PERFORMANT FINANCIAL CORPORATION You should read the following discussion in conjunction with our consolidated financial statements (unaudited) and related notes included elsewhere in this report. This report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The words "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" under Item 1A of Part II of this report. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements include, but are not limited to, statements about: the impact of COVID-19 on our business and operations, opportunities and expectations for the markets in which we operate; anticipated trends and challenges in our business and competition in the markets in which we operate; our client relationships and our ability to maintain such client relationships; our ability to generate sufficient cash flows to fund our ongoing operations and other liquidity needs; our ability to maintain compliance with the covenants in our debt agreements; our ability to generate revenue following long implementation periods associated with new customer contracts; the adaptability of our technology platform to new markets and processes; our ability to invest in and utilize our data and analytics capabilities to expand our capabilities; our growth strategy of expanding in our existing markets and considering strategic alliances or acquisitions; maintaining, protecting and enhancing our intellectual property; our expectations regarding future expenses; expected future financial performance; and our ability to comply with and adapt to industry regulations and compliance demands. The forward-looking statements in this report speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Overview
We provide technology-enabled audit, recovery, and analytics services inthe United States with a focus in the healthcare payment integrity industry. We work with healthcare payers through claims auditing and eligibility-based (also known as coordination-of-benefits or COB) services to identify improper payments. We engage clients in both government and commercial markets. We also have a call center which serves clients with complex consumer engagement needs. Our clients typically operate in complex and highly regulated environments and contract for their payment integrity needs in order to reduce losses on improper healthcare payments. We historically worked in recovery markets such as defaulted student loans, federal treasury and state tax receivables, and commercial recovery. However, with the ongoing impact of the COVID-19 pandemic and theDepartment of Education's decision to continue to pause student loan recovery work, we sold certain of our non-healthcare recovery contracts in 2021 and we did not renew or restart existing recovery contracts, nor pursue new non-healthcare recovery opportunities. Our revenue model is generally success-based as we earn fees on the aggregate correct audits and/or amount of funds that we enable our clients to recover. Our services do not require significant upfront investments by our clients and offer our clients the opportunity to recover significant funds otherwise lost. Because our model is based upon the success of our efforts, our business objectives are aligned with those of our clients and we are generally not reliant on their spending budgets.
COVID-19 Pandemic Update
We continue to face uncertainty around the breadth, and duration of business disruptions related to the COVID-19 pandemic, as well as its impact on theU.S. economy, the ongoing business operations of our clients, and the results of our operations and financial condition. While our management team continues to actively monitor the impacts of the COVID-19 pandemic and may take further actions to our business operations that we determine are in the best interests of our employees and clients, or as required by federal, state, or local authorities, the continuing impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for fiscal year 2022 and beyond cannot be estimated at this point.
The following discussions are subject to the effects of the COVID-19 pandemic on our ongoing business operations.
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Sources of Revenues
We derive our revenues from services for clients in a variety of different
markets. These markets include our two largest markets, healthcare and recovery,
as well as our other markets which include but are not limited to outsourced
call center services, delinquent state and federal taxes and federal treasury
and other receivables.
Three Months Ended
March 31,
2022 2021
(in thousands)
Eligibility-based $ 14,215 $ 7,911
Claims-based 9,149 5,375
Healthcare Total 23,364 13,286
Recovery (1) 118 14,491Customer Care / Outsourced Services 3,601 3,613 Total Revenues
$ 27,083 $ 31,390
(1)Represents student lending, state and municipal tax authorities,
Healthcare Revenues
We derive revenues from both commercial and government clients by providing healthcare payment integrity services, which include claims-based and eligibility-based services. Revenues earned under claims-based contracts in the healthcare market are driven by auditing, identifying, and sometimes recovering improperly paid claims through both automated and manual review of such claims. Eligibility-based services, which may also be referred to as coordination-of-benefits, involve identifying and recovering payments in situations where our client should not be the primary payer of healthcare claims because a member has other forms of insurance coverage. We are paid contingency fees by our clients based on a percentage of the dollar amount of improper claims recovered as a result of our efforts. The revenues we recognize are net of our estimate of claims that we believe will be overturned by appeal or disputed following payment by the provider. For our healthcare business, our business strategy is focused on utilizing our technology-enabled services platform to provide claims-based, eligibility-based, and analytical services for healthcare payers. Revenues from our healthcare services were$23.4 million for the three months endedMarch 31, 2022 compared to revenues of$13.3 million from our healthcare services during for the three months endedMarch 31, 2021 . In 2017, we were awarded the Medicare Secondary Payer Commercial Payment Center (MSP) contract by theCenters for Medicare and Medicaid Services (CMS). Under this agreement, we are responsible for coordination-of-benefits, which includes identifying and recovering payments in situations where Medicare should not be the primary payer of healthcare claims because a beneficiary has other forms of insurance coverage, such as through an employer group health plan or certain other payers. In 2016, CMS awarded two new Medicare Recovery Audit Contractor (RAC) contracts to us, for audit Regions 1 and 5. The RAC contract award for Region 1 allows us to continue our audit of payments under Medicare's Part A and Part B for all provider types other than Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) and home health and hospice within an 11 state region in the Northeast and Midwest. The Region 5 RAC contract provides for the post-payment review of DMEPOS and home health and hospice claims nationally.
In
InJanuary 2022 , we were awarded the indefinite delivery, indefinite quantity (IDIQ) contract by theU.S. Department of Health and Human Services ,Office of the Inspector General (HHS OIG) , which has a base term of one year and four additional 1-year options. Under the IDIQ contract, we will provide medical review and consultative services associated with the oversight activities of the HHS OIG, primarily assessing services and claims for Medicare fee-for-service payments for Part A and Part B. This contract was awarded via a full-and-open competitive procurement. 15
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InMarch 2022 , we were awarded the contract for Region 2 of the Medicare Fee for Service Recovery Audit Program, but we anticipate a delay before the contract kicks off, as the award is currently under review by CMS related to the incumbent contractor's protest. Many of our healthcare clients are expanding the scope of services that we provide, and we continue to implement new programs for them. We believe this growth trend will continue as our suite of payment integrity services and our customer relationships continue to mature. We currently anticipate that our healthcare revenues will drive the majority of our overall revenue growth.
Recovery Revenues
Historically, the recovery market revenues contributed a majority of our revenues. However, the COVID-19 pandemic had a significant impact on our recovery revenues. In 2021, we sold certain non-healthcare recovery contracts, and did not renew or restart other existing non-healthcare recovery contracts, nor pursue new non-healthcare recovery opportunities. Commencing in 2022, we anticipate that we will not generate significant revenues from the non-healthcare recovery market.
Customer Care / Outsourced Services Revenues
We derive revenues from first party call center and other outsourced services for certain clients. Our revenues for these services include contingent fees based on the volume of processed transactions and the quantity of labor hours provided to our clients. Costs and Expenses We generally report two categories of operating expenses: salaries and benefits and other operating expense. Salaries and benefits expenses consist primarily of salaries and performance incentives paid and benefits provided to our employees. Other operating expenses include expenses related to our use of subcontractors, other production related expenses, including costs associated with data processing, retrieval of medical records, printing and mailing services, amortization and other outside services, as well as general corporate and administrative expenses.
Factors Affecting Our Operating Results
Our results of operations are influenced by a number of factors, including costs associated with commencing new contracts, claim recovery volume, contingency fees, regulatory matters, client contract cancellation and macroeconomic factors.
Costs Associated with Commencing New Contracts
When we obtain an engagement with a new client or a new contract with an existing client, it typically takes a long period of time to plan our services in detail, which includes integrating our technology, processes and resources with the client's operations and hiring new employees, before we receive any revenues from the new client or new contract. Our clients may also experience delays in obtaining approvals or managing protests from unsuccessful bidders, delays associated with system implementations, as we had experienced with the implementation of our first RAC contracts with CMS. If we are not able to pay the upfront expenses out of cash from operations or availability of borrowings under our lending arrangements, we may scale back our operations or alter our business plans, either of which could prevent of us from earning future revenues under any such new client or new contract engagements.
Claims Recovery Volume
Our claims-based audit business reflects the scale of claims which are deemed permissible to audit by certain of our healthcare clients. Non-permissible claims may result from client product lines which are determined by our clients to be out of scope of our audit services, claims related to excluded providers or excluded provider groups, changes in policy, or other factors such as geographies disrupted by natural disasters or a global pandemic like the COVID-19 pandemic. For example, the COVID-19 pandemic has had a negative impact on overall hospital utilization rates inthe United States . This negative impact on overall hospital utilization rates has caused delays with the healthcare industry as a whole, which in turn has had a negative impact on our healthcare business.
Claims volume provided by our healthcare clients also impact our eligibility-based services. To the extent claims volume is impacted by any of the factors above, it may result in an adverse effect on our revenues and results of operations.
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Contingency Fees
Our revenues consist primarily of contract-based contingency fees. The contingency fee percentages that we earn are set by our clients or agreed upon during the bid process and may change from time to time either under the terms of existing contracts or pursuant to the terms of contract renewals. Changes in contingency fee percentages set by our clients may have a material effect on our revenues and results of operations.
Regulatory Matters
Each of the markets which we serve is highly regulated. Accordingly, changes in regulations that affect the types of receivables and claims that we are able to service or audit or the manner in which any such receivables and claims can be recovered will affect our revenues and results of operations. For example, inMarch 2020 , CMS paused medical review activities under our two RAC contracts as a result of the COVID-19 pandemic, which were later resumed inAugust 2020 . In addition, our entry into the healthcare market was facilitated by the passage of the Tax Relief and Health Care Act of 2006, which mandated CMS to contract with private firms to audit Medicare claims in an effort to increase the recovery of improper Medicare payments. Any changes to the regulations that affect the Medicare program or the audit and recovery of Medicare claims could have a significant impact on our revenues and results of operations.
Client Contract Cancellation
Substantially all of our contracts entitle our clients to unilaterally terminate their contractual relationship with us at any time without penalty. Our revenues could decline if we lose one or more of our significant clients, or if one of our significant clients decides to limit the amount of claims that we are allowed to audit or if the terms of compensation for our services change or if there is a reduction in the level of placements provided by any of these clients. Further, our revenues could be adversely affected if one of our significant clients is acquired by an entity that does not wish to continue use our services. Macroeconomic Factors Certain macroeconomic factors influence our business and results of operations. For example, the growth in Medicare expenditures or claims made to private healthcare providers resulting from changes in healthcare costs or the healthcare industry taken as a whole, as well as the fiscal budget tightening of federal, state and local governments as a result of general economic weakness and lower tax revenues. Critical Accounting Policies Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Revenue Recognition We derive our revenues primarily from providing audit, recovery, and analytics services. Revenues are recognized when upon completion of these services for our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
•Identification of the contract with a customer
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•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, the performance obligations are satisfied
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Our contracts generally contain a single performance obligation, delivered over time as a series of services that are substantially the same and have the same pattern of transfer to a client, as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Our contracts are composed primarily of variable consideration. Fees earned under our audit and recovery service contracts consist primarily of contingency fees based on a specified percentage of the amount we enable our clients to recover. The contingency fee percentage for a particular recovery depends on the type of recovery or claim facilitated. We generally either apply the as-invoiced practical expedient, where our right to consideration corresponds directly to our right to invoice our clients, or the variable consideration allocation exception, where the variable consideration is attributable to one or more, but not all, of the services promised in a series of distinct services that form part of a single performance obligation. As such, we have elected the optional exemptions related to the as-invoiced practical expedient and the variable consideration allocation exception, whereby the disclosure of the amount of transaction price allocated to the remaining performance obligations is not required. We estimate variable consideration only if we can reasonably measure our progress toward complete satisfaction of the performance obligation using an output method based on reliable information, and recognize such revenue over the performance period only if it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Any change made to the measure of progress toward complete satisfaction of our performance obligation is recorded as a change in estimate. We exercise judgment to estimate the amount of constraint on variable consideration based on the facts and circumstances of the relevant contract operations and availability and reliability of data. Although we believe the estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of variable consideration. For contracts that contain a refund right, these amounts are considered variable consideration, and we estimate our refund liability for each claim and recognize revenue net of such estimate.
Under certain contracts, consideration can include periodic performance-based bonuses which can be awarded based on our performance under the specific contract. These performance-based awards are considered variable and may be constrained by us until there is not a risk of a material reversal.
We have applied the as-invoiced practical expedient and the variable consideration allocation exception to contracts with performance obligations that have an average remaining duration of less than a year.
Healthcare providers have the right to appeal claims audit findings and may pursue additional appeals if the initial appeal is found in favor of healthcare clients. For eligibility or COB contracts, insurance companies or other responsible parties may dispute our findings regarding our clients not being the primary payer of healthcare claims. Total estimated liability for appeals, disputes, and refunds was$1.5 million as ofMarch 31, 2022 and$1.2 million as ofDecember 31, 2021 . This represents our best estimate of the amount probable of being refunded to our healthcare clients. Contract assets totaled$8.9 million and$8.1 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Contract assets relate to our right to consideration for services completed, but not invoiced at the reporting date, and receipt of payment is conditional upon factors other than the passage of time. Contract assets primarily consist of commissions we estimate we have earned from completed claims audit findings submitted to healthcare clients. The increase in contract assets resulted primarily from additional consideration earned for services provided to our healthcare clients, offset by invoiced amounts. 18
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Contract assets are recorded to accounts receivable when our rights to payment become unconditional, which is generally when healthcare providers or payers have paid our clients. There was no impairment loss related to contract assets for the three months endedMarch 31, 2022 and 2021. Contract liabilities totaled$0.8 million and$0.6 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Our contract liabilities related to certain reimbursable costs due to a client.
Recent Accounting Pronouncements
See "New Accounting Pronouncements" in Note 1(f) of the Consolidated Financial Statements included in Part I - Item 1 of this report.
Results of Operations
Three Months Ended
The following table represents our historical operating results for the periods
presented:
Three Months Ended March 31,
2022 2021 $ Change % Change
(in thousands)
Consolidated Statement of Operations Data:
Revenues $ 27,083 $ 31,390 $ (4,307) (14) %
Operating expenses:
Salaries and benefits 20,439 24,090 (3,651) (15) %
Other operating expenses 8,131 10,356 (2,225) (21) %
Total operating expenses 28,570 34,446 (5,876) (17) %
Income (loss) from operations (1,487) (3,056) 1,569 51 %
Interest expense (155) (1,346) 1,191 88 %
Income (loss) before provision for (benefit
from) income taxes (1,642) (4,402) 2,760 63 %
Provision for (benefit from) income taxes 31 37 6 16 %
Net income (loss) $ (1,673) $ (4,439) $ 2,766 62 %
Revenues
Total revenues were $27.1 million for the three months ended March 31, 2022 , a
decrease of approximately 14%, compared to total revenues of $31.4 million for
the three months ended March 31, 2021 .
Healthcare revenues were $23.4 million for the three months ended March 31,
2022 , representing an increase of $10.1 million , or 76%, compared to the three
months ended March 31, 2021 . This increase in healthcare revenues was primarily
attributable to the continued growth from our fully implemented statements of
work and numerous program implementations over the past year. In addition, the
increase in eligibility-based services revenue of $6.3 million compared to the
three months ended March 31, 2021 reflects a $3.3 million charge to revenue to
accrue a refund liability to a client for the three months ended March 31, 2021 .
Recovery revenues were $0.1 million for the three months ended March 31, 2022 ,
representing a decrease of $14.4 million , or 99%, compared to the three months
ended March 31, 2021 . The decrease was primarily due to our decision to sell
certain of our recovery contracts and to not renew or extend our other existing
recovery contracts as a result of the adverse impacts of the COVID-19 pandemic
on our recovery business.
Customer Care / Outsourced Services revenues were approximately $3.6 million for
both the three months ended March 31, 2022 and 2021. The primary service that we
offer within our customer care markets continue to be impacted by the pause in
collections of payments for federal student loans, which has been extended to
August 31, 2022 .
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Salaries and Benefits
Salaries and benefits expense was$20.4 million for the three months endedMarch 31, 2022 , a decrease of$3.7 million , or 15%, compared to salaries and benefits expense of$24.1 million for the three months endedMarch 31, 2021 . The decrease in salaries and benefits expense was primarily driven by lower headcount related to lower activities under our non-healthcare recovery contracts as a result of selling certain of our recovery contracts and our decision to not renew or extend our other existing recovery contracts in 2021.
Other Operating Expenses
Other operating expenses were$8.1 million for the three months endedMarch 31, 2022 , compared to other operating expenses of$10.4 million for the three months endedMarch 31, 2021 . The decrease in other operating expenses was primarily due to lower activity levels under our non-healthcare recovery contracts during the three months endedMarch 31, 2022 and a decrease in professional services.
Income (Loss) from Operations
As a result of the factors described above, loss from operations was
Interest Expense
Interest expense was$0.2 million for the three months endedMarch 31, 2022 , compared to$1.4 million for the three months endedMarch 31, 2021 , representing a decrease of$1.2 million . This decrease in interest expense is due to a lower principal balance and lower interest rate during the three months endedMarch 31, 2022 .
Income Taxes
We recognized an income tax expense of$31 thousand for the three months endedMarch 31, 2022 , compared to an income tax expense of$37 thousand for the three months endedMarch 31, 2021 . Our effective income tax rate changed to (2)% for the three months endedMarch 31, 2022 , from (1)% for the three months endedMarch 31, 2021 . Similar to the three months endedMarch 31, 2021 , the primary driver of our effective tax rate is the overall losses from operations for the three months endedMarch 31, 2022 for which no benefit is recognized due to valuation allowance.
Net Income (Loss)
As a result of the factors described above, net loss was$1.7 million for the three months endedMarch 31, 2022 , which represented a decrease in net loss of approximately$2.8 million , or 62%, compared to net loss of$4.4 million for the three months endedMarch 31, 2021 . 20
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Adjusted EBITDA and Adjusted Net Income
To provide investors with additional information regarding our financial results, we have disclosed in the table below adjusted EBITDA and adjusted net income, both of which are non-U.S. GAAP financial measures. We have provided a reconciliation below of adjusted EBITDA to net income and adjusted net income to net income, the most directly comparableU.S. GAAP financial measure to these non-U.S. GAAP financial measures. We have included adjusted EBITDA and adjusted net income in this report because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends and to prepare and approve our annual budget. Accordingly, we believe that adjusted EBITDA and adjusted net income provide useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA and adjusted net income has limitations as an
analytical tool, and you should not consider it in isolation or as a substitute
for analysis of our results as reported under
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•adjusted EBITDA does not reflect interest expense on our indebtedness;
•adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA does not reflect tax payments;
•adjusted EBITDA and adjusted net income do not reflect the potentially dilutive impact of equity-based compensation;
•adjusted EBITDA and adjusted net income do not reflect the impact of certain non-operating expenses resulting from matters we do not consider to be indicative of our core operating performance; and
•other companies may calculate adjusted EBITDA and adjusted net income differently than we do, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA and adjusted net income alongside other financial performance measures, including net income and our otherU.S. GAAP results. The following tables present a reconciliation of adjusted EBITDA and adjusted net income for each of the periods indicated: 21
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Three Months Ended
March 31,
2022 2021
(in thousands)
Adjusted EBITDA:
Net income (loss) $ (1,673) $ (4,439)
Provision for income taxes 31 37
Interest expense (1) 155 1,346
Stock-based compensation 558 649
Depreciation and amortization 1,102 1,016
Impairment of long-lived assets - 636
Severance expenses (4) 142 -
Non-core operating expenses (5) 4 511
Adjusted EBITDA $ 319 $ (244)
Three Months Ended
March 31,
2022 2021
(in thousands)
Adjusted Net Income (Loss):
Net income (loss) $ (1,673) $ (4,439)
Stock-based compensation 558 649
Amortization of intangible assets (2) - 59
Amortization of debt issuance costs (3) 24 369
Impairment of long-lived assets - 636
Severance expenses (4) 142 -
Non-core operating expenses (5) 4 511
Tax adjustments (6) (200) (611)
Adjusted net income (loss) $ (1,145) $ (2,826)
Three Months Ended
March 31,
2022 2021
(in thousands)
Adjusted Net Income (Loss) Per Diluted Share:
Net income (loss) $
(1,673)
528 1,613
Adjusted net income (loss) $ (1,145) $ (2,826)
Adjusted net income (loss) per diluted share $ (0.02) $ (0.05)
Diluted average shares outstanding 69,873 54,813
(1)Represents interest expense and amortization of debt issuance costs related to our Credit Agreement and Prior Credit Agreement.
(2)Represents amortization of intangibles related to the acquisition of
Performant by an affiliate of
(3)Represents amortization of debt issuance costs related to our Credit Agreement and Prior Credit Agreement.
(4)Represents severance expenses incurred in connection with a reduction in force for our non-healthcare recovery services.
(5)Represents professional fees related to strategic corporate development activities.
(6)Represents tax adjustments assuming a marginal tax rate of 27.5% at full profitability.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations, and cash and cash equivalents on hand. Cash and cash equivalents, which includes restricted cash and consists primarily of cash on deposit with banks, totaled$19.6 million as of bothMarch 31, 2022 andDecember 31, 2021 . We have a$15.0 million revolving loan commitment in the credit agreement we signed withMUFG Union Bank , N.A onDecember 17, 2021 (the Credit Agreement), which was undrawn as ofDecember 31, 2021 . Our ability to fund our business plans, capital expenditures and to fund our other liquidity needs depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control, and the availability of borrowings under our current Credit Agreement. Our current financial projections show that we expect to be able to maintain a level of cash flows from operating activities sufficient to permit us to fund our ongoing and planned business operations and to fund our other liquidity needs. If, however, we are required to obtain additional borrowings to fund our ongoing or future business operations, there can be no assurance that we will be successful in obtaining such additional borrowings or upon terms that are acceptable to us. The impact of the COVID-19 pandemic on our business operations cannot be fully estimated at this point. A pause by any of our clients as a result of the continued effects of the COVID-19 pandemic could adversely affect our financial condition, cash flow and the achievement of our strategic objectives. While we currently believe our financial projections are attainable while considering the impact of the COVID-19 pandemic, there can be no assurances that our financial results will be recognized in a time frame necessary to meet our ongoing cash requirements. Further, conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding. If our cash flows and capital resources are insufficient to fund our planned business operations or to fund our other liquidity needs as a result of the ongoing COVID-19 pandemic or uncertainties in the financial and credit markets, our business, financial position and results of operations may be adversely affected. Our Credit Agreement contains, and any agreements to refinance our debt likely will contain, certain financial covenants, including the maintenance of minimum fixed charge coverage ratio and total debt to EBITDA ratio, as well as restrictive covenants that require us to limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets. After considering a variety of potential effects the COVID-19 pandemic could have on our revenues and results of operations, as well as the actions we have already taken and other options available to us, we currently believe we will be in compliance with our covenants for the remainder of the term of the Credit Agreement. If conditions change in the future due to the ongoing COVID-19 pandemic or for other reasons and we expect to be out of compliance as a result, we will likely seek waivers from our lender prior to any covenant violation. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain any such waivers in a timely manner, or on acceptable terms, or at all. Our failure to comply with these financial covenants or the restrictive covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or result in modifications to our credit terms. If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned.
Cash flows from operating activities
Cash used in operating activities was$4.7 million for the three months endedMarch 31, 2022 , primarily as a result of changes in accrued salaries and benefits and contract liabilities and other current liabilities during the period. Cash provided by operating activities was$4.8 million for the three months endedMarch 31, 2021 , primarily as a result of changes in trade accounts receivable during the period.
Cash flows from investing activities
Cash used in investing activities of$0.7 million for the three months endedMarch 31, 2022 related to capital expenditures for information technology, data storage, hardware, telecommunication systems and security enhancements to our information technology systems. Cash used in investing activities for the three months endedMarch 31, 2021 was$0.8 million , which was used primarily for similar purposes. 23
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Cash flows from financing activities
Cash provided by financing activities of$5.4 million for the three months endedMarch 31, 2022 was primarily attributable to$5.6 million in proceeds from the exercise of warrants by ECMC, offset by$0.1 million in repayments of notes payable. Cash used in financing activities for the three months endedMarch 31, 2021 was$0.9 million , primarily attributable to repayments of notes payable during the period. Restricted Cash
As of
Notes Payable
OnDecember 17, 2021 , we entered into the Credit Agreement withMUFG Union Bank, N.A. The Credit Agreement includes a$20 million term loan commitment, which was fully advanced at closing and a$15 million revolving loan commitment, which remains undrawn as ofMarch 31, 2022 . A portion of the revolving loan commitment of up to$2.5 million is available for the issuance of letters of credit. Subject to certain customary exceptions, the obligations under the Credit Agreement are, or will be, guaranteed by each of our existing and future, direct or indirect, domestic subsidiaries. Our obligations under the Credit Agreement are secured by liens on substantially all of our assets and each of our domestic subsidiaries that are guarantors under the Credit Agreement.
As of
The Credit Agreement matures onDecember 17, 2026 . The proceeds from the term loan under the Credit Agreement were used, together with cash on hand, to refinance its credit agreement dated as ofAugust 17, 2017 , withECMC Group, Inc. (as amended, the Prior Credit Agreement), and to pay fees and expenses in connection with the Credit Agreement. Pursuant to the Credit Agreement, we are required to repay the aggregate outstanding principal amount of the term loan under the Credit Agreement in quarterly installments commencingMarch 31, 2022 in an amount that would result in amortization of (a) 2.5% of the term loan principal in the first full year following commencement of amortization, (b) 5.0% of the term loan principal in the second full year following commencement of amortization, (c) 7.5% of the term loan principal in each of the third and fourth full years following commencement of amortization, and (d) 10% of the term loan principal in the fifth full year (or portion thereof) following commencement of amortization. In addition, we must make mandatory prepayments of the term loan principal under the Credit Agreement with the net cash proceeds received in connection with certain specified events, including certain asset sales, casualty and condemnation events (subject to customary reinvestment rights). Any remaining outstanding principal balance of the term loan under the Credit Agreement is repayable on the maturity date. Amounts repaid or prepaid with respect to the term loan under the Credit Agreement cannot be reborrowed. We may, at our option, prepay any revolving loan borrowings under the Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). Borrowings of revolving loans under the Credit Agreement are also subject to mandatory prepayment in the event that outstanding borrowings and letter of credit usage exceed aggregate revolving loan commitments then in effect. Under the Credit Agreement, loans generally may bear interest based on term SOFR (the secured overnight financing right) or an annual base rate, as applicable, plus an applicable margin based on our leverage ratio each quarter that may range between 2.50% per annum and 3.00% per annum, in the case of term SOFR loans and between 1.50% per annum and 2.00% per annum in the case of base rate loans. In addition, a commitment fee based on unused availability of the revolving credit facility is also payable which may vary from 0.30% per annum to 0.40% per annum, also based on our leverage ratio. 24
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The Credit Agreement contains certain customary representations, warranties, and affirmative and negative covenants by us and our subsidiaries that restrict the Company's and its subsidiaries' ability to take certain actions, including, incurrence of indebtedness, creation of liens, making certain investments, mergers or consolidations, dispositions of assets, assignments, sales or transfers of equity in subsidiaries, repurchase or redemption of capital stock, entering into certain transactions with affiliates, or changing the nature of the Company's business. The Credit Agreement also contains two financial covenants, which require us to maintain, as of the last day of each fiscal quarter commencing withMarch 31, 2022 , (a) a total leverage ratio of not greater than (i) 3.00 to 1.00 throughSeptember 30, 2022 and (ii) 2.50 to 1.00 thereafter and (b) a fixed charge coverage ratio of not less than 1.20 to 1.00. The obligations under the Credit Agreement may be accelerated or the commitments terminated upon the occurrence of events of default under the Credit Agreement, which include payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to other material indebtedness, defaults arising in connection with changes in control, and other customary events of default.
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The obligations under the Credit Agreement are secured by substantially all of our subsidiaries' assets and are guaranteed by the Company and its subsidiaries, other than the borrowers.
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