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PERFORMANT FINANCIAL CORPORATION

(PFMT)
  Report
Delayed Nasdaq  -  04:00 2022-09-23 pm EDT
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PERFORMANT FINANCIAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

08/09/2022 | 04:48pm EDT
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 our ability to generate revenue following long
implementation periods associated with new customer contracts; the high level of
revenue concentration among our largest customers; our client relationships and
our ability to maintain such client relationships; many of the our customer
contracts are subject to periodic renewal, are not exclusive, do not provide for
committed business volumes; downturns in domestic or global economic conditions
and other macroeconomic factors; our ability to generate sufficient cash flows
to fund our ongoing operations and other liquidity needs; anticipated trends and
challenges in our business and competition in the markets in which we operate;
the impact of COVID-19 on our business and operations, opportunities and
expectations for the markets in which we operate; our ability to maintain
compliance with the covenants in our debt agreements; the adaptability of our
technology platform to new markets and processes; failure of our or third
parties' operating systems and technology infrastructure could disrupt our
operation and the threat of breach of the Company's security measures or failure
or unauthorized access to confidential data that we possess; 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 in the
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 the Department 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.


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Sources of Revenues


We derive a substantial portion of our revenues from services provided to our
clients in the healthcare market. We also derive revenues from our outsourced
call center services. In 2021, we also derived revenues in recovery markets such
as defaulted student loans, federal treasury and state tax receivables, and
commercial recovery.

                                          Three Months Ended             Six Months Ended
                                               June 30,                      June 30,
                                          2022            2021          2022           2021
                                            (in thousands)                (in thousands)
Eligibility-based                     $    12,417      $ 11,577      $  26,632      $ 19,488
Claims-based                                9,339         7,025         18,488        12,400
Healthcare Total                           21,756        18,602         45,120        31,888
Recovery (1)                                    7        11,091            124        25,582
Customer Care / Outsourced Services         3,918         3,149          7,520         6,762
Total Revenues                        $    25,681      $ 32,842      $  52,764      $ 64,232

(1)Represented student lending, state and municipal tax authorities, IRS, Department of the Treasury, and Premiere.

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 $21.8 million for the six months ended June 30, 2022 compared to
revenues of $18.6 million from our healthcare services during for the six months
ended June 30, 2021.

In 2017, the centers for Medicare and Medicaid Services (CMS) awarded us the
Medicare Secondary Payer, Commercial Payment Center (MSP CRC) contract. The
original contract term was 1 base year, plus 3 option years. CMS exercised all
three option years, and then extended the term for an additional year, for a
total term of 5 years. 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. Consistent with Federal
procurement guidelines, the contract is being recompeted and we recently
received a Request for Quote (RFQ) from CMS. We intend to pursue the RFQ which
has an anticipated award term of 1 base year, plus 5 option years.

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 March 2021, we were re-awarded the Region 1 RAC contract by CMS after a competitive procurement process. The renewed contract has an 8.5-year term.

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In January 2022, we were awarded the indefinite delivery, indefinite quantity
(IDIQ) contract by the U.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.

In March 2022, we were awarded the Medicare RAC contract for Region 2. This contract award is currently under review by CMS related to the incumbent contractor's protest.


Currently our healthcare clients continue to expand the scope of services that
we provide, and we continue to implement new programs for existing and new
healthcare clients. We believe this growth trend should 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, certain regulatory changes and the COVID-19 pandemic had a
significant impact on our recovery revenues, which led to our decision to sell
certain non-healthcare recovery contracts, and to not renew or restart other
existing non-healthcare recovery contracts, nor pursue new non-healthcare
recovery opportunities during the course of 2021. As a result, in 2022 and going
forward, we expect our revenues from the non-healthcare recovery market will be
minimal.

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.

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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 in the 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.

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, in March 2020, CMS paused medical review activities under our two
RAC contracts as a result of the COVID-19 pandemic, which were later resumed in
August 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 or Non-Renewal


We derive a substantial portion of our revenues from contracts with a limited
number of our largest clients. Substantially all of our contracts (i) entitle
our clients to unilaterally terminate their contractual relationship with us at
any time without penalty and (ii) are subject to competitive procurement or
renewal processes from time to time. Our revenues could decline if we lose one
or more of our significant clients either due to a contract cancellation or our
inability to be awarded a new contract in connection with a competitive renewal
process, 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.

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Critical Accounting Policies


Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, or U.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

•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.

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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.


Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. Amounts collected on trade accounts receivable are included in cash
used in operating activities in the consolidated statements of cash flows. The
Company determines the allowance for doubtful accounts by specific
identification. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
consider remote. The allowance for doubtful accounts was $29 thousand and $0 at
June 30, 2022 and December 31, 2021, respectively.

Contract assets totaled $9.2 million and $8.1 million as of June 30, 2022 and
December 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 an update in the measure of
progress under a certain contract, and additional consideration earned for
services provided to our healthcare clients, offset by invoiced amounts.

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 six months ended June 30, 2022 and 2021.

Contract liabilities totaled $0.4 million and $0.6 million as of June 30, 2022
and December 31, 2021, respectively. Our contract liabilities related to certain
reimbursable costs due to a client.

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 $1.1 million as of June 30, 2022 and $1.2 million as
of December 31, 2021. This represents our best estimate of the amount probable
of being refunded to our healthcare clients.

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.

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Results of Operations

Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021


The following table represents our historical operating results for the periods
presented:

                                                            Three Months Ended June 30,
                                                   2022           2021        $ Change      % Change
                                                                   (in thousands)

Consolidated Statement of Operations Data:

  Revenues                                     $   25,681      $ 32,842      $ (7,161)         (22) %
  Operating expenses:
      Salaries and benefits                        20,903        23,295         2,392           10  %
      Other operating expenses                      8,081        10,759         2,678           25  %

  Total operating expenses                         28,984        34,054         5,070           15  %
  Loss from operations                             (3,303)       (1,212)       (2,091)        (173) %

Gain on sale of certain recovery contracts 382 1,849

(1,467) (79) %

  Interest expense                                   (216)       (2,126)        1,910           90  %

  Loss before provision for income taxes           (3,137)       (1,489)       (1,648)        (111) %
  Provision for income taxes                           32            33             1            3  %
  Net loss                                     $   (3,169)     $ (1,522)     $ (1,647)        (108) %


Revenues

Total revenues were $25.7 million for the three months ended June 30, 2022, a
decrease of approximately 22%, compared to total revenues of $32.8 million for
the three months ended June 30, 2021.

Healthcare revenues were $21.8 million for the three months ended June 30, 2022,
representing an increase of $3.2 million, or 17%, compared to the three months
ended June 30, 2021. This increase in healthcare revenues was primarily
attributable to the continued growth from our fully implemented statements of
work, as well as numerous new program implementations.

Recovery revenues were $7 thousand for the three months ended June 30, 2022,
compared to $11.1 million for the three months ended June 30, 2021. The decrease
was primarily due to our decision in 2021 to sell certain of our recovery
contracts.

Customer Care / Outsourced Services revenues were approximately $3.9 million,
representing an increase of $0.8 million, or 24%, compared to the three months
ended June 30, 2021. The change was due to increased demand for our outsourced
services.

Salaries and Benefits

Salaries and benefits expense was $20.9 million for the three months ended
June 30, 2022, a decrease of $2.4 million, or 10%, compared to salaries and
benefits expense of $23.3 million for the three months ended June 30, 2021. The
decrease in salaries and benefits expense was primarily driven by lower
headcount related to the cessation of non-healthcare recovery activity, which
largely occurred by the end of 2021, partially offset by an increase in
headcount related to continued growth in our healthcare business during the
period.

Other Operating Expenses


Other operating expenses were $8.1 million for the three months ended June 30,
2022, compared to other operating expenses of $10.8 million for the three months
ended June 30, 2021. The decrease in other operating expenses was primarily due
to the cessation of non-healthcare recovery activity, which largely occurred by
the end of 2021, and a decrease in professional services.

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Loss from Operations


As a result of the factors described above, loss from operations was $3.3
million for the three months ended June 30, 2022, compared to loss from
operations of $1.2 million for the three months ended June 30, 2021. This
increase of $2.1 million in loss from operations was driven primarily by a
greater decrease in total revenues as a result of the cessation of our
non-healthcare recovery business, as compared to a smaller relative decrease in
total operating expenses due to the continued growth in our healthcare business,
during the three months ended June 30, 2022.

Interest Expense


Interest expense was $0.2 million for the three months ended June 30, 2022,
compared to $2.1 million for the three months ended June 30, 2021, representing
a decrease of $1.9 million. This decrease in interest expense is due to a lower
principal balance related to our refinance in December 2021, and lower interest
rate during the three months ended June 30, 2022.

Income Taxes


We recognized an income tax expense of $32 thousand for the three months ended
June 30, 2022, compared to an income tax expense of $33 thousand for the three
months ended June 30, 2021. Our effective income tax rate changed to (1)% for
the three months ended June 30, 2022, from (2)% for the three months ended
June 30, 2021. Similar to the three months ended June 30, 2021, the primary
driver of our effective income tax rate is the overall losses from operations
for the three months ended June 30, 2022 for which no benefit is recognized due
to recognition of a full valuation allowance.

Net Loss


As a result of the factors described above, net loss was $3.2 million for the
three months ended June 30, 2022, which represented an increase in net loss of
approximately $1.7 million, or 108%, compared to net loss of $1.5 million for
the three months ended June 30, 2021.

Six months ended June 30, 2022 compared to the Six months ended June 30, 2021


The following table represents our historical operating results for the periods
presented:

                                                             Six Months Ended June 30,
                                                  2022          2021        $ Change       % Change
                                                                  (in thousands)

Consolidated Statement of Operations Data:

  Revenues                                     $ 52,764      $ 64,232      $ (11,468)         (18) %
  Operating expenses:
      Salaries and benefits                      41,342        47,385          6,043           13  %
      Other operating expenses                   16,212        21,115      
   4,903           23  %

  Total operating expenses                       57,554        68,500         10,946           16  %
  Loss from operations                           (4,790)       (4,268)          (522)         (12) %

Gain on sale of certain recovery contracts 382 1,849

(1,467) (79) %

  Interest expense                                 (371)       (3,472)         3,101           89  %

Loss before provision for income taxes (4,779) (5,891)

   1,112           19  %
  Provision for income taxes                         63            70              7           10  %
  Net loss                                     $ (4,842)     $ (5,961)     $   1,119           19  %


Revenues

Total revenues were $52.8 million for the six months ended June 30, 2022, a decrease of approximately (18)%, compared to total revenues of $64.2 million for the six months ended June 30, 2021.

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Healthcare revenues were $45.1 million for the six months ended June 30, 2022,
representing an increase of $13.2 million, or 41%, compared to the six months
ended June 30, 2021. This increase in healthcare revenues was primarily
attributable to the continued growth from our fully implemented statements of
work and numerous new program implementations. Revenues from eligibility-based
services during the six months ended June 30, 2022 were $7.1 million higher than
revenues for the six months ended June 30, 2021, which included a $3.3 million
charge to revenue to accrue a refund liability to a client.

Recovery revenues were $124 thousand for the six months ended June 30, 2022,
compared to $25.6 million during the six months ended June 30, 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 certain regulatory changes and the COVID-19
pandemic on our recovery business.

Customer Care / Outsourced Services revenues were approximately $7.5 million for
the six months ended June 30, 2022 compared to $6.8 million for the six months
ended June 30, 2021. The change was due to increased demand for our outsourced
services.

Salaries and Benefits

Salaries and benefits expense was $41.3 million for the six months ended
June 30, 2022, a decrease of $6.1 million, or 13%, compared to salaries and
benefits expense of $47.4 million for the six months ended June 30, 2021. The
decrease in salaries and benefits expense was primarily driven by lower
headcount related to the cessation of non-healthcare recovery activity which
largely occurred by the end of 2021, partially offset by an increase in
headcount related to continued growth in our healthcare business during the
period.

Other Operating Expenses


Other operating expenses were $16.2 million for the six months ended June 30,
2022, compared to other operating expenses of $21.1 million for the six months
ended June 30, 2021. The decrease in other operating expenses was primarily due
to the cessation of non-healthcare recovery activity which largely occurred by
the end of 2021, and a decrease in professional services.

Loss from Operations


As a result of the factors described above, loss from operations was $4.8
million for the six months ended June 30, 2022, compared to loss from operations
of $4.3 million for the six months ended June 30, 2021. This increase of $0.5
million in loss from operations was driven primarily by a greater decrease in
total revenues as a result of the cessation of our non-healthcare recovery
business, as compared to a smaller relative decrease in total operating expenses
due to the continued growth in our healthcare business during the six months
ended June 30, 2022.

Interest Expense

Interest expense was $0.4 million for the six months ended June 30, 2022,
compared to $3.5 million for the six months ended June 30, 2021, representing a
decrease of $3.1 million. This decrease in interest expense is due primarily to
a lower principal balance related to the refinance of our then existing
indebtedness in December 2021, and lower interest rate during the six months
ended June 30, 2022.

Income Taxes

We recognized an income tax expense of $63 thousand for the six months ended
June 30, 2022, compared to an income tax expense of $70 thousand for the six
months ended June 30, 2021. Our effective income tax rate was (1)% for the six
months ended June 30, 2022, compared to (1)% for the six months ended June 30,
2021. Similar to the six months ended June 30, 2021, the primary driver of our
effective tax rate is the overall losses from operations for the six months
ended June 30, 2022 for which no benefit is recognized due to recognition of a
full valuation allowance.

Net Loss

As a result of the factors described above, net loss was $4.8 million for the
six months ended June 30, 2022, which represented a decrease in net loss of
approximately $1.2 million, or 19%, compared to net loss of $6.0 million for the
six months ended June 30, 2021.

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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 comparable U.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 U.S. GAAP. Some of these limitations are:


•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 other U.S. GAAP results. The following tables present a reconciliation
of adjusted EBITDA and adjusted net income for each of the periods indicated:

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                                                            Three Months Ended                      Six Months Ended
                                                                 June 30,                                June 30,
                                                          2022                2021               2022                2021
                                                              (in thousands)                          (in thousands)
Adjusted EBITDA:
Net income (loss)                                    $    (3,169)         $  (1,522)         $   (4,842)         $  (5,961)
Provision for income taxes                                    32                 33                  63                 70
Interest expense (1)                                         216              2,126                 371              3,472

Stock-based compensation                                     723                774               1,281              1,423
Depreciation and amortization                              1,158              2,024               2,260              3,040

Impairment of long-lived assets                                -                  -                   -                636

Severance expenses (4)                                        37              1,188                 179              1,496
Non-core operating expenses (5)                                2              1,397                   6              1,908
Gain on sale of certain recovery contracts (6)              (382)            (1,849)               (382)            (1,849)

Adjusted EBITDA                                      $    (1,383)         $   4,171          $   (1,064)         $   4,235

                                                            Three Months Ended                      Six Months Ended
                                                                 June 30,                                June 30,
                                                          2022                2021               2022                2021
                                                              (in thousands)                          (in thousands)
Adjusted Net Income (Loss):
Net income (loss)                                    $    (3,169)         $  (1,522)         $   (4,842)         $  (5,961)
Stock-based compensation                                     723                774               1,281              1,423
Amortization of intangible assets (2)                          -                558                   -                617
Amortization of debt issuance costs (3)                       24                764                  48              1,133

Severance expenses (4)                                        37              1,188                 179              1,496
Non-core operating expenses (5)                                2              1,397                   6              1,908
Gain on sale of certain recovery contracts (6)              (382)            (1,849)               (382)            (1,849)

Tax adjustments (7)                                         (111)              (779)               (311)            (1,475)
Adjusted net income (loss)                           $    (2,876)         $     531          $   (4,021)         $  (2,072)



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                                                         Three Months Ended                      Six Months Ended
                                                              June 30,                                June 30,
                                                       2022                2021               2021                2021
                                                           (in thousands)                          (in thousands)
Adjusted Net Income (Loss) Per Diluted
Share:
Net income (loss)                                 $    (3,169)         $  (1,522)         $   (4,842)         $  (5,961)
Plus: Adjustment items per reconciliation
of adjusted net income (loss)                             293              2,053                 821              3,889
Adjusted net income (loss)                        $    (2,876)         $     531          $   (4,021)         $  (2,072)
Adjusted net income (loss) per diluted            $     (0.04)         $    0.01          $    (0.06)         $   (0.04)
share
Diluted average shares outstanding (8)                 73,502             60,617              71,698             55,167



(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 Parthenon Capital Partners in 2004.

(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 gain on the sale of certain non-healthcare recovery contracts.

(7)Represents tax adjustments assuming a marginal tax rate of 27.5% at full profitability.


(8)While net loss for the three months ended June 30, 2021 is ($1,522), the
computation of adjusted net income results in adjusted net income of $531.
Therefore, the calculation of the adjusted earnings per diluted share for the
three months ended June 30, 2021 includes dilutive common share equivalents of
5,101 added to the basic weighted average shares of 55,516.

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 $18.2 million
as of June 30, 2022 and $19.6 million as of December 31, 2021. On December 17,
2021, we entered into the Credit Agreement with MUFG 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 of June 30, 2022. A portion of the revolving loan commitment of up to $2.5
million is available for the issuance of letters of credit.

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.

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. We currently believe we
will be in compliance with our covenants for the remainder of the term of the
Credit Agreement. However, conditions may change for a variety of reasons in the
future that may affect our ability to maintain compliance with our financial or
restrictive covenants. 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.
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Cash flows from operating activities


Cash used in operating activities was $5.5 million for the six months ended
June 30, 2022, was primarily as a result of changes in contract assets, accrued
salaries and benefits, and contract liabilities and other current liabilities
during the period. Cash provided by operating activities was $1.5 million for
the six months ended June 30, 2021, was primarily as a result of changes in
trade accounts receivable, offset by contract assets.

Cash flows from investing activities


Cash used in investing activities of $1.2 million for the six months ended
June 30, 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 six
months ended June 30, 2021 was $0.8 million, which was used primarily for
similar purposes.

Cash flows from financing activities


Cash provided by financing activities of $5.3 million for the six months ended
June 30, 2022 was primarily attributable to $5.6 million in proceeds from the
exercise of warrants by ECMC, offset by $0.3 million in repayments of notes
payable. Cash used in financing activities for the six months ended June 30,
2021 was $8.4 million, primarily attributable to repayments of notes payable
during the period.

Restricted Cash

As of June 30, 2022, restricted cash included in current assets on our consolidated balance sheet was $2.2 million.

Notes Payable


On December 17, 2021, we entered into the Credit Agreement with MUFG 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 of June 30, 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 June 30, 2022, $19.8 million was outstanding under the Credit Agreement. The Company's interest rate at June 30, 2022 was 3.8%.


The Credit Agreement matures on December 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 of August 17, 2017, with ECMC 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 commencing March 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.

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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.

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 with March 31, 2022, (a) a total leverage ratio of not
greater than (i) 3.00 to 1.00 through September 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.

As of June 30, 2022, the Company was in compliance with all financial covenants.


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.

© Edgar Online, source Glimpses

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