HNGR Hanger Inc

The “Other disclosures” information provided in the table above reflects items that are inherently included as deductions within the net cash numbers provided on the “Net cash provided by operating activities” line item.

“Certain cash payments to 3rd party professional firms” reflect amounts paid to third party professional firms in connection with the identification and remediation of the Company’s accounting issues, and the preparation and audit of its annual financial statements, in excess of the expenses historically incurred in connection with the Company’s annual financial statement preparation and audit activities. Disclosure of these expenditures has been provided to assist in the explanation of changes in the Company’s cash flow trends between the comparative periods disclosed in the table. Cash payments differ in timing from the Company’s recognition of expenses in that certain of these professional expenses incurred in connection with the 2014 audit but paid during 2015 and 2016 will be recognized in the year ended December 31, 2014. The Company currently estimates that expenses in excess of historically incurred amounts will be approximately $28.7 million for 2014, $21.9 million for 2015 and $36.3 million for 2016, for a total of $86.9 million for the three years, of which $58.9 million has been paid through September 30, 2016. The Company considers its historically incurred amounts to have been approximately $2.0 million a year, for a total of $30.7 million in total expenses in 2014, $23.9 million in 2015 and $38.3 million in 2016, for a total of $92.9 million for the three years. Amounts relating to these fees that have been incurred but not yet paid and reflected in the above table will be paid in future periods. These estimated amounts may increase depending on the nature of the activities and time necessary for the Company (with the assistance of its third party professional firms) and its auditors to comply with their respective financial accounting and auditing requirements.

4

During the second quarter of 2016, the Company extended the timing of its payments to certain vendors and undertook other actions affecting its working capital.  During the third quarter of 2016, the Company received federal income tax refunds totaling approximately $35.0 million.  These actions had the effect of increasing the Company’s operating cash flows during these periods as compared to the prior year periods.   This increase in operating cash flow should therefore not be considered reflective of any commensurate growth or improvement in the Company’s underlying operating results.

The Company paid $6.1 million in fees in 2015, and, through the date of this filing, paid $10.4 million in fees in 2016, to the holders of its debt to obtain the consent to modifications to the underlying debt instruments. Included in these amounts, the Company paid $1.7 million in 2015 and $4.1 million in 2016 to obtain amendments and waivers to the Credit Agreement, dated as of June 17, 2013 among the Company, the lenders from time to time party thereto and Bank of America, N.A. (the “ Credit Agreement ”).  The remaining $4.4 million of fees paid in 2015 and $6.3 million of fees paid in 2016 relate to the Fourth and Fifth Supplemental Indentures to the Indenture (the “ Indenture ”) among the Company, the Guarantors and Wilmington Trust Company, as Trustee, pursuant to which the Company had issued $200 million aggregate principal amount of Senior Notes due 2018 (the “Notes”).  The Company redeemed the Notes and the Indenture was satisfied and discharged in August 2016.   In addition to fees paid to holders of its debt, the Company also paid legal and professional fees in connection with these amendments and waivers of $1.7 million in 2015 and $8.0 million in 2016.

Liquidity

As discussed in a Form 8-K filed on August 1, 2016, the Company entered into the Fifth Amendment and Waiver, effective as of August 1, 2016 (the “ Fifth Amendment and Waiver ”), with respect to the Credit Agreement, which waives defaults and events of default under the Credit Agreement and also modifies certain of the terms and covenants contained in the Credit Agreement, including by increasing the applicable interest rates, with some of the modifications terminating at such time as the Company meets various conditions described above.  The Company also entered into the new credit agreement (the “ Term B Credit Agreement ”) by and among the Company, the various lenders party thereto and Wilmington Trust, National Association, as administrative agent, which provides for a $280 million senior unsecured term loan facility under which all outstanding principal is due at maturity on August 1, 2019 and all borrowings bear interest at a fixed rate per annum equal to 11.50% payable quarterly in arrears.

Also as discussed in a Form 8-K filed on August 1, 2016, the Company issued a notice of redemption to the holders of all of the Notes pursuant to the terms of the Indenture.  The Company redeemed the Notes and the Indenture was satisfied and discharged in August 2016.  As a result of this redemption and defeasance, there are no Notes outstanding and the Indenture is no longer effective.

If the Company fails to comply with the terms of its Credit Agreement as amended by the Fifth Amendment and Waiver or the terms of its Term B Credit Agreement, or is unsuccessful at further amending or waiving the Credit Agreement when the existing amendments and waivers expire (if such further amendment and waivers become necessary), then the Company may be subject to numerous penalties, including but not limited to the acceleration of all of its debt outstanding pursuant to the Credit Agreement and the Term B Credit Agreement.  In the event that the debt were to be accelerated, then the Company may need to seek alternative financing to satisfy its obligations.  This alternative financing may not be available to the Company on terms that are favorable to it, or at all.

The Company currently believes that cash generated from operations, together with other available sources of liquidity, including borrowings available under its Credit Agreement and the Term B Credit Agreement, will be sufficient for at least the next twelve months to fund anticipated capital expenditures, make required routine payments of principal and interest on debt as such payments become due, and pay the additional third party expenses that the Company continues to incur as a result of the ongoing work relating to the filing of its financial statements .  A table setting forth the Company’s outstanding indebtedness as of September 30, 2016, is included below.

As of September 30, 2016, the Company had $104.1 million in liquidity as defined in its Credit Agreement.   This was comprised of $13.6 million in cash and cash equivalents in its bank accounts and $90.5 million of available borrowing capacity under its revolving credit line.   As of September 30, 2016 the Company’s cash and cash equivalents

5

for financial statement purposes were $2.1 million, which reflected $13.6 million in bank cash balances after reduction for outstanding un-cleared checks and related items.

As of September 30, 2016, the Company’s Aggregate Revolving Commitment under its Credit Agreement was $118.3 million.   Of this amount, the Company had $13.9 million in limitations on its revolving availability under the Credit Agreement, had borrowed $8.0 million and had utilized a further $5.9 million for letters of credit, resulting in $90.5 million of available borrowing capacity.

receivables as misstatements arising in the historical period in which the original transactions were recognized.  The Company has now applied corrections to its historical accounts receivable allowances through the revision of incorrect data and assumptions originally utilized in its methodology.  Accordingly, the Company’s application of adjustments as presented below utilized contemporaneous historical collection experience as the basis for establishing estimates of required accounts receivable allowances in each restatement period.

Since its reporting of the estimated impacts of the restatements on the Non-Reliance Periods as disclosed in its Current Report on Form 8-K filed on May 10, 2016, the Company has identified additional misstatements. These additional misstatements have been included in the tables set forth below.  Changes to previously reported items generally relate to additional errors of similar nature identified in other balances or business units and to refinements to the Company’s determinations of the amounts of the previously reported misstatements.  Changes to previously reported items for other adjustments primarily relate to errors in the Company’s sales tax, bonus, and vacation accruals and in its escheatment process.  The new adjustments primarily relate to the following:

·                   Misstatements of net sales due primarily to the failure to timely identify and record certain refund obligations within the Patient Care segment.  This liability is established to reserve for revenue collected from third party payors and patients that the Company estimates will be refunded in a subsequent period.

·                   Misstatements of net sales and accounts receivable due to errors within the revenue accrual estimation model for goods delivered but not yet invoiced associated with the Company’s Patient Care segment.

·                   Misstatements of accrued liabilities and expenses due to errors in the Company’s accounts payable cut-off process.

·                   Understatement of other operating expenses due to not providing for an accrued loss for excess purchase commitments associated with the Company’s Products & Services segment in the second quarter of 2014.

The Company has not yet completed its final determination and review of the items listed below, and therefore the listed amounts are preliminary, unaudited, may not be complete and are subject to change.  While the Company expects to report the estimated adjustments described in this Current Report on Form 8-K, there can be no assurance that the final adjustments will not differ materially from the estimated amounts discussed herein, or that additional misstatements will not be identified.

The Company is in the process of, but has not yet completed, its final determination of the degree to which these errors will have an effect on the classification of the primary captions reported in its financial statements. Based on its review to date, the Company preliminarily anticipates that the restatements will result in the estimated adjustments to its unaudited “Income before taxes” identified in the tables below (amounts in thousands):

7

TABLE 1: Adjustments to Pre-Tax Income

(in thousands, amounts are unaudited, preliminary and subject to change)

8

9

10

Goodwill Impairment

As of September 30, 2016, the preliminary carrying value of the Company’s goodwill was approximately $718.4 million.  The Company reported in a Form 8-K filed on June 22, 2016 that, prompted by a significant decline in the market capitalization of the Company’s common stock following the Company’s announcements included in its Form 8-K filed with the SEC on February 26, 2016, management engaged a third-party valuation firm to prepare the first step of a two-step interim impairment test of its goodwill as of March 31, 2016.  Based on the results of this first step impairment test, Company management, in consultation with the Audit Committee of the Company’s Board of Directors, made at that time a preliminary assessment that it is more likely than not that the Company will record a material non-cash goodwill impairment charge.  Similarly, the Company is assessing its other indefinite lived intangibles for potential impairment.  Management continues to assess the timing of when the impairment occurred, but currently believes the impairment charge will be recorded no later than in the first quarter of 2016.  It is also possible that the Company may come to the conclusion that the impairment occurred effective in either the third or fourth quarter of 2015.

The Company will not be able to make a final determination regarding the existence of the impairment charge, the amount of the likely impairment charge or the period in which the impairment charge will occur until it has completed its financial accounting for 2014, 2015, and the first quarter of 2016, and has performed the second required step of its goodwill impairment analysis, which will involve the measurement of the impairment amount.

The statements in this Current Report on Form 8-K regarding, among others, the expected impact of the restatement, the estimated cash flow data for various periods, expected liquidity, the expected timing of the Company’s filings and the existence, amount or period of incurrence of any impairment charge constitute forward-looking statements that are based on the Company’s current expectations.  The Company’s final financial statements, including its restated financial statements, will be included in filings that the Company files with the SEC after the Company has completed its work on its restated financial statements, and after the Audit Committee of the Board of Directors has completed its review of the financial statements and other financial data.  See “Disclosures About Forward-Looking Statements” below.

Disclosures About Forward-Looking Statements

This Form 8-K contains certain “forward-looking statements” relating to the Company. All statements, other than statements of historical fact included herein, are “forward-looking statements,” including statements regarding the timing of filing of, and the outcome of the Company’s work in connection with, completing certain financial statements and other financial data. These forward-looking statements are often identified by the use of forward-looking terminology such as “intends,” “expects” or similar expressions and involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks, and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this filing. The Company disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. These uncertainties include, but are not limited to, the risk that additional information may arise during the course of the Company’s ongoing financial statement preparation and closing processes that would require the Company to make additional adjustments or revisions to its estimates or financial statements and other financial data, to restate further its financial statements and other financial data for current or historical periods, to identify additional material weaknesses, or to take any other necessary action relating to the Company’s accounting practices; the time required to complete the financial statements and other financial data and accounting review; the time required to prepare its periodic reports for filings with the Securities and Exchange Commission; and any regulatory review of, or litigation relating to, the Company’s accounting practices, financial statements and other financial data or other corporate actions. For additional information and risk factors that could affect the Company, see its Form 10-K for the year ended December 31, 2013 and its Form 10-Q for the quarter ended June 30, 2014 as well as the risk factor set forth in Item 8.01 of the Company’s Current Report on Form 8-K filed February 17, 2015, each as filed with the Securities and Exchange Commission. The information contained in this filing is made as of the date hereof, even if subsequently made available by the Company on its website or otherwise.

11