Case Study: Short Hanger Inc (HGR)

We are releasing our previous short piece on Hanger, Inc. (HGR) when it was trading at $32.16. It is since down ~85% and has been delisted from the NYSE and trading on the OTC under (HNGR). We've included the report to detail our research process and expertise, as well as the resulting performance since we initiated coverage. Read the synopsis below and the attached full PDF report.

Report Dated: June 20, 2014

We are concerned about a surge in receivables given (1) a recent increase in CMS audit activity, (2) delays in Medicare appeals, and (3) deterioration in receivables aging. In addition, we believe the Company may not be adequately reserved for potential unfavorable CMS audit decisions. Our concerns are heightened given a recent SEC investigation into the Company’s receivables and bad debt expense levels, a previous overstatement of receivables, potential evidence of manual control processes, and a systems upgrade that we believe may be a catalyst for a potential financial restatement. In addition, we are concerned about a surge in inventory given (1) a valuation methodology that requires significant estimation and physical inventory counts, (2) two consecutive years of inventory internal control weaknesses, (3) evidence of recent material (in our view) inventory misstatements, and (4) the existence of six SEC correspondence letters focused on inventory valuation over the past eighteen months. Our concerns are heightened in light of negative cash from operations, a surge in capex and prepaid expenses, a high level of soft assets with negative tangible book value, the recent announcement of the departure of the CFO and COO, and significant insider divestitures. We are initiating coverage of HGR on The Short List.

Catalysts and Timing

• FY 14 guidance reduction.
  
• Q4 14 physical inventory count results in discovery of inventory overstatement.
  
• New Janus billing system integration results in discovery of accounts receivable and/or reserve irregularities.
  
• SEC and/or auditor compelled restatement of prior period results.
  
• Unfavorable Medicare appeals results in receivable write-downs.