HANGER, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS – InsuranceNewsNet

Overview of the transaction with patient square capital

On July 21, 2022, Hanger, Inc. entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Hero Parent, Inc., a Delaware corporation ("Parent"),
and Hero Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary
of Parent ("Merger Sub"). Parent and Merger Sub are indirect subsidiaries of
funds managed and advised by Patient Square Capital, a dedicated health care
investment firm. The Merger Agreement provides, among other things and subject
to the terms and conditions set forth therein, that Merger Sub will be merged
with and into the Company, with the Company surviving as a wholly-owned
subsidiary of Parent (the "Merger"). At the Effective Time (as defined in the
Merger Agreement), by virtue of the Merger, each share of common stock of the
Company issued and outstanding immediately prior to the Effective Time will be
converted automatically into the right to receive $18.75 per share in cash.
After the Merger, Hanger's common stock will no longer be traded on the New York
Stock Exchange and will be deregistered under the Securities Exchange Act of
1934, as amended.

The descriptions of the Merger Agreement and the transactions contemplated
thereby contained in this Quarterly Report on Form 10-Q are summaries only and
are qualified in their entirety by reference to the full text of the Merger
Agreement, which was included as Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on July 22, 2022.

The closing of the Merger is subject to various closing conditions, including
(i) adoption and approval of the Merger Agreement, including the Merger, by
holders of a majority of the Company's shares of common stock then outstanding,
(ii) the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any other
similar approvals, (iii) the consummation of the Merger shall not be restrained,
enjoined or prohibited by any law or order that is continuing and remains in
effect, and (iv) subject to Company Material Adverse Effect (as defined in the
Merger Agreement) and other customary materiality qualifications, the accuracy
of the representations and warranties contained in the Merger Agreement and
compliance with the covenants and agreements contained in the Merger Agreement.
The closing of the Merger is not subject to a financing condition.

Forward-looking statements

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

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

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

Non-GAAP Measures

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

Revenue from the same clinic per day – measures the change in revenue from year to year
from clinics that have been open for a full calendar year or more. examples of
clinics not included in the population of the same center are closures and
purchases. Adjusted day growth normalizes sales for number of days
clinic was open during each comparable period.

Company Overview

General

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

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Our Patient Care segment is primarily comprised of Hanger Clinic, which
specializes in comprehensive, outcomes-based design, fabrication, and delivery
of custom O&P devices through 761 patient care clinics and 117 satellite
locations in 48 states, the District of Columbia, and the U.S. Virgin Islands as
of June 30, 2022. We also provide payor network contracting services to other
O&P providers through this segment.

Our Products & Services segment is comprised of our distribution services and
therapeutic solutions businesses. As a leading provider of O&P products in the
United States, we engage in the distribution of a broad catalog of branded and
private label O&P devices, products, and components to independent O&P providers
nationwide. The other business in our Products & Services segment is our
therapeutic solutions business, which develops specialized rehabilitation
technologies and provides evidence-based clinical programs for post-acute
rehabilitation to patients at approximately 3,800 skilled nursing and post-acute
providers nationwide.

For the three and six months ended June 30, 2022, our net revenues were $312.0
million and $573.3 million, respectively, and we recorded net income of $10.1
million and $2.1 million, respectively. For the three and six months ended
June 30, 2021, our net revenues were $280.8 million and $518.3 million,
respectively, and we recorded net income of $10.2 million and $6.8 million,
respectively.

Industry Overview

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

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

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

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

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

activity Descrition

Patient care

Our Patient Care segment employs approximately 1,660 clinical prosthetists,
orthotists, and pedorthists, which we refer to as clinicians, substantially all
of which are certified by either the American Board for Certification ("ABC") or
the Board of Certification of Orthotists and Prosthetists, which are the two
boards that certify O&P clinicians. To facilitate timely service to our
patients, we also employ technicians, fitters, and other ancillary providers to
assist our clinicians in the performance of their duties. Through this segment,
we additionally provide network contracting services to independent providers of
O&P.

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

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

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

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

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

The main sources of reimbursement for our services are:

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

• Medicare, a federally funded health insurance program
insurance coverage for people age 65 or older and certain people
disabilities;

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

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

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

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

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

Products & Services

Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. ("SPS"),
we distribute branded and private label devices, products, and components to
independent O&P clinics and other customers. Through our wholly-owned
subsidiary, Accelerated Care Plus Corp. ("ACP"), our therapeutic solutions
business is a leading provider of rehabilitation technologies and integrated
clinical programs to skilled nursing and post-acute rehabilitation providers.
Our value proposition is to provide our customers with a full-service "total
solutions" approach encompassing proven medical technology, evidence-based
clinical programs, and ongoing consultative education and training. Our services
support increasingly advanced treatment options for a broader patient population
and more medically complex conditions. We currently serve approximately 3,800
skilled nursing and post-acute providers nationwide. Through our SureFit
subsidiary, we also manufacture and sell therapeutic footwear for diabetic
patients in the podiatric market. We also operate the Hanger Fabrication
Network, which fabricates custom O&P devices for our patient care clinics, as
well as for independent O&P clinics.

Through our internal "supply chain" organization, we purchase, warehouse, and
distribute over 350,000 active SKUs from approximately 750 different suppliers
through SPS or directly to our own clinics within our Patient Care segment. Our
warehousing and distribution facilities provide us with the ability to deliver
products to the vast majority of our customers in the United States within two
business days. In Q2 2022, we closed the warehouse and distribution facilities
in Illinois and Texas, consolidating their operations into our Georgia and
Nevada facilities.

Our supply chain organization allows us to:

• centralize our purchases and thus lower our material costs by negotiating
purchase discounts from manufacturers;

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

•improve inventory quality control;

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

•coordinate new product development efforts with key suppliers.

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Effects of the COVID-19 pandemic

We began to see a reduction in business volumes as a result of the COVID-19
pandemic starting in the last weeks of March 2020. As federal, state, and local
authorities implemented social distancing and suppression measures to respond to
an increasing number of nationwide COVID-19 infections, we experienced a
decrease in our patient appointments and general business volumes. In response,
during the last week of March 2020, we made certain changes to our operations,
implemented a broad number of cost reduction measures, and delayed certain
capital investment projects. Although our business volumes have shown gradual
improvement from their initial significant decline in mid-2020, our results of
operations were adversely affected by COVID throughout 2020, 2021 and into the
early months of 2022. The volume effects and our operating responses are
discussed further in this section, and the effects of COVID-19 on our financial
condition are discussed in the "Financial Condition, Liquidity and Capital
Resources" section below. Our results of operations for any quarter during the
COVID-19 pandemic may not be indicative of results of operations that may be
achieved for a subsequent quarter or the full year, and may not be similar to
results of operations experienced in prior years. Additionally, current period
comparisons should be viewed in the context of the adverse effects which the
COVID-19 pandemic had on comparative prior period results.

Effect on business volumes

In the early months of 2021, vaccines for combating COVID-19 were approved by
the US Food and Drug Administration, and the US government began a phased roll
out. However, the initial quantities of the vaccines were limited, and the US
government prioritized distribution to front-line health care workers and other
essential workers, followed by individual populations that were most susceptible
to the severe effects of COVID-19. The lack of achievement of broad immunity
coupled with an increase in infections caused by variants contributed to an
increase in the duration and effect of COVID-19 on our business volumes and
staffing shortages. Specifically, we experienced increased employee absences,
particularly due to the Delta variant in the third quarter of 2021 and the
Omicron variant in December of 2021 and January of 2022. We believe our business
volumes during those periods were inhibited primarily by reduced medical
procedures due to surgical constraints, reduced referral volumes from in-patient
and out-patient providers due to decreases in their volumes and the effect of
COVID related protocols on their businesses, patient hesitancy to seek care
during the pandemic, and increased patient mortality. Additionally, we believe
that our patient volumes have been affected by our own labor constraints in
technical and administrative positions, employee absences related to COVID-19,
as well as decreases in our sales of off-the-shelf orthotic devices. While the
emerging variants of the COVID-19 virus continue to contribute to employee
absences and our use of temporary labor, we believe the overall adverse impact
of the COVID-19 pandemic on our business volumes has diminished and stabilized
over time.

Patient appointments in our clinics during the second quarter of 2022 increased
by approximately 2% as compared to the corresponding period in 2021. During the
quarter, our prosthetics and orthotics day-adjusted sales, excluding
acquisitions, increased by 6.2% on a per day basis, when compared to the same
period in the prior year.

Operation, cost reduction and other answers

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

We recommenced our implementation of supply chain and financial systems, further
discussed in the "New Systems Implementations" section, in the second quarter of
2021, after we elected to temporarily delay these activities in 2020 as part of
our efforts to preserve liquidity. We also recommenced activities related to the
reconfiguration of our distribution facilities in the second quarter of 2021,
after they were suspended in 2020, which are still currently ongoing.

Despite the effects of the COVID-19 pandemic on our business volumes, for the
foreseeable future, we currently believe that our cash flows from operations and
retained cash and cash equivalent balances are sufficient to enable us to fund
our operations, capital expenditures and other financial obligations as they
become due. Please refer to the "Financial Condition, Liquidity and Capital
Resources" section below for a discussion of our liquidity position.

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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 $203.5
billion to be administered through grants and other mechanisms to hospitals,
public entities, not-for-profit entities and Medicare- and Medicaid-enrolled
suppliers and institutional providers. The purpose of these funds is to
reimburse providers for lost revenue attributable to the COVID-19 pandemic, such
as lost revenues attributable to canceled procedures, as well as to provide
support for health-care related expenses. In April 2020, the U.S. Department of
Health and Human Services ("HHS") began making payments to healthcare providers
from the $203.5 billion appropriation. These are grants, rather than loans, to
healthcare providers, and will not need to be repaid.

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

The CARES Act also provided for a deferral of the employer portion of payroll
taxes incurred during the COVID-19 pandemic through December 2020. The
provisions allowed us to defer half of such payroll taxes until December 2021
and the remaining half until December 2022. We paid the first half in September
2021, and deferred the remaining $5.9 million of payroll taxes within Accrued
compensation related costs in the condensed consolidated balance sheet as of
June 30, 2022.

Performance Considerations for Other Products and Services

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

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

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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,
                                                   2022                     2021                     2022                     2021
Medicare                                               31.2  %                  31.4  %                  30.7  %                  30.4  %
Medicaid                                               18.6  %                  18.5  %                  18.3  %                  18.0  %
Commercial insurance / managed care
(excluding Medicare and Medicaid
managed care)                                          33.4  %                  33.7  %                  34.2  %                  34.6  %
VA                                                      9.6  %                   9.1  %                   9.6  %                   9.6  %
Private Pay                                             7.2  %                   7.3  %                   7.2  %                   7.4  %
Patient Care                                          100.0  %                 100.0  %                 100.0  %                 100.0  %


Patient Care constituted 85.1% and 84.7% of our net revenues for the three and
six months ended June 30, 2022 and 84.3% and 83.4% for the three and six months
ended June 30, 2021. Our remaining net revenues were provided by our Products &
Services segment which derives its net revenues from commercial transactions
with independent O&P providers, healthcare facilities, and other customers. In
contrast to net revenues from our Patient Care segment, payment for these
products and services are not directly subject to third party reimbursement from
health care payors.

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

To receive reimbursement for our work, we must ensure that our clinical,
administrative, and billing personnel receive and verify certain medical and
health plan information, record detailed documentation regarding the services we
provide, and accurately and timely perform a number of claims submission and
related administrative tasks. It is our belief the increased nationwide efforts
to reduce health care costs has driven changes in industry trends with increases
in payor pre-authorization processes, documentation requirements, pre-payment
reviews, and pre- and post-payment audits, and our ability to successfully
undertake these tasks using our traditional approach has become increasingly
challenging. For example, the Medicare contractor for Pricing, Data Analysis and
Coding (referred to as "PDAC") has announced verification requirements and code
changes that has reduced the reimbursement level for certain prosthetic feet,
and the VA is in the process of reassessing the method it uses to determine
reimbursement levels for O&P services and products provided under certain
miscellaneous codes.

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

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

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Payor disallowances is considered an adjustment to the transaction price.
Estimated uncollectible amounts due to us by patients are generally considered
implicit price concessions and are presented as a reduction of net revenues.
These amounts recorded in net revenues within the Patient Care segment for the
three and six months ended June 30, 2022 and 2021 are as follows:

                                                  For the Three Months Ended                     For the Six Months Ended
                                                           June 30,                                      June 30,
(dollars in thousands)                          2022                       2021                  2022                 2021
Gross charges                             $     277,870                $  245,196          $    507,792           $  446,648
Less estimated implicit price
concessions arising from:
Payor disallowances                              10,385                     6,802                18,770               11,316
Patient non-payments                              1,815                     1,607                 3,534                2,863
Payor disallowances and patient
non-payments                                     12,200                     8,409                22,304               14,179
Net revenues                              $     265,670                $  236,787          $    485,488           $  432,469

Payor disallowances                       $      10,385                $    6,802          $     18,770           $   11,316
Patient non-payments                              1,815                     1,607                 3,534                2,863
Payor disallowances and patient
non-payments                              $      12,200                $    8,409          $     22,304           $   14,179

Payor disallowances %                               3.7   %                   2.8  %                3.7   %              2.5  %
Patient non-payments %                              0.7   %                   0.6  %                0.7   %              0.7  %
Percent of gross charges                            4.4   %                   3.4  %                4.4   %              3.2  %


Included in the results above, are clinics that have been recently acquired.
Acquired clinics typically continue to operate on their legacy systems for the
first 90 to 180 day before they are fully integrated over to Hanger's systems
and related processes. While operating on their legacy systems, the rate of
payor disallowances and patient non-payments run higher than the rates
experienced on Hanger's systems. Excluding acquisitions since 2020, the percent
of payor disallowances and patient non-payments would have been 4.0% and 3.8%
for the three and six months ended June 30, 2022, respectively, and 3.2% and
2.8% for the three and six months ended June 30, 2021, respectively.

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

Acquisitions

During 2022, we completed the following acquisitions of O&P clinics with the
intention of expanding the geographic footprint of our patient care offerings
through the acquisitions of these high quality O&P providers. None of the
acquisitions were individually material to our financial position, results of
operations, or cash flows.

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

•In the second quarter of 2022, we completed the acquisitions of all the
outstanding equity interests of two O&P businesses for total consideration of
$11.7 million, of which $8.5 million was cash consideration, net of cash
acquired, and $3.2 million was issued in the form of notes to shareholders at
fair value.


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

                                       31
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$1.8 million in the form of notes to shareholders at fair value. Due to the
proximity in time of these transactions to the filing of this Form 10-Q, it is
not practicable to provide a preliminary purchase price allocation of the fair
value of the assets purchased and liabilities assumed in the acquisitions.
Acquisition-related expenses related to these transactions were not material.

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

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

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

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

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

Acquisition-related costs associated with Hanger's acquisition of O&P businesses
are included in general and administrative expenses in our condensed
consolidated statements of operations. Total acquisition-related costs incurred
during the three and six months ended June 30, 2022 were $0.3 million and
$0.6 million, respectively, which includes those costs for transactions that are
in progress or were not completed during the respective period.
Acquisition-related costs incurred for the acquisitions completed during the
three and six months ended June 30, 2022 were $0.2 million and $0.3 million,
respectively. Total acquisition-related costs incurred during the year ended
December 31, 2021 were $2.1 million, which includes those costs for transactions
that were in progress or not completed during the respective period.
Acquisition-related costs incurred for acquisitions completed during the year
ended December 31, 2021 were $1.6 million.

Implementations of new systems

During 2019, we commenced the design, planning, and initial implementation of
new financial and supply chain systems ("New Systems Implementations"), and
planned to invest in new servers and software that operate as a part of our
technology infrastructure. We recommenced our New Systems Implementations
activities in the second quarter of 2021, and transitioned our corporate
financial systems to the Oracle Cloud Financials platform in the third quarter
of 2021, after we elected in 2020 to temporarily delay our New Systems
Implementations as part of our efforts to preserve liquidity.

In connection with our New Systems Implementations, for the three and six months
ended June 30, 2022, we expensed $0.4 million and $0.8 million, respectively,
and for the three and six months ended June 30, 2021, we expensed $1.7 million
and $2.3 million, respectively. For the year ended December 31, 2021, we
expensed $5.2 million. We currently anticipate that we will spend approximately
$3 million to $5 million for the full year 2022 on these systems.

As of June 30, 2022, we capitalized $6.8 million of implementation costs for
cloud computing arrangements, net of accumulated amortization, and recorded in
Other current assets and Other assets in the condensed consolidated balance
sheet.

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Personal

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

In order to attract and retain personnel, we may find it necessary to further
increase wages in these areas. Additionally, when coupled with the generally
fixed nature of our reimbursement arrangements, increases in our personnel costs
caused by current inflation conditions may put increasing pressure on our
ability to maintain or increase our margins. Please refer to Part II, Item 1A.
"Risk Factors" contained in our 2021 Form 10-K.

Seasonality

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

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

                                       33
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Significant Accounting Policies and Estimates

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

•Revenue recognition

•Accounts receivable, net

•Inventories

•Business combinations

• Goodwill and other intangible assets, net

•Income taxes

The use of different estimates, assumptions, or judgments could have a material
effect on reported amounts of assets, liabilities, revenue, expenses, and
related disclosures as of the date of the financial statements and during the
reporting period. Critical accounting policies and estimates are described in
our 2021 Form 10-K, under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note A - "Organization and
Summary of Significant Accounting Policies" contained within these condensed
consolidated financial statements. There have been no material updates to those
critical accounting policies and estimates as contained in the 2021 Form 10-K.

Reclassifications

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

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Operating results

Our results of operations for the three months ended June 30, 2022 and 2021 were
as follows (unaudited):

                                                        For the Three Months Ended                       Percent
                                                                 June 30,                                Change
(dollars in thousands)                                  2022                   2021                   2022 vs 2021
Net revenues                                      $      312,033          $    280,819                            11.1  %
Material costs                                            98,433                89,271                            10.3  %
Personnel costs                                          110,275                97,549                            13.0  %
Other operating costs                                     38,970                32,788                            18.9  %
General and administrative expenses                       35,444                33,110                             7.0  %
Depreciation and amortization                              8,124                 8,007                             1.5  %
Operating expenses                                       291,246               260,725                            11.7  %
Income from operations                                    20,787                20,094                             3.4  %
Interest expense, net                                      7,524                 7,152                             5.2  %
Non-service defined benefit plan expense                     160                   167                            (4.2) %
Income before income taxes                                13,103                12,775                             2.6  %
Provision for income taxes                                 2,986                 2,616                            14.1  %
Net income                                        $       10,117          $     10,159                            (0.4) %


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

                                                      For the Three Months Ended
                                                               June 30,
                                                           2022                  2021
      Material costs                                                31.5  %     31.8  %
      Personnel costs                                               35.3  %     34.7  %
      Other operating costs                                         12.5  %     11.6  %
      General and administrative expenses                           11.4  %     11.8  %
      Depreciation and amortization                                  2.6  %      2.9  %
      Operating expenses                                            93.3  %     92.8  %

Three months completed June 30, 2022 Compared to the three months ended June 30th,
2021

Relevance of Second Quarter Results to Comparative and Future Periods. As
discussed in "Effects of the COVID-19 Pandemic" above, commencing late in the
first quarter of 2020, our revenues and operating results began to be adversely
affected by the COVID-19 pandemic, a trend that continued into 2022. The effects
of this public health emergency on our revenues and earnings impacted the
comparison to our historical financial results. As a result, our comparative
financial and operational results when viewed as a whole for the periods
impacted by the COVID-19 pandemic may not be indicative of future financial and
operational performance. Please refer to the "Effects of the COVID-19 Pandemic"
section above and the "Financial Condition, Liquidity and Capital Resources"
section below for additional forward-looking information concerning our current
expectations regarding the effect of the COVID-19 pandemic on our prospective
results and financial condition.

                                       35
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Net revenues. Net revenues for the three months ended June 30, 2022 were $312.0
million, an increase of $31.2 million, or 11.1%, from $280.8 million for the
three months ended June 30, 2021. Net revenues by operating segment, after
elimination of intersegment activity, were as follows:

                                         For the Three Months Ended
                                                  June 30,                                   Percent
     (dollars in thousands)                  2022                 2021          Change       Change
     Patient Care                  $      265,670              $ 236,787      $ 28,883        12.2  %
     Products & Services                   46,363                 44,032         2,331         5.3  %
     Net revenues                  $      312,033              $ 280,819      $ 31,214        11.1  %


Patient Care net revenues for the three months ended June 30, 2022 were $265.7
million, an increase of $28.9 million, or 12.2%, from $236.8 million for the
same period in the prior year. Same clinic revenues increased $14.2 million for
the three months ended June 30, 2022 compared to the same period in the prior
year, reflecting an increase of 6.2% on a per-day basis. This increase is driven
primarily by a 3.6% increase in rate with a smaller increase of 3.3% in volume
and mix. The increase is partially offset by a 0.7% increase in disallowed
revenue. Net revenues from acquired clinics increased $13.7 million, and
revenues from consolidations and other services increased $0.9 million.

Net revenue growth was adversely affected during the period by an increase in
the relative rate of disallowed and patient non-payment revenue. As discussed in
"Reimbursement Trends" above, these items constituted 4.4% of gross charges in
the three month period ended June 30, 2022 compared to 3.4% for the three month
period ended June 30, 2021. During the past twelve month period, disallowed and
patient non-payment amounts have been 4.2% of gross charges, and as such, we
believe the level reported in the second quarter to be more indicative of
current trends.

Prosthetics constituted approximately 55.1% of our total Patient Care revenues
for the three months ended June 30, 2022 and 53.7% for the same period in 2021,
excluding the impact of acquisitions. Prosthetic revenues for the three months
ended June 30, 2022 were 8.9% higher, on a per-day basis, than the same period
in the prior year, excluding the impact of acquisitions. Orthotics, shoes,
inserts, and other products increased by 3.0% on a per-day basis compared to the
same comparative prior periods, excluding the impact of acquisitions.

Products & Services net revenues for the three months ended June 30, 2022 were
$46.4 million, an increase of $2.3 million, or 5.3% from the same period in the
prior year. This was primarily attributable to an increase of $2.7 million, or
8.1%, in the distribution of O&P componentry to independent providers in the
period stemming primarily from lower volumes in the same period of 2021 due to
the COVID-19 pandemic, as discussed in the "Effects of the COVID-19 Pandemic"
section above. The increase is partially offset by a decrease in net revenues
from therapeutic solutions of $0.4 million, or 3.5% primarily as a result of
historical customer lease cancellations and discounts, partially offset by lease
installations.

Material costs. Material costs for the three months ended June 30, 2022 were
$98.4 million, an increase of $9.2 million or 10.3%, from the same period in the
prior year. Total material costs as a percentage of net revenues for the three
months ended June 30, 2022 was 31.5% compared to 31.8% for the three months
ended June 30, 2021. While we have not experienced significant inflation in our
material costs during the current quarter, we believe the effect of inflation
may increase during the remainder of 2022. Material costs by operating segment,
after elimination of intersegment activity, were as follows:

                                     For the Three Months Ended
                                              June 30,                                   Percent
(dollars in thousands)                   2022                  2021         Change       Change
Patient Care                  $       82,085                $ 71,717      $ 10,368        14.5  %
Products & Services                   16,348                  17,554        (1,206)       (6.9) %
Material costs                $       98,433                $ 89,271      $  9,162        10.3  %


                                       36
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Patient Care material costs increased $10.4 million, or 14.5%, for the three
months ended June 30, 2022 compared to the same period in the prior year as a
result of the increase in segment net sales, additional costs as a result of our
acquisitions, and freight. Freight cost increases have primarily related to
increased fuel surcharges and higher container costs. We currently anticipate
that higher freight costs will continue to affect our material costs in future
periods. Patient Care material costs as a percent of segment net revenues
increased to 30.9% for the three months ended June 30, 2022 from 30.3% for the
three months ended June 30, 2021.

Products & Services material costs decreased $1.2 million, or 6.9%, for the
three months ended June 30, 2022 compared to the same period in the prior year.
As a percent of net revenues in the Products & Services segment, material costs
were 35.3% for the three months ended June 30, 2022 as compared to 39.9% in the
same period of 2021. The decrease in cost of materials as a percent of segment
net revenues was primarily due to product mix within the segment. However, in a
similar fashion to our Patient Care segment, increases in freight costs have
also affected our material costs and margin in this segment, as we rebill only a
portion of our freight costs to our third party customers.

Personnel costs. Personnel costs for the three months ended June 30, 2022 were
$110.3 million, an increase of $12.7 million, or 13.0%, from $97.5 million for
the same period in the prior year. Personnel costs by operating segment were as
follows:

                                         For the Three Months Ended
                                                  June 30,                                   Percent
    (dollars in thousands)                   2022                  2021         Change       Change
    Patient Care                  $        93,838               $ 83,198      $ 10,640        12.8  %
    Products & Services                    16,437                 14,351         2,086        14.5  %
    Personnel costs               $       110,275               $ 97,549      $ 12,726        13.0  %


Personnel costs for the Patient Care segment were $93.8 million for the three
months ended June 30, 2022, an increase of $10.6 million, or 12.8%, from $83.2
million in the same period of the prior year. The increase in Patient Care
personnel costs during the three months ended June 30, 2022 was primarily
related to an increase in salary expense of $7.8 million from the three months
ended June 30, 2021. Additionally, incentive compensation, benefits, and other
personnel expenses increased $1.4 million, commissions increased $0.8 million,
and payroll taxes increased $0.6 million compared to the three months ended
June 30, 2021.

Personnel costs in the Products & Services segment were $16.4 million for the
three months ended June 30, 2022, an increase of $2.1 million compared to the
same period in the prior year. The increase is primarily related to an increase
in salary expense of $1.6 million from the three months ended June 30, 2021.
Additionally, bonus, commissions, benefits, and other personnel cost increased
$0.5 million for the three months ended June 30, 2022 compared to the same
period in the prior year.

Other operating costs. Other operating costs for the three months ended June 30,
2022 were $39.0 million, an increase of $6.2 million, or 18.9%, from $32.8
million for the same period in the prior year. The increase is primarily related
to an increase in rent, utilities, occupancy, and office expenses of $2.1
million from the three months ended June 30, 2021. Additionally, expenses
related to a California wage and hour litigation settlement increased $1.3
million, travel increased $0.8 million, professional fees increased $0.3
million, bad debt expense increased $0.2 million, and other expenses increased
$1.5 million as compared to the same period in the prior year.

General and administrative expenses. General and administrative expenses for the
three months ended June 30, 2022 were $35.4 million, an increase of $2.3
million, or 7.0%, from the same period in the prior year. The increase is the
result of a $1.3 million increase in severance expense, a $0.8 million increase
in salary expense, and a $0.5 million increase in other expenses, partially
offset by a $0.3 million decrease in incentive compensation and other personnel
costs compared to the three months ended June 30, 2021.

Depreciation and amortization. Depreciation and amortization for the three
months ended June 30, 2022 were $8.1 million, an increase of $0.1 million, or
1.5% from the same period in the prior year. Amortization expense increased $0.5
million and depreciation expense decreased $0.4 million when compared to the
same period in the prior year.

Interest expense, net. Interest expense for the three months ended June 30, 2022
increased by 5.2% for $7.5 million of $7.2 million for the same period in the
last year.

                                       37
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Provision for income taxes. The provision for income taxes for the three months
ended June 30, 2022 was $3.0 million, or 22.8% of income before income taxes,
compared to a provision of $2.6 million, or 20.5% of income before income taxes
for the three months ended June 30, 2021. The increase in the effective tax rate
for the three months ended June 30, 2022 compared with the three months ended
June 30, 2021 is primarily attributable to a windfall from share-based
compensation for the three months ended June 30, 2021 compared to a shortfall
from share-based compensation for the three months ended June 30, 2022. Our
effective tax rate for the three months ended June 30, 2022 is similar to the
federal statutory tax rate of 21%, but the difference consists primarily of
research and development credits offset by non-deductible expenses and shortfall
from share-based compensation. Our effective tax rate for the three months ended
June 30, 2021 differed from the federal statutory tax rate of 21% primarily due
to research and development credits, non-deductible expenses, and windfall from
share-based compensation.

We evaluate our deferred tax assets quarterly to determine whether adjustments
to the valuation allowance are appropriate in light of changes in facts or
circumstances, such as changes in expected future pre-tax earnings, tax law,
interactions with taxing authorities, and developments in case law. Our material
assumptions include forecasts of future pre-tax earnings and the nature and
timing of future deductions and income represented by the deferred tax assets
and liabilities, all of which involve the exercise of significant judgment. As
of June 30, 2022, our valuation allowance was approximately $2.1 million.

For the year ending December 31, 2022, we estimate a research and development
tax credit of $2.7 million, net of tax reserves. We record the tax benefit, net
of tax reserves, as a deferred tax asset. For the year ended December 31, 2021,
we recognized research and development tax credits of $4.3 million, net of tax
reserves.

Our results of operations for the six months ended June 30, 2022 and 2021 were
as follows (unaudited):

                                                           For the Six Months Ended                          Percent
                                                                   June 30,                                  Change
(dollars in thousands)                                    2022                     2021                   2022 vs 2021
Net revenues                                      $     573,320               $    518,289                            10.6  %
Material costs                                          184,025                    164,441                            11.9  %
Personnel costs                                         211,950                    187,429                            13.1  %
Other operating costs                                    75,138                     64,286                            16.9  %
General and administrative expenses                      67,886                     64,013                             6.1  %
Depreciation and amortization                            16,079                     16,005                             0.5  %
Operating expenses                                      555,078                    496,174                            11.9  %
Income from operations                                   18,242                     22,115                           (17.5) %
Interest expense, net                                    14,909                     14,492                             2.9  %
Non-service defined benefit plan expense                    320                        334                            (4.2) %
Income before income taxes                                3,013                      7,289                           (58.7) %
Provision for income taxes                                  873                        460                            89.8  %
Net income                                        $       2,140               $      6,829                           (68.7) %


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

                                                       For the Six Months Ended
                                                               June 30,
                                                           2022                 2021
       Material costs                                              32.1  %     31.7  %
       Personnel costs                                             37.0  %     36.2  %
       Other operating costs                                       13.1  %     12.3  %
       General and administrative expenses                         11.8  %     12.4  %
       Depreciation and amortization                                2.8  %      3.1  %
       Operating expenses                                          96.8  %     95.7  %


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Semester completed June 30, 2022 Compared to the half-year ended June 30, 2021

Relevance of Six Months Ended Results to Comparative and Future Periods. As
discussed in "Effects of the COVID-19 Pandemic" above, commencing late in the
first quarter of 2020, our revenues and operating results began to be adversely
affected by the COVID-19 pandemic, a trend that continued into 2022. The effects
of this public health emergency on our revenues and earnings impacted the
comparison to our historical financial results. As a result, our comparative
financial and operational results when viewed as a whole for the periods
impacted by the COVID-19 pandemic may not be indicative of future financial and
operational performance. Please refer to the "Effects of the COVID-19 Pandemic"
section above and the "Financial Condition, Liquidity and Capital Resources"
section below for additional forward-looking information concerning our current
expectations regarding the effect of the COVID-19 pandemic on our prospective
results and financial condition.

Net revenues. Net revenues for the six months ended June 30, 2022 were $573.3
million, an increase of $55.0 million, or 10.6%, from $518.3 million for the six
months ended June 30, 2021. Net revenues by operating segment, after elimination
of intersegment activity, were as follows:

                                          For the Six Months Ended
                                                  June 30,                                 Percent
      (dollars in thousands)                2022                2021       
  Change       Change
      Patient Care                  $     485,488            $ 432,469      $ 53,019        12.3  %
      Products & Services                  87,832               85,820         2,012         2.3  %
      Net revenues                  $     573,320            $ 518,289      $ 55,031        10.6  %


Patient Care net revenues for the six months ended June 30, 2022 were $485.5
million, an increase of $53.0 million, or 12.3%, from $432.5 million for the
same period in the prior year. Same clinic revenues increased $27.4 million for
the six months ended June 30, 2022 compared to the same period in the prior
year, reflecting an increase of 6.5% on a per-day basis. Net revenues from
acquired clinics increased $24.9 million, and revenues from consolidations and
other services increased $0.7 million.

Prosthetics constituted approximately 53.7% of our total Patient Care revenues
for the six months ended June 30, 2022 and 52.7% for the same period in 2021,
excluding the impact of acquisitions. Prosthetic revenues for the six months
ended June 30, 2022 were 8.4% higher, on a per-day basis, than the same period
in the prior year, excluding the impact of acquisitions. Orthotics, shoes,
inserts, and other products increased by 4.3% on a per-day basis compared to the
same comparative prior periods, excluding the impact of acquisitions.

Products & Services net revenues for the six months ended June 30, 2022 were
$87.8 million, an increase of $2.0 million, or 2.3% from the same period in the
prior year. This was primarily attributable to an increase of $3.4 million, or
5.4%, in the distribution of O&P componentry in the period to independent
providers stemming primarily from lower volumes in the same period of 2021 due
to the COVID-19 pandemic, as discussed in the "Effects of the COVID-19 Pandemic"
section above. The increase is partially offset by a decrease in net revenues
from therapeutic solutions of $1.4 million, or 6.5% primarily as a result of
historical customer lease cancellations and discounts, partially offset by lease
installations.

Material costs. Material costs for the six months ended June 30, 2022 were
$184.0 million, an increase of $19.6 million or 11.9%, from the same period in
the prior year. Total material costs as a percentage of net revenues increased
to 32.1% in the six months ended June 30, 2022 from 31.7% in the six months
ended June 30, 2021 due to changes in our Patient Care segment business as
discussed further below. While we have not experienced significant inflation in
our material costs during the current year, we believe the effect of inflation
may increase during the remainder of 2022. Material costs by operating segment,
after elimination of intersegment activity, were as follows:

                                    For the Six Months Ended
                                            June 30,                                 Percent
(dollars in thousands)                2022                2021          Change       Change
Patient Care                  $     153,061            $ 131,639      $ 21,422        16.3  %
Products & Services                  30,964               32,802        (1,838)       (5.6) %
Material costs                $     184,025            $ 164,441      $ 19,584        11.9  %


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Patient Care material costs increased $21.4 million, or 16.3%, for the six
months ended June 30, 2022 compared to the same period in the prior year as a
result of the increase in segment net sales, additional costs as a result of our
acquisitions, freight, and increase in our use of third-party fabricators.
Freight cost increases have primarily related to increased fuel surcharges and
higher container costs. We currently anticipate that higher freight costs will
continue to affect our material costs in future periods. Patient Care material
costs as a percent of segment net revenues increased to 31.5% for the six months
ended June 30, 2022 from 30.4% for the six months ended June 30, 2021.

Products & Services material costs decreased $1.8 million, or 5.6%, for the six
months ended June 30, 2022 compared to the same period in the prior year. As a
percent of net revenues in the Products & Services segment, material costs were
35.3% for the six months ended June 30, 2022 as compared to 38.2% in the same
period of 2021. The decrease in material costs as a percent of segment net
revenues was due to a change in business and product mix within the segment as
well as cost savings related to certain supply chain initiatives.

Personnel costs. Personnel costs for the six months ended June 30, 2022 were
$212.0 million, an increase of $24.5 million, or 13.1%, from $187.4 million for
the same period in the prior year. Personnel costs by operating segment were as
follows:

                                          For the Six Months Ended
                                                  June 30,                                 Percent
      (dollars in thousands)                2022                2021          Change       Change
      Patient Care                  $     180,247            $ 158,952      $ 21,295        13.4  %
      Products & Services                  31,703               28,477         3,226        11.3  %
      Personnel costs               $     211,950            $ 187,429      $ 24,521        13.1  %


Personnel costs for the Patient Care segment were $180.2 million for the six
months ended June 30, 2022, an increase of $21.3 million, or 13.4%, from $159.0
million for the same period in the prior year. The increase in Patient Care
personnel costs during the six months ended June 30, 2022 was primarily related
to an increase in salary expense of $15.4 million from the six months ended
June 30, 2021. Additionally, incentive compensation and other personnel costs
increased $1.8 million, commissions increased $1.6 million, benefits increased
$1.4 million, and payroll taxes increased $1.1 million compared to the six
months ended June 30, 2021.

Personnel costs in the Products & Services segment were $31.7 million for the
six months ended June 30, 2022, an increase of $3.2 million compared to the same
period in the prior year. The increase is primarily related to an increase in
salary expense of $3.0 million from the six months ended June 30, 2021.
Additionally, other personnel cost increased $0.4 million. Bonus and commissions
decreased $0.2 million for the six months ended June 30, 2022 compared to the
same period in the prior year.

Other operating costs. Other operating costs for the six months ended June 30,
2022 were $75.1 million, an increase of $10.9 million, or 16.9%, from $64.3
million for the same period in the prior year. Rent, utilities, occupancy, and
office expenses increased $4.7 million, travel increased $1.8 million, expenses
related to a California wage and hour litigation settlement increased $1.3
million, professional education and professional fees increased $1.2 million,
other expenses increased $1.7 million, and bad debt expense increased $0.2
million as compared to the same period in the prior year.

General and administrative expenses. General and administrative expenses for the
six months ended June 30, 2022 were $67.9 million, an increase of $3.9 million,
or 6.1%, from the same period in the prior year. The increase is the result of a
$1.8 million increase in salary expense, a $1.2 million increase in severance
expense, and a $1.3 million increase in other expenses, partially offset by a
$0.4 million decrease in equity-based compensation compared to the six months
ended June 30, 2021.

Depreciation and amortization. Depreciation and amortization for the six months
ended June 30, 2022 was $16.1 million, an increase of $0.1 million, or 0.5%,
from the same period in the prior year. Amortization expense increased $1.1
million and depreciation expense decreased $1.0 million when compared to the
same period in the prior year.

Interest expense, net. Interest expense for the six months ended June 30, 2022
increased 2.9% to $14.9 million from $14.5 million for the same period in the
prior year.

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Provision for income taxes. The provision for income taxes for the six months
ended June 30, 2022 was $0.9 million, or 29.0% of income before income taxes,
compared to a provision of $0.5 million, or 6.3% of income before income taxes
for the six months ended June 30, 2021. The increase in the effective tax rate
for the six months ended June 30, 2022 compared with the six months ended
June 30, 2021 is primarily attributable to a windfall from share-based
compensation for the six months ended June 30, 2021 compared to a shortfall from
share-based compensation for the six months ended June 30, 2022. Our effective
tax rate for the six months ended June 30, 2022 differed from the federal
statutory tax rate of 21% primarily due to research and development credits,
non-deductible expenses, and a shortfall from share-based compensation.

We evaluate our deferred tax assets quarterly to determine whether adjustments
to the valuation allowance are appropriate in light of changes in facts or
circumstances, such as changes in expected future pre-tax earnings, tax law,
interactions with taxing authorities, and developments in case law. Our material
assumptions include forecasts of future pre-tax earnings and the nature and
timing of future deductions and income represented by the deferred tax assets
and liabilities, all of which involve the exercise of significant judgment. As
of June 30, 2022, our valuation allowance approximated $2.1 million.

For the year ending December 31, 2022, we estimate a research and development
tax credit of $2.7 million, net of tax reserves. We record the tax benefit, net
of tax reserves, as a deferred tax asset. For the year ended December 31, 2021,
we recognized research and development tax credits of $4.3 million, net of tax
reserves.

Financial position, liquidity and capital resources

Liquidity

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

At June 30, 2022, we had total liquidity of $154.2 million, which reflected a
decrease of $36.8 million from the $191.0 million in liquidity we had as of
December 31, 2021. Our liquidity at June 30, 2022 was comprised of cash and cash
equivalents of $24.4 million and $129.8 million in available borrowing capacity
under our $135.0 million revolving credit facility. This decrease in liquidity
primarily related to a decrease in cash of $37.3 million, comprised of net cash
from operations of $30.9 million, capital expenditures of $10.6 million, cash
paid for acquisitions, net of cash acquired, of $12.5 million, and net cash used
in financing activities of $45.2 million. In June 2022, we made a prepayment of
$33.7 million in borrowings under the Credit Agreement.

Our Credit Agreement contains customary representations and warranties, as well
as financial covenants, including that we maintain compliance with certain
leverage and interest coverage ratios. If we are not compliant with our debt
covenants in any period, absent a waiver or amendment of our Credit Agreement,
we may be unable to access funds under our revolving credit facility. We were in
compliance with our debt covenants as of June 30, 2022.

For more information, please refer to the Liquidity Outlook section below.

Working capital and outstanding days of sales

At June 30, 2022, we had working capital of $52.4 million compared to working
capital of $91.5 million at December 31, 2021. Our working capital decreased
$39.2 million during the six months ended June 30, 2022 due to a decrease in
current assets of $35.4 million and an increase in current liabilities of $3.8
million.

The decrease in current assets of $35.4 million was mainly attributable to a
decrease in Cash and cash equivalents of $37.3 million discussed in the
“Liquidity” section above, a decrease in accounts receivable, net of $1.2
million
and a decrease in income tax receivable from $0.6 million. These
decreases were offset by an increase of approximately $3.1 million in other
current assets and an increase in inventories of approximately $0.6 million.

The increase in current liabilities of $3.8 million was primarily attributable
to an increase in Accounts payable of $4.1 million. The remainder of the
increase is primarily attributable to an increase of accrued incentive
compensation related costs of $2.3 million, an increase in Current portion of
operating lease liabilities of $0.9 million, and an increase of $0.7 million in
Current portion of long-term debt, partially offset by a decrease in Accrued
expenses and other current liabilities of $4.2 million.

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Days sales outstanding ("DSO") is a calculation that approximates the average
number of days between the billing for our services and the date of our receipt
of payment, which we estimate using a 90-day rolling period of net revenue. This
computation can provide a relative measure of the effectiveness of our billing
and collections activities. Clinics acquired during the past 90-day period are
excluded from the calculation. As of June 30, 2022, our DSO was 44 days,
compared to a DSO of 40 days as of June 30, 2021. The increase is partially
attributable to a larger increase in net revenue relative to accounts
receivable, as well as the impact of acquisitions completed in the fourth
quarter of 2021.

Sources and uses of cash for the six months ended June 30, 2022 Compared to June
30, 2021

Net cash flows from operating activities were $30.9 million for the six months
ended June 30, 2022, while net cash flows used in operating activities were $9.3
million for the six months ended June 30, 2021. The most significant decreases
were due to $23.7 million in Accrued compensation related costs and $11.2
million in Accounts payable.

Cash flows used in investing activities decreased $25.2 million to $23.1 million
for the six months ended June 30, 2022, from $48.2 million for the six months
ended June 30, 2021. The decrease in cash used in investing activities was due
to a decrease of $22.9 million in cash paid for acquisitions, net of cash
acquired, and $2.3 million less in capital expenditures, net of proceeds from
sale of property, plant and equipment.

Cash flows used in financing activities were $45.2 million for the six months
ended June 30, 2022, as compared to cash used in financing activities of $10.9
million for the six months ended June 30, 2021. The increase in cash used in
financing activities is primarily due to an increase in payments on outstanding
debt and Seller Notes of $36.5 million, offset by a decrease in payment of
employee taxes on share-based compensation, payments under vendor financing
arrangements and other activities of $2.2 million.

Effect of indebtedness

As of June 30, 2022, we have a Senior Credit Facility (the "Credit Agreement")
which provides for (i) a Term Loan B facility with $449.8 million outstanding
which is due in quarterly principal installments with all remaining outstanding
principal due at maturity in March 2025 and (ii) a revolving credit facility
with an availability of $135.0 million which matures on November 23, 2026
(subject to a springing maturity if the term loans outstanding under the Credit
Agreement are not repaid prior to the date that is 91 days prior to the stated
maturity thereof). In June 2022, we made a prepayment of $33.7 million in
borrowings under the Credit Agreement. Availability under the revolving credit
facility is reduced by outstanding letters of credit, which were $5.2 million as
of June 30, 2022, resulting in approximately $129.8 million in available
borrowing capacity. For additional discussion surrounding the Credit Agreement,
see Note K - "Debt and Other Obligations," in the notes to the condensed
consolidated financial statements contained elsewhere in this report. Cash paid
for interest totaled $13.2 million and $13.0 million for the six months ended
June 30, 2022 and 2021, respectively.

Liquidity outlook

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

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

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

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