in payroll taxes of $0.3 million, offset by a decrease in benefits of $0.5 million and a decrease in bonus, commissions, and other personnel costs of ~~$0.1~~$0.2 million ~~offset by $0.5 million lower commission expense, when~~ compared to the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019.

Personnel costs in the Products & Services segment were ~~$26.1~~$12.8 million for the ~~six~~three months ended ~~June 30, 2019, an increase~~March 31, 2020, a decrease of ~~$0.8~~$0.2 million compared to the same period in the prior year. Salary expense increased ~~$0.6~~$0.1 million due to merit increases, and ~~benefits expense increased $0.2~~bonus and commissions decreased $0.3 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in the prior year.

Other operating costs. Other operating costs for the three months ended March 31, 2020 were $35.9 million, an increase of $2.3 million, or 6.9%, from $33.6 million for the same period in the prior year. Bad debt expense increased $1.9 million primarily due to higher expected losses in our Products & Services Segment as a result of the COVID-19 pandemic, rent expense increased $0.7 million from new, renewed, and acquired leases, professional fees increased $0.5 million due to

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investments made in certain revenue cycle management initiatives, and travel and other expenses decreased $0.8 million as compared to the same period in the prior year.

~~Other operating costs~~. Other operating costs for the six months ended June 30, 2019 were $67.3 million, an increase of $5.7 million, or 9.2%, from $61.6 million for the same period in the prior year. Other operating expenses increased $1.5 million from higher sales and use tax and additional costs from acquisitions. Rent expense increased an additional $1.2 million from new, renewed, and acquired leases and $0.3 million as a result of the adoption of ASC 842, further described in Note A — “~~Organization and Summary of Significant Accounting Policies~~”. In addition, professional fees increased $0.9 million for the six months ended June 30, 2019 due to investments made in certain revenue cycle management initiatives. Bad debt expense increased by $0.9 million due to recoveries in the same period of the prior year. Other occupancy costs and all other operating costs increased $0.9 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

General and administrative expenses. General and administrative expenses for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were ~~$57.6~~$28.4 million, an increase of ~~$5.5~~$0.1 million, or ~~10.5%~~0.3%, from the same period in the prior year. ~~This includes a $2.3~~Salary expense increased $0.3 million, ~~increase in~~bonus and other personnel-related costs decreased $0.5 million, and other expenses ~~largely due~~increased $0.3 million as compared to ~~favorable settlements~~the same period in the prior ~~year, a $1.6 million increase in salary expense, a $0.8 million increase in equity-based compensation, and a $0.8 million increase in benefits related to higher claim costs.~~year.

Professional accounting and legal fees. Professional accounting and legal fees for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were ~~$5.9~~$3.4 million, ~~a decrease~~an increase of ~~$3.1~~$0.7 million, or ~~34.5%~~25.8%, from ~~$9.1~~$2.7 million for the same period in the prior year primarily attributable to targeted efforts to remediate material weaknesses in our internal controls over financial reporting.

Depreciation and amortization. Depreciation and amortization for the three months ended March 31, 2020 was $8.8 million, an increase of $0.1 million, or 0.7%, from the same period in the prior year. Depreciation 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, 2020 decreased 3.2% to $8.3 million from $8.5 million for the same period in the prior year. Advisory and other fees decreased primarily due to decreased utilization of professional fees to assist in the remediation of our material weaknesses, to regain our timely filing status and to undertake related activities.

~~Depreciation and amortization~~. Depreciation and amortization for the six months ended June 30, 2019 was $17.5 million, a decrease of $1.1 million, or 5.7%, from $18.6 million for the same period in the prior year. Amortization expense decreased $1.6 million when compared to the prior period as a result of certain intangible assets becoming fully amortized prior to the first quarter of 2019.

~~Interest expense, net.~~ Interest expense for the six months ended June 30, 2019 was $17.0 million, a decrease of $2.6 million, or 13.1%, from $19.6 million for the same period in the prior year. This decrease was primarily due to lower interest rates on outstanding borrowings arising from our debt refinancing in March 2018.

~~Provision (benefit)~~Benefit for income taxes. The ~~provision~~benefit for income taxes for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was ~~$0.7~~$1.9 million, or ~~18.0%~~10.5% of ~~income~~loss before income taxes, compared to a benefit of ~~$6.3~~$3.7 million, or ~~39.4%~~35.0% of loss before income taxes for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. The effective tax rate in ~~2019 consists~~2020 consisted principally of the 21% federal statutory tax rate, the rate impact from state income taxes, the windfall from ~~stock-based~~share-based compensation, and permanent tax differences. The decrease in the effective tax rate for ~~six~~the three months ended ~~June 30, 2019~~March 31, 2020 compared with the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 is primarily attributable to ~~an increased annual~~a lower estimated pre-tax income impacted more proportionally by nondeductible permanent items for the three months ended March 31, 2020 as compared to the prior period, as well as an increase in ~~pre-tax book loss for the six months ended June 30, 2018 to pre-tax book income for the six months ended June 30, 2019, and~~ the windfall from ~~stock-based compensation recorded as a discrete item during the period.~~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, 2020, our valuation allowance approximated $2.1 million.

The CARES Act was signed into law on March 27, 2020. The CARES Act includes various income tax provisions that affect the Company for which we have recorded $5.4 million to deferred taxes in the current quarter. We continue to examine other aspects of the CARES Act to determine whether other benefits exist that might impact our financial condition.

Financial Condition, Liquidity, and Capital Resources

Liquidity

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

At ~~June 30, 2019,~~March 31, 2020, we had total liquidity of ~~$133.0~~$131.8 million, which reflected a decrease of ~~$56.1~~$37.5 million from the ~~$189.2~~$169.2 million in liquidity we had as of December 31, ~~2018.~~2019. Our liquidity at ~~June 30, 2019~~March 31, 2020 was comprised of cash and cash equivalents of ~~$38.2~~$115.9 million and ~~$94.8~~$15.8 million in available borrowing capacity under our $100.0 million revolving credit facility. This decrease in liquidity primarily ~~relates~~related to ~~$36.5~~uses of cash of $37.5 million, comprised of net cash used in operations of $22.0 million, capital expenditures of $8.8 million and other investing and financing activities of $6.7 million, including $1.2 million in liquidity used for the ~~payment~~reduction of ~~the annual incentive compensation, tax payments on stock vesting, and the employer 401(k) matching contribution, $27.9 million for acquisitions consummated in 2019,~~our net ~~of cash acquired, and the remainder attributable~~indebtedness related to our ~~operational results and changes in working capital.~~Term Loan B facility. Borrowings of $79.0 million

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under our revolving credit facility during the three months ended March 31, 2020 did not have an impact on our overall liquidity, but reduced our available borrowing capacity under the Credit Agreement to $15.8 million.

The Credit Agreement contains customary representations and warranties, as well as financial covenants, including that the Company maintains 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 inunder our revolving credit facility. Due to the additional borrowings under our revolving credit facility in March 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, 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, 2020.

For additional discussion, please refer to theLiquidity Outlooksection below.

Working Capital and Days Sales Outstanding

At ~~June 30, 2019,~~March 31, 2020, we had working capital of ~~$92.3~~$163.1 million compared to working capital of ~~$154.6~~$107.2 million at December 31, ~~2018.~~2019. Our working capital ~~decreased $62.3~~increased $55.9 million infor the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 due to an increase in current assets of $16.5 million and a decrease in current liabilities of $39.3 million.

The increase in current assets was primarily attributable to an increase in cash and cash equivalents of ~~$51.6~~$41.5 million, which is due to borrowings of $79.0 million under our revolving credit facility, which does not require repayment until March 2023, and an increase in ~~current liabilities~~income tax receivables of ~~$10.7~~$4.4 million, which relates to income tax relief under the CARES Act enacted in March 2020. These increases were offset by the uses of cash of $37.5 million discussed in theLiquidity section above and a decrease in accounts receivable of $30.5 million.

The decrease in current assets was primarily attributable to a decrease in cash and cash equivalents of $56.9 million and the reclassification of prepaid rent of $3.8 million to the current portion of long-term debt upon adoption of ASC 842, historically recorded in other current assets. The decrease in cash primarily relates to the uses of cash discussed in the liquidity section above. The decreases were offset by increases in accounts receivable and inventory of $4.3 million and $3.4 million, respectively, which were partially attributable to acquisitions.

~~The increase in current~~ liabilities was primarily attributable ~~to the adoption of ASC 842 and recognition of operating lease liabilities, resulting in an increase of $30.6 million at June 30, 2019, partially offset by~~ a net decrease in accrued incentive compensation related costs of ~~$17.8~~$38.2 million ~~related~~primarily due to the payment of $34.2 million in annual inventive compensation ~~tax payments on stock vesting,~~ and the employer 401(k) matching contribution made during the first quarter of the ~~year, offset by current year activity.~~year. The remainder of the decrease is attributable to other changes in current liabilities.

Days sales outstanding (“DSO”) is a calculation that approximates the average number of days between the billing for our services and the date of our receipt of payment, which we estimate using a 90-day rolling period of net revenue. This computation can provide a relative measure of the effectiveness of our billing and collections activities. Clinics acquired during the past 90-day period are excluded from the calculation. As of ~~June 30, 2019,~~March 31, 2020, our DSO was 4750 days, which ~~compared~~compares to a

DSO of 4552 days as of ~~June 30, 2018.~~March 31, 2019. One-time administrative billing changes and the impact of implementing our patient management and electronic health system in certain of our largest operating regions contributed to collection delays ~~during the quarter, which we believe to be temporary. As~~impacting our DSO as of March 31, ~~2019, the implementation of the new patient management and electronic health record system was complete.~~2019.

Sources and Uses of Cash for the ~~Six~~Three Months Ended ~~June 30, 2019~~March 31, 2020 Compared to ~~June 30, 2018~~March 31, 2019

Net cash flows used in operating activities ~~increased $20.4~~decreased $10.8 million to ~~$3.5~~$22.0 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 from net cash ~~provided by~~used in operating activities of ~~$16.9~~$32.8 million for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. This comparative decrease was primarily due ~~primarily~~ to a $17.8 million increase in cash provided by net accounts receivable, which is largely attributable to increased Accounts receivable, net and Net revenues of $15.4 million and $16.0 million, respectively, as of and for the ~~uses of cash and changes in working capital~~three months ended December 31, 2019, versus the comparable period in the ~~six months ended June 30, 2019 as compared to~~prior year. This increase was partially offset by an increase in cash used for the ~~six months ended June 30, 2018 discussed in the~~ ~~Working Capital~~satisfaction of Accrued compensation related costs expenses of $5.2 million and ~~Days Sales Outstanding~~ ~~section above.~~purchase of Other current assets and other assets of $2.6 million.

Cash flows used in investing activities ~~increased $30.7~~decreased $26.5 million to ~~$44.8~~$8.5 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020, from ~~$14.1~~$35.0 million for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. The ~~increase~~decrease in cash used in investing activities was due to ~~$27.9~~an

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acquisition during the first quarter of 2019 totaling $27.7 million in cash ~~consideration for~~consideration. We did not close any acquisitions ~~net~~during the first quarter of ~~cash acquired, and a $3.5 million increase in purchases of property, plant and equipment.~~2020.

Cash flows used in financing activities increased by $52.1 million to a use of cash of $8.6 million for the six months ended June 30, 2019 from cash provided by financing activities of $43.5 million for the six months ended June 30, 2018. Cash flows provided by financing activities ~~during~~increased to $72.0 million for the ~~six~~three months ended ~~June 30, 2018 included $48.4~~March 31, 2020, from cash used in financing activities of $6.8 million ~~related~~for the three months ended March 31, 2019, an increase of $78.8 million. The increase in cash provided by financing activities is due to ~~the refinancing of our indebtedness, net of payment of $14.9~~$79.0 million in ~~debt issuance and extinguishment costs, whereas in the six months ended June 30, 2019, cash flows used in debt financing activities was $2.5 million.~~proceeds from borrowings under our revolving credit facility.

Effect of Indebtedness

On March 6, 2018 we entered into a new Credit Agreement in order to refinance our indebtedness, ~~and is~~as disclosed in Note ML - “~~Debt~~,“Debt and Other Obligations,” in the notes to the condensed consolidated financial statements contained elsewhere in this report. Our indebtedness bears reduced rates of interest compared with ~~those~~the indebtedness under our prior ~~indebtedness,~~credit agreement, and as such, interest expense iswas lower for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 as compared to the same period in the prior year. Cash paid for interest totaled ~~$14.9~~$7.5 million and ~~$16.6~~$7.7 million for the ~~six~~three months ended March 31, 2020 and 2019, respectively.

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 quarters ended June 30, ~~2019~~2020 through March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021; and ~~2018, respectively.~~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 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.

Scheduled maturities of debt as of ~~June 30, 2019~~March 31, 2020 were as follows:

(in thousands)
2019 (remainder of year)	$	4,194
2020	8,335
2020 (remainder of year)				$	6,223
2021	7,276				8,266
2022	5,946				6,955
2023	5,380				85,449
2024					6,190
Thereafter	476,052				471,278
Total debt before unamortized discount and debt issuance costs, net	507,183				584,361
Unamortized discount and debt issuance costs, net	(8,873		)		(7,933	)
Total debt	$	498,310		$	576,428

Liquidity Outlook ~~and Going Concern Evaluation~~

Our Credit Agreement has a term loan facility with ~~$499~~$494.9 million in principal outstanding at ~~June 30, 2019,~~March 31, 2020, due in quarterly principal installments equal to 0.25% of the original aggregate principal amount of ~~$505~~$505.0 million, ~~commencing June 29, 2018,~~ with all remaining outstanding principal due at maturity in March 2025, and a revolving credit facility with no$79.0 million in borrowings and ~~a maximum aggregate amount~~available borrowing capacity of ~~availability of $100~~$15.8 million at ~~June 30, 2019~~March 31, 2020 that matures in March 2023.

We ~~currently anticipate that~~chose to borrow $79.0 million from our revolving credit facility in ~~connection with our planned reconfiguration~~March 2020 to preserve access to these funds in the event of ~~distribution facilities~~further instability in ~~2020 that we will incur a significant increase in our capital expenditures for our internal supply chain organization. Additionally, we plan~~financial markets due to ~~spend a significant amount of cash in connection with~~ the ~~implementation of our new financial and supply chain systems during 2020. The amounts of these expenditures has not been firmly established at this time.~~COVID-19 pandemic.

~~Nevertheless, based on~~

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Historically, our ~~range~~primary sources of ~~estimates of the costs for our reconfiguration of distribution facilities~~liquidity are cash and ~~our financial~~cash equivalents, and supply chain systems implementations, as well as our estimates of potential expenditures for the acquisition of O&P providers, we currently believe that our anticipated operating trends when combined with available borrowings under our revolving credit ~~facility~~facility. Due to the economic and social activity impacts outlined in the “Effects of the COVID-19 Pandemic” section above, we expect that the resulting disruption will have an adverse impact on the Company’s operations, financial condition, and results of operations. While we believe the business disruption will be temporary, we cannot predict the extent or duration of the COVID-19 pandemic, when state and local restrictions will be lifted or when patients will resume their normal healthcare treatment activities. In response to the expected decline in cash flows from operations, the Company has implemented certain cost mitigation and liquidity management strategies including, but not limited to, reductions in componentry purchases, salary reductions for all exempt employees, the furloughing of certain employees, reductions in non-exempt employee hours, reductions in bonus and commission expenses, the temporary reduction in operating hours and days of clinics, reducing other operating expenses, deferring the implementation of our New Systems Implementations, temporarily delaying the Company’s acquisition of O&P providers, and extending the payment terms for certain vendors. These measures have been taken in an effort to preserve liquidity in a manner sufficient to provide ~~us with sufficient liquidity~~for the Company's ability to ~~meet~~respond to the adverse cash flow pressures likely to be caused by the COVID-19 pandemic. Please refer to the "Effects of the COVID-19 Pandemic" section above for our ~~financial obligations during~~current estimates of the ~~coming twelve months.~~amounts of operating and capital expenditure reductions provided through these measures.

On March 27, 2020, the CARES Act was enacted into law in response to the COVID-19 pandemic. In April 2020, the Company received $15.8 million in government grants (the “Grant”) under the CARES Act to compensate for health-care related expenses and lost revenues associated with the COVID-19 pandemic. The terms and conditions of the Grant require the Company to certify the proceeds received under the Grant are for health-care related expenses or lost revenues attributable to the COVID-19 pandemic, as well as certain administrative reporting requirements related to the use of proceeds from the Grant. In addition, the CARES Act allows Companies to defer paying the employer portion of applicable payroll taxes from the effective date of the CARES Act through December 31, 2020. The total amount of the deferral would be due in two equal installments on December 31, 2021 and December 31, 2022. Under this provision of the CARES Act, the Company expects to defer payment of approximately $10.9 million in payroll taxes.

While we currently do not anticipate the need to do so, if the COVID-19 pandemic causes adverse cash flow and liquidity trends greater than those we currently expect and have planned for, we may find it necessary to seek additional borrowings to fund our operations. If we were to do so, given current credit market conditions, we may find that such additional borrowings are not available at that time, and if they are available, that the interest costs of such borrowings and effects on the costs of our existing borrowings could be significantly higher than the costs we currently pay under our existing Credit Agreement. Additionally, while we do not currently have the need or intention to do so, if necessary the Company may extend its accounts payable and payment of other obligations to address any such funding shortage.

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Going Concern Evaluation

During each financial reporting period, in accordance with ASU 2014-15,~~Disclosure~~Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern ~~requires~~(“ASU 2014-15”), we perform an assessment of whether conditions exist that we evaluate whether there is substantial doubt about our ability to meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to be issued. We have performed such an evaluation and, based on the results of that assessment, we are not aware of any relevant conditions or events thatcould raise substantial doubt regarding ~~our~~the Company's ability to continue as a going ~~concern within one year~~concern. Commensurate with the onset of the COVID-19 pandemic, we developed projections to evaluate the possible adverse impact that decreases in business volumes caused by the pandemic could have on our financial condition. Those projections, when combined with additional borrowings under our revolving credit facility, indicated that the Company could become non-compliant with the net leverage ratio financial covenant of its Credit Agreement as early as the second quarter of 2020. In connection with those projections, as discussed in the ‘Liquidity Outlook’ section, the Company implemented a number of cost mitigation and liquidity management strategies in late March and early April 2020. In addition, and as discussed in the ‘Liquidity’ section, in May 2020 the Company entered into an amendment to the Credit Agreement that increased its allowable maximum net leverage ratio covenant for the term of the Credit Agreement. This amendment is further discussed in Note L - “Debt and Other Obligations.” While the Company cannot forecast with certainty the ultimate extent of the impacts from or the duration of the COVID-19 pandemic, or the degree to which the cost mitigation and liquidity management strategies it has implemented will offset declines in its cash flows caused by the COVID-19 pandemic, we currently believe that these measures, when accompanied if necessary by additional funding sources, if available, and further cost reduction actions, will enable us to maintain sufficient liquidity for at least the twelve month period following the issuance date of these condensed consolidated financial statements. Accordingly, we have performed our evaluation under ASU 2014-15 and concluded that the ~~financial statements are issued.~~substantial doubt raised by the forecasted impacts of the COVID-19 pandemic have been alleviated.

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.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our future financial results are subject to a variety of risks, including interest rate risk. Our interest expense is sensitive to changes in market interest rates. To manage the impact of the interest rate risk associated with our Credit Agreement, we enter into interest rate swaps from time to time, effectively converting a portion of the cash flows related to variable-rate debt into fixed-rate cash flows.

As of ~~June 30, 2019,~~March 31, 2020, we had a combined principal amount of ~~$498.7~~$494.9 million of variable rate debt and a notional amount of $312.5 million of fixed to variable interest rate swap agreements. Based on our hedged and unhedged positions, a hypothetical increase or decrease in interest rates by 1.0% would impact our annual interest expense by ~~$1.9~~$2.5 million.

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ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and effectiveness of our disclosure controls and procedures as of ~~June 30, 2019.~~March 31, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were ~~not~~ effective as of ~~June 30, 2019 because of the material weaknesses in our internal control over financial reporting described in Item 9A., “~~~~Controls and Procedures~~~~”, of our Annual Report on Form 10-K for the year-ending December~~March 31, ~~2018, our “2018 Form 10-K”.~~2020.

Although we have not fully remediated the material weaknesses described in our 2018 Form 10-K, we believe that we have made substantial progress on the remediation plans described in our 2018 Form 10-K, under Item 9A., “~~Controls and Procedures~~”.

During the period ending June 30, 2019, we continued to make improvements to controls in the areas of inventory; accounts payable; information technology general controls; revenue; and accounts receivable and are continuing our evaluation of the design and operating effectiveness of these controls. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a period of time sufficient for management to conclude, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

~~With the exception of ongoing remediation activities, there~~There have been no material changes to our internal controls over financial ~~reporting.~~reporting during the period ended March 31, 2020.

Therefore, in accordance with Rule 13a-15(d) of the Exchange Act ~~management,~~and with the participation of our Chief Executive Officer and our Chief Financial Officer, management determined there ~~has~~have been no material changes to our internal control over financial reporting ~~occurred~~ during the period ended ~~June 30, 2019.~~March 31, 2020.

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

~~Securities and Derivative Litigation~~

~~In November 2014, a securities class action complaint,~~ ~~City of Pontiac General Employees’ Retirement System v. Hanger, et al.~~, C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, ~~inter alia~~, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.Derivative Litigation

In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated intoJudy v. Asar, et. al.,Cause No. D-1-GN-15-000625.On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the ~~459th~~345th Judicial District Court of Travis County, Texas.

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

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

any of the claims in theJudyderivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.

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

The plaintiffs subsequently subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, took the position that the full report is not discoverable under Texas law. Plaintiffs’ counsel filed a motion to compel the Special Committee’s counsel to produce the report. We opposed the motion. On July 20, 2018, the Travis County ~~court~~Court ruled that only a redacted version of the report is discoverable, and counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel. Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County ~~court~~Court appointed a Special Master to review plaintiffs’ objections to the redacted report. On March 22, 2019, the Special Master submitted a report to the Travis County ~~court~~Court recommending that the court order that the entire Special Committee report be produced. On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter. On June 25, 2019, the Travis County ~~court~~Court rejected the recommendation of the Special Master, and instead ordered that only a limited additional portion of the Special Committee report should be ~~unredacted.~~made available to plaintiffs. On July 10, 2019, the updated redacted Special Committee report was provided to plaintiffs through their counsel. ~~Upon completion~~

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Company’s shareholders. On March 10, 2020, the Travis County court issued an order providing final approval of the settlement and dismissing with prejudice the consolidated derivative action.

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

Other Matters

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

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

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ITEM 1A.RISK FACTORS

~~Our business and financial results are subject~~In addition to ~~numerous risks and uncertainties. The risk and uncertainties have not changed materially from those reported in~~ ~~Item 1A., “~~~~Risk Factors~~~~”, in our 2018 Form 10-K, which are incorporated by reference. For additional~~the other information ~~regarding risks and uncertainties, see the information provided under the header “~~~~Forward Looking Statements~~~~” contained in Part I, Item 2, “~~~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~”set forth in this Quarterly Report on Form ~~10-Q.~~10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or results of operations. In the first quarter of 2020, we identified the following additional risk factor, which supplements those discussed in our Form 10-K:

The Company’s financial condition and results of operations for fiscal year 2020 and beyond may be materially adversely affected by the ongoing coronavirus (COVID-19) outbreak.

The outbreak of the novel coronavirus (COVID-19) has evolved into a global pandemic. The coronavirus has spread to many regions of the world, including the United States. The full extent to which the COVID-19 outbreak will impact our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new medical and other information that may emerge concerning COVID-19 and the actions by governmental entities or others to contain it or treat its impact.

To date, we have experienced a significant reduction in the number of patients that we are treating in our patient care clinics. A significant portion of this decline has been due to patients determining voluntarily to wait for various reasons, including concerns regarding their own health and safety, for appointments and procedures, both with us and with their referring physicians, that the patient deems to be non-urgent or otherwise able to be deferred or postponed. In response to this decline in patients, in certain areas we have reduced our operating hours or temporarily closed certain of our clinics.

We believe that these patient volume declines primarily reflect a deferral of healthcare services utilization to a later period, rather than a permanent reduction in demand for our services. Given the general necessity of the services that our patient care clinics provide, we anticipate that this deferral of services may create a backlog of demand in the future, in addition to the resumption of historically normal activity; however, there is no assurance that either will occur. We may also require an increased level of working capital if we experience extended billing and collection cycles as a result of displaced employees, delayed reimbursement by governmental or private payers, delayed revenue cycle management procedures, or otherwise. We may also face a shortage in products within our supply chain now or in the future, which could impact our ability to service our patients in our clinics on a timely basis or at all.

Our management of the impact of COVID-19 has and will continue to require significant investment of time from our management and employees, as well as resources across our enterprise. The focus on managing and mitigating the impacts of COVID-19 on our business may cause us to divert or delay the application of our resources toward existing or new initiatives or investments, which could have a material adverse impact on our results of operations.

Further, the impacts of COVID-19 have caused significant uncertainty and volatility in the credit markets. If our access to capital were to become significantly constrained, or if costs of capital increased significantly due the impact of COVID-19 including, volatility in the capital markets, a reduction in our credit ratings or other factors, then our financial condition, results of operations and cash flows could be materially adversely affected.

The foregoing and other continued disruptions to our business as a result of COVID-19 has had and could continue to have a material adverse effect on our business, results of operations, and financial condition during 2020 and potentially in future years.

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

There has been no share repurchase activity during the three months ended ~~June 30, 2019.~~March 31, 2020.

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ITEM 3.DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the three months ended ~~June 30, 2019.~~March 31, 2020.

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.

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EXHIBITS INDEX

Exhibit No.		Document
~~10.1~~ 31.1		Hanger, Inc. 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Annex A to Hanger, Inc.o’s Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders.)*
~~10.2~~		Form of Restricted Stock Unit Agreement for Employees under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 4.4 to the Registration Statement on Form S-8 (Reg No. 333-231610) filed by the Registrant on May 20, 2019.)*
~~10.3~~		Form of Non-Qualified Stock Option Agreement for Employees under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-8 (Reg. No. 333-231610) filed by the Registrant on May 20, 2019.)*
~~10.4~~		Form of Performance Share Unit Agreement for Executives under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 4.6 to the Registration Statement on Form S-8 (Reg. No. 333-231610) filed by the Registrant on May 20, 2019.)*
~~10.5~~		Form of Non-Employee Director Restricted Stock Unit Agreement under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 4.7 to the Registration Statement on Form S-8 (Reg. No. 333-231610) filed by the Registrant on May 20, 2019.)*
~~10.6~~		Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2019 Omnibus Incentive Plan. (Incorporated herein by reference to Exhibit 4.8 to the Registration Statement on Form S-8 (Reg. No. 333-231610) filed by the Registrant on May 20, 2019.)*
~~31.1~~		Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
31.2		Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
101.INS		XBRL Instance Document. (Filed herewith.)
101.SCH		XBRL Taxonomy Extension Schema. (Filed herewith.)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LAB		XBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEF		XBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)

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*Management contract or compensatory plan

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		HANGER, INC.


Dated: ~~August~~May 7, ~~2019~~ 2020	By:	/s/ THOMAS E. KIRALY
		Thomas E. Kiraly
		Executive Vice President and Chief Financial Officer


Dated: ~~August~~May 7, ~~2019~~ 2020	By:	/s/ GABRIELLE B. ADAMS
		Gabrielle B. Adams
		Vice President and Chief Accounting Officer

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

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

	As of June 30,			As of December 31,			As of March 31,			As of December 31,
	2019			2018			2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	38,229		$	95,114		$	115,949		$	74,419
Accounts receivable, net	148,275			143,986				128,882			159,359
Inventories	71,110			67,690				67,255			68,204
Income taxes receivable	1,718			379				4,434			—
Other current assets	14,888			18,731				15,669			13,673
Total current assets	274,220			325,900				332,189			315,655
Non-current assets:
Property, plant and equipment, net	85,210			89,489
Property, plant, and equipment, net								88,835			84,057
Goodwill	226,732			198,742				232,254			232,244
Other intangible assets, net	15,770			15,478				16,586			17,952
Deferred income taxes	66,682			65,635				69,893			70,481
Operating lease right-of-use assets	104,632			—				115,250			110,559
Other assets	7,589			7,766				14,180			11,305
Total assets	$	780,835		$	703,010		$	869,187		$	842,253
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term debt	$	8,648		$	8,583		$	7,926		$	8,752
Accounts payable	52,268			55,797				47,189			48,477
Accrued expenses and other current liabilities	53,107			51,783				58,245			55,825
Accrued compensation related costs	37,309			55,111				22,835			61,010
Current portion of operating lease liabilities	30,592			—				32,878			34,342
Total current liabilities	181,924			171,274				169,073			208,406
Long-term liabilities:
Long-term debt, less current portion	489,662			502,090				568,502			490,121
Operating lease liabilities	85,046			—				95,200			88,418
Other liabilities	46,033			51,570				52,412			45,804
Total liabilities	802,665			724,934				885,187			832,749
Commitments and contingencies (Note R)
Shareholders’ deficit:
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,478,087 shares issued and 37,335,266 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018	375			371
Commitments and contingencies (Note Q)
Shareholders’ (deficit) equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,957,627 shares issued and 37,814,806 shares outstanding at 2020, and 37,602,873 shares issued and 37,460,052 shares outstanding at 2019, respectively								380			376
Additional paid-in capital	347,012			343,955				353,677			354,326
Accumulated other comprehensive loss	(12,143		)	(4,531		)		(21,424	)		(12,551	)
Accumulated deficit	(356,378		)	(361,023		)		(347,937	)		(331,951	)
Treasury stock, at cost; 142,821 shares at 2019 and 2018, respectively	(696		)	(696		)
Total shareholders’ deficit	(21,830		)	(21,924		)
Total liabilities and shareholders’ deficit	$	780,835		$	703,010
Treasury stock, at cost; 142,821 shares at 2020 and 2019, respectively								(696	)		(696	)
Total shareholders’ (deficit) equity								(16,000	)		9,504
Total liabilities and shareholders’ (deficit) equity							$	869,187		$	842,253

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2019			2018		2019			2018
Net income (loss)	$	10,035		$	12,928	$	3,084		$	(9,690	)

Other comprehensive (loss) income:
Unrealized (loss) gain on cash flow hedges, net of tax of ($1,476), $710, ($2,400), and $8, respectively	$	(4,688	)	$	2,314	$	(7,624	)	$	24
Unrealized gain (loss) on defined benefit plan, net of tax of $2, $0, $4, and ($105), respectively	6			26		12			(266		)
Total other comprehensive (loss) income	(4,682		)	2,340		(7,612		)	(242		)
Comprehensive income (loss)	$	5,353		$	15,268	$	(4,528	)	$	(9,932	)

	Common Shares, Balance	Common Stock, Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, December 31, 2017	36,372	$	365	$	333,738		$	(1,686	)	$	(359,772	)	$	(696	)	$	(28,051	)
Cumulative effect of a change in accounting for revenue recognition	—	—		—			—			(759		)	—			(759		)
Balance, January 1, 2018	36,372	365		333,738			(1,686		)	(360,531		)	(696		)	(28,810		)
Net loss	—	—		—			—			(22,618		)	—			(22,618		)
Shares based compensation expense	—	—		2,585			—			—			—			2,585
Issuance of common stock upon vesting of restricted stock units	372	4		(4		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(2,150		)	—			—			—			(2,150		)
Total other comprehensive loss	—	—		—			(2,582		)	—			—			(2,582		)
Balance, March 31, 2018	36,744	$	369	$	334,169		$	(4,268	)	$	(383,149	)	$	(696	)	$	(53,575	)
Net income	—	—		—			—			12,928			—			12,928
Shares based compensation expense	—	—		3,320			—			—			—			3,320
Issuance of common stock upon vesting of restricted stock units	106	1		(1		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(313		)	—			—			—			(313		)
Total other comprehensive income	—	—		—			2,340			—			—			2,340
Balance, June 30, 2018	36,850	$	370	$	337,175		$	(1,928	)	$	(370,221	)	$	(696	)	$	(35,300	)

Hanger, Inc.
Part I Financial Information
	Item 1. Condensed Consolidated Financial Statements (unaudited)			1
	Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations	32		25
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	50		44
	Item 4. Controls and Procedures	51		45
Part II Other Information
	Item 1. Legal Proceedings	52		46
	Item 1A. Risk Factors	54		48
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54		48
	Item 3. Defaults Upon Senior Securities	54		49
	Item 4. Mine Safety Disclosures	54		49
	Item 5. Other Information	54		49
	Item 6. Exhibits	54		49
Exhibits Index	55		50
Signatures	56		51

Purchase of property, plant, and equipment in accounts payable at period end	$	6,244	$	4,443
Right-of-use assets obtained in exchange for finance lease obligations		730		76
Issuance of seller notes in connection with acquisitions		36		4,451

	December 31, 2018			Effects of			January 1, 2019
(in thousands)	As reported			adoption			After adoption
Assets
Other current assets	$	18,731		$	(5,770	)	$	12,961
Total current assets	325,900			(5,770		)	320,130
Property, plant and equipment, net	89,489			(8,068		)	81,421
Other intangible assets, net	15,478			(220		)	15,258
Deferred income taxes	65,635			(570		)	65,065
Operating lease right-of-use assets	—			103,378			103,378
Other assets	7,766			538			8,304
Total assets	703,010			89,288			792,298
Liabilities
Current liabilities:
Current portion of long-term debt	8,583			(619		)	7,964
Accrued expenses and other current liabilities	51,783			(1,352		)	50,431
Current portion of operating lease liabilities	—			31,479			31,479
Total current liabilities	171,274			29,508			200,782
Long-term liabilities:
Long-term debt, less current portion	502,090			(12,493		)	489,597
Operating lease liabilities	—			83,662			83,662
Other liabilities	51,570			(12,950		)	38,620
Total liabilities	724,934			87,727			812,661
Shareholders’ deficit:
Accumulated deficit	(361,023		)	1,561			(359,462		)
Total shareholders’ deficit	(21,924		)	1,561			(20,363		)
Total liabilities and shareholders’ deficit	$	703,010		$	89,288		$	792,298

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands except per share data)	2019		2018		2019		2018
Net income (loss)	$	10,035	$	12,928	$	3,084	$	(9,690	)

Weighted average shares outstanding - basic	37,300		36,790		37,152		36,645
Effect of potentially dilutive restricted stock units and options (1)	588		614		738		—
Weighted average shares outstanding - diluted	37,888		37,404		37,890		36,645

Basic income (loss) per share	$	0.27	$	0.35	$	0.08	$	(0.26	)

Diluted income (loss) per share	$	0.26	$	0.35	$	0.08	$	(0.26	)

	For the Three Months Ended March 31,
(in thousands except per share data)	2020			2019
Net loss	$	(15,748	)	$	(6,951	)

Weighted average shares outstanding - basic		37,541,452			37,001,977
Effect of potentially dilutive restricted stock units and options⁽¹⁾		—			—
Weighted average shares outstanding - diluted		37,541,452			37,001,977

Basic and diluted loss per share	$	(0.42	)	$	(0.19	)

Cash paid, net of cash acquired	$	27,916
Issuance of seller notes at fair value	4,686
Additional consideration (1)	659
Aggregate purchase price	33,261

Accounts receivable, net	3,561
Inventories	1,558
Customer relationships (Useful life of 3.0 years)	2,368
Non-compete agreements (Weighted average useful life of 4.9 years)	349
Other assets	413
Accounts payable	(1,264		)
Accrued expenses and other liabilities	(1,714		)
Net assets acquired	5,271
Goodwill	$	27,990

Cash paid, net of cash acquired	$	1,978
Issuance of seller notes	1,120
Aggregate purchase price	3,098

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

(in thousands)	Classification	As of June 30, 2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	104,632
Finance lease right-of-use assets	Other assets	614
Total lease assets		$	105,246
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	30,592
Finance	Current portion of long-term debt	259
Noncurrent
Operating	Operating lease liabilities	85,046
Finance	Long-term debt, less current portion	368
Total lease liabilities		$	116,265

(in thousands)	For the Three Months Ended June 30, 2019			For the Six Months Ended June 30, 2019
Operating lease cost	$	10,794		$	21,630
Finance lease cost
Amortization of right-of-use assets	75			150
Interest on lease liabilities	6			12
Sublease income	(46		)	(79		)
Short-term lease cost	222			414
Variable lease cost	1,813			3,030		��
Total lease cost	$	12,864		$	25,157

(in thousands)	Finance Leases			Operating Leases			Total Leases
2019 (remainder of year)	$	150		$	15,873		$	16,023
2020	244			38,090			38,334
2021	172			28,788			28,960
2022	86			20,890			20,976
2023	14			13,711			13,725
2024	—			7,287			7,287
Thereafter	—			6,210			6,210
Total future minimum lease payments	666			130,849			131,515
Imputed interest	(39		)	(15,211		)	(15,250		)
Total	$	627		$	115,638		$	116,265

(in thousands)	For the Six Months Ended June 30, 2019
Cash flows for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	22,704
Operating cash flows from finance leases	12
Financing cash flows from finance leases	156
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	19,699
Finance leases	209

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

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2018	$	2,936
Unrealized loss recognized in other comprehensive income, net of tax	7,926
Reclassification to interest expense, net	(302		)
Balance as of June 30, 2019	$	10,560

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

				Balance to be Paid
For the Three Months Ended	Expensed	Paid		in Future Periods
March 31, 2018	3,700	(7,755	)	6,230
June 30, 2018	2,940	(5,938	)	3,232
September 30, 2018	2,230	(2,297	)	3,165
December 31, 2018	3,591	(3,561	)	3,195
March 31, 2019	1,649	(2,621	)	2,223
June 30, 2019	1,745	(2,016	)	1,952

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018
Patient Care Segment
Medicare	32.7	%	32.3	%	31.6	%	31.4	%
Medicaid	16.2	%	15.4	%	16.0	%	15.6	%
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)	34.1	%	35.6	%	35.3	%	36.5	%
Veterans Administration	9.7	%	9.6	%	9.7	%	9.2	%
Private Pay	7.3	%	7.1	%	7.4	%	7.3	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

	For the Three Months Ended June 30,					Percent Change (1)
(dollars in thousands)	2019		2018			2019 vs 2018
Net revenues	$	281,098	$	266,966		5.3	%
Material costs	91,399		86,516			5.6	%
Personnel costs	91,490		89,554			2.2	%
Other operating costs	33,741		30,536			10.5	%
General and administrative expenses	29,358		26,523			10.7	%
Professional accounting and legal fees	3,247		4,236			(23.3	)%
Depreciation and amortization	8,760		9,272			(5.5	)%
Operating expenses	257,995		246,637			4.6	%
Income from operations	23,103		20,329			13.6	%
Interest expense, net	8,481		7,317			15.9	%
Loss on extinguishment of debt	—		—			—
Non-service defined benefit plan expense	173		176			(1.7	)%
Income before income taxes	14,449		12,836			12.6	%
Provision (benefit) for income taxes	4,414		(92		)	NM
Net income	$	10,035	$	12,928		(22.4	)%