UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended~~June 30, 2020~~ March 31, 2021

☐

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

For the transition period from

Commission File Number 1-10670

HANGER, INC.

(Exact name of registrant as specified in its charter)


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


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

Registrant’s telephone number, including area code: (512) 777-3800

Securities registered pursuant to Section 12(b) of the Act:


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

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

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

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

Large accelerated filer ◻

Accelerated filer ⌧

Non-accelerated filer ◻

Smaller reporting company ☐

Emerging growth company ☐

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

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

As of ~~July 28, 2020,~~April 27, 2021, the registrant had ~~38,100,757~~38,541,339 shares of its Common Stock outstanding.

Table of Contents

TABLE OF CONTENTS


Hanger, Inc.
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2623
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4839
Item 4. Controls and Procedures	4839
Part II Other Information
Item 1. Legal Proceedings	4940
Item 1A. Risk Factors	4940
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5040
Item 3. Defaults Upon Senior Securities	5040
Item 4. Mine Safety Disclosures	5040
Item 5. Other Information	5040
Item 6. Exhibits	5040
Exhibits Index	5141
Signatures	5242

Table of Contents

PART 1.FINANCIAL INFORMATION

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)


	As of June 30,		As of December 31,		As of March 31,		As of December 31,
	2020		2019
					2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	129,853	$	74,419	$	70,316	$	144,602
Accounts receivable, net		115,575		159,359		118,162		128,596
Inventories		65,152		68,204		78,622		76,429
Income taxes receivable		4,409		—		12,863		12,888
Other current assets		16,740		13,673		15,489		12,357
Total current assets		331,729		315,655		295,452		374,872

Non-current assets:
Property, plant, and equipment, net		90,195		84,057		84,761		84,873
Goodwill		271,646		232,244		298,166		277,223
Other intangible assets, net		20,841		17,952		19,844		18,431
Deferred income taxes		73,036		70,481		55,482		54,877
Operating lease right-of-use assets		127,725		110,559		124,663		124,741
Other assets		14,811		11,305		16,204		15,734
Total assets	$	929,983	$	842,253	$	894,572	$	950,751

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	27,501	$	8,752	$	11,064	$	10,085
Accounts payable		51,449		48,477		51,002		65,091
Accrued expenses and other current liabilities		68,196		55,825		62,491		62,861
Accrued compensation related costs		45,653		61,010		35,665		72,541
Current portion of operating lease liabilities		33,839		34,342		35,005		35,002
Total current liabilities		226,638		208,406		195,227		245,580

Long-term liabilities:
Long-term debt, less current portion		516,507		490,121		494,326		493,012
Operating lease liabilities		108,489		88,418		104,030		104,589
Other liabilities		57,501		45,804		51,745		56,593
Total liabilities		909,135		832,749		845,328		899,774
Commitments and contingencies (Note Q)
Shareholders' equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 38,275,378 shares issued and 38,132,557 shares outstanding at 2020, and 37,602,873 shares issued and 37,460,052 shares outstanding at 2019, respectively		383		376
Commitments and contingencies (Note P)
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 38,715,640 shares issued and 38,572,819 shares outstanding at 2021, and 38,321,796 shares issued and 38,178,975 shares outstanding at 2020, respectively						387		383
Additional paid-in capital		360,014		354,326		364,524		365,503
Accumulated other comprehensive loss		(21,970)		(12,551)		(17,643)		(20,215)
Accumulated deficit		(316,883)		(331,951)		(297,328)		(293,998)
Treasury stock, at cost; 142,821 shares at 2020 and 2019, respectively		(696)		(696)
Treasury stock, at cost; 142,821 shares at 2021 and 2020, respectively						(696)		(696)
Total shareholders’ equity		20,848		9,504		49,244		50,977
Total liabilities and shareholders’ equity	$	929,983	$	842,253	$	894,572	$	950,751

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

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HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Net revenues	$	233,434	$	281,098	$	467,173	$	517,517	$	237,470	$	233,739
Material costs		69,972		91,399		147,213		169,776		75,170		77,241
Personnel costs		73,822		91,490		163,007		178,201		89,880		89,185
Other operating costs		8,277		33,741		44,163		67,296		31,460		35,886
General and administrative expenses		31,874		29,358		60,247		57,640		30,941		31,769
Professional accounting and legal fees		1,749		3,247		5,145		5,947
Depreciation and amortization		8,879		8,760		17,710		17,533		7,998		8,831
Income from operations		38,861		23,103		29,688		21,124
Income (loss) from operations										2,021		(9,173)
Interest expense, net		8,636		8,481		16,906		17,019		7,340		8,269
Non-service defined benefit plan expense		158		173		316		346		167		158
Income before income taxes		30,067		14,449		12,466		3,759
(Benefit) provision for income taxes		(987)		4,414		(2,840)		675
Net income	$	31,054	$	10,035	$	15,306	$	3,084
Loss before income taxes										(5,486)		(17,600)
Benefit for income taxes										(2,156)		(1,852)
Net loss									$	(3,330)	$	(15,748)

Basic and Diluted Per Common Share Data:
Basic income per share	$	0.82	$	0.27	$	0.41	$	0.08
Weighted average shares used to compute basic earnings per common share		37,958,408		37,299,766		37,749,930		37,151,694
Diluted income per share	$	0.81	$	0.26	$	0.40	$	0.08
Weighted average shares used to compute diluted earnings per common share		38,325,872		37,887,559		38,424,334		37,889,586
Basic and diluted loss per share									$	(0.09)	$	(0.42)
Weighted average shares used to compute basic and diluted earnings per common share										38,268,332		37,541,452

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

Table of Contents

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

(dollars in thousands)

(Unaudited)

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,


2020

2019

2020

2019
Net income

$
31,054

$
10,035

$
15,306

$
3,084

Other comprehensive loss:

Unrealized loss on cash flow hedges, net of tax benefit of ($182), ($1,476), ($2,997), and ($2,400), respectively

$
(573)

$
(4,688)

$
(9,475)

$
(7,624)
Unrealized gain on defined benefit plan, net of tax provision of $9, $2, $18, and $4, respectively

27

6

56

12
Total other comprehensive loss

(546)

(4,682)

(9,419)

(7,612)
Comprehensive income (loss)

$
30,508

$
5,353

$
5,887

$
(4,528)


	For the Three Months Ended March 31,
	2021		2020
Net loss	$	(3,330)	$	(15,748)

Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges, net of tax provision (benefit) of $796 and ($2,815), respectively	$	2,512	$	(8,902)
Unrealized gain on defined benefit plan, net of tax provision of $19 and $9, respectively		60		29
Total other comprehensive income (loss)		2,572		(8,873)
Comprehensive loss	$	(758)	$	(24,621)

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

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HANGER, INC.

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

(dollars and share amounts in thousands)

(Unaudited)


		Common				Accumulated									Common				Accumulated
	Common	Stock,		Additional		Other								Common	Stock,		Additional		Other
	Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury				Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury
	Balance	Value		Capital		Loss		Deficit		Stock		Total		Balance	Value		Capital		Loss		Deficit		Stock		Total
Balance, December 31, 2019	37,460	$	376	$	354,326	$	(12,551)	$	(331,951)	$	(696)	$	9,504
Cumulative effect of a change in accounting for credit losses	—		—		—		—		(238)		—		(238)
Balance, January 1, 2020	37,460		376		354,326		(12,551)		(332,189)		(696)		9,266
Balance, December 31, 2020														38,179	$	383	$	365,503	$	(20,215)	$	(293,998)	$	(696)	$	50,977
Net loss	—		—		—		—		(15,748)		—		(15,748)	—		—		—		—		(3,330)		—		(3,330)
Share-based compensation expense	—		—		3,501		—		—		—		3,501
Issuance of common stock upon vesting of restricted stock units	354		4		(4)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(4,146)		—		—		—		(4,146)
Total other comprehensive loss	—		—		—		(8,873)		—		—		(8,873)
Balance, March 31, 2020	37,814	$	380	$	353,677	$	(21,424)	$	(347,937)	$	(696)	$	(16,000)
Net income	—		—		—		—		31,054		—		31,054
Share-based compensation expense	—		—		8,984		—		—		—		8,984	—		—		3,179		—		—		—		3,179
Issuance in connection with the exercise of stock options	3		—		38		—		—		—		38	29		—		366		—		—		—		366
Issuance of common stock upon vesting of restricted stock units	316		3		(3)		—		—		—		—	365		4		(4)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(2,682)		—		—		—		(2,682)	—		—		(4,520)		—		—		—		(4,520)
Total other comprehensive loss	—		—		—		(546)		—		—		(546)
Balance, June 30, 2020	38,133	$	383	$	360,014	$	(21,970)	$	(316,883)	$	(696)	$	20,848
Total other comprehensive income														—		—		—		2,572		—		—		2,572
Balance, March 31, 2021														38,573	$	387	$	364,524	$	(17,643)	$	(297,328)	$	(696)	$	49,244


		Common				Accumulated									Common				Accumulated
	Common	Stock,		Additional		Other								Common	Stock,		Additional		Other
	Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury				Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury
	Balance	Value		Capital		Loss		Deficit		Stock		Total		Balance	Value		Capital		Loss		Deficit		Stock		Total
Balance, December 31, 2018	36,921	$	371	$	343,955	$	(4,531)	$	(361,023)	$	(696)	$	(21,924)
Cumulative effect of a change in accounting for leases	—		—		—		—		1,547		—		1,547
Balance, January 1, 2019	36,921		371		343,955		(4,531)		(359,476)		(696)		(20,377)
Balance, December 31, 2019														37,460	$	376	$	354,326	$	(12,551)	$	(331,951)	$	(696)	$	9,504
Cumulative effect of a change in accounting for credit losses														—		—		—		—		(238)		—		(238)
Balance, January 1, 2020														37,460		376		354,326		(12,551)		(332,189)		(696)		9,266
Net loss	—		—		—		—		(6,951)		—		(6,951)	—		—		—		—		(15,748)		—		(15,748)
Share-based compensation expense	—		—		3,265		—		—		—		3,265	—		—		3,501		—		—		—		3,501
Issuance of common stock upon vesting of restricted stock units	350		3		(3)		—		—		—		—	354		4		(4)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(3,626)		—		—		—		(3,626)	—		—		(4,146)		—		—		—		(4,146)
Total other comprehensive loss	—		—		—		(2,930)		—		—		(2,930)	—		—		—		(8,873)		—		—		(8,873)
Balance,March 31, 2019	37,271	$	374	$	343,591	$	(7,461)	$	(366,427)	$	(696)	$	(30,619)
Net income	—		—		—		—		10,035		—		10,035
Share-based compensation expense	—		—		3,450		—		—		—		3,450
Issuance of common stock upon vesting of restricted stock units	64		1		(1)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(28)		—		—		—		(28)
Total other comprehensive loss	—		—		—		(4,682)		—		—		(4,682)
Balance, June 30, 2019	37,335	$	375	$	347,012	$	(12,143)	$	(356,392)	$	(696)	$	(21,844)
Balance, March 31, 2020														37,814	$	380	$	353,677	$	(21,424)	$	(347,937)	$	(696)	$	(16,000)

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

Table of Contents

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

For the Six Months Ended

June 30,

2020

2019
Cash flows provided by (used in) operating activities:

Net income

$
15,306

$
3,084
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

17,710

17,533
Provision for doubtful accounts

1,084

304
Share-based compensation expense

12,485

6,715
Deferred income taxes

(9)

779
Amortization of debt discounts and issuance costs

936

797
Gain on sale and disposal of fixed assets

(531)

(792)
Changes in operating assets and liabilities:

Accounts receivable, net

44,917

(1,010)
Inventories

5,072

(1,862)
Other current assets and other assets

(4,882)

(1,100)
Income taxes

(5,278)

(1,339)
Accounts payable

305

(3,208)
Accrued expenses and other current liabilities

2,393

(2,778)
Accrued compensation related costs

(15,536)

(17,901)
Other liabilities

3,686

(1,871)
Operating lease liabilities, net of amortization of right-of-use assets

2,403

(890)
Changes in operating assets and liabilities:

33,080

(31,959)
Net cash provided by (used in) operating activities

80,061

(3,539)
Cash flows used in investing activities:

Acquisitions, net of cash acquired

(16,788)

(27,916)
Purchase of property, plant, and equipment

(15,742)

(14,806)
Purchase of therapeutic program equipment leased to third parties under operating leases

(3,065)

(3,530)
Proceeds from sale of property, plant, and equipment

1,134

1,476
Purchase of company-owned life insurance investment

(250)

—
Net cash used in investing activities

(34,711)

(44,776)
Cash flows provided by (used in) financing activities:

Borrowings under revolving credit agreement

79,000

—
Repayment of borrowings under revolving credit agreement

(57,000)

—
Repayment of term loan

(2,525)

(2,525)
Payment of employee taxes on share-based compensation

(6,828)

(3,654)
Payment on seller notes

(1,799)

(2,162)
Payments of financing lease obligations

(314)

(229)
Payments under vendor financing arrangements

(275)

—
Payment of debt issuance costs

(214)

—
Proceeds from the exercise of options

39

—
Net cash provided by (used in) financing activities

10,084

(8,570)
Increase (decrease) in cash and cash equivalents

55,434

(56,885)
Cash and cash equivalents at beginning of period

74,419

95,114
Cash and cash equivalents at end of period

$
129,853

$
38,229


					For the Three Months Ended March 31,
					2021		2020
Cash flows used in operating activities:
Net loss					$	(3,330)	$	(15,748)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization						7,998		8,831
(Benefit) provision for doubtful accounts						(211)		1,928
Share-based compensation expense						3,179		3,501
Deferred income taxes						(1,795)		3,476
Amortization of debt discounts and issuance costs						472		409
Gain on sale and disposal of fixed assets						(524)		(411)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net						11,093		28,229
Inventories						(1,437)		949
Other current assets and other assets						(3,492)		(3,989)
Income taxes						25		(5,303)
Accounts payable						(14,055)		(4,757)
Accrued expenses and other current liabilities						(1,299)		(385)
Accrued compensation related costs						(36,936)		(38,175)
Other liabilities						(1,576)		(1,153)
Operating lease liabilities, net of amortization of right-of-use assets						(478)		628
Changes in operating assets and liabilities:						(48,155)		(23,956)
Net cash used in operating activities						(42,366)		(21,970)
Cash flows used in investing activities:
Acquisitions, net of cash acquired						(19,377)		(26)
Purchase of property, plant, and equipment						(6,541)		(6,526)
Purchase of therapeutic program equipment leased to third parties under operating leases						(395)		(2,286)
Proceeds from sale of property, plant, and equipment						796		595
Purchase of company-owned life insurance investment						—		(250)
Net cash used in investing activities						(25,517)		(8,493)
Cash flows (used in) provided by financing activities:
Borrowings under revolving credit agreement						—		79,000
Payment of employee taxes on share-based compensation						(4,520)		(4,146)
Repayment of term loan						(1,263)		(1,263)
Payment on Seller Notes						(446)		(1,446)
Payments under vendor financing arrangements						(275)		—
Payments of financing lease obligations						(265)		(152)
Proceeds from the exercise of options						366		—
Net cash (used in) provided by financing activities						(6,403)		71,993
(Decrease) increase in cash and cash equivalents						(74,286)		41,530
Cash and cash equivalents at beginning of period						144,602		74,419
Cash and cash equivalents at end of period					$	70,316	$	115,949

Non-cash financing and investing activities:
Seller notes, deferred payment obligations and additional consideration related to acquisitions	$	29,393	$	5,345
Seller Notes and other non-cash consideration related to acquisitions					$	4,865	$	36
Purchase of property, plant, and equipment in accounts payable at period end		4,659		3,437		3,458		6,244
Purchase of property, plant, and equipment through vendor financing		—		2,200
Right-of-use assets obtained in exchange for finance lease obligations		1,335		209		82		730

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

Table of Contents

HANGER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A — Organization and Summary of Significant Accounting Policies

Description of Business

Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries. We provide orthotic and prosthetic (“O&P”) services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through 2 segments, Patient Care and Products & Services.

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “SEC”).

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

A detailed description of our significant accounting policies and management judgments is contained in our ~~2019~~2020 Form 10-K.

Reclassifications

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

Recent Developments Regarding COVID-19

We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”). The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition ~~are highly~~remain uncertain and difficult to ~~predict, as viral infections continue to increase and information is rapidly evolving. We~~predict. As a result of the COVID-19 pandemic, we believe that our patients are deferring visits to our O&P clinics, as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. ~~Furthermore, capital markets and the economy have been disrupted by the COVID-19 pandemic, and it still~~It remains possible that itfurther outbreaks of COVID-19, or reinstitution of restrictive measures by federal, state and local governments could cause a recessionary environment impacting the healthcare industry generally, including the O&P industry. The continuing economic disruption has had and could have a continuing material adverse effect on our business, as the duration and extent of state and local government restrictions impacting our patients’ ability or willingness to visit our O&P clinics and those of our customers, is unknown. The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020. We continue to monitor the provisions of the CARES Act and their application to us, as well as future governmental policies and their impact on our business; however, the magnitude and overall effectiveness of such policies to us and the economy as a whole remains uncertain.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside ~~$100.0~~$178.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the ~~$100.0~~$178.0 billion appropriation. These are ~~payments,~~grants, rather than loans, to healthcare providers, and will not need to be repaid.

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During ~~the second quarter of~~ 2020, we recognized a total benefit of ~~$20.5~~$24.0 million in our ~~Statement~~consolidated statement of ~~Operations~~operations within Other operating costs for ~~a portion of~~ the grant proceeds we received under the CARES Act (“Grants”) from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment. As of June 30, 2020, we have recorded a liability of $3.5 million within Accrued expenses and other liabilities in the condensed consolidated balance sheet related to proceeds from the Grants for amounts that have not met the recognition criteria in accordance with our accounting policy.

The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We deferred ~~$3.0~~$11.8 million of payroll taxes within Accrued compensation related costs and Other liabilities in the condensed consolidated balance sheet as of ~~June 30, 2020.~~

~~Recently Adopted Accounting Pronouncements~~

~~In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, and related clarifying standards, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of this standard on January 1, 2020 resulted in a cumulative effect adjustment to accumulated deficit of $0.2 million.

~~In August 2018, the FASB issued ASU No. 2018-13,~~ ~~Fair Value Measurement (Topic 820)~~, which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption on January 1, 2020.

~~In December 2019, the FASB issued ASU No. 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes~~. Among other provisions, this ASU removes the exception that limited the income tax benefit recognized in the interim period in cases when the year-to-date loss exceeds the anticipated loss for the year. Adoption of this standard is effective beginning January 1, 2021, but as early adoption is permitted, we have selected to adopt this standard effective January 1, 2020. There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption.March 31, 2021.

Recent Accounting Pronouncements, Not Yet Adopted

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

Note B — Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed using the weighted average number of common shares outstanding during the period plus any potentially dilutive common shares, such as stock options, restricted stock units, and performance-based units calculated using the treasury stock method. Total anti-dilutive shares excluded from the diluted earnings per share were ~~118,525 and 17,864 for the three and six months ended June 30, 2020,~~3,471 and 0 for the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2021 and 2020, respectively.

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

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				For the Three Months Ended March 31,
(in thousands except share and per share amounts)	2020		2019		2020		2019		2021		2020
Net income	$	31,054	$	10,035	$	15,306	$	3,084
Net loss									$	(3,330)	$	(15,748)

Weighted average shares outstanding - basic		37,958,408		37,299,766		37,749,930		37,151,694		38,268,332		37,541,452
Effect of potentially dilutive restricted stock units and options		367,464		587,793		674,404		737,892
Effect of potentially dilutive restricted stock units and options ⁽¹⁾										—		—
Weighted average shares outstanding - diluted		38,325,872		37,887,559		38,424,334		37,889,586		38,268,332		37,541,452

Basic income per share	$	0.82	$	0.27	$	0.41	$	0.08

Diluted income per share	$	0.81	$	0.26	$	0.40	$	0.08
Basic and diluted loss per share									$	(0.09)	$	(0.42)

(1)

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

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Note C — Revenue Recognition

Patient Care Segment

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

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				For the Three Months Ended March 31,
(in thousands)	2020		2019		2020		2019		2021		2020
Patient Care Segment
Medicare	$	64,191	$	75,640	$	125,916	$	133,416	$	57,335	$	61,725
Medicaid		31,243		37,344		62,071		67,491		34,048		30,828
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		70,828		78,808		137,268		149,026
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)										69,663		66,440
Veterans Administration		16,826		22,497		34,718		40,819		19,764		17,892
Private Pay		12,771		16,879		26,069		31,017		14,872		13,298
Total	$	195,859	$	231,168	$	386,042	$	421,769	$	195,682	$	190,183

The impact to revenue related to prior period performance obligations was not material for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Products & Services Segment

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

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The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				For the Three Months Ended March 31,
(in thousands)	2020		2019		2020		2019		2021		2020
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	26,527	$	37,662	$	58,217	$	70,857	$	30,660	$	31,690
Therapeutic solutions		11,048		12,268		22,914		24,891		11,128		11,866
Total	$	37,575	$	49,930	$	81,131	$	95,748	$	41,788	$	43,556

Note D — Accounts Receivable, Net

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

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

~~As part of the new accounting standard discussed in Note A - “Organization and Summary of Significant Accounting Policies,” our~~Our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current status of our patients and ~~customers'~~customers’ trade accounts receivable balances. We also grouped our receivables into similar risk pools to better measure the risks for each pool. After evaluating the risk for each pool, we determined that additional credit loss risk was immaterial for the Patient Care segment. For the Products & Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” As of ~~June 30, 2020,~~March 31, 2021, we have considered the current and future economic and market conditions resulting in ~~an increase~~a decrease to the allowance for doubtful accounts by approximately ~~$0.9~~$0.2 million since December 31, ~~2019.~~2020.

Accounts receivable, net as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 is comprised of the following:


	As of June 30, 2020						As of December 31, 2019						As of March 31, 2021						As of December 31, 2020
			Products &						Products &						Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated		Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Gross charges before estimates for implicit price concessions	$	156,641	$	20,534	$	177,175	$	202,132	$	27,551	$	229,683	$	143,007	$	21,056	$	164,063	$	156,504	$	21,300	$	177,804
Less estimates for implicit price concessions:
Payor disallowances		(49,926)		—		(49,926)		(58,094)		—		(58,094)		(36,816)		—		(36,816)		(39,343)		—		(39,343)
Patient non-payments		(8,119)		—		(8,119)		(9,589)		—		(9,589)		(6,499)		—		(6,499)		(7,042)		—		(7,042)
Accounts receivable, gross		98,596		20,534		119,130		134,449		27,551		162,000		99,692		21,056		120,748		110,119		21,300		131,419
Allowance for doubtful accounts		—		(3,555)		(3,555)		—		(2,641)		(2,641)		—		(2,586)		(2,586)		—		(2,823)		(2,823)
Accounts receivable, net	$	98,596	$	16,979	$	115,575	$	134,449	$	24,910	$	159,359	$	99,692	$	18,470	$	118,162	$	110,119	$	18,477	$	128,596

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Note E — Inventories

Our inventories are comprised of the following:


	As of June 30,		As of December 31,
					As of March 31,		As of December 31,
(in thousands)	2020		2019		2021		2020
Raw materials	$	19,684	$	20,574	$	20,251	$	19,716
Work in process		13,887		10,165		15,808		12,040
Finished goods		31,581		37,465		42,563		44,673
Total inventories	$	65,152	$	68,204	$	78,622	$	76,429

Note F ~~— Property, Plant, and Equipment, Net~~

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

As of June 30,

As of December 31,
(in thousands)

2020

2019
Land

$
554

$
634
Buildings

3,747

4,110
Furniture and fixtures

14,705

13,835
Machinery and equipment

26,315

25,438
Equipment leased to third parties under operating leases

29,110

29,217
Leasehold improvements

137,273

131,617
Computers and software

78,732

75,540
Total property, plant, and equipment, gross

290,436

280,391
Less: accumulated depreciation and amortization

(200,241)

(196,334)
Total property, plant, and equipment, net

$
90,195

$
84,057

Total depreciation expense was approximately $7.1 million and $14.4 million for the three and six months ended June 30, 2020 and $7.6 million and $15.1 million for the three and six months ended June 30, 2019, respectively. Total amortization of finance right-of-use assets was approximately $0.2 million and $0.3 million for the three and six months ended June 30, 2020 and $0.1 million and $0.2 million for the three and six months ended June 30, 2019, respectively.

~~Note G~~ — Acquisitions

~~2020~~2021 Acquisition Activity

~~On April 1, 2020,~~In the first quarter of 2021, we ~~acquired~~completed the acquisitions of all of the outstanding equity interests of anthree O&P businesses and the assets of one O&P business for total consideration of ~~$46.1~~$24.2 million, ~~at fair value,~~ of which ~~$16.8~~$19.2 million was cash consideration, net of cash acquired, ~~$21.9~~$4.0 million was issued in the form of notes to ~~the former~~ shareholders ~~$3.5 million in the form of a deferred payment obligation to the former shareholders~~at fair value, and ~~$3.9~~$1.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes are payable in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Payments totaling $3.5 million under the deferred payment obligation are due in annual installments beginning in the ~~fourth~~ year following the acquisition and for three years thereafter. Additional consideration includes approximately $3.5 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the condensed consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of high quality O&P providers.

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

Acquisition-related costs ~~of $0.0 million and $0.4 million for the three and six months ended June 30, 2020 related to the acquisition~~ are included in ~~General~~general and administrative expenses in our condensed consolidated ~~statement~~statements of operations. Total acquisition-related costs incurred during the three months ended March 31, 2021 was $0.4 million, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the three months ended March 31, 2021 was $0.2 million.

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

Purchase Price Allocation

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the ~~acquisition.~~acquisitions. The final purchase price ~~allocation~~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 ~~this acquisition was~~these acquisitions were allocated on a preliminary basis as follows:


(in thousands)
Cash paid, net of cash acquired	$	16,762	$	19,238
Issuance of seller notes at fair value		21,941
Deferred payment obligation at fair value		3,468
Issuance of Seller Notes at fair value				3,956
Additional consideration, net		3,948		998
Aggregate purchase price		46,119		24,192

Accounts receivable		3,180		805
Inventories		2,020		756
Customer relationships (Weighted average useful life of 5.0 years)		5,700		2,460
Non-compete agreements (Weighted average useful life of 5.0 years)		200
Other assets and liabilities, net		(4,367)		(589)
Net assets acquired		6,733		3,432
Goodwill	$	39,386	$	20,760

Right-of-use assets and lease liabilities related to operating leases recognized in connection with the acquisitions completed ~~for~~during the ~~six~~three months ended ~~June 30, 2020 was $4.7~~March 31, 2021 were $1.5 million.

~~2019 Acquisition Activity~~

During 2019, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows. We completed each acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisitions of high quality O&P providers.

●

In the first quarter of 2019, we completed the acquisition of all the outstanding equity interests of an O&P business 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.

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2020 Acquisition Activity

During 2020, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows:

●

In the second quarter of ~~2019,~~2020, we ~~completed the acquisition~~acquired all of ~~all~~ the outstanding equity interests of an O&P business for total consideration of ~~$0.5~~$46.2 million at fair value, of which ~~$0.2~~$16.8 million was cash consideration, net of cash acquired, ~~and $0.3~~$21.9 million was issued in the form of notes to the former shareholders, ~~at fair value.~~

●

~~In the third quarter of 2019, we completed the 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 $3.3~~$3.5 million ~~of which $3.0 million was cash consideration, net of cash acquired, and $0.3 million was issued~~ in the form of a deferred payment obligation to the former shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, ~~at fair value.~~approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Total payments of $4.0 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter. Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of this high quality O&P provider.

●

In the fourth quarter of ~~2019,~~2020, we completed the ~~acquisition~~acquisitions of all the outstanding equity interests of ~~one~~four O&P ~~business and acquired the assets of another O&P business~~businesses for total consideration of ~~$7.8~~$7.1 million, of which ~~$5.0~~$4.9 million was cash consideration, net of cash acquired, ~~and $2.8~~$1.9 million was issued in the form of notes to shareholders at fair ~~value.~~value, and $0.3 million in additional consideration.

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

(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.


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

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

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, ~~2019 was $5.2~~2020 were $5.5 million.

Note HG — Goodwill and Other Intangible Assets

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

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

For the Six Months Ended June 30, 2020

Patient Care

Products & Services

Consolidated

Goodwill,

Accumulated

Goodwill,

Goodwill,

Accumulated

Goodwill,

Goodwill,

Accumulated

Goodwill,
(in thousands)

Gross

Impairment

Net

Gross

Impairment

Net

Gross

Impairment

Net
As of December 31, 2019

$
660,912

$
(428,668)

$
232,244

$
139,299

$
(139,299)

$
—

$
800,211

$
(567,967)

$
232,244
Additions from acquisitions

39,386

—

39,386

—

—

—

39,386

—

39,386
Measurement period adjustments⁽¹⁾

16

—

16

—

—

—

16

—

16
As of June 30, 2020

$
700,314

$
(428,668)

$
271,646

$
139,299

$
(139,299)

$
—

$
839,613

$
(567,967)

$
271,646

~~(1)~~

~~Measurement period adjustments relate to 2019 acquisitions.~~

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For the Year Ended December 31, 2019

Patient Care

Products & Services

Consolidated

Goodwill,

Accumulated

Goodwill,

Goodwill,

Accumulated

Goodwill,

Goodwill,

Accumulated

Goodwill,
(in thousands)

Gross

Impairment

Net

Gross

Impairment

Net

Gross

Impairment

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

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


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

(1)	Measurement period adjustments increasing goodwill relate to ~~2019 and 2018~~ acquisitions in the prior year of approximately ~~$2.1~~$0.2 million ~~and $0.3 million, respectively,~~ and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.


	For the Year Ended December 31, 2020
	Goodwill,		Accumulated		Goodwill,
(in thousands)	Gross		Impairment		Net
As of December 31, 2019	$	660,912	$	(428,668)	$	232,244
Additions from acquisitions		45,144		—		45,144
Measurement period adjustments ⁽¹⁾		(165)		—		(165)
As of December 31, 2020	$	705,891	$	(428,668)	$	277,223

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

As of December 31, 2017, goodwill of approximately $139.3 million within the Products and Services operating segment was impaired in full.

The balances related to intangible assets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are as follows:


									As of March 31, 2021
	As of June 30, 2020								Gross
	Gross Carrying		Accumulated		Accumulated		Net Carrying		Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount		Amount		Amortization		Impairment		Amount
Customer lists	$	38,472	$	(25,389)	$	—	$	13,083	$	19,339	$	(6,712)	$	—	$	12,627
Trade name		255		(164)		—		91		255		(183)		—		72
Patents and other intangibles		9,011		(5,461)		—		3,550		8,994		(5,966)		—		3,028
Definite-lived intangible assets		47,738		(31,014)		—		16,724		28,588		(12,861)		—		15,727
Indefinite-lived trade name		9,070		—		(4,953)		4,117		9,070		—		(4,953)		4,117
Total other intangible assets	$	56,808	$	(31,014)	$	(4,953)	$	20,841	$	37,658	$	(12,861)	$	(4,953)	$	19,844


									As of December 31, 2020
	As of December 31, 2019								Gross
	Gross Carrying		Accumulated		Accumulated		Net Carrying		Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount		Amount		Amortization		Impairment		Amount
Customer lists	$	32,772	$	(22,726)	$	—	$	10,046	$	16,879	$	(5,845)	$	—	$	11,034
Trade name		255		(151)		—		104		255		(176)		—		79
Patents and other intangibles		9,188		(5,503)		—		3,685		9,011		(5,810)		—		3,201
Definite-lived intangible assets		42,215		(28,380)		—		13,835		26,145		(11,831)		—		14,314
Indefinite-lived trade name		9,070		—		(4,953)		4,117		9,070		—		(4,953)		4,117
Total other intangible assets	$	51,285	$	(28,380)	$	(4,953)	$	17,952	$	35,215	$	(11,831)	$	(4,953)	$	18,431

Amortization expense related to other intangible assets was approximately ~~$1.6~~$1.0 million and ~~$3.0~~$1.4 million for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~$1.1 million and $2.2 million for the three and six months ended June 30, 2019.~~2020.

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


(in thousands)
2020 (remainder of the year)	$	3,056
2021		3,755
2021 (remainder of the year)			$	3,290
2022		3,688		4,319
2023		3,444		4,076
2024		1,961		2,586
2025				1,397
Thereafter		820		59
Total	$	16,724	$	15,727

Note H — Other Current Assets and Other Assets

Other current assets consist of the following:


	As of March 31,		As of December 31,
(in thousands)	2021		2020
Non-trade receivables	$	6,411	$	6,063
Prepaid maintenance		4,057		2,942
Prepaid insurance		2,424		266
Other prepaid assets		2,597		3,086
Total other current assets	$	15,489	$	12,357

Other assets consist of the following:


	As of March 31,		As of December 31,
(in thousands)	2021		2020
Implementation costs for cloud computing arrangements	$	5,187	$	4,811
Cash surrender value of company-owned life insurance		4,159		3,973
Finance lease right-of-use assets		2,906		3,016
Deposits		2,156		2,144
Non-trade receivables		1,310		1,274
Other		486		516
Total other assets	$	16,204	$	15,734

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

Accrued expenses and other current liabilities consist of:


	As of March 31,		As of December 31,
(in thousands)	2021		2020
Patient prepayments, deposits, and refunds payable	$	25,823	$	27,195
Accrued sales taxes and other taxes		9,837		9,863
Insurance and self-insurance accruals		7,912		7,651
Derivative liability		7,585		7,686
Accrued professional fees		916		1,016
Accrued interest payable		542		440
Other current liabilities		9,876		9,010
Total	$	62,491	$	62,861

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Other liabilities consist of:


	As of March 31,		As of December 31,
(in thousands)	2021		2020
Supplemental executive retirement plan obligations	$	20,133	$	21,503
Derivative liability		11,182		14,388
Long-term insurance accruals		7,444		7,326
Deferred payroll taxes		5,918		5,918
Unrecognized tax benefits		5,050		5,465
Other		2,018		1,993
Total	$	51,745	$	56,593

Note J — Income Taxes

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

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

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

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

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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,
(in thousands)

2020

2019
Non-trade receivables

$
9,290

$
6,711
Prepaid maintenance

2,894

2,767
Prepaid insurance

1,641

264
Other prepaid assets

2,915

3,931
Total other current assets

$
16,740

$
13,673

~~Other assets consist of the following:~~

As of June 30,

As of December 31,
(in thousands)

2020

2019
Implementation costs for cloud computing arrangements

$
4,553

$
1,964
Cash surrender value of company-owned life insurance

3,454

3,253
Finance lease right-of-use assets

2,322

1,488
Deposits

2,093

1,893
Non-trade receivables

1,827

2,398
Other

562

309
Total other assets

$
14,811

$
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)

2020

2019
Patient prepayments, deposits, and refunds payable

$
26,345

$
24,183
Accrued sales taxes and other taxes

9,802

8,543
Derivative liability

7,814

3,516
Insurance and self-insurance accruals

7,584

8,033
Liabilities incurred to seller in acquisitions

3,583

—
Accrued professional fees

1,584

2,533
Accrued interest payable

565

266
Other current liabilities

10,919

8,751
Total

$
68,196

$
55,825

~~Other liabilities consist of:~~

As of June 30,

As of December 31,
(in thousands)

2020

2019
Supplemental executive retirement plan obligations

$
19,607

$
20,851
Derivative liability

17,996

9,821
Long-term insurance accruals

7,511

7,424
Unrecognized tax benefits

7,843

5,296
Other

4,544

2,412
Total

$
57,501

$
45,804

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Note K ~~— Income Taxes~~

We recorded a benefit for income taxes of $1.0 million and $2.8 million for the three and six months ended June 30, 2020. The effective tax rate was -3.3% and -22.8% for the three and six months ended June 30, 2020. 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.

The decrease in the effective tax rate for the three months and six months ended June 30, 2020 compared with the three and six months ended June 30, 2019 is primarily attributable to the recognition of research and development tax credits for the current and prior years in the current quarter, partially offset by a shortfall from share-based compensation. Our effective tax rate for the three and six months ended June 30, 2020 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and research and development tax credits. Our effective tax rate for the three and six months ended June 30, 2019 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses.

During the second quarter of 2020, we completed a study of qualifying research and development expenses resulting in the recognition of tax benefits of $2.1 million, net of tax reserves, related to the current year and $6.3 million, net of tax reserves, related to the prior years. We recorded the tax benefit, before tax reserves, as a deferred tax asset in the second quarter of 2020.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing our deferred income taxes and decreasing our current income taxes payable by approximately $5.4 million. The CARES Act allowed for bonus depreciation on certain types of qualified property and the provision for an increase in the amounts allowed for interest expense for tax years beginning January 1, 2019. We continue to evaluate other aspects of the CARES Act to determine whether other tax benefits are available.

~~Note L~~ — Debt and Other Obligations

Debt consists of the following:


					As of March 31,		As of December 31,
(in thousands)	As of June 30, 2020		As of December 31, 2019		2021		2020
Debt:
Term Loan B	$	493,638	$	496,163	$	489,850	$	491,113
Revolving credit facility		22,000		—
Seller notes		29,610		9,005
Seller Notes						14,876		11,510
Deferred payment obligation		4,000		—		4,000		4,000
Finance lease liabilities and other		3,152		2,033		3,712		3,869
Total debt before unamortized discount and debt issuance costs		552,400		507,201		512,438		510,492
Unamortized discount and debt issuance costs, net		(8,392)		(8,328)		(7,048)		(7,395)
Total debt	$	544,008	$	498,873	$	505,390	$	503,097

Current portion of long-term debt:
Term Loan B	$	5,050	$	5,050	$	5,050	$	5,050
Seller notes		21,710		3,175
Seller Notes						5,043		4,060
Finance lease liabilities and other		741		527		971		975
Total current portion of long-term debt		27,501		8,752		11,064		10,085
Long-term debt	$	516,507	$	490,121	$	494,326	$	493,012

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Refinancing of Credit Agreement and Term B Borrowings

On March 6, 2018, we entered into a new $605.0 million Senior Credit Facility (the “Credit Agreement”). The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term Loan 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, 2020.~~March 31, 2021. We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all 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. In June 2020, we repaid $57.0 million in borrowings under our revolving credit facility.~~ We had approximately ~~$72.8~~$94.8 million in available borrowing capacity under our $100.0 million revolving credit facility as of ~~June 30, 2020.~~March 31, 2021.

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, 2020,~~March 31, 2021, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately ~~4.0%~~3.6%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note NM – “Derivative Financial Instruments.”

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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)(i) requirements that we maintain certain financial ratios at prescribed levels, ~~ii)~~(ii) a prohibition on payment of dividends and other distributions and ~~iii)~~(iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry. The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement (some of which were amended in May 2020 by the Amendment (as defined and described below)): (i) a maximum consolidated first lien net leverage ratio (“Net Leverage ~~Ratio"~~Ratio”) (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) of 4.50 to 1.00 for the fiscal ~~quarters~~quarter ended ~~June 30, 2020 through~~ March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.

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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"~~“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~~quarter 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'~~subsidiaries’ ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed with the proceeds of an equity offering, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. We capitalized debt issuance costs of $0.2 million in connection with the Amendment, which were recorded in Other assets.

We were in compliance with all covenants at ~~June 30, 2020.~~March 31, 2021.

Seller ~~notes~~Notes and the ~~deferred payment obligation~~Deferred Payment Obligation

We typically issue subordinated promissory notes (“Seller ~~notes”~~Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of $0.9 million as of March 31, 2021 and December 31, 2020, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from ~~2.50%~~2.70% to 3.00%. ~~The Seller notes are unsecured and are presented net of unamortized discount of $1.2 million and $0.4 million as of June 30, 2020 and December 31, 2019, respectively.~~ Principal and interest are payable in quarterly or annual installments and mature through ~~October 2024.~~February 2026.

~~Payments~~16

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Amounts due under the deferred payment obligation ~~plan due~~ to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized discount of $0.5 million as of ~~June 30, 2020.~~March 31, 2021 and December 31, 2020, respectively. The deferred payment obligation was measured at its estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due in annual installments beginning in 2024 and for three years thereafter.

Scheduled Maturities of Total Debt

Scheduled maturities of debt at ~~June 30, 2020~~March 31, 2021 were as follows:


(in thousands)
2020 (remainder of year)	$	22,853
2021		9,640
2021 (remainder of year)			$	8,273
2022		8,371		10,040
2023		29,921		9,641
2024		7,203		8,979
2025				473,009
Thereafter		474,412		2,496
Total debt before unamortized discount and debt issuance costs, net		552,400		512,438
Unamortized discount and debt issuance costs, net		(8,392)		(7,048)
Total debt	$	544,008	$	505,390

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Note ML — Fair Value Measurements

Financial Instruments

The carrying value of our outstanding term loan as of ~~June 30, 2020~~March 31, 2021 (excluding unamortized discounts and debt issuance costs of ~~$7.2~~$6.1 million) was ~~$493.6~~$489.9 million compared to its fair value of ~~$471.4~~$488.0 million. The carrying value of our outstanding term loan as of December 31, ~~2019~~2020 (excluding unamortized discounts and debt issuance costs of ~~$7.9~~$6.5 million) was ~~$496.2~~$491.1 million compared to its fair value of ~~$497.4~~$489.9 million. Our estimates of fair value are based on a discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

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

We believe that the carrying value of the Seller ~~notes~~Notes and the deferred payment obligation approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement. The carrying value of our outstanding Seller ~~notes~~Notes and the deferred payment obligation issued in connection with past acquisitions as of ~~June 30,~~March 31, 2021 and December 31, 2020 was ~~$32.4~~$18.0 million and $14.6 million, net of unamortized discounts of ~~$1.2 million.~~$0.9 million, respectively.

Note NM — Derivative Financial Instruments

Cash Flow Hedges of Interest Rate Risk

In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, our swaps, had a notional value outstanding of ~~$300.0~~$287.5 million and ~~$312.5~~$300.0 million, respectively.

~~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 for the three months ended June 30, 2020 and 2019, respectively:~~


~~(in thousands)~~	~~Cash Flow Hedges~~
~~Balance as of March 31, 2020~~	$	~~(19,039)~~
~~Unrealized loss recognized in other comprehensive loss, net of tax~~		~~(2,290)~~
~~Reclassification to interest expense, net~~		~~1,717~~
~~Balance as of June 30, 2020~~	$	~~(19,612)~~

~~Balance as of March 31, 2019~~	$	~~(5,872)~~
~~Unrealized loss recognized in other comprehensive loss, net of tax~~		~~(4,775)~~
~~Reclassification to interest expense, net~~		87
~~Balance as of June 30, 2019~~	$	~~(10,560)~~

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

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively:


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

Balance as of December 31, 2019	$	(10,137)
Unrealized loss recognized in other comprehensive loss, net of tax		~~(12,063)~~
~~Reclassification to interest expense, net~~		~~2,588~~
~~Balance as of June 30, 2020~~	$	~~(19,612)~~

~~Balance as of December 31, 2018~~	$	~~(2,936)~~
~~Unrealized loss recognized in other comprehensive loss, net of tax~~		~~(7,926)~~(9,773)
Reclassification to interest expense, net		~~302~~871
Balance as of ~~June 30, 2019~~March 31, 2020	$	~~(10,560)~~(19,039)

The following table presents the fair value of derivative ~~assets and~~ liabilities within the condensed consolidated balance sheets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	As of June 30, 2020				As of December 31, 2019				As of March 31, 2021				As of December 31, 2020
(in thousands)	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	7,814	$	—	$	3,516	$	—	$	7,585	$	—	$	7,686
Other liabilities		—		17,996		—		9,821		—		11,182		—		14,388

Note ON — Share-Based Compensation

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

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

As of ~~June 30, 2020,~~March 31, 2021, there were ~~1,562,708~~1,459,779 unvested restricted stock awards outstanding. This was comprised of ~~1,130,187~~1,058,024 employee service-based awards with a weighted average grant date fair value of ~~$19.22~~$21.26 per share, ~~367,097~~331,132 employee performance-based awards with a weighted average grant date fair value of ~~$18.94~~$21.51 per share, and ~~65,424~~70,623 director service-based awards with a weighted average grant date value of ~~$17.13~~$17.07 per share. As of ~~June 30, 2020,~~March 31, 2021, there were ~~520,105~~487,264 outstanding options exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of ~~6.9~~5.3 years.

The 2017 Special Equity Plan was amended in May 2020 to modify the performance period ending date for purposes of the compounded annual growth rate calculation to February 20, 2020, shortening the performance period to approximately 33 months, representing a reduction of three months. This adjustment was considered a modification per Accounting Standards Codification 718, Compensation - Stock Compensation, and, therefore, any incremental fair value arising from the modification of an award with market conditions would be recognized over the remaining service period. As a result of the modification, we recognized an additional $5.9 million in Share-based compensation expense during the second quarter of 2020.

We recognized a total of approximately ~~$9.0~~$3.2 million and ~~$12.5~~$3.5 million of share-based compensation expense for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and a total of approximately $3.4 million and $6.7 million for the three and six months ended June 30, 2019,~~ respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

1918

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Note PO — Supplemental Executive Retirement Plans

Defined Benefit Supplemental Executive Retirement Plan

Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives. The DB SERP, which we administer, calls for 15 annual payments upon retirement with the payment amount based on years of service and final average salary. Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates, and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.

We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The change in net benefit cost and obligation during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ is as follows:

Change in Benefit Obligation:


(in thousands)	2020		2019		2021		2020
Benefit obligation as of March 31	$	17,556	$	17,299
Benefit obligation as of December 31, 2020 and 2019, respectively					$	19,746	$	19,214
Service cost		98		84		123		98
Interest cost		121		164		87		121
Payments		(12)		(12)		(1,877)		(1,877)
Benefit obligation as of June 30	$	17,763	$	17,535

Benefit obligation as of December 31, 2019 and 2018, respectively	$	19,214	$	18,927
Service cost		196		168
Interest cost		242		329
Payments		(1,889)		(1,889)
Benefit obligation as of June 30	$	17,763	$	17,535
Benefit obligation as of March 31					$	18,079	$	17,556

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)	2020		2019		2021		2020
Current accrued expenses and other current liabilities	$	1,913	$	1,913	$	1,913	$	1,913
Non-current other liabilities		15,850		17,301		16,166		17,833
Total accrued liabilities	$	17,763	$	19,214	$	18,079	$	19,746

Defined Contribution Supplemental Executive Retirement Plan

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

As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the estimated accumulated obligation benefit is ~~$4.0~~$4.9 million and ~~$3.9~~$4.5 million, of which ~~$3.7~~$4.7 million and ~~$3.3~~$4.0 million is funded and ~~$0.3~~$0.2 million and ~~$0.6~~$0.5 million is unfunded at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

~~Table of Contents~~

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 IH - “Other Current Assets and Other Assets” for additional information.

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Note QP — 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~~

~~Derivative Litigation~~

In February and August of 2015, 2 separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated into ~~Judy v. Asar, et. al.,~~ ~~Cause No. D-1-GN-15-000625~~. ~~On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 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 sought unspecified damages, costs, attorneys’ fees, and equitable relief.

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

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

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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 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.

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 the settlement and ordering that notice of the settlement be made to 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.

Other Matters

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

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

Note RQ — Segment and Related Information

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

Patient Care — This segment consists of (i) our owned and operated patient care clinics, and (ii) our contracting and network management business. The patient care clinics provide services to design and fit O&P devices to patients. These clinics also instruct patients in the use, care, and maintenance of the devices. The principal reimbursement sources for our services are:

●

Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation, workers’ compensation programs, and similar sources;

●

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

●

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

●

the VA.

~~Table of Contents~~

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

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

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

The accounting policies of the segments are the same as those described in Note A - “Organization and Summary of Significant Accounting Policies” in our ~~2019~~2020 Form 10-K.

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

Summarized financial information concerning our reporting segments is shown in the following tables. Total assets for each of the segments has not materially changed from December 31, ~~2019.~~2020.


	Patient Care				Products & Services				Patient Care				Products & Services
	For the Three Months Ended				For the Three Months Ended				For the Three Months Ended				For the Three Months Ended
	June 30,				June 30,				March 31,				March 31,
(in thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Net revenues
Third party	$	195,859	$	231,168	$	37,575	$	49,930	$	195,682	$	190,183	$	41,788	$	43,556
Intersegments		—		—		42,866		51,696		—		—		47,047		46,022
Total net revenues		195,859		231,168		80,441		101,626		195,682		190,183		88,835		89,578
Material costs
Third party suppliers		50,489		62,948		19,483		28,451		51,617		53,124		23,553		24,117
Intersegments		4,747		6,189		38,119		45,507		8,305		6,553		38,742		39,469
Total material costs		55,236		69,137		57,602		73,958		59,922		59,677		62,295		63,586
Personnel expenses		63,576		78,419		10,246		13,071		75,754		76,345		14,126		12,840
Other expenses		13,601		37,336		4,337		7,077		36,141		38,148		5,803		8,320
Depreciation & amortization		4,827		4,502		2,498		2,596		4,815		4,476		1,935		2,752
Segment income from operations	$	58,619	$	41,774	$	5,758	$	4,924	$	19,050	$	11,537	$	4,676	$	2,080

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


	For the Three Months Ended March 31,
(in thousands)	2021		2020
Income (loss) from operations
Patient Care	$	19,050	$	11,537
Products & Services		4,676		2,080
Corporate & other		(21,705)		(22,790)
Income (loss) from operations		2,021		(9,173)
Interest expense, net		7,340		8,269
Non-service defined benefit plan expense		167		158
Loss before income taxes		(5,486)		(17,600)
Benefit for income taxes		(2,156)		(1,852)
Net loss	$	(3,330)	$	(15,748)

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Patient Care

Products & Services

For the Six Months Ended

For the Six Months Ended

June 30,

June 30,
(in thousands)

2020

2019

2020

2019
Net revenues








Third party

$
386,042

$
421,769

$
81,131

$
95,748
Intersegments

—

—

88,888

96,575
Total net revenues

386,042

421,769

170,019

192,323
Material costs

Third party suppliers

103,613

116,303

43,600

53,473
Intersegments

11,300

11,984

77,588

84,591
Total material costs

114,913

128,287

121,188

138,064
Personnel expenses

139,921

152,128

23,086

26,073
Other expenses

51,749

74,769

12,657

14,025
Depreciation & amortization

9,303

9,054

5,250

5,139
Segment income from operations

$
70,156

$
57,531

$
7,838

$
9,022

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

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,
(in thousands)

2020

2019

2020

2019
Income from operations

Patient Care

$
58,619

$
41,774

$
70,156

$
57,531
Products & Services

5,758

4,924

7,838

9,022
Corporate & other

(25,516)

(23,595)

(48,306)

(45,429)
Income from operations

38,861

23,103

29,688

21,124
Interest expense, net

8,636

8,481

16,906

17,019
Non-service defined benefit plan expense

158

173

316

346
Income before income taxes

30,067

14,449

12,466

3,759
(Benefit) provision for income taxes

(987)

4,414

(2,840)

675
Net income

$
31,054

$
10,035

$
15,306

$
3,084

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				For the Three Months Ended March 31,
(in thousands)	2020		2019		2020		2019		2021		2020
Net revenues
Patient Care	$	195,859	$	231,168	$	386,042	$	421,769	$	195,682	$	190,183
Products & Services		80,441		101,626		170,019		192,323		88,835		89,578
Corporate & other		—		—		—		—		—		—
Consolidating adjustments		(42,866)		(51,696)		(88,888)		(96,575)		(47,047)		(46,022)
Consolidated net revenues	$	233,434	$	281,098	$	467,173	$	517,517	$	237,470	$	233,739

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


	For the Three Months Ended March 31,
(in thousands)	2021		2020
Material costs
Patient Care	$	59,922	$	59,677
Products & Services		62,295		63,586
Corporate & other		—		—
Consolidating adjustments		(47,047)		(46,022)
Consolidated material costs	$	75,170	$	77,241

Note R — Subsequent Events

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

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

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

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,
(in thousands)

2020

2019

2020

2019
Material costs








Patient Care

$
55,236

$
69,137

$
114,913

$
128,287
Products & Services

57,602

73,958

121,188

138,064
Corporate & other

—

—

—

—
Consolidating adjustments

(42,866)

(51,696)

(88,888)

(96,575)
Consolidated material costs

$
69,972

$
91,399

$
147,213

$
169,776

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

These statements involve risks, estimates, assumptions, and uncertainties that could cause actual results to differ materially from those expressed in these statements and elsewhere in this report. These uncertainties include, but are not limited to, the financial and 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 other disruptions to information technology systems; the inability to successfully execute our acquisition strategy, including integration of recently acquired O&P clinics into our existing business; changes in the demand for our O&P products and services, including additional competition in the O&P services market; disruptions to our supply chain; our ability to enter into and derive benefits from managed-care contracts; our ability to successfully attract and retain qualified O&P clinicians; and other risks and uncertainties generally affecting the health care industry.

Readers are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. “Risk Factors”, contained in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 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 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 ~~2019~~2020 Form 10-K, ~~and in this Quarterly Report on Form 10-Q,~~ or by other unknown risks and uncertainties.

Non-GAAP Measures

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

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

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Business Overview

General

We are a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries, and we and our predecessor companies have provided O&P services for ~~over 150~~nearly 160 years. We provide O&P services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments - Patient Care and Products & Services.

Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication, and delivery of custom O&P devices through ~~707~~718 patient care clinics and ~~108~~107 satellite locations in 46 states and the District of Columbia as of ~~June 30, 2020.~~March 31, 2021. 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 engage in the distribution of a broad catalog of O&P parts, componentry, and devices to independent O&P providers nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately ~~4,000~~3,900 skilled nursing and post-acute providers nationwide.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2021, our net revenues were $237.5 million and we recorded net loss of $3.3 million. For the three months ended March 31, 2020, our net revenues were ~~$233.4~~$233.7 million ~~and $467.2 million, respectively,~~ and we recorded net ~~income~~loss of ~~$31.1 million and $15.3~~$15.7 million. ~~For the three and six months ended June 30, 2019, our net revenues were $281.1 million and $517.5 million, respectively, and we recorded net income of $10.0 million and $3.1 million, respectively.~~

Industry Overview

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

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

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

We estimate that approximately ~~$1.7~~$1.8 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components, devices, and supplies used in their businesses. Our Products & Services segment distributes to independent providers of O&P ~~services and supplies our own patient care clinics.~~services. We estimate that our distribution sales account for approximately 8%9% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).

We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be approximately $150 million annually. We currently provide these products and services to approximately ~~25%~~24% of the estimated 15,000 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs, and training within the broader post-acute rehabilitation markets to be approximately $400 million annually. We do not currently provide a meaningful amount of products and services to this broader market.

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Business Description

Patient Care

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

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

Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs. When fabricating a device, our clinicians ascertain the specific requirements, componentry, and measurements necessary for the construction of the device. Custom devices are constructed using componentry provided by a variety of third party manufacturers who 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,~~We utilize multiple scanning and imaging technologies in the fabrication process, depending on the patient’s individual needs, including our proprietary Insignia scanning ~~system is used in the fabrication process.~~system. The Insignia system scans the patient and produces an accurate computer-generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.

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

The principal reimbursement sources for our services are:

●

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

●

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

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the VA.

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

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

We, and the O&P industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits, ~~Zone Program Integrity Contractor (“ZPIC”) audits,~~ Supplemental Medical Review Contractor (“SMRC”) audits, and ~~Universal Payment Identification Code~~Unified Program Integrity Contractor (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, ~~ZPIC,~~ and 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 wholly-owned subsidiary, Accelerated Care Plus Corp. (“ACP”), our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute rehabilitation providers. Our value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence-based clinical programs, and ongoing consultative education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We currently serve approximately ~~4,000~~3,900 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~~475,000 SKUs from more than 300 different manufacturers through SPS or directly to our own clinics within our Patient Care segment. Our warehousing and distribution facilities in Nevada, Georgia, Illinois, ~~Pennsylvania,~~ and Texas provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days. The distribution facility we formerly operated in Pennsylvania ceased operations in September 2020.

Our supply chain organization enables us to:

●

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

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

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improve inventory quality control;

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

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coordinate new product development efforts with key vendors.

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Effects of the COVID-19 Pandemic

Beginning in the last weeks of March 2020, our 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. In response, during the last week of March 2020, we made certain changes to our operations, implemented a broad number of cost reduction measures, and delayed certain capital investment projects. Although ~~as the quarter progressed,~~ our business volumes ~~showed~~have shown gradual improvement from their initial significant decline in mid- 2020, the adverse impact of the COVID-19 pandemic on our business has continued ~~into~~through the first quarter of 2021. As a result, our comparative financial and operational results when viewed as a whole for the periods impacted by the COVID-19 pandemic, including temporary cost reduction measures largely in place during the second and third ~~quarter. These~~quarters of 2020, may not be indicative of future financial and operational performance. The volume effects and our operating responses are discussed further in this section, and the effects of COVID-19 on our financial condition is discussed in the “Financial Condition, Liquidity and Capital Resources” section below.

Effect on Business Volumes

~~During the months of April, May, and June 2020, patient~~Patient appointments in our ~~Patient Care Clinics~~clinics during the first quarter of 2021 declined by approximately ~~40%, 34%, and 24%, respectively,~~3% as compared ~~with~~to the ~~same~~corresponding period in ~~2019. This constituted an approximate average decrease of 33% in patient appointments during the three months ended June 30,~~ 2020. During the quarter, ~~we experienced a relatively lower decline in prosthetic patient volumes as compared~~our prosthetics and orthotics day-adjusted sales, excluding acquisitions, increased by approximately 1.0% and 1.9% respectively, with ~~orthotic patient volumes. Given the higher relative price of prosthetic devices that resulted in a more favorable product mix, same-clinic~~same clinic revenues ~~within our Patient Care segment declined at a lower rate than patient appointments, reflecting a decrease of 18.7%,~~increasing by 1.4% on a per day basis, aswhen compared ~~with~~to the ~~comparable~~same period ~~last~~in the prior year. As of the end of ~~June 2020,~~March 2021, we ~~had temporarily closed 24~~re-opened all of our patient care clinics, ~~and another 137~~although 38 clinics were open for reduced hours or by appointment only. We believe the generally more acute nature of conditions that lead to the need for prosthetics and orthotics, the patient age demographics and the relatively greater impact that the absence of access to these devices can have on a ~~patient's~~patient’s daily life were the primary reasons that have led to the ~~relatively lower decline in prosthetic patients as compared with orthotic patients~~graduated improvement in our ~~Patient Care Segment during the period.~~business results. Billings for componentry delivered to independent providers of orthotics and prosthetics by our distribution services business ~~decreased by approximately 30%~~remained flat during the first quarter ~~ended June 30, 2020~~of 2021, as compared to the same period in 2019. 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.2020. Due to significant geographic product mix and timing differences, there can be no assurance that these volumes or billing amounts will be reflective of our future results and are solely provided for the purposes of giving context to the magnitude of the effect of the COVID-19 pandemic on our business during the ~~second quarter.~~periods impacted by the COVID-19 pandemic.

~~Given that~~In the ~~development~~early months of 2021, vaccines for combating COVID-19 were authorized by the US Food and Drug Administration, and the US government commenced a ~~clearly effective medical treatment approach for treating COVID-19 does not appear imminent and that~~phased roll out of these vaccines. However, the ~~vast majority~~initial quantities of the ~~general population~~vaccines were limited, and the US government prioritized distribution to front-line health care workers and other essential workers, followed by individual populations that are most susceptible to the severe effects of COVID-19. Given the ~~United States has not developed natural immunity,~~continuing impact of restrictions to mitigate the spread of COVID-19 and unknown challenges with regards to the effectiveness, distribution, and acceptance of COVID-19 vaccines, 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 anticipated continuing governmental measures~~in 2021 when compared 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.pre- pandemic levels.

Nevertheless, ~~we do believe that~~ the overall adverse impact ~~will diminish~~of the COVID-19 pandemic on our business volumes has diminished over time, and ~~that~~ our patient appointment and other business volumes ~~will~~continue to gradually improve as the prevalence of the virus decreases and ~~social distancing, masking and testing measures~~COVID-19 vaccines become more ~~routine, and the perception of infection risks subside.~~widely available. Additionally, we believe that if a patient is initially unable or unwilling to come to one of our clinics to receive their prosthetic or orthotic device, then their ultimate need for that device is not likely to change, and ~~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 are considered essential, we have continued to operate our businesses. However, due to the risks posed to our clinicians, other employees, and patients, we have made certain changes to our operating practices in order to promote safety and to minimize the risk of virus transmission. These have included the implementation of certain patient screening protocols and the relocation of certain administrative and support personnel to a “work at home” environment. ~~We have also changed the operating days and hours of certain of our clinics to adapt to changes in patient volumes.~~

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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 historical 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~~varied from lower amounts for lower salaried employees up to reduction amounts ranging from 47% to 100% for our senior leadership team; (ii) the furloughing of certain employees on a voluntary and involuntary basis; (iii) the reduction of work hours for non-exempt employees; (iv) modification of bonus, commission, and other variable incentive plans; (v) the reduction of overtime expenses; (vi) the elimination of certain open positions; (vii) a reduction in the use of contract employees, and (viii) the temporary suspension of certain auto allowances. During the period April 2020 through September 2020, salaries were gradually reinstated, with full reinstatement of all exempt employees’ salaries being effective on September 19, 2020. We 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 (the “Reduction Period”). Due to the trends in our business volumes discussed in the ~~Effect on Business Volumes~~ section, on June 8, 2020, we announced we had reinstated a portion of the salary reduction for our exempt employees. Effective July 11, 2020, we reinstated an additional portion of the salary reduction for our exempt employees, resulting in an average 11% decrease in salaries for the remainder of the Reduction Period. In addition, after giving effect to the reinstatements above, the salary reductions of our senior leadership team range from 15% to 100% for the remainder of the Reduction Period. Our decision to reduce employee wages rather than to implement a more permanent reduction in force was based on our preference 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. Additionally,believe this approach ~~has~~ allowed us to retain as many employees as possible to preserve the experience, culture, and patient service capabilities of our workforce for periods subsequent to the COVID-19 pandemic. ~~We have not implemented changes to employee benefits, nor do we currently intend to suspend our 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, which amounted to $16.7 million and $33.0 million during the three and six months ended June 30, 2020, respectively, has proven difficult to meaningfully reduce in the short term.

Excluding reductions in componentry costs, which varied in a corresponding fashion with decreases in revenue, these cost reduction measures provided savings in the approximate amount of $35 million in operating expenses for the three month period ended June 30, 2020. We believe these expense reductions are temporary in nature, and are not sustainable during periods of normal operation. Due to the fact that by early July 2020 we have restored approximately two thirds of our wage reductions, and have reduced the number of employees who are on furlough, we currently expect that there will be a substantial reduction in the amount of benefit we receive from these cost reduction actions in coming quarters.

In addition to these reductions in operating expenses, we ~~have elected to~~ temporarily ~~delay~~delayed the implementation of our supply chain and financial systems, further discussed in the “New Systems Implementations” section. We ~~have not established a date for recommencement of this systems initiative, but currently believe it is likely that the project will not recommence until at least early 2021. We have~~ also suspended construction of our new fabrication facility in Tempe, Arizona, and other projects related to the reconfiguration of our distribution facilities. We resumed construction of the Tempe, Arizona fabrication facility in the first quarter of 2021, and anticipate that we will recommence the remaining activities in the second quarter of 2021. These actions to delay activities during 2020 will correspondingly delay 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.

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 remainder of 2020. 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 the foreseeable future.

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CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside ~~$100.0~~$178.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the COVID-19 pandemic, such as lost revenues attributable to canceled procedures, as well as to provide support for health-care related expenses. In April 2020, HHS began making payments to healthcare providers from the ~~$100.0~~$178.0 billion appropriation. These are ~~payments,~~grants, rather than loans, to healthcare providers, and will not need to be repaid.

During ~~the second quarter of~~ 2020, we recognized ~~$20.5~~a total benefit of $24.0 million in ~~Income from~~our consolidated statement of operations ~~related to Grants~~within Other operating costs for the grant proceeds we received ~~in two separate distributions~~under the CARES Act from HHS. In ~~addition, as of June 30, 2020,~~April 2021, we ~~have recorded a liability of $3.5~~received approximately $0.7 million ~~within Accrued expenses and other liabilities~~ in additional grant proceeds under the ~~condensed consolidated balance sheet for Grant proceeds that have not met the recognition criteria for income.~~CARES Act from HHS.

Other Products & Services Performance Considerations

As discussed in our ~~2019~~2020 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~~three months ended ~~June 30, 2020~~March 31, 2021, which resulted in our discontinuing distribution services to these customers. 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 services. We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities. As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations. Within this portion of our business, we have and continue to respond to these historical trends through the expansion of our products and services offerings.

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Reimbursement Trends

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Medicare	32.8	% ��	32.7	%	32.6	%	31.6	%	29.3	%	32.5	%
Medicaid	16.0	%	16.2	%	16.1	%	16.0	%	17.4	%	16.2	%
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)	36.2	%	34.1	%	35.6	%	35.3	%
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)									35.6	%	34.9	%
Veterans Administration	8.6	%	9.7	%	9.0	%	9.7	%	10.1	%	9.4	%
Private Pay	6.4	%	7.3	%	6.7	%	7.4	%	7.6	%	7.0	%
Patient Care	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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Patient Care constituted ~~83.9%~~82.4% and ~~82.6%~~81.4% of our net revenues for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 82.2% and 81.5% for the three and six months ended June 30, 2019.~~respectively. Our remaining net revenues were provided by our Products & Services segment which derives its net revenues from commercial transactions with independent O&P providers, healthcare facilities, and other customers. In contrast to net revenues from our Patient Care segment, payment for these products and services are not directly subject to third party reimbursement from health care payors.

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

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

For example, the Medicare contractor for Pricing, Data Analysis and Coding (referred to as “PDAC”) recently announced verification requirements and code changes that has reduced the reimbursement level for certain prosthetic feet, and the VA is in ~~industry trends have been brought about in part by increased nationwide efforts~~the process of reassessing the method it uses to ~~reduce health care costs.~~determine reimbursement levels for O&P services and products provided under certain miscellaneous codes.

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

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

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~~Disallowed revenue~~Payor disallowances is considered an adjustment to the transaction price. Estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are presented as a reduction of net revenues. These amounts recorded in net revenues within the Patient Care segment for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ are as follows:


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,						For the Three Months Ended March 31,
(dollars in thousands)	2020			2019			2020			2019			2021			2020
Gross charges	$	202,536		$	244,258		$	402,489		$	444,701		$	201,452		$	199,953
Less estimated implicit price concessions arising from:
Payor disallowances		6,577			9,784			14,651			18,258			4,514			8,075
Patient non-payments		100			3,306			1,796			4,674			1,256			1,695
Payor disallowances and patient non-payments		6,677			13,090			16,447			22,932			5,770			9,770
Net revenues	$	195,859		$	231,168		$	386,042		$	421,769		$	195,682		$	190,183

Payor disallowances	$	6,577		$	9,784		$	14,651		$	18,258		$	4,514		$	8,075
Patient non-payments		100			3,306			1,796			4,674			1,256			1,695
Payor disallowances and patient non-payments	$	6,677		$	13,090		$	16,447		$	22,932		$	5,770		$	9,770

Payor disallowances%		3.2	%		4.0	%		3.6	%		4.1	%
Patient non-payments%		0.1	%		1.4	%		0.5	%		1.1	%
Payor disallowances %														2.3	%		4.0	%
Patient non-payments %														0.6	%		0.9	%
Percent of gross charges		3.3	%		5.4	%		4.1	%		5.2	%		2.9	%		4.9	%

Payor disallowances and patient non-payments as percentage of gross charges both decreased significantly in the first quarter as compared with the first quarter of the prior year. During 2020 and the first quarter of 2021, we benefited from reductions in claims denials and increases in our rates of collection. This has been due to a variety of factors, including increases in our revenue cycle management staffing and an increased focus on collections and liquidity during a period of reduced business volumes, a possible temporary relaxing of payor review procedures during the COVID-19 pandemic, the benefit of CARES Act funds on the ability of patients to pay their portion of claims and other factors relating to our pre-authorization and documentation procedures for devices. We do not believe this favorable trend will necessarily be sustainable in future periods as the COVID-19 pandemic subsides and patient volumes and resulting revenues increase.

Acquisitions

~~On April 1, 2020,~~In the first quarter of 2021, we ~~acquired~~completed the acquisitions of all of the outstanding equity interests of anthree O&P businesses and the assets of one O&P business for total consideration of ~~$46.1~~$24.2 million, ~~at fair value,~~ of which ~~$16.8~~$19.2 million was cash consideration, net of cash acquired, ~~$21.9~~$4.0 million was issued in the form of notes to ~~the former~~ shareholders ~~$3.5 million in the form of a deferred payment obligation to the former shareholders~~at fair value, and ~~$3.9~~$1.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes are payable in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Payments totaling $3.5 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter. Additional consideration includes approximately $3.5 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the condensed consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of high quality O&P providers.

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During ~~2019,~~2020, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows:

●

In the ~~first~~second quarter of ~~2019,~~2020, we ~~completed the acquisition~~acquired all of ~~all~~ the outstanding equity interests of an O&P business for total consideration of ~~$32.8~~$46.2 million at fair value, of which ~~$27.7~~$16.8 million was cash consideration, net of cash acquired, ~~$4.4~~$21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former shareholders, and $4.0 million in additional consideration. Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Total payments of $4.0 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter. Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of this high quality O&P provider.

In the fourth quarter of 2020, we completed the acquisitions of all the outstanding equity interests of four O&P businesses for total consideration of $7.1 million, of which $4.9 million was cash consideration, net of cash acquired, $1.9 million was issued in the form of notes to shareholders at fair value, and ~~$0.7~~$0.3 million ~~was~~in additional consideration.

In the second quarter of 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $0.5 million, of which $0.2 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

In the third quarter of 2019, we completed the 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 $3.3 million, of which $3.0 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

~~Table~~Acquisition-related costs are included in general and administrative expenses in our consolidated statements of ~~Contents~~

In fourth quarter of 2019, we completed the 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 the form of notes to shareholders at fair value.

operations. Total acquisition-related costs incurred during the three ~~and six months~~month period ended ~~June 30, 2020~~March 31, 2021 were ~~$0.0~~$0.4 million, ~~and $0.5 million, respectively, and~~which includes those costs for transactions that are ~~included~~ in ~~General and administrative expenses in our consolidated statement of operations.~~progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2020~~March 31, 2021 were ~~$0.0 million and $0.4 million, respectively.~~$0.2 million. Total acquisition-related costs incurred during the year ended December 31, ~~2019~~2020 were ~~$1.5~~$0.9 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~~2020 were ~~$1.0~~$0.6 million.

In response to the expected economic impact of the COVID-19 pandemic, we have implemented certain cost mitigation and liquidity management strategies, including the temporary delay of our acquisitions of O&P providers, subject to certain conditions and thresholds in the first amendment to our 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 commenced the design, planning, and initial implementation of new financial and supply chain systems (“New Systems Implementations”), and planned to invest in new servers and software that operate as a part of our technology infrastructure. In connection with our new financial and supply chain systems, for the three and six month period ended June 30, 2020, we have expensed $0.6 million and $1.5 million, respectively, and for the year ended December 31, 2019, we expensed $2.9 million. We currently anticipate that we will spend $2.6 million for the full year in 2020.

As discussed in the “Effects of the COVID-19 Pandemic” section, we ~~have~~ elected in 2020 to temporarily delay our New Systems Implementations as part of our efforts to preserve liquidity. We ~~have not set a date~~recommenced these activities in the second quarter of 2021.

In connection with our new financial and supply chain systems, for ~~recommencement of~~the three month period ended March 31, 2021 and March 31, 2020, we expensed $0.6 million and $0.9 million, respectively. For the year ended December 31, 2020, we expensed $2.6 million. We currently anticipate that we will spend $5.6 million for the full year 2021 on 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.systems.

As of ~~June 30, 2020,~~March 31, 2021, we capitalized ~~$4.6~~$5.5 million of implementation costs for cloud computing arrangements, net of accumulated amortization, and recorded in other current assets and other assets in the condensed consolidated balance sheet.

~~Effect of Delay in Financial Filings~~Personnel

~~As discussed~~While we have traditionally been able to recruit and retain adequate staffing to operate and support our business, our ability to support growth is dependent on our ability to add new personnel. Nevertheless, as many employers are experiencing, we are currently finding it difficult to recruit and retain personnel in ~~our 2019 Form 10-K, due~~certain positions, including clinic front office administrative, distribution center, and fabrication center positions. We may find it necessary to ~~prior restatements and related issues,~~increase wages in these areas in coming quarters if 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 incurred third party professional fees in excess of the amounts we estimatefind 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
June 30, 2020

—

(1,307)

—

~~During the first quarter~~unable to attract a sufficient number 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 incur further excess third party professional fees for these purposes in future periods.personnel.

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Seasonality

We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year. The first quarter is normally our lowest relative net revenue quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another. Due to the general fulfillment by patients of their health plan co-payments and deductible requirements towards the year’s end, our fourth quarter is normally our highest revenue producing quarter. However, historical seasonality ~~may be~~patterns have been impacted by the COVID-19 pandemic and ~~historical seasonal patterns~~ may not be reflective of our prospective financial results and ~~operations for the remainder of 2020.~~operations. Please refer to the “Effects of the COVID-19 Pandemic” section for further discussion.

Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This ~~one-week~~ event is conducted to assist our clinicians in maintaining their training and certification requirements and to facilitate a national meeting with our clinical leaders. We also invite manufacturers of the componentry for the devices we fabricate to these annual events so they can demonstrate their products and otherwise assist in our training process. Due to the COVID-19 pandemic, we conducted our first virtual education fair in 2021. During the ~~first quarter of~~three months ended March 31, 2021 and 2020 ~~and 2019,~~ we spent ~~approximately~~$0.3 million and $2.3 million ~~in each of these two years,~~ on travel and other costs associated with this ~~one-week event.~~event, respectively. In addition to the costs we incur associated with this annual event, we also lose the productivity of a significant portion of our clinicians during the ~~one-week~~ period in which this event occurs, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.

Critical Accounting Policies

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

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 ~~2019~~2020 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note A - “Organization and Summary of Significant Accounting Policies” contained within these condensed consolidated financial statements.

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Results of Operations

Our results of operations for the three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows (unaudited):


	For the Three Months Ended						For the Three Months Ended
	June 30,				Percent Change		March 31,				Percent Change
(dollars in thousands)	2020		2019		2020 vs 2019		2021		2020		2021 vs 2020
Net revenues	$	233,434	$	281,098	(17.0)	%	$	237,470	$	233,739	1.6	%
Material costs		69,972		91,399	(23.4)	%		75,170		77,241	(2.7)	%
Personnel costs		73,822		91,490	(19.3)	%		89,880		89,185	0.8	%
Other operating costs		8,277		33,741	(75.5)	%		31,460		35,886	(12.3)	%
General and administrative expenses		31,874		29,358	8.6	%		30,941		31,769	(2.6)	%
Professional accounting and legal fees		1,749		3,247	(46.1)	%
Depreciation and amortization		8,879		8,760	1.4	%		7,998		8,831	(9.4)	%
Operating expenses		194,573		257,995	(24.6)	%		235,449		242,912	(3.1)	%
Income from operations		38,861		23,103	68.2	%
Income (loss) from operations								2,021		(9,173)	122.0	%
Interest expense, net		8,636		8,481	1.8	%		7,340		8,269	(11.2)	%
Non-service defined benefit plan expense		158		173	(8.7)	%		167		158	5.7	%
Income before income taxes		30,067		14,449	108.1	%
(Benefit) provision for income taxes		(987)		4,414	(122.4)	%
Net income	$	31,054	$	10,035	209.5	%
Loss before income taxes								(5,486)		(17,600)	68.8	%
Benefit for income taxes								(2,156)		(1,852)	(16.4)	%
Net loss							$	(3,330)	$	(15,748)	78.9	%

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


	For the Three Months Ended
	June 30,				For the Three Months Ended March 31,
	2020		2019		2021		2020
Material costs	30.0	%	32.5	%	31.7	%	33.0	%
Personnel costs	31.6	%	32.5	%	37.8	%	38.2	%
Other operating costs	3.6	%	12.1	%	13.2	%	15.3	%
General and administrative expenses	13.7	%	10.4	%	13.0	%	13.6	%
Professional accounting and legal fees	0.7	%	1.2	%
Depreciation and amortization	3.8	%	3.1	%	3.4	%	3.8	%
Operating expenses	83.4	%	91.8	%	99.1	%	103.9	%

Three Months Ended ~~June 30, 2020~~March 31, 2021 Compared to the Three Months Ended ~~June 30, 2019~~March 31, 2020

Relevance of ~~Second~~First Quarter Results to Comparative and Future Periods.As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter of 2020, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend which continued ~~through June~~throughout 2020 and into ~~the third quarter.~~2021. The effects of this public health emergency on our revenues and earnings in the three months ended ~~June 30, 2020~~March 31, 2021 impacted the comparison to our historical financial results. ~~Due to~~As a result, our comparative financial and operational results when viewed as a whole for the ~~uncertainty surrounding the future economic and social impacts of~~periods impacted by the COVID-19 pandemic, ~~such comparison~~including temporary cost reduction measures largely in place during the second and third quarters of 2020, may not be indicative of future ~~results.~~financial and operational performance. Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.

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Net revenues. Net revenues for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$233.4~~$237.5 million, ~~a decrease~~an increase of ~~$47.7~~$3.7 million, or ~~17.0%~~1.6%, from ~~$281.1~~$233.7 million for the three months ended ~~June 30, 2019.~~March 31, 2020. Net revenues by operating segment, after elimination of intersegment activity, were as follows:


	For the Three Months Ended									For the Three Months Ended
	June 30,						Percent		March 31,						Percent
(dollars in thousands)	2020		2019		Change		Change		2021		2020		Change		Change
Patient Care	$	195,859	$	231,168	$	(35,309)	(15.3)	%	$	195,682	$	190,183	$	5,499	2.9	%
Products & Services		37,575		49,930		(12,355)	(24.7)	%		41,788		43,556		(1,768)	(4.1)	%
Net revenues	$	233,434	$	281,098	$	(47,664)	(17.0)	%	$	237,470	$	233,739	$	3,731	1.6	%

Patient Care net revenues for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$195.9~~$195.7 million, ~~a decrease~~an increase of ~~$35.3~~$5.5 million, or ~~15.3%~~2.9%, from ~~$231.2~~$190.2 million for the same period in the prior year. Same clinic revenues decreased ~~$41.3~~$3.3 million for the three months ended ~~June 30, 2020~~March 31, 2021. However, on a day-adjusted basis, excluding acquisitions, same clinic revenues increased by 1.4%, as there were two fewer business days in the first quarter of 2021 as compared to ~~the same period in the prior year, reflecting a decrease of 18.7% on a per-day basis.~~2020. Net revenues from acquired clinics and consolidations increased ~~$6.2~~$9.0 million, and revenues from other services decreased $0.2 million.

Prosthetics constituted approximately ~~61%~~52% of our total Patient Care revenues for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 55% for the same period in 2019,~~ excluding the impact of acquisitions. Prosthetic revenues for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~8.9% lower,~~1.0% higher, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions. Orthotics, shoes, inserts, and other products ~~decreased~~increased by ~~30.4%~~1.9% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions. Revenue growth in the quarter was benefited by decreases in disallowance and patient non-payment rates as compared to the prior year period, please refer to the “Reimbursement Trends” section above for a discussion of these favorable trends. Revenues in the latter half of March 2020 were adversely affected ~~during the quarter~~ due to a decline in patient appointment volumes ~~beginning in the last weeks of March and continuing through the second quarter of 2020~~ as a result of the onset of the COVID-19 pandemic, governmental suppression measures implemented in response to the COVID-19 pandemic, ~~the continuing increase in viral infections during the second quarter of 2020,~~ and other factors impacting our business volumes discussed in the “Effects of the COVID-19 Pandemic” section.

Products & Services net revenues for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$37.6~~$41.8 million, a decrease of ~~$12.4~~$1.8 million, or ~~24.7%~~4.1% from the same period in the prior year. This was primarily attributable to a decrease of ~~$11.1~~$1.0 million, or ~~29.6%~~3.3%, in the distribution of O&P componentry to independent providers stemming primarily from ~~lower volumes due to the COVID-19 pandemic, as discussed~~there being two fewer business days in the ~~“Effects~~first quarter of 2021 as compared with that of 2020. Within our distribution services, decreases in revenue associated with the ~~COVID-19 Pandemic” section above,~~discontinuance of providing certain off-the-shelf orthotics to podiatry distributors and reductions in revenue associated with our acquisition of independent orthotics and prosthetic providers were offset by increases in volumes to ~~a lesser extent from a change in~~new customers and the ~~business mix.~~expansion of sales to existing customers of additional componentry items added to our product offerings. In addition, net revenues from therapeutic solutions decreased ~~$1.2~~$0.8 million, or ~~9.9%~~6.2%, primarily as a result of the impact of historical customer lease cancellations ~~partially offset by lease installations in the second quarter of 2020.~~

~~Beginning in the latter half of March 2020~~ and continuing throughout the second quarter of 2020, our business volumes were adversely affected by the COVID-19 pandemic. We believe that the decline in net revenues during the three months ended June 30, 2020 was primarily due to state and local government restrictions, social distancing and suppression measures adopted by our patients and customers, the deferral of elective surgical procedures, and an increase in viral infections, all of which we believe to have contributed to a decline in physician referrals and patient appointments. These adverse volume effects continued throughout the second quarter of 2020. For additional discussion, refer to the “Effects of the COVID-19 Pandemic” section.discounts.

Material costs. Material costs for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$70.0~~$75.2 million, a decrease of ~~$21.4~~$2.1 million or ~~23.4%~~2.7%, from the same period in the prior year. Total material costs as a percentage of net revenues decreased to ~~30.0%~~31.7% in the three months ended ~~June 30, 2020~~March 31, 2021 from ~~32.5%~~33.0% in the three months ended ~~June 30, 2019~~March 31, 2020 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 Three Months Ended								For the Three Months Ended
	June 30,						Percent		March 31,						Percent
(dollars in thousands)	2020		2019		Change		Change		2021		2020		Change		Change
Patient Care	$	55,236	$	69,137	$	(13,901)	(20.1)	%	$	59,922	$	59,677	$	245	0.4	%
Products & Services		14,736		22,262		(7,526)	(33.8)	%		15,248		17,564		(2,316)	(13.2)	%
Material costs	$	69,972	$	91,399	$	(21,427)	(23.4)	%	$	75,170	$	77,241	$	(2,071)	(2.7)	%

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Patient Care material costs ~~decreased $13.9~~increased $0.2 million, or ~~20.1%~~0.4%, for the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in the prior year as a result of the reduction in segment net sales, offset by additional costs as a result of our acquisitions and changes in the segment product mix. Patient Care material costs as a percent of segment net revenues decreased to ~~28.2%~~30.6% for the three months ended ~~June 30, 2020~~March 31, 2021 from ~~29.9%~~31.4% for the three months ended ~~June 30, 2019.~~March 31, 2020.

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Products & Services material costs decreased ~~$7.5~~$2.3 million, or ~~33.8%~~13.2%, for the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were ~~39.2%~~36.5% for the three months ended ~~June 30, 2020~~March 31, 2021 as compared to ~~44.6%~~40.3% in the same period of ~~2019.~~2020. The decrease in ~~material~~cost of materials as a percent of segment net revenues was primarily due to cost savings related to certain supply chain initiatives and a change in business volume and product mix within the segment.

Personnel costs. Personnel costs for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$73.8~~$89.9 million, ~~a decrease~~an increase of ~~$17.7~~$0.7 million, or ~~19.3%~~0.8%, from ~~$91.5~~$89.2 million for the same period in the prior year. Personnel costs by operating segment were as follows:


	For the Three Months Ended								For the Three Months Ended
	June 30,						Percent		March 31,						Percent
(dollars in thousands)	2020		2019		Change		Change		2021		2020		Change		Change
Patient Care	$	63,576	$	78,419	$	(14,843)	(18.9)	%	$	75,754	$	76,345	$	(591)	(0.8)	%
Products & Services		10,246		13,071		(2,825)	(21.6)	%		14,126		12,840		1,286	10.0	%
Personnel costs	$	73,822	$	91,490	$	(17,668)	(19.3)	%	$	89,880	$	89,185	$	695	0.8	%

Personnel costs for the Patient Care segment were ~~$63.6~~$75.8 million for the three months ended ~~June 30, 2020,~~March 31, 2021, a decrease of ~~$14.8~~$0.6 million, or ~~18.9%~~0.8%, from ~~$78.4~~$76.3 million ~~compared to~~in the same period inof the prior year. The decrease in Patient Care personnel costs during the three months ended ~~June 30, 2020~~March 31, 2021 was primarily related to ~~a decrease~~the release of the vacation accrual of $0.9 million, as well as decreases in salary expense of ~~$16.6~~$0.2 million, ~~due to cost mitigation efforts implemented as a result~~commissions of ~~the COVID-19 pandemic~~$0.2 million, and ~~a decrease in benefits costs of $1.5 million due to reduced claims experience,~~ payroll taxes of ~~$1.0 million, and commissions of $0.5 million,~~$0.1 million. These decreases were offset by an increase of $0.7 million in ~~incentive~~benefits and an increase in variable compensation and other personnel costs of ~~$4.8~~$0.1 million, compared to the three months ended ~~June 30, 2019.~~March 31, 2020.

Personnel costs in the Products & Services segment were ~~$10.2~~$14.1 million for the three months ended ~~June 30, 2020, a decrease~~March 31, 2021, an increase of ~~$2.8~~$1.3 million compared to the same period in the prior year. Salary expense ~~decreased $2.9~~increased $0.5 million ~~due to cost mitigation efforts implemented as a result of the COVID-19 pandemic,~~ and bonus, commissions, and other personnel ~~costs~~cost increased ~~$0.1~~$0.8 million for the three months ended ~~June 30, 2020~~March 31, 2021 compared to the same period in the prior year.

Other operating costs. Other operating costs for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$8.3~~$31.5 million, a decrease of ~~$25.5~~$4.4 million, or ~~75.5%~~12.3%, from ~~$33.7~~$35.9 million for the same period in the prior year. Other operating costs decreased by $19.7 million, largely due to the benefit associated with the recognition of $20.5 million in proceeds from Grants under the CARES Act included in Other operating costs, as discussed in the “Effects of the COVID-19 Pandemic” section. Travel, professional education, and other expenses decreased ~~$5.8~~$4.4 million due to cost mitigation efforts as a result of the COVID-19 pandemic, and bad debt expense decreased ~~$1.2~~$2.1 million primarily due to favorable collection experience. During the quarter we benefited by $2.0 million in travel and professional education expenses through conducting our annual provider meeting and education event as a ~~moderation of forecast assumptions used~~“virtual” event. In future years, we currently believe that this first quarter meeting will be conducted as it has in ~~the estimate.~~prior years, as a physical meeting, and these expenses will resume in those periods. The decreases were offset by a ~~$1.2~~$1.5 million increase in other expenses and a $0.6 million increase in rent expense from new, renewed, and acquired leases as compared to the same period in the prior year.

General and administrative expenses. General and administrative expenses for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~$31.9~~$30.9 million, ~~an increase~~a decrease of ~~$2.5~~$0.8 million, or ~~8.6%~~2.6%, from the same period in the prior year. The increase was primarily the result of incremental share-based compensation expense of $5.9 million recognized during the quarter due to the modification of certain equity awards granted in 2017 and incentive compensation and other personnel-related costs increased by $2.6 million, offset by decreases in salary expense of $3.9 million and other expenses of $2.1 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, 2020 were $1.7 million, a decrease of~~decreased $1.5 million ~~or 46.1%, from $3.2 million for the same period in the prior year~~ primarily due to targeted efforts to remediate material weaknesses in our internal controls over financial reporting that occurred in the three months ended ~~June 30, 2019~~March 31, 2020 that did not recur in the same period of 2021, and salary and other expenses decreased $0.7 million as compared to the same period in the prior year. The decreases were offset by an increase in incentive and other personnel costs of $1.4 million compared to the three months ended March 31, 2020.

Depreciation and amortization. Depreciation and amortization for the three months ended ~~June 30, 2020~~March 31, 2021 was ~~$8.9~~$8.0 million, ~~an increase~~a decrease of ~~$0.1~~$0.8 million, or ~~1.4%~~9.4%, from the same period in the prior year. ~~Amortization~~Depreciation expense ~~increased~~decreased $0.6 million and ~~depreciation~~amortization expense decreased ~~$0.5~~$0.2 million when compared to the same period in the prior year.

~~Table of Contents~~

Interest expense, net. Interest expense for the three months ended ~~June 30, 2020 increased 1.8%~~March 31, 2021 decreased 11.2% to ~~$8.6~~$7.3 million from ~~$8.5~~$8.3 million for the same period in the prior year.

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~~(Benefit) provision~~Benefit for income taxes. The benefit for income taxes for the three months ended ~~June 30, 2020~~March 31, 2021 was ~~$1.0~~$2.2 million, or ~~-3.3%~~39.3% of ~~income~~loss before income taxes, compared to a ~~provision~~benefit of ~~$4.4~~$1.9 million, or ~~30.5%~~10.5% of ~~income~~loss before income taxes for the three months ended ~~June 30, 2019.~~March 31, 2020. The effective tax rate ~~in 2020~~for the three months ended March 31, 2021 consisted principally of the 21% federal statutory tax rate, research and development ~~tax~~ credits, ~~the rate impact from state income taxes, the shortfall from share-based compensation,~~ and permanent tax differences. The ~~decrease~~increase in the effective tax rate for the three months ended ~~June 30, 2020~~March 31, 2021 compared with the three months ended ~~June 30, 2019~~March 31, 2020 is primarily attributable to ~~the recognition of research and development tax credits~~a higher estimated annual pre-tax income impacted less proportionally by nondeductible permanent items for the ~~current and~~three months ended March 31, 2021 as compared to the prior ~~years in the current quarter, partially offset by a shortfall from share-based compensation.~~period.

We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. As of ~~June 30, 2020,~~March 31, 2021, our valuation allowance was approximately $2.1 million.

~~During~~For the ~~second quarter of~~year ended December 31, 2020, we ~~finalized~~completed a formal study to identify qualifying research and development ~~study recognizing~~expenses resulting in the recognition of Federal tax benefits of ~~$2.1~~$2.2 million, net of tax reserves, related to ~~the current year~~2020 and ~~$6.3~~$6.1 million, net of tax reserves, related to prior years. We recorded the tax benefit, before tax reserves, as a deferred tax ~~asset in~~asset. For the ~~second quarter~~year ended December 31, 2021, we estimate a Federal tax benefit of ~~2020.~~$3.0 million, net of tax reserves. We record the tax benefit, before tax reserves, as a deferred tax asset.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and ~~depreciation.~~depreciation, as well as the provision to carryback net operating losses to five preceding years. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. ~~This legislation had~~As a result of the ~~effect~~CARES Act provisions, for the year ended December 31, 2020, we recognized a tax benefit of ~~increasing our deferred income taxes and decreasing~~$4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by approximately $5.4 million. The CARES Act allowed for bonus depreciation on certain types of qualified property and the provision for an increase in the amounts allowed for interest expense for tax years beginning January 1, 2019. We continue to evaluate other aspects of the CARES Act to determine whether other tax benefits are available.

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

For the Six Months Ended

Percent

June 30,

Change

(dollars in thousands)

2020

2019

2020 vs 2019

Net revenues

$
467,173

$
517,517

(9.7)
%
Material costs

147,213

169,776

(13.3)
%
Personnel costs

163,007

178,201

(8.5)
%
Other operating costs

44,163

67,296

(34.4)
%
General and administrative expenses

60,247

57,640

4.5
%
Professional accounting and legal fees

5,145

5,947

(13.5)
%
Depreciation and amortization

17,710

17,533

1.0
%
Operating expenses

437,485

496,393

(11.9)
%
Income from operations

29,688

21,124

40.5
%
Interest expense, net

16,906

17,019

(0.7)
%
Non-service defined benefit plan expense

316

346

(8.7)
%
Income before income taxes

12,466

3,759

231.6
%
(Benefit) provision for income taxes

(2,840)

675

(520.7)
%
Net income

$
15,306

$
3,084

396.3
%

~~Table of Contents~~

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

For the Six Months Ended

June 30,


2020

2019

Material costs

31.5
%
32.8
%
Personnel costs

34.9
%
34.4
%
Other operating costs

9.4
%
13.1
%
General and administrative expenses

12.9
%
11.1
%
Professional accounting and legal fees

1.1
%
1.1
%
Depreciation and amortization

3.8
%
3.4
%
Operating expenses

93.6
%
95.9
%

~~Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019~~

~~Relevance of Six Months Ended Results to Comparative and Future Periods.~~ As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend which continued through June 2020. The effects of this public health emergency on our revenues and earnings in the six months ended June 30, 2020 impacted the comparison to our historical financial results. Due to the uncertainty surrounding the future economic and social impacts of the COVID-19 pandemic, the comparison may not be indicative of future 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 revenues~~. Net revenues for the six months ended June 30, 2020 were $467.2 million, a decrease of $50.3 million, or 9.7%, from $517.5 million for the six months ended June 30, 2019. Net revenues by operating segment, after elimination of intersegment activity, were as follows:

For the Six Months Ended

June 30,

Percent

(dollars in thousands)

2020

2019

Change

Change

Patient Care

$
386,042

$
421,769

$
(35,727)

(8.5)
%
Products & Services

81,131

95,748

(14,617)

(15.3)
%
Net revenues

$
467,173

$
517,517

$
(50,344)

(9.7)
%

Patient Care net revenues for the six months ended June 30, 2020 were $386.0 million, a decrease of $35.7 million, or 8.5%, from $421.8 million for the same period in the prior year. Same clinic revenues decreased $44.3 million for the six months ended June 30, 2020 compared to the same period in the prior year, reflecting a decrease of 11.7% on a per-day basis. Net revenues from acquired clinics and consolidations increased $9.0 million, and revenues from other services decreased $0.4 million.

Prosthetics constituted approximately 57% of our total Patient Care revenues for the six months ended June 30, 2020 and 53% for the same period in 2019, excluding the impact of acquisitions. Prosthetic revenues for the six months ended June 30, 2020 were 5.3% 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 decreased by 18.6% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions. Revenues were adversely affected during the period due to a decline in patient appointment volumes beginning in the last weeks of March and continuing through the second quarter of 2020 as a result of governmental suppression measures implemented in response to the COVID-19 pandemic, the continuing increase in viral infections during the second quarter of 2020, and other factors impacting our business volumes discussed in the “Effects of the COVID-19 Pandemic” section.

Products & Services net revenues for the six months ended June 30, 2020 were $81.1 million, a decrease of $14.6 million, or 15.3% from the same period in the prior year. This was primarily attributable to a decrease of $12.6 million, or 17.8%, in the distribution of O&P componentry to independent providers stemming from lower volumes due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19 Pandemic” section above, and a $2.0 million, or 7.9%, decrease in net revenues from therapeutic solutions as a result of the impact of historical customer lease cancellations, partially offset by lease installations.

~~Table of Contents~~

Beginning in the latter half of March 2020, our business volumes began to be adversely affected by the COVID-19 pandemic, and business volumes were adversely impacted throughout the second quarter of 2020. We believe that the decline in net revenues in the six months ended June 30, 2020 was primarily due to state and local government restrictions, social distancing and suppression measures adopted by our patients and customers, deferral of elective surgical procedures, and an increase in viral infections in the second quarter, all of which resulted in a decline in physician referrals and patient appointments. These adverse volume effects have continued into July 2020. For additional discussion, refer to the “Effects of the COVID-19 Pandemic” section.

~~Material costs~~. Material costs for the six months ended June 30, 2020 were $147.2 million, a decrease of $22.6 million or 13.3%, from the same period in the prior year. Total material costs as a percentage of net revenues decreased to 31.5% in the six months ended June 30, 2020 from 32.8% in the six months ended June 30, 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)

2020

2019

Change

Change

Patient Care

$
114,913

$
128,287

$
(13,374)

(10.4)
%
Products & Services

32,300

41,489

(9,189)

(22.1)
%
Material costs

$
147,213

$
169,776

$
(22,563)

(13.3)
%

Patient Care material costs decreased $13.4 million, or 10.4%, for the six months ended June 30, 2020 compared to the same period in the prior year as a result of our acquisitions and changes in the segment product mix. Patient Care material costs as a percent of segment net revenues increased to 29.8% for the three months ended June 30, 2020 from 30.4% for the six months ended June 30, 2019.

Products & Services material costs decreased $9.2 million, or 22.1%, for the six months ended June 30, 2020 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were 39.8% for the six months ended June 30, 2020 as compared to 43.3% in the same period of 2019. The decrease in material as a percent of segment net revenues was due to a change in business and product mix within the segment.

~~Personnel costs~~. Personnel costs for the six months ended June 30, 2020 were $163.0 million, an increase of $15.2 million, or 8.5%, from $178.2 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)

2020

2019

Change

Change

Patient Care

$
139,921

$
152,128

$
(12,207)

(8.0)
%
Products & Services

23,086

26,073

(2,987)

(11.5)
%
Personnel costs

$
163,007

$
178,201

$
(15,194)

(8.5)
%

Personnel costs for the Patient Care segment were $139.9 million for the six months ended June 30, 2020, a decrease of $12.2 million, or 8.0%, from $152.1 million compared to the same period in the prior year. The decrease in Patient Care personnel costs during the six months ended June 30, 2020 was primarily related to a decrease in salary expense of $13.5 million due to cost mitigation efforts implemented as a result of the COVID-19 pandemic, and a decrease in benefits costs of $2.0 million due to reduced claims experience, payroll taxes of $0.7 million, and commissions by $0.3 million, offset by an increase in incentive compensation and other personnel costs of $4.3 million compared to the six months ended June 30, 2019.

Personnel costs in the Products & Services segment were $23.1 million for the six months ended June 30, 2020, a decrease of $3.0 million compared to the same period in the prior year. Salary expense decreased $2.8 million due to cost mitigation efforts as a result of the COVID-19 pandemic, and bonus, commissions, and other personnel costs decreased $0.2 million for the six months ended June 30, 2020 compared to the same period in the prior year.

~~Table of Contents~~

~~Other operating costs~~. Other operating costs for the six months ended June 30, 2020 were $44.2 million, a decrease of $23.1 million, or 34.4%, from $67.3 million for the same period in the prior year. Other expenses decreased by $20.3 million due to the benefit associated with the recognition of $20.5 million in proceeds from Grants under the CARES Act included in Other operating costs, as discussed in the “Effects of the COVID-19 Pandemic” section. Travel and other expenses decreased $5.6 million due to cost mitigation efforts as a result of the COVID-19 pandemic. The decreases are offset by a $2.0 million increase in rent expense from new, renewed, and acquired leases and a $0.8 million increase in bad debt expense as compared to the same period in the prior year.

~~General and administrative expenses~~. General and administrative expenses for the six months ended June 30, 2020 were $60.2 million, an increase of $2.6 million, or 4.5%, from the same period in the prior year. The increase was primarily the result of incremental share-based compensation expense of $5.9 million recognized during the second quarter due to the modification of certain equity awards granted in 2017 and incentive compensation and other personnel-related costs increased by $2.2 million, offset by decreases in salary expense of $3.6 million and other expenses of $1.9$17.2 million as ~~compared to the same period in the prior year.~~

~~Professional accounting and legal fees~~~~. Professional accounting and legal fees for the six months ended June 30, 2020 were $5.1 million, a decrease~~ of $0.8 million, or 13.5%, from $5.9 million for the same period in the prior year primarily due to targeted efforts to remediate material weaknesses in our internal controls over financial reporting that occurred in the six months ended June 30, 2019 that did not recur in the same period ofDecember 31, 2020.

~~Depreciation and amortization~~. Depreciation and amortization for the six months ended June 30, 2020 was $17.7 million, an increase of $0.2 million, or 1.0%, from the same period in the prior year. Amortization expense increased $0.9 million and depreciation expense decreased $0.7 million when compared to the same period in the prior year.

~~Interest expense, net.~~ ~~Interest expense for the six months ended June 30, 2020 decreased 0.7% to $16.9 million from $17.0 million for the same period in the prior year.~~

~~(Benefit) provision for income taxes~~. The benefit for income taxes for the six months ended June 30, 2020 was $2.8 million, or -22.8% of income before income taxes, compared to a provision of $0.7 million, or 18.0% of income before income taxes for the six months ended June 30, 2019. The effective tax rate in 2020 consisted principally of the 21% federal statutory tax rate, research and development tax credits, the rate impact from state income taxes, the shortfall from share-based compensation, and permanent tax differences. The decrease in the effective tax rate for the six months ended June 30, 2020 compared with the six months ended June 30, 2019 is primarily attributable to the recognition of research and development tax credits for the current and prior years in the current quarter, partially offset by a shortfall from share-based compensation.

We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. As of June 30, 2020, our valuation allowance approximated $2.1 million.

During the second quarter of 2020, we finalized a research and development study recognizing tax benefits of $2.1 million, net of tax reserves, related to the current year and $6.3 million, net of tax reserves, related to prior years. We recorded the tax benefit, before tax reserves, as a deferred tax asset in the second quarter of 2020.

~~Table of Contents~~

Financial Condition, Liquidity, and Capital Resources

Liquidity

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

At ~~June 30, 2020,~~March 31, 2021, we had total liquidity of ~~$202.7~~$165.1 million, which reflected ~~an increase~~a decrease of ~~$33.5~~$74.3 million from the ~~$169.2~~$239.4 million in liquidity we had as of December 31, ~~2019.~~2020. Our liquidity at ~~June 30, 2020~~March 31, 2021 was comprised of cash and cash equivalents of ~~$129.9~~$70.3 million and ~~$72.8~~$94.8 million in available borrowing capacity under our $100.0 million revolving credit facility. This ~~increase~~decrease in liquidity primarily related to ~~an increase~~a decrease in cash of ~~$55.4~~$74.3 million, comprised of net cash ~~provided by~~used in operations of ~~$80.1~~$42.4 million, which includes approximately $24.0 million in proceeds received for Grants from the federal government under the CARES Act, and net cash provided by financing activities of $10.1 million, partially offset by investing cash flows for capital expenditures of $18.8 million and cash paid for acquisitions, net of cash acquired, of ~~$16.8~~$19.4 million, capital expenditures of $6.9 million, and net cash used in financing activities of $6.4 million. ~~Borrowings, net~~Due to the seasonality of ~~repayments,~~our business and our payment of ~~$22.0 million under~~annual incentive compensation and related compensatory items, we usually experience significant first quarter uses of cash in operations.

On a comparable period basis, our ~~revolving credit facility during the first half~~liquidity of ~~2020 did not have an impact on our overall liquidity, but reduced our available borrowing capacity under the Credit Agreement to $72.8~~$165.1 million as of ~~June 30,~~March 31, 2021 reflected an increase of $33.3 million as compared with the liquidity of $131.8 million reported as of March 31, 2020.

~~The~~Our Credit Agreement contains customary representations and warranties, as well as financial covenants, including that we maintain compliance with certain leverage and interest coverage ratios. If we are not compliant with our debt covenants in any period, absent a waiver or amendment of our Credit Agreement, we may be unable to access funds under our revolving credit facility. Due to the additional borrowings under our revolving credit facility in March 2020, which were repaid in full during the third quarter of 2020, and in anticipation of the potential economic impact of the COVID-19 pandemic, we entered into an amendment to the Credit Agreement that provided for, among other things, increases in the allowable level of indebtedness we may carry relative to our earnings, changes in the definition of EBITDA used to compute certain financial ratios, certain restrictions regarding investments and payments we may make until the completion of the first quarter of 2021 and increases in the interest costs associated with borrowings under our revolving credit facility. We were in compliance with our debt covenants as of ~~June 30, 2020.~~March 31, 2021.

Table of Contents

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

Working Capital and Days Sales Outstanding

At ~~June 30, 2020,~~March 31, 2021, we had working capital of ~~$105.1~~$100.2 million compared to working capital of ~~$107.2~~$129.3 million at December 31, ~~2019.~~2020. Our working capital decreased ~~$2.2~~$29.0 million ~~for~~during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 due to ~~an increase~~a decrease in current assets of ~~$16.1~~$79.4 million, ~~and an increase~~partially offset by a decrease in current liabilities of ~~$18.2~~$50.4 million.

The ~~increase~~decrease in current assets of ~~$16.1~~$79.4 million was primarily attributable to ~~an increase~~a decrease in Cash and cash equivalents of ~~$55.4~~$74.3 million discussed in the “Liquidity” section above, and a decrease in Accounts receivable, net of $10.4 million. The decreases were offset by an increase ~~in Income taxes receivable~~ of ~~$4.4 million, which relates to income tax relief under the CARES Act, and~~ approximately $3.1 million in Other current ~~assets. These increases were offset by decreases in Accounts receivable, net of $43.8 million~~assets and Inventories of ~~$3.0~~$2.2 million.

The ~~increase~~decrease in current liabilities of ~~$18.2~~$50.4 million was primarily attributable to an increase of i) $18.7 million in the Current portion of long-term debt primarily related to $19.3 million in Seller notes issued in connection with the acquisition of an O&P business in the second quarter of 2020, ii) $12.4 million in Accrued expenses and other current liabilities, of which $4.3 million relates to changes in the fair value of our interest rate swap, $3.5 million relates to liabilities incurred in the acquisition of an O&P business in the second quarter of 2020, and $3.5 million relates to deferred grant income under the CARES Act and iii) $3.0 million in Accounts payable. These increases were partially offset by a net decrease ~~of $15.4 million~~ in accrued incentive compensation related costs of $36.9 million, primarily due to the payment of ~~$34.2~~$42.9 million in annual incentive compensation and the employer 401(k) matching contribution made during the first quarter of the ~~year, offset by current year accruals.~~year. The remainder of the decrease is primarily attributable to a decrease of $14.1 million in Accounts payable.

~~Table of Contents~~

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, 2020,~~March 31, 2021, our DSO was 45 days, which compares favorably to a DSO of 4750 days as of ~~June 30, 2019. One-time administrative billing changes and~~March 31, 2020. The reduction is attributable to improved collections experience due to the ~~impact of implementing our patient management and electronic health system in certain~~targeted efforts of our ~~largest operating regions contributed to collection delays impacting our DSO as of June 30, 2019.~~centralized revenue cycle management function.

Sources and Uses of Cash for the ~~Six~~Three Months Ended ~~June 30, 2020~~March 31, 2021 Compared to ~~June 30, 2019~~March 31, 2020

Net cash flows ~~provided by~~used in operating activities increased ~~$83.6~~$20.4 million to ~~$80.1~~$42.4 million for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 from net cash used in operating activities of ~~$3.5~~$22.0 million for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. The ~~most significant~~comparative increase in operating cash ~~provided by operating activities was due~~flows is primarily attributable to a ~~$45.9 million increase in~~combination of lower revenues and the acceleration of cash ~~provided by~~collections of Accounts receivable ~~net which is largely attributable~~of $17.1 million, when compared to the ~~effect of decreases in our revenue on the related amount of accounts receivable we would otherwise carry associated with those billings as well as improvements~~same periods in the ~~our collection activities,~~prior year. This is consistent with the ~~decrease~~decline in DSO from 50 days as of March 31, 2020 to 45 days as of ~~June 30, 2020, compared to a DSO of 47 days as June 30, 2019. In addition, we recognized approximately $20.5 million in proceeds from the Grants received under the CARES Act within Net income.~~March 31, 2021. The remaining increase in cash ~~flows provided by operations is attributable~~used from operating activities primarily related to ~~favorable~~cash used in the satisfaction of Accounts payable of $9.3 million and changes in ~~working capital in~~ Inventories ~~Accounts payable, Accrued expenses and other current liabilities, and Other liabilities~~ of ~~$21.2 million. Increases in Accounts payable include the temporary benefit of approximately $9.5~~$2.4 million, associated with more lenient credit terms provided to us by vendors. Other liability increases include $3.0 million in deferred payroll tax liabilities associated with the CARES Act. These increases in cash flows provided by operating activities were partially offset by ~~higher cash outflows related to Other current assets and other assets of $4.0 million, primarily related to~~ an increase in ~~lease- related receivables, and Income taxes~~income of ~~approximately $3.9~~$12.4 million ~~primarily due to the impact of the CARES Act.~~

We believe the favorable working capital trends experienced in the second quarter to be largely temporary, as they related primarily to a reduction in the amount of our required working capital resulting from decreases in our business volumes associated with the onset of the COVID-19 pandemic, and, to a lesser extent, our temporary actions to further reduce our net working capital through reductions in inventory and negotiated changes in payment terms. Given these factors, we are unlikely to experience similar favorable contributions to operating cash flow from working capital improvements in the third and fourth quarters of 2020. Further, as the COVID-19 pandemic subsides and our business volumes return to more normal levels, we anticipate the favorable working capital trends observed in the second quarter to reverse in the form of increases to our accounts receivable, inventory, and cash paid to vendors as our credit terms return to previous arrangements, as well as further reductions as other temporary working capital benefits subside. For these reasons, and the reasons discussed in the “Liquidity Outlook” section below, we currently anticipate that we will experience a net consumption of cash during the ~~remainder of 2020.~~quarter.

Cash flows used in investing activities ~~decreased $10.1~~increased $17.0 million to ~~$34.7~~$25.5 million for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, from ~~$44.8~~$8.5 million for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. The ~~decrease~~increase in cash used in investing activities was ~~primarily~~ due to ~~lower~~an increase of $19.4 million in cash ~~outflows of $11.1 million~~paid for acquisitions, net of cash acquired, ~~during the six months ended June 30, 2020,~~ partially offset by ~~higher~~$1.9 million less in capital ~~expenditures of $0.5 million.~~expenditures.

Cash flows used in financing activities decreased to $6.4 million for the three months ended March 31, 2021, from cash provided by financing activities ~~increased $18.7 million to $10.1~~of $72.0 million for the ~~six~~three months ended ~~June 30, 2020, from~~March 31, 2020. The decrease in cash used in financing activities ~~of $8.6 million for the six months ended June 30, 2019. The increase in cash provided by financing activities~~ is primarily due to ~~net~~$79.0 million in proceeds from borrowings ~~of $22.0 million on~~under our revolving credit facility ~~which was partially~~in March 2020, offset by ~~higher cash outflows~~the net effect of ~~$3.2 million related to employee taxes on stock-based compensation.~~activities of $0.6 million.

Effect of Indebtedness

On March 6, 2018, we entered into a $605.0 million Credit Agreement, which provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term Loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025. For additional discussion surrounding the Credit Agreement, see Note LK - “Debt and Other Obligations,” in the notes to the condensed consolidated financial statements contained elsewhere in this report. Cash paid for interest totaled ~~$15.0~~$6.6 million and ~~$14.9~~$7.5 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

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Table of Contents

In May 2020, we entered into an amendment to the Credit Agreement (the “Amendment”) that provided for, amongst other things, an increase in the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal ~~quarters~~quarter 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 1.00%, plus 3.75%. In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries’ ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions if we do not ~~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. During the fourth quarter of 2020, we recommenced our acquisition of O&P providers.

Scheduled maturities of debt as of ~~June 30, 2020~~March 31, 2021 were as follows:


(in thousands)
2020 (remainder of year)	$	22,853
2021		9,640
2021 (remainder of year )			$	8,273
2022		8,371		10,040
2023		29,921		9,641
2024		7,203		8,979
2025				473,009
Thereafter		474,412		2,496
Total debt before unamortized discount and debt issuance costs, net		552,400		512,438
Unamortized discount and debt issuance costs, net		(8,392)		(7,048)
Total debt	$	544,008	$	505,390

Liquidity Outlook

Our Credit Agreement has a term loan facility with ~~$493.6~~$489.9 million in principal outstanding at ~~June 30, 2020,~~March 31, 2021, due in quarterly principal installments equal to 0.25% of the original aggregate principal amount of $505.0 million, with all remaining outstanding principal due at maturity in March 2025, and, as of ~~June 30, 2020,~~March 31, 2021, a revolving credit facility with ~~$22.0 million in outstanding~~no borrowings ~~that matures in March 2023~~ and available borrowing capacity of ~~$72.8 million. We chose to borrow $79.0~~$94.8 million ~~from our revolving credit facility~~that matures in March 2020 to preserve access to these funds in the event of further instability in financial markets due to the COVID-19 pandemic. Based on developments further discussed in the “Effects of the COVID-19 Pandemic” section of this report, as well as current and future expectations of our business volumes and their related impact on our liquidity, we repaid $57.0 million in borrowings under our revolving credit facility in June 2020.2023.

~~Historically, our~~Our primary sources of liquidity are cash and cash equivalents, and available borrowings under our revolving credit facility. Due to the economic and social activity impacts outlined in the “Effects of the COVID-19 Pandemic” section above, we expect the continuing disruption to have an ~~adverse~~unfavorable impact on our operations, financial condition, and results of operations. While ~~we believe~~ the ~~business disruption will be temporary, we cannot predict~~duration and extent of the ~~extent or duration of~~impact from the COVID-19 pandemic on our operations and liquidity depends on future developments which cannot be predicted with certainty, we believe that our existing sources of liquidity, when state and local restrictions will be lifted, the impact of increasing viral infections, or when patients will resume their normal healthcare treatment activities. In response to the expected decline incombined with our operating cash flows ~~from operations, in March 2020, we 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 our acquisition of O&P providers, and extending the payment terms for certain vendors. These measures were taken in an effort to preserve liquidity in a manner sufficient to provide for our ability to respond to the adverse cash flow pressures likely to be caused by the COVID-19 pandemic. While many of our cost mitigation and liquidity strategies remain in place, as of the start of the third quarter, we have reduced the rate of benefit of the measures taken ~~in March 2020, including through~~to enhance our liquidity position and cost structure, will continue to allow us to finance our operations for the ~~reinstatement of the majority of the salary reductions for exempt employees and reductions in the number of employees who are on furlough.~~foreseeable future. Please refer to the “Effects of the COVID-19 Pandemic” section above for ~~our current estimates of the amounts of operating and capital expenditure reductions provided through these measures.~~

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In connection with an acquisition we completed in April of 2020, we are obligated to pay $18.4 million in short term seller notes and $3.6 million in liabilities incurred in the transaction in October of 2020. Additionally, as discussed above, the favorable working capital trends we experienced in the second quarter are largely temporary. As our business volumes return to more normal levels, we will experience a consumption of cash associated with the funding of accounts receivable and componentry inventories associated with those increases in revenue. Additionally, as our credit terms with vendors return to normal, we would expect to consume approximately $9.5 million in additional cash associated with a reduction of accounts payable. In addition to these amounts, we anticipate other uses of cash to fund the reduction of increases in accrued compensation associated with employee bonus, commissions, and payroll taxes.discussion.

~~While~~We anticipate that we ~~currently do not anticipate the need~~will continue to ~~do so, if the COVID-19 pandemic causes adverse~~pursue acquisitions and other growth initiatives that provide value to our shareholders. We expect to continue to generate positive operating cash ~~flow~~flows that, together with our revolving credit facility, will allow us to invest in acquisitions and ~~liquidity trends greater than those we currently expect and have planned for,~~other growth opportunities to provide value to our shareholders. From time to time, we may ~~find it necessary to~~ seek additional ~~borrowings~~funding through the issuance of debt or equity securities to provide additional liquidity to fund acquisitions aligned with 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,~~strategic priorities 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, we may extend our accounts payable and payment offor other obligations to address any such funding shortage. While we cannot forecast with certainty the ultimate extent of the impacts from or the duration of the COVID-19 pandemic, we 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 the foreseeable future.

general corporate purposes.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside ~~$100.0~~$178.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the ~~$100.0~~$178.0 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

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During ~~the second quarter of~~ 2020, we recognized a total benefit of ~~$20.5~~$24.0 million in our ~~Statement~~condensed consolidated statement of ~~Operations~~operations within Other operating costs ~~for a portion of the grant proceeds we received under the CARES Act (“Grants”)~~Grants from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment. ~~As of June 30, 2020,~~In April 2021, we ~~have recorded a liability of $3.5~~recognized an additional $0.7 million ~~within Accrued expenses and other liabilities~~ in proceeds received from grants under the ~~condensed consolidated balance sheet related to proceeds from the Grants for amounts that have not met the recognition criteria in accordance with our accounting policy.~~CARES Act.

~~Going Concern Evaluation~~

~~ASU 2014-15~~ ~~Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern~~ requires that we evaluate whether there is substantial doubt about our ability to meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to be issued. We have performed such an evaluation considering the financial and operational effects of the COVID-19 pandemic and, based on the results of that assessment, we are not aware of any relevant conditions or events that raise substantial doubt regarding our ability to continue as a going concern within one year of the date the financial statements are issued.March 31, 2021.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that may or could have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

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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, 2020,~~March 31, 2021, we had a combined principal amount of ~~$515.6~~$489.9 million of variable rate debt under our Term Loan B and revolving credit facility and a notional amount of ~~$300.0~~$287.5 million of fixed to variable interest rate swap agreements. Based on our hedged and unhedged positions, a hypothetical increase ~~in interest rates of 1.0% would impact our annual interest expense by $2.4 million and a~~or decrease in interest rates of 1.0% would impact our annual interest expense by ~~$0.3 million, as borrowings under our revolving credit facility have an interest rate floor.~~$2.5 million.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and effectiveness of our disclosure controls and procedures as of ~~June 30, 2020.~~March 31, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~June 30, 2020.~~March 31, 2021.

Changes in Internal Control over Financial Reporting

There have been no material changes to our internal controls over financial reporting during the ~~three month~~ period ended ~~June 30, 2020.~~March 31, 2021.

Therefore, in accordance with Rule 13a-15(d) of the Exchange Act and with the participation of our Chief Executive Officer and our Chief Financial Officer, management determined there have been no material changes to our internal control over financial reporting during the ~~three month~~ period ended ~~June 30, 2020.~~March 31, 2021.

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Not applicable.

ITEM 1A.RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or results of operations. We have also 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 continue to be materially adversely affected by the ongoing coronavirus (~~“~~COVID-19~~”~~) outbreak.~~

The outbreak of COVID-19 evolved into a global pandemic in the first quarter of 2020. The full extent to which the COVID-19 outbreak will continue to 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 mitigate its impact.

The COVID-19 pandemic had a significant negative impact on our business and results of operations in the second quarter of 2020. We experienced a significant reduction in revenue due to a decline in the number of patients that we treated in our patient care clinics, as well as a reduction in sales to independent O&P clinics by our distribution business. A significant portion of this decline was due to O&P 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. Although we have seen some recovery in patient volume since April of 2020, the progress of the COVID-19 pandemic has been erratic, with infection rates fluctuating and recently rising in many regions throughout the United States, and we are unable to predict when the COVID-19 pandemic will no longer significantly impact our patient volumes, both in our own clinics and at independent O&P providers.

Nevertheless, we continue to 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 levels of patient activity; however, there is no assurance that either will occur. To date, we have not experienced significantly extended billing and collection cycles as a result of displaced employees, delayed reimbursement by governmental or private payers, or delayed revenue cycle management procedures; however, we cannot predict the impact the ongoing COVID-19 pandemic may have on these areas of our operations in future periods. We may also face a shortage in products within our supply chain 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 is expected to continue to have, a material adverse effect on our business, results of operations, and financial condition during 2020, and potentially in future years as well.Not applicable.

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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, 2020.~~March 31, 2021.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the three months ended ~~June 30, 2020.~~March 31, 2021.

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~~		First Amendment to Credit Agreement, dated as of May 4, 2020, among Hanger, Inc., the subsidiary guarantors party thereto, the revolving lenders party thereto and Bank of America, N.A., as agent. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 7, 2020.)
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.)
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.)

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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 5, ~~2020~~2021	By:	/s/ THOMAS E. KIRALY
		Thomas E. Kiraly
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

Dated: ~~August~~May 5, ~~2020~~2021	By:	/s/ GABRIELLE B. ADAMS
		Gabrielle B. Adams
		Vice President and Chief Accounting Officer
		(Principal Accounting Officer)

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(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


					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
June 30, 2020		—		(1,307)		—