Table of Contents

     
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q 
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2020
or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 001-35628
 
 
PERFORMANT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Delaware 20-0484934
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Performant Financial Corporation
333 North Canyons Parkway
Livermore, CA 94551
(925) 960-4800
(Address, including zip code and telephone number, including area code of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act). (Check one):Act.
Large accelerated filer¨  Accelerated filer¨
    
Non-accelerated filer¨  Smaller reporting companyx
Emerging growth company¨
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
x Emerging growth company

o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s) Name of exchange on which registered
Common Stock, par value $.0001 per sharePFMTThe Nasdaq Stock Market LLC
The number of shares of Common Stock outstanding as of November 13, 2017May 27, 2020 was 50,961,377.54,428,324.
     

Table of Contents
PERFORMANT FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017MARCH 31, 2020
INDEX


  Page
PART I—Financial Information
 
   
Item 1.
Consolidated Financial Statements
 
 
Consolidated Balance Sheets September 30, 2017March 31, 2020 (unaudited) and December 31, 20162019
1
 
Consolidated Statements of Operations Three and Nine Months Ended September 30, 2017March 31, 2020 and 20162019 (unaudited)
2
 
Consolidated Statements of Comprehensive Income (Loss)Changes in Stockholders' Equity Three and Nine Months Ended September 30, 2017March 31, 2020 and 20162019 (unaudited)
3
 
Consolidated Statements of Cash Flows NineThree Months Ended September 30, 2017March 31, 2020 and 20162019 (unaudited)
4
 
Notes to Consolidated Financial Statements Three and Nine Months Ended September 30, 2017March 31, 2020 and 20162019 (unaudited)
65
Item 2.
Management's DiscussionDiscussion and Analysis of Financial Condition and Results of Operations
1415
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
29
Item 4.
Disclosure Controls and Procedures
29
   
PART II—Other Information
30
   
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
30
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4041
Item 3.
Defaults Upon Senior Securities
4041
Item 4.
Mine Safety Disclosures
4041
Item 5.
Other Information
4041
Item 6.
Exhibits
4142
Signatures
4243
  
 


i
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PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)





September 30,
2017		 December 31,
2016		March 31,
2020		 December 31,
2019
(Unaudited)  (Unaudited)  
Assets      
Current assets:      
Cash and cash equivalents$23,179
 $32,982
$8,574
 $3,373
Restricted cash—
 7,502
1,622
 1,622
Trade accounts receivable, net of allowance for doubtful accounts of $0 and $224, respectively12,490
 11,484
Deferred income taxes—
 5,331
Trade accounts receivable, net of allowance for doubtful accounts of $518 and $237, respectively27,276
 27,170
Contract assets1,201
 1,339
Prepaid expenses and other current assets14,222
 12,686
3,780
 3,329
Income tax receivable1,454
 2,027
3,989
 164
Total current assets51,345
 72,012
46,442
 36,997
Property, equipment, and leasehold improvements, net21,393
 23,735
18,361
 18,769
Identifiable intangible assets, net5,066
 5,895
866
 925
Goodwill81,572
 82,522
55,372
 74,372
Deferred income taxes3,534
 —
Right-of-use assets6,235
 6,834
Other assets897
 914
986
 975
Total assets$163,807
 $185,078
$128,262

$138,872
Liabilities and Stockholders’ Equity      
Current liabilities:      
Current maturities of notes payable, net of unamortized debt issuance costs of $138 and $1,294, respectively$1,512
 $9,738
Current maturities of notes payable to related party, net of unamortized debt issuance costs of $111 and $130, respectively$3,339
 $3,320
Accrued salaries and benefits5,640
 4,315
7,676
 6,126
Accounts payable1,052
 628
3,007
 2,532
Other current liabilities3,860
 4,409
3,830
 3,659
Estimated liability for appeals19,145
 19,305
Net payable to client12,669
 13,074
Estimated liability for appeals and disputes1,169
 1,018
Lease liabilities2,601
 2,775
Total current liabilities43,878
 51,469
21,622
 19,430
Notes payable, net of current portion and unamortized debt issuance costs of $3,549 and $272, respectively38,801
 43,878
Notes payable to related party, net of current portion and unamortized debt issuance costs of $1,938 and $2,301, respectively58,062
 58,562
Deferred income taxes—
 1,130
35
 35
Earnout payable475
 475
Lease liabilities4,481
 4,984
Other liabilities2,099
 2,356
1,839
 1,761
Total liabilities84,778
 98,833
86,514
 85,247
Commitments and contingencies

 



 

Stockholders’ equity:      
Common stock, $0.0001 par value. Authorized, 500,000 shares at September 30, 2017 and December 31, 2016; issued and outstanding 50,949 and 50,234 shares at September 30, 2017 and December 31, 2016, respectively5
 5
Common stock, $0.0001 par value. Authorized, 500,000 shares at March 31, 2020 and December 31, 2019 respectively; issued and outstanding 54,022 and 53,900 shares at March 31, 2020 and December 31, 2019, respectively5
 5
Additional paid-in capital71,684
 65,650
81,196
 80,589
Retained earnings7,340
 20,590
Accumulated deficit(39,453) (26,969)
Total stockholders’ equity79,029
 86,245
41,748
 53,625
Total liabilities and stockholders’ equity$163,807
 $185,078
$128,262
 $138,872
See accompanying notes to consolidated financial statements.


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PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)


 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		 Three Months Ended 
 March 31,
 2017 2016 2017 2016 2020 2019
Revenues $29,744
 $31,195
 $98,760
 $107,548
 $45,888
 $34,876
Operating expenses:            
Salaries and benefits 20,494
 18,710
 61,640
 60,107
 28,805
 29,116
Other operating expenses 13,496
 12,311
 43,019
 40,401
 12,220
 12,953
Impairment of goodwill 19,000
 —
Total operating expenses 33,990
 31,021
 104,659
 100,508
 60,025
 42,069
Income (loss) from operations (4,246) 174
 (5,899) 7,040
Loss from operations (14,137) (7,193)
Interest expense (2,459) (1,863) (5,683) (6,136) (2,227) (1,136)
Income (loss) before provision for (benefit from) income taxes (6,705) (1,689) (11,582) 904
Interest income 6
 11
Loss before provision for income taxes (16,358) (8,318)
Provision for (benefit from) income taxes 1,146
 (974) 1,668
 62
 (3,874) 171
Net income (loss) $(7,851) $(715) $(13,250) $842
Net income (loss) per share        
Net loss $(12,484) $(8,489)
Net loss per share    
Basic $(0.15) $(0.01) $(0.26) $0.02
 $(0.23) $(0.16)
Diluted $(0.15) $(0.01) $(0.26) $0.02
 $(0.23) $(0.16)
Weighted average shares            
Basic 50,852
 50,200
 50,581
 49,974
 53,943
 53,059
Diluted 50,852
 50,200
 50,581
 50,401
 53,943
 53,059
See accompanying notes to consolidated financial statements.


2
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PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated StatementsStatement of Comprehensive Income (Loss)Changes in Stockholders’ Equity
(In thousands)
(Unaudited)



 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Net income (loss)$(7,851) $(715) $(13,250) $842
Other comprehensive income:       
Foreign currency translation adjustment1
 (1) (4) 24
Comprehensive income (loss)$(7,850) $(716) $(13,254) $866
  Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
  Common Stock Additional
Paid-In
Capital		 Accumulated Deficit Total Common Stock Additional
Paid-In
Capital		 Accumulated Deficit Total
 Shares Amount  Shares Amount   
Balances at beginning of period 53,900
 $5
 $80,589
 $(26,969) $53,625
 52,999
 $5
 $77,370
 $(149) $77,226
Common stock issued under stock plans, net of shares withheld for employee taxes 122
 —
 (84) —
 (84) 147
 —
 (122) —
 (122)
Stock-based compensation expense —
 —
 691
 —
 691
 —
 —
 499
 —
 499
Net loss —
 —
 —
 (12,484) (12,484) —
 —
 —
 (8,489) (8,489)
Balances at end of period 54,022
 $5
 $81,196
 $(39,453) $41,748
 53,146
 $5
 $77,747
 $(8,638) $69,114
See accompanying notes to consolidated financial statements.





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PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


 Three Months Ended 
 March 31,
 2020 2019
Cash flows from operating activities:   
Net loss$(12,484) $(8,489)
Adjustments to reconcile net loss to net cash provided by operating activities:   
Impairment of goodwill19,000
 —
Depreciation and amortization1,540
 2,312
Right-of-use assets amortization599
 660
Deferred income taxes—
 31
Stock-based compensation691
 499
Interest expense from debt issuance costs382
 232
Earnout mark-to-market—
 276
Changes in operating assets and liabilities:   
Trade accounts receivable(106) 3,002
Contract assets138
 —
Prepaid expenses and other current assets(451) (372)
Income tax receivable(3,825) 165
Other assets(11) —
Accrued salaries and benefits1,550
 1,605
Accounts payable475
 587
Other current liabilities171
 483
Estimated liability for appeals and disputes151
 45
Lease liabilities(677) (723)
Other liabilities78
 43
Net cash provided by operating activities7,221
 356
Cash flows from investing activities:   
Purchase of property, equipment, and leasehold improvements(1,073) (1,486)
Net cash used in investing activities(1,073) (1,486)
Cash flows from financing activities:   
Repayment of notes payable(863) —
Taxes paid related to net share settlement of stock awards(84) (156)
Proceeds from exercise of stock options—
 34
Net cash used in financing activities(947) (122)
Net increase (decrease) in cash, cash equivalents and restricted cash5,201
 (1,252)
Cash, cash equivalents and restricted cash at beginning of period4,995
 7,275
Cash, cash equivalents and restricted cash at end of period$10,196
 $6,023
    
Reconciliation of the Consolidated Statements of Cash Flows to the
Consolidated Balance Sheets:		   
Cash and cash equivalents$8,574
 $4,364
Restricted cash1,622
 1,659
Total cash, cash equivalents and restricted cash at end of period$10,196
 $6,023
    
Supplemental disclosures of cash flow information:   
Cash received for income taxes$72
 $54
Cash paid for interest$1,845
 $—
 Nine Months Ended 
 September 30,
 2017 2016
Cash flows from operating activities:   
Net income (loss)$(13,250) $842
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Loss on disposal of assets67
 12
Impairment of goodwill and intangible assets1,081
 —
Depreciation and amortization8,381
 10,098
Deferred income taxes667
 (2,455)
Stock-based compensation3,027
 3,546
Interest expense from debt issuance costs989
 874
Write-off unamortized debt issuance costs1,049
 468
Interest expense paid in kind331
 —
Changes in operating assets and liabilities:   
Trade accounts receivable(1,006) 7,656
Prepaid expenses and other current assets(1,536) 55
Income tax receivable573
 (658)
Other assets17
 22
Accrued salaries and benefits1,325
 3,757
Accounts payable424
 152
Other current liabilities(547) (2,210)
Income taxes payable—
 (895)
Estimated liability for appeals(160) 438
Net payable to client(405) (981)
Other liabilities(257) (230)
Net cash provided by operating activities770
 20,491
Cash flows from investing activities:   
Purchase of property, equipment, and leasehold improvements(5,408) (5,529)
Net cash used in investing activities(5,408) (5,529)
Cash flows from financing activities:   
Repayment of notes payable(55,513) (29,307)
Restricted cash for repayment of notes payable7,502
 (7,507)
Debt issuance costs paid(858) (800)
Taxes paid related to net share settlement of stock awards(382) (261)
Proceeds from exercise of stock options90
 333
Borrowings from notes payable44,000
 —
Income tax benefit from employee stock options—
 103
Payment of purchase obligation—
 (427)
Net cash used in financing activities(5,161) (37,866)
Effect of foreign currency exchange rate changes on cash(4) 24
Net decrease in cash and cash equivalents(9,803) (22,880)
Cash and cash equivalents at beginning of period32,982
 71,182
Cash and cash equivalents at end of period$23,179
 $48,302
Non-cash financing activities:   
Recognition of warrant issued in debt financing$3,302
 $—
Supplemental disclosures of cash flow information:   

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PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


Cash paid for income taxes$540
 $3,976
Cash paid for interest$2,835
 $4,797

See accompanying notes to consolidated financial statements.


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PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2017March 31, 2020 and 20162019
(Unaudited)



1. Organization and Description of Business
(a)Basis of Presentation and Organization
(a) Basis of Presentation and Organization
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles,accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary (consisting only of normal recurring adjustments) for a fair presentation of our and our subsidiaries’ financial position at September 30, 2017,March 31, 2020, and the results of our operations for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 and cash flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019. Interim financial statements are prepared on a basis consistent with our annual consolidated financial statements. The interim financial statements included herein should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the yearsyear ended December 31, 2016, 2015, and 2014.2019.
The CompanyPerformant Financial Corporation (the "Company" or "we") is a leading provider of technology-enabled audit, recovery and analytics services in the United States. The Company's services help identify, improper payments, and in some markets, restructure and recover delinquent or defaulted assets and improper payments for both government and private clients across differentin a broad range of markets. The Company's clientsClients of the Company typically operate in complex and regulated environments and outsourcecontract for their recovery needs in order to reduce losses on billions of dollars of defaulted student loans, improper healthcare payments and delinquent state tax and federal treasury receivables. The Company generally provides services on an outsourced basis, where we handlebasis; handling many or all aspects of the clients’ variousrecovery processes.
The Company's consolidated financial statements include the operations of Performant Financial Corporation (PFC)(Performant), its wholly owned subsidiarywholly-owned subsidiaries Premiere Credit of North America, LLC (Premiere) and Performant Business Services, Inc. (PBS), and its wholly ownedPBS's wholly-owned subsidiaries Performant Recovery, Inc. (Recovery), and Performant Technologies, Inc., andLLC (PTL). Performant Europe Ltd. PFC is a Delaware corporation headquartered in California and was formed in 2003. Premiere is an Indiana limited liability company acquired by Performant Business Services, Inc.on August 31, 2018. PBS is a Nevada corporation founded in 1997. Recovery is a California corporation founded in 1976. Performant Technologies, Inc.PTL is a California corporationlimited liability company that was originally formed in 2004. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company is managed and operated as one business, with a single management team that reports to the Chief Executive Officer.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, contract assets, intangible assets, goodwill, right-of-use assets, estimated liability for appeals accrued expenses,and disputes, lease liabilities, earnout payable, other liabilities, deferred income taxes and income tax expense (benefit) and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Our actual results could differ from those estimates.
(b)Revenues, Accounts Receivable, and Estimated Liability for AppealsLiquidity
The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates that the Company will be able to realize assets and discharge its liabilities in the normal course of business. Accordingly, they do not give effect to any adjustments that would be necessary should the Company be required to liquidate its assets. The ability of the Company to continue to fund its business plans is dependent upon realizing sufficient cash flows in the future. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic. COVID-19 has had, and will likely continue to have, an impact on the Company’s business, both operationally and financially. For example, all states in which the Company has offices are under state of emergency and continue to have shelter-in-place or equivalent orders as of the filing of this Form 10-Q, which has resulted in both management and employees continuing to work remotely (from home).

The United States Government passed multiple new laws designed to help companies respond to the COVID-19 pandemic. Specifically, on March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which included several student loan-related changes. These changes have had an impact on the Company’s financial results and management expects that they will continue to affect the Company’s financial results into the foreseeable future.
The CARES Act included changes to student loans owned by the Department of Education. These changes include the suspension of payments, the ceasing of accruing interest, and stopping involuntary collections of payments (e.g., wage garnishments). The changes are in effect through September 30, 2020. While these changes impact the set-up of new loan rehabilitation agreements by defaulted student loan borrowers, the Department of Education will consider each month during the period of suspended payments as an eligible month towards achieving loan rehabilitation, which is an element in determining future revenue to which the Company is entitled. In addition, student loan revenue and related cash flows will continue during this period because the Company earns revenue for a number of months from existing in-process borrower rehabilitation agreements. Further, while not mandated by the CARES Act, all of the Company’s Guaranty Agency clients (who administer the Federal Family Education Loan Program) are largely complying with the provisions of the Act, with the exception of counting missed payments toward qualification for loan rehabilitation. Given the CARES Act impacts on the Company’s recovery activities through September 30, 2020, the Company has furloughed more than 500 employees to date, which will result in annual savings of more than $18 million.
The Company’s healthcare business has not experienced, and is not currently expected to experience, a similar level of impact as the recovery business due to the fact that only two healthcare customers have been impacted by congressional regulations to date. While a few healthcare customers placed short term pauses on audit activities, the Company has continued to see growth and expansion in other healthcare offerings; notably, the Company’s Third Party Liability contracts have not experienced any contractions to date. Additionally, the Company does not foresee any permanent negative effects to its relationships or overall contract expectations within the healthcare markets.
With respect to favorable impacts to the Company’s liquidity, the CARES Act provided the right to carryback net operating losses from 2018 and 2019 to earlier periods. The Company has already filed for a refund request for the 2013 tax year which will result in an approximately $2.4 million cash refund, and the Company will file a refund request for the 2014 tax year which is expected to result in a refund of approximately $1.5 million. The CARES Act also allows deferrals and credits for payroll tax amounts, which is expected to provide approximately $3 million in cash savings through the remainder of 2020.
The Company continues to analyze the impact of COVID-19. However, the Company believes that its forecasted results, considering the impact of COVID-19, will be sufficient to fund the Company’s current operations, for at least a year from the issuance of these consolidated financial statements. While the Company believes its financial projections are attainable, there can be no assurances that the financial results will be recognized in a timeframe necessary to meet the Company’s ongoing cash requirements.
To address the Company’s liquidity needs, the Company may need to execute various actions to increase cash necessary for operations. These actions include, but are not limited to, additional reductions in workforce (both through furloughs and layoffs), reduce or delay capital expenditures, seek additional capital infusions through public and/or private means, sales of real estate assets or operations, and scaling back of certain lower margin operations.



(c) Revenues, Accounts Receivable, and Estimated Liability for Appeals
The Company derives its revenues primarily from providing recovery services and healthcare audit services. Revenues are recognized when control of these services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company determines 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
Recognition of revenue when, or as, the performance obligations are satisfied
The Company accounts 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.
The Company’s 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 the client, as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company would allocate the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct service in the contract. The Company determines the standalone selling prices by taking into consideration the value of the services being provided, the client type and how similar services are priced in other contracts on a standalone basis.
The Company’s contracts are composed primarily of variable consideration. Fees earned under the Company’s recovery service contracts consist primarily of contingency fees based on a specified percentage of the amount the Company enables its clients to recover. The contingency fee percentage for a particular recovery depends on the type of recovery or claim facilitated. In certain contracts the Company can earn additional performance-based consideration determined based on its performance relative to the client’s other contractors providing similar services.
Revenue from contingency fees earned upon recovery of funds is generally recognized as amounts are invoiced based on either the ‘as-invoiced’ practical expedient when such amounts reflect the value of the services completed to-date, or an output measure based on milestones which is used to measure progress of the satisfaction of its performance obligation. The Company estimates any performance-based variable consideration and recognizes 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. Under certain contracts, consideration can include periodic performance-based bonuses which can be awarded based on the Company’s performance under the specific contract. These performance-based awards are considered variable and may be constrained by the Company until there is not a risk of a material reversal.
For contracts that contain a refund right, these amounts are considered variable consideration and the Company estimates its refund liability for each claim and recognizes revenue net of such estimate.
The Company generally either applies the as-invoiced practical expedient where its right to consideration corresponds directly to its right to invoice its 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 the Company has 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.
The Company has applied the as-invoiced practical expedient or the variable consideration allocation exception to contracts with performance obligations that have an average remaining duration of less than a year.
Revenue is recognized upon the collection of defaulted loan and debt payments. Loan rehabilitation revenue is recognized when the rehabilitated loans are sold (funded) by clients. Incentive revenue is recognized upon receipt of official notification of incentive award from customers.

Under the Company’s Medicare Recovery Audit Contractor, or RAC,Secondary Payer (MSP) Commercial Payment Center (CPC) contract with Centers for Medicare and Medicaid Services (CMS), the Company recognizes revenues when insurance companies or other responsible parties remit payment to reimburse CMS for claims for which they are responsible, and the remittance has been applied in the CMS database. Under the Company’s Medicare Recovery Audit Contractor (RAC) contract with CMS, the Company recognizes revenues when the healthcare provider has paid CMS for a given claim or has agreed to an offset against other claims by the provider. Providers
For healthcare claims audit contracts with commercial clients, the Company may recognize revenue upon delivering the results of claims audits, when sufficient reliable information is available to the Company for estimating the variable consideration earned, as it is a reasonable measure of the Company’s progress toward complete satisfaction of our performance obligation. For coordination-of-benefits contracts with commercial clients, the Company recognizes revenue when insurance companies or other responsible parties have remitted payments to the client.
For customer care / outsourced services clients, the Company recognizes revenues based on the volume of processed transactions or the quantity of labor hours provided.
The following table presents revenue disaggregated by category for the three months ended March 31, 2020 and 2019 (in thousands):
 Three Months Ended 
 March 31,
 2020 2019
 (in thousands)
Healthcare17,524
 9,020
Recovery (1)
24,265
 21,375
Customer Care / Outsourced Services4,099
 4,481
Total Revenues$45,888
 $34,876
(1)Represents student lending, state and municipal tax authorities, IRS and Department of Treasury markets, select financial institutions, as well as Premiere Credit of North America.
Healthcare providers have the right to appeal a claim and may pursue additional appeals if the initial appeal is found in favor of CMS. The Company accrues anCMS or other healthcare clients under the RAC or other commercial healthcare contracts, respectively. Under the MSP contract, insurance companies or other responsible parties may dispute the Company’s findings regarding Medicare not being the primary payer of healthcare claims. Total estimated liability for appeals at the time revenue is recognized based on the Company's estimateand disputes was $1.2 million and $1.0 million as of the amount of revenue probable of being refunded to CMS following successful appeal. In addition, if the Company's estimate of the liability for appeals with respect to revenues recognized during a prior period changes, the Company increases or decreases current period accruals based on such change in estimated liability. At September 30, 2017, a total of $18.8 million was presented as an allowance against revenue, representing the Company’s estimate of claims audited under the CMS contract that may be overturned. Of this, none was related to accounts receivableMarch 31, 2020 and $18.8 million was related to commissions which had already been received. In addition to the $18.8 million related to the RAC contract with CMS, the Company has accrued $0.3 million of additional estimated liability for appeals related to other healthcare contracts. The total accrued liability for appeals of $19.1 million has been presented in the

caption estimated liability for appeals at September 30, 2017.  At December 31, 2016, the total appeals-related liability was $19.3 million. The $19.1 million balance at September 30, 2017 and $19.3 million at December 31, 2016, represent2019, respectively. This represents the Company’s best estimate of the amount probable amount of losses relatedbeing refunded to the Company’s healthcare clients following successful appeals of claims for which commissions were previously collected. In addition to the $19.1 million amount accrued at September 30, 2017, the Company estimates that it is reasonably possible that it could be required to pay an additional amount up to approximately $5.4 million as a result of potentially successful appeals. To the extent that required payments by the Company exceed the amount accrued, revenues in the applicable period would be reduced by the amount of the excess. The zero allowance against
Trade accounts receivable are recorded at September 30, 2017 resulted from no customer receivables existing in an aged position which required a specific reserve; whilethe invoiced amount and do not bear interest. The Company determines the allowance at December 31, 2016for 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 account was $0.2 million.
(c)Net Payable to Client
The Company nets outstanding accounts receivable invoices from an audit and recovery contract against payables for overturned audits. The overturned audits are netted against current fees due on the invoice to the client when they are processed by the client’s system. The “Net payable to client” balance of $12.7$0.5 million and $13.1$0.2 million at September 30, 2017March 31, 2020 and December 31, 2016, respectively, represent the excess of payables for overturned audits. 2019, respectively.
The Company expectsdetermined that the net payableit does not have any costs related to client balance will be paidobtaining or fulfilling a contract that are recoverable and as such, these contract costs are expensed as incurred.
The Company has contract assets of $1.2 million and $1.3 million as of March 31, 2020 and December 31, 2019, respectively. The contract assets relate to the client withinCompany’s rights to consideration for services completed during the next twelve months.three months ended March 31, 2020 and year ended December 31, 2019, but not invoiced at the reporting date. The decrease in contract assets is primarily due to timing of invoices issued. Contract assets are recorded to accounts receivable when the rights become unconditional and amounts are invoiced.
(d)Prepaid Expenses and Other Current Assets
The Company has contract liabilities of $0.1 million as of March 31, 2020 and December 31, 2019, respectively, which are included in other current liabilities in the consolidated balance sheets. The Company’s contract liability relates to an advance recovery commission payment received from a customer, for which the Company anticipates revenue to be recognized as services are delivered. 


(d) Prepaid Expenses and Other Current Assets
At September 30, 2017,March 31, 2020, prepaid expenses and other current assets includes $5.6were $3.8 million of amounts estimatedand included approximately $2.1 million related to become due from subcontractors. The Company employs subcontractors to audit claims as part of an audit & recovery contract,prepaid software licenses and to the extent that audits by these subcontractors are overturned on appeal, the fees associated with such claims are contractually refundable to the Company.maintenance agreements, $0.8 million for prepaid insurance, and $0.9 million for various other prepaid expenses. At September 30, 2017, the receivable associated with estimated future overturns of subcontractor audits was $5.6 million. In addition, at September 30, 2017,December 31, 2019, prepaid expenses and other current assets includes a net receivable of $3.7were $3.3 million and included approximately $2.2 million related to prepaid software licenses and maintenance agreements, $0.7 million for subcontractor feesprepaid insurance, and $0.4 million for already overturned audits refundable tovarious other prepaid expenses.
(e) Impairment of Goodwill and Long-Lived Assets
Goodwill is reviewed for impairment at least annually. The balance of goodwill was $55.4 million as of March 31, 2020 and $74.4 million as of December 31, 2019, respectively. The economic impact from the COVID-19 pandemic was a triggering factor requiring an interim assessment of goodwill for impairment. In performing the quantitative assessment of goodwill, if the carrying value of the Company, onceas one reporting unit, exceeds its fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of the reporting unit.
Impairment testing is based upon the best information available and estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, our market capitalization, projecting future cash flows and other assumptions, to estimate the fair value of the reporting unit. Although the Company refundsbelieves the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of impairment. Based on management’s quantitative analysis, we concluded that the carrying value of our reporting unit was greater than its feesfair value, which resulted in a non-cash goodwill impairment charge of $19.0 million. The goodwill impairment charge had no impact on the Company’s cash flows or compliance with debt covenants.
Long-lived assets and intangible assets that are subject to the client as prime contractor. By comparison, at December 31, 2016, prepaid expenses and other current assets included $5.7 million of estimated future overturns of subcontractor audits, as well as a net receivable of $3.7 million for subcontractor fees for already overturned audits refundable to the Company once the Company refunds its fees to the client as prime contractor.
(e)Impairment of Goodwill and Long-Lived Assets
Goodwill and long-lived assetsamortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. For the nine months ended September 30, 2017, an impairment expense of $1.1 million was recognized to account for the write-off of goodwill and intangible assets in one of our subsidiaries, Performant Europe Ltd., due to the Company's decision to wind down activity in this business. The expense has been included in other operating expenses in the consolidated statements of operations. There was no impairment expense for goodwill andneed to impair long-lived assets or intangible assets as of March 31, 2020.
(f) Other Current Liabilities
At March 31, 2020, other current liabilities primarily included $2.5 million for the nine months ended September 30, 2016.
(f)Restricted Cash
On August 3, 2017, $6.0services received for which we have not received an invoice, $0.6 million of restricted cash was paid to the administrative agent for the benefit of the lenders under our Prior Credit Agreement.insurance premium financing payables, and $0.3 million for estimated workers' compensation claims incurred but not reported. At September 30, 2017, and at December 31, 2016, restricted cash2019, other current liabilities primarily included in current assets on our consolidated balance sheet was $0.0$2.2 million for services received for which we have not received an invoice, $0.6 million for insurance premium financing payables, $0.3 million for accrued subcontractor fees, and $7.5$0.3 million respectively.for estimated workers' compensation claims incurred but not reported.
(g)New Accounting Pronouncements
Recently Adopted Accounting Standards
In November 2015, the FASB issued Accounting Standards Update (ASU) 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes"("ASU 2015-17"), which simplifies the reporting requirements of deferred taxes by requiring all organizations to classify all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We adopted ASU-2015-17 during our first quarter of 2017 on a prospective basis.

During the first quarter 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09) on a prospective basis.  As a result of the adoption, the Company recognized $84 thousand of income tax expense for the nine months ended September 30, 2017.  These tax benefits, or shortfalls, were historically recorded in equity.  In addition, cash flows related to excess tax benefits, or shortfalls, are now classified as an operating activity.  Cash paid on employees’ behalf related to shares withheld for tax purposes is classified as a financing activity, consistent with prior year’s presentation.
Recently Issued Accounting Standards
In May 2014, the FASB issued an ASU that amends the FASB ASC by creating a new Topic 606, "Revenue from Contracts with Customers". The new guidance will supersede the revenue recognition requirements in Topic 605, "Revenue Recognition", and most industry-specific guidance on revenue recognition throughout the Industry Topics of the Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply a five step model for recognizing and measuring revenue from contracts with customers. In addition, an entity should disclose sufficient qualitative and quantitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new revenue recognition guidance, including subsequent amendments, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with the option to early adopt the standard for annual periods beginning after December 15, 2016. We have not adopted this guidance early and are currently evaluating the effect on our consolidated financial statements.
In February 2016,August 2018, the FASB issued ASU 2016-02, “Leases”2018-13, "Fair Value Measurements", which eliminates, adds or modifies certain disclosure requirements for operating leases, requires a lesseefair value measurements. Entities will no longer be required to recognize a right-of-use assetdisclose the amount of and a lease liability, initially measured at the present valuereasons for transfers between Level 1 and Level 2 of the lease payments, in its balance sheet. The standard also requires a lesseefair value hierarchy, but will be required to recognize a single lease cost, calculated so thatdisclose the cost of the lease is allocated over the lease term, on a generally straight-line basis.range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This new guidanceASU is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. We have not adopted this guidance early and are currently evaluating the effect on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” which provides guidance on the presentation of certain cash receipts and cash payments in the statement of cash flows in order to reduce diversity in existing practice. This new guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. This new standard requires retrospective adoption, with a provision for impracticability. We have not adopted this guidance early and are currently evaluating the effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment" to simplify the goodwill impairment testing process. The new standard eliminates Step 2 of the goodwill impairment test. If a company determines in Step 1 of the goodwill impairment test that the carrying value of goodwill is less than the fair value, an impairment in that amount should be recorded to the income statement, rather than proceeding to Step 2. This new guidance is effective for annual reporting periods, and interim periods with goodwill impairment tests within thosefiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company adopted this pronouncement on January 1, 2020, noting no impact to the consolidated financial statements as the amounts subject to Level 3 fair value measurements are not material.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" as modified by subsequently issued ASU's 2018-19, 2019-04, 2019-05 and 2019-11. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption is permitted, for testingpublic entities, except for Smaller Reporting Companies. This ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2017. We have not adopted this guidance early and are currentlyDecember 31, 2022. The Company is evaluating the effect on our consolidated financial statements.of the adoption of this pronouncement.

2. Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements consist of the following at September 30, 2017March 31, 2020 and December 31, 20162019 (in thousands):
September 30,
2017		 December 31,
2016		March 31,
2020		 December 31,
2019
Land$1,122
 $1,122
$1,943
 $1,943
Building and leasehold improvements6,223
 6,203
8,146
 8,124
Furniture and equipment5,706
 5,656
6,257
 6,257
Computer hardware and software70,615
 67,861
80,117
 79,066
83,666
 80,842
96,463
 95,390
Less accumulated depreciation and amortization(62,273) (57,107)(78,102) (76,621)
Property, equipment and leasehold improvements, net$21,393
 $23,735
$18,361
 $18,769
Depreciation expense of property, equipment and leasehold improvements was $2.5$1.5 million and $2.4$2.3 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, $7.7 million and $7.3 million for the nine months ended September 30, 2017 and 2016,2019, respectively.
3. Credit Agreement
On March 19, 2012, we, through our wholly owned subsidiary, entered into a $147.5 million credit agreement, as amended and restated, with Madison Capital Funding LLC as administrative agent, ING Capital LLC as syndication agent, and other lenders party thereto (as amended, the "Prior Credit Agreement"). The senior credit facility consists of (i) a $57.0 million Term A loan that matured and was fully paid in March 2017, (ii) a $79.5 million Term B loan that matures in June 2018, and (iii) a $11.0 million revolving credit facility that expired and was fully paid in March 2017. On June 28, 2012, we amended the Credit Agreement to increase the amount of our borrowings under our Term B loan by $19.5 million.
On November 4, 2014, February 19, 2016, July 26, 2016, October 27, 2016, and March 22, 2017, the Prior Credit Agreement was further amended to, among other things, modify a number of existing covenants and add new covenants requiring the Company to maintain a minimum cash balance, comply with an interest coverage ratio and achieve minimum EBITDA levels. On May 3, 2017, we further amended the credit agreement (the "Eighth Amendment") to extend the maturity date of the Term B loan to June 19, 2018. As a result of this extension, regularly scheduled quarterly amortization payments of $247,500 were also extended through March 31, 2018, with the remaining outstanding principal amount due on the June 19, 2018 maturity date. Interest on the Term B loan charged under the credit agreement was also increased by 3.00% per annum, however the amount of such increased interest was payable in kind. Pursuant to the Eighth Amendment, the quarterly and annual financial reporting covenants were also modified to require that the Company’s financial statements not contain a qualification, if required by GAAP, with respect to our ability to continue as a going concern.
On August 7, 2017, we, through our wholly-owned subsidiary Performant Business Services, Inc. (the "Borrower"), entered into a new credit agreement (as amended, the “Credit Agreement”) with ECMC Group, Inc.  (the “New Credit Agreement”).  The NewBefore the amendment described below, the Credit Agreement providesprovided for a term loan facility in the initial amount of $44 million (the “Initial Term Loan”) and for up to $15 million of additional term loans (“Additional Term Loans”; and together with the Initial Term Loan, the “Loans”) which original Additional Term Loans maywere initially able to be drawn until the second anniversary of the funding of the Initial Term Loans, subject to the satisfaction of customary conditions.  On August 11, 2017, the Initial Term Loan was advanced (the "Closing Date") and the proceeds were applied to repay all outstanding amounts under the Prior Credit Agreement.  On September 29, 2017,31, 2018, we entered into Amendment No. 12 to the New Credit Agreement to among other things (i) extend the initial interest payment duematurity date of the Initial Term Loan and any Additional Term Loans by one year to DecemberAugust 2021, (ii) expand the Additional Term Loans commitment from $15 million to $25 million, (iii) extend the period during which Additional Term Loans can be borrowed by one year to August 2020, and (iv) relieve the Borrower from its obligation to comply with the financial covenants in the Credit Agreement during the six fiscal quarters following the Premiere acquisition.
On March 21, 2019, we entered into Amendment No. 3 to the Credit Agreement to, among other things, relieve the Borrower from its obligation to comply with the financial covenants in the Credit Agreement until the quarter ending June 30, 2020. As of September 30, 2019, the Company has borrowed all of the $25 million available as Additional Term Loans.
As of March 31, 2017. Approximately $22020, $63.5 million of contingent reimbursement obligations with respect to outstanding but undrawn letters of credit remainwas outstanding under the Prior Credit Agreement, however, those contingent reimbursement obligations will remain cash collateralized with the administrative agent.Agreement.
The Loans will mature on the third anniversary of the Closing Date, however we willWe have the option to extend the maturity of the Loans for two additional one yearone-year periods, subject to the satisfaction of customary conditions.  The Loans will bear interest at the one-month LIBOR rate (subject to a 1% per annum floor) plus a margin which may vary from 5.5% per annum to 10.0% per annum based on our total debt to EBITDA ratio. The Initial Term Loans will initially bearOur annual interest rate at LIBOR plus 7.0% per annum.March 31, 2020 was 11.0% and 11.8%at December 31, 2019. We will beare required to pay 5% of the original principal balance of the Loans annually in quarterly installments beginning March 31, 2018, and to offer to make mandatory prepayments of the Loans with a percentage of our excess cash flow which may vary between 75% and 0% depending on our total debt to EBITDA ratio.  In addition to mandatory

prepayments for excess cash flow, we will also be required to offer to prepay the Loans withratio and from the net cash proceeds of certain asset dispositions and with the issuance of debt not otherwise permitted under the New Credit Agreement.  ExceptAgreement, in connection with a change of control andeach case, subject to the payment of a 1% premium, we will not be permittedlender's right to voluntarily prepay the Loans until after the first anniversary of the Closing Date.  We will be permitteddecline to prepay the Loans during the second year after the Closing Date if accompanied by a prepayment premium of 1%.  Thereafter, we will be permitted to prepay the Loans without any prepayment premium.receive such payments.

The New Credit Agreement contains certain restrictive financial covenants which becameare not effective onuntil the Closing Date. Such covenants require, among other things, thatquarter ending June 30, 2020, at which point, we meetwill be required to (1) achieve a minimum fixed charge coverage ratio of 0.5 to 1.0 through December 31, 2019, 1.0 to 1.0 through June 30, 2020 (or until December 31, 2020 if the maturity date of the Loans is extended until the fourth anniversary of the Closing Date), 1.25 to 1.0 through June 30, 2021 if the maturity date of the Loans is extended until the fourth anniversary of the Closing Date and 1.25 to 1.0 through June 30, 2022 if the maturity date of the Loans is extended until the fifth anniversary of the Closing Date. In addition, we will be required toDate and (2) maintain a maximum total debt to EBITDA ratio of 6.00 to 1.00. The New Credit Agreement also contains covenants that will restrict the CompanyCompany's and its subsidiaries’ ability to incur certain types or amounts of indebtedness, incur liens on certain assets, make material changes in corporate structure or the nature of its business, dispose of material assets, engage in a change in control transaction, make certain foreign investments, enter into certain restrictive agreements, or engage in certain transactions with affiliates. The Credit Agreement also contains various customary events of default, including with respect to change of control of the Company or its ownership of the Borrower.
The obligations under the New Credit Agreement are secured by substantially all of our United States domestic subsidiaries' assets and are guaranteed by the Company and its United States domestic subsidiaries, other than the Borrower.
As a result of our entry into our New Credit Agreement, and the repayment of all amounts owed under the Prior Credit Agreement, we wrote off debt issuance costs related to the Prior Credit Agreement of approximately $1.0 million in August 2017.
Scheduled payments under the Agreement for the next five years and thereafter are as follows (in thousands):
Year Ending December 31,Amount
Remainder of 2017$—
20182,200
20192,200
202039,600
2021—
Thereafter—
Total$44,000
In consideration for, and concurrently with, the extensionorigination of the Initial Term Loan in accordance with the terms of the New Credit Agreement, we issued a warrant to the lender to purchase up to an aggregate of 3,863,326 shares of the Company’s common stock (representing approximately up to 7.5% of our diluted common stock as calculated using the “treasury stock” method as defined under U.S. GAAP for the most recent fiscal quarter)three month period ended June 30, 2017) with an exercise price of $1.92 per share. share (the "Exercise Price").
Upon our election to borrow anyborrowing of the Additional Term Loans, we will bethe Company was required to issue additional warrants at the same exercise priceExercise Price to purchase up to an aggregate of 77,267 additional shares of common stock (which represents approximately 0.15% of our diluted common stock calculated using the “treasury stock” method as defined under U.S. GAAP for the most recent fiscal quarter)quarter ended June 30, 2017) for each $1,000,000$1.0 million of such Additional Term Loans. Similarly, upon our election to extend the maturity of the loans for two additional one year periods, we will be required to issue additional warrants at the same Exercise Price to purchase up to an aggregate of 515,110 additional shares of common stock for the first year, and to purchase up to an aggregate of 772,665 additional shares of common stock for the second year (which represent approximately 1.0% and 1.5% of our diluted common stock for the first and second years, respectively, calculated using the “treasury stock” method as defined under U.S. GAAP for the fiscal quarter ended June 30, 2017).
The Company has accounted for this warrantthese warrants as an equity instrumentinstruments since the Warrant iswarrants are indexed to the Company’s common shares and meetsmeet the criteria for classification in shareholders’ equity. The relative fair valuevalues of the Warrant on the date of issuance was approximately $3.3 millionwarrants are noted below and iswere treated as a discount to the associated debt. This amount will beThese amounts are being amortized to interest expense under the effective interest method over the life of the Term Loan and Additional Term Loans, respectively, which is a period of 3648 months. The Company estimated the value of the Warrantwarrants using the Black-Scholes model. The key information and assumptions used to value the Warrantwarrants are as follows:

August 2017 IssuanceOctober 2018 IssuanceApril 2019 IssuanceMay 2019 IssuanceAugust 2019 IssuanceSeptember 2019 Issuance
Exercise price$1.92
$1.92
Share price on date of issuance$1.85
$1.85$1.93$2.24$1.75$1.11$1.10
Volatility50.0%50.0%55.0%57.5%67.5%
Risk-free interest rate1.83%1.83%3.01%2.31%2.15%1.53%1.60%
Expected dividend yield—%—%
Contractual term (in years)5
5
Number of shares3,863,326309,066386,333463,599386,333
Relative fair value of each warrant$3.3 million$0.2 million$0.4 million$0.2 million
In addition, at the closing of the Initial Term Loan, the Company paid transaction costs of $0.6 million, which were recorded as a discount on the debt and will beare being amortized to interest expense using the effective interest method over the life of the initialInitial Term Loan, which is a period of 3648 months.

Outstanding debt obligations are as follows (in thousands):
 September 30, 2017
Principal amount$44,000
Less: unamortized discount and debt issuance costs(3,687)
Loan payable less unamortized discount and debt issuance costs40,313
Less: current maturities(1,512)
Long-term loan payable, net of current maturities$38,801
 March 31, 2020
Principal amount$63,450
Less: unamortized discount and debt issuance costs(2,049)
Notes payable less unamortized discount and debt issuance costs61,401
Less: current maturities, net of unamortized discount and debt issuance costs(3,339)
Long-term notes payable, net of current maturities and unamortized discount and debt issuance costs$58,062
4. Commitments and ContingenciesLeases
We haveThe Company has entered into various non-cancelable operating lease agreements for certain of our office facilities and equipment with original lease periods expiring between 20172020 and 2022.2025. Certain of these arrangements have free rent periods and /orand/or escalating rent payment provisions, andprovisions. As such, we recognize rent expense under such arrangements on a straight-line basis. In October 2017, we renewedbasis in accordance with U.S. GAAP. Some leases include options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Our lease agreements for office space for approximately 50,000 square feet in Livermore, California.do not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of twelve months or less are not recorded on the balance sheet.
Future minimum rental commitments under non-cancelable leases as of September 30, 2017 are as follows (in thousands):
  
Year Ending December 31,Amount
Remainder of 2017$393
20182,223
20192,158
20202,109
20211,377
Thereafter933
Total$9,193
Operating lease expense was $0.6$0.8 million and $0.7$0.8 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively,2019, respectively. Supplemental cash flow and other information related to operating leases was $2.0 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.as follows:
 March 31,
2020		 March 31,
2019
Weighted Average Remaining Lease Term (in years)3.3 4.5
Weighted Average Discount Rate6.3% 6.4%
Cash paid for amounts included in the measurement of operating lease liabilities$0.8 million $0.9 million
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2020 (in thousands):
  
Year Ending December 31,Amount
Remainder of 20202,375
20212,313
20221,690
2023569
2024579
Thereafter397
Total undiscounted cash flows$7,923
Less imputed interest$(841)
Present value of lease liabilities$7,082


5. Stock-based Compensation
(a) Stock Options
Total stock-based compensation expense charged as salaries and benefits expense in the consolidated statements of operations was $0.7 million and $1.2$0.5 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $3.0 million and $3.5 million for the nine months ended September 30, 2017 and 2016,2019, respectively.

The following table showssets forth a summary of the Company's stock option activity for the ninethree months ended September 30, 2017:March 31, 2020:
 
Outstanding
Options
 
Weighted
average
exercise price
per share
 
Weighted
average
remaining
contractual life
(Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 20163,506,529
 $7.32
 5.04 $1,367
Granted—
 —
    
Forfeited(159,310) 5.38
    
Exercised(188,959) 0.50
    
Outstanding at September 30, 20173,158,260
 $7.83
 4.41 $613
Vested, exercisable, expected to vest(1) at September 30, 2017
3,149,795
 $7.83
 4.41 $613
Exercisable at September 30, 20172,980,079
 $7.98
 4.24 $610
 
Outstanding
Options
 
Weighted
average
exercise price
per share
 
Weighted
average
remaining
contractual life
(Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 20191,991,166
 $10.06
 2.89 $—
Granted—
 —
    
Forfeited(141,105) 7.55
    
Exercised—
 —
    
Outstanding at March 31, 20201,850,061
 $10.25
 2.70 $—
Vested and exercisable at March 31, 20201,850,061
 $10.25
 2.70 $—
 
(1)Options expected to vest reflect an estimated forfeiture rate.
The Company recognizes share-based compensation costs as expense on a straight-line basis over the option vesting period, which generally is four to five years.
(b) Restricted Stock Units and Performance Stock Units
The following table summarizes restricted stock unit and performance stock unit activity for the ninethree months ended September 30, 2017:
March 31, 2020:
Number of Awards 
Weighted
average
grant date fair value
per share
Number of Awards 
Weighted
average
grant date fair value
per share
Outstanding at December 31, 20162,060,240
 $2.70
Outstanding at December 31, 20193,254,254
 $2.12
Granted1,481,252
 2.41
55,000
 1.07
Forfeited(371,800) 2.98
(52,375) 2.23
Expired(40,500) 2.57
Vested and converted to shares, net of units withheld for taxes(533,872) 2.73
(122,529) 1.72
Units withheld for taxes(209,743) 2.73
(73,346) 1.72
Outstanding at September 30, 20172,385,577
 $2.46
Expected to vest at September 30, 20172,266,348
 $2.46
Outstanding at March 31, 20203,061,004
 $2.13
Expected to vest at March 31, 20202,730,719
 $2.13
Restricted stock units and performance stock units granted under the Performant Financial Corporation Amended and Restated 2012 Stock Incentive Plan generally vest over periods ranging from one to four years.
6. Income Taxes
Our effective income tax rate changed to a negative rate of (14.4)24% for the three months ended March 31, 2020 from (2)% for the ninethree months ended September 30, 2017 from 6.9% for the nine months ended September 30, 2016.March 31, 2019. The decreasechange in the effective tax rate is primarily due to more significant losses from operations generated indriven by the ninenet operating loss (“NOL”) carryback benefit recorded as a result of the newly enacted provisions of the CARES Act for the three months ended September 30, 2017 for which no tax benefit is recognized compared to the income tax expense recorded on income from operations for the nine months ended September 30, 2016.March 31, 2020.
We file income tax returns with the U.S. federal government and various state jurisdictions. We operate in a number of state and local jurisdictions, most of which have never audited our records. Accordingly, we are subject to state and local income tax examinations based upon the various statutes of limitations in each jurisdiction. For tax years before 2014,2016, the Company is no longer subject to Federal and certain other state tax examinations. We are currently being examined by the Franchise Tax Board of California for tax years 2011 through 2014.2014 and by the Internal Revenue Service for tax year 2017.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. This modification significantly impacts the Company by allowing for the carryback of 2018 and 2019 NOL to tax years 2013 and 2014, respectively. These NOL carryforwards had been represented in the December 31, 2019 financial statements by deferred tax assets (“DTA”) for which a valuation allowance had been recorded as the Company did not expect that these DTA would be more likely than not realizable in future periods. As a result of carrying back the NOL, the Company is recognizing an income tax benefit of $3.9 million associated with these previously unrecognized DTA in the three months ended March 31, 2020.
7. EarningsLoss per Share
For the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, basic incomeloss per share is calculated by dividing net incomeloss by the sum of the weighted average number of shares of Common Stockcommon stock outstanding during the period. Diluted incomeearnings per share is calculated by dividing net income by the weighted average number of shares of Common Stockcommon stock and dilutive common share equivalents outstanding during the period. Common share equivalents consist of stock options, restricted stock units, and performance stock units.units, and warrants. When there is a loss in the period, dilutive common share equivalents are excluded from the calculation of diluted earnings per share, as their effect would be anti-dilutive. For example, for the three months ended March 31, 2020 and nine months ended September 30, 2017, and the three months ended September 30, 2016, dilutive common share equivalents have been excluded, and2019, respectively, diluted weighted average shares outstanding are the same as basic average shares outstanding. When there is net income in the period, the Company excludes stock options, restricted stock units, and performance stock units and warrants from the calculation of diluted earnings per share when thetheir combined exercise price and unamortized fair value and excess tax benefits of the options exceedexceeds the average market price of the Company's common stock because their effect would be anti-dilutive. For the nine months ended September 30, 2016, the Company excluded 4,559,511 options from the calculation of diluted earnings per share because their effect would be anti-dilutive.
The following table reconciles the basic to diluted weighted average shares outstanding using the treasury stock method (shares in thousands):
 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		 Three Months Ended 
 March 31,
 2017 2016 2017 2016 2020 2019
Weighted average shares outstanding – basic 50,852
 50,200
 50,581
 49,974
 53,943
 53,059
Dilutive effect of stock options —
 —
 —
 427
 —
 —
Weighted average shares outstanding – diluted 50,852
 50,200
 50,581
 50,401
 53,943
 53,059
8. Subsequent Events
We have evaluated subsequent events through the date these consolidated financial statements were issuedfiled with the Securities and Exchange Commission and there are no other events that have occurred that would require adjustments or disclosures to our consolidated financial statements.


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion in conjunction with our condensed 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:about: the impact of COVID-19 on our business and operations, opportunities and expectations for growth in the student lending, healthcare and other markets; 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; the sufficiency of our appeals reserve; our growth strategy of expanding in our existing markets and considering strategic alliances or acquisitions; our ability to meet our liquidity and working capital needs; 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, outsource services and related analytics services in the United States. Our services help identify improper payments, and in some markets, restructure and recover delinquent or defaulted assets and improper payments for both government and private clients across differentin a broad range of markets. Our clients typically operate in complex and regulated environments and outsource their audit and recovery needs in order to reduce losses on billions of dollars of defaulted student loans, improper healthcare payments, and delinquent state and federal tax and federal treasury, defaulted student loans and other receivables. We generallyalso provide complex outsource services for clients across our services on an outsourced basis,various markets, where we handle many or all aspects of our clients’ various processes.
Our revenue model is generally success-based as we earn fees on the aggregate correct audits and/or amount of improper paymentsfunds that we identify on behalf of our clients that we either recover directly or enable our clients to recover. Our services do not require any 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, and the dollars we enable our clients to recover, our business objectives are aligned with those of our clients and we are generally not reliant on their spending budgets. Furthermore, our business model does not require significant capital expenditures andas we do not purchase loans or obligations.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has become widespread in the United States, including the areas in which the Company conducts its business operations. State and local governments in places where our primary offices are located, as well as certain of our clients, have enacted stay-at-home orders as well as restrictions to travel and business activities, all of which have had a significant negative impact on our business as well as global economic conditions.

We took proactive actions early on to protect the health of our employees and their families, including limiting the number of people permitted to be present in any particular meeting, curtailing business travel, and encouraging videoconferencing whenever possible. In addition, as the COVID-19 pandemic worsened throughout March and into April 2020, we required almost all personnel to work remotely and we restricted access to our sites to personnel who are required to perform critical business continuity activities.


While we currently believe we have taken steps that will allow us to function in a virtual or remote fashion as a result of the COVID-19 pandemic, the extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, additional protective measures implemented by governmental authorities or by us to protect our employees, and effects of the pandemic and such protective measures on our clients, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain or predict the overall long-term impact of the COVID-19 pandemic on our business. To date, certain of our customers, including federal and state governments, have chosen to delay the recovery and audit services that we provide, which may have a material negative impact on our revenues and results of operations. For example, pursuant to the terms of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted in March 2020, the U.S. Federal government suspended payments, ceased accruing interest, and stopped involuntary collections of payments (e.g., wage garnishments) for student loans owned by the Department of Education through September 30, 2020. To date, we have furloughed over 500 employees in our recovery business in response to the suspension of certain of our customer contracts. In addition, as a large portion of our employees continue to be subject to shelter-in-place or other quarantine orders, which may result in the complete or partial closure of one or more of our recovery call centers or other disruptions in our ongoing business operations. If the COVID-19 pandemic continues to increase in severity or if overall global or localized economic activity continues to contract for any appreciable length of time, it will continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our healthcare business has not experienced, and is not currently expected to experience, a similar level of impact as the recovery business due to the fact that only two healthcare customers have been impacted by congressional regulations to date. While a few healthcare customers placed short term pauses on audit activities, we have continued to see growth and expansion in other healthcare offerings.

There continues to be significant uncertainty around the breadth and duration of business disruptions related to COVID-19 pandemic, as well as its impact on the U.S. economy, the ongoing business operations of our clients or our results of operations and financial condition. While our management team is actively monitoring the impacts of the COVID-19 pandemic and may take further actions altering 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 full impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for fiscal year 2020 and beyond cannot be estimated at this point. The following discussions are subject to the future effects of the COVID-19 outbreak on our ongoing business operations.

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 student lending, and healthcare, as well as our other markets which include but are not limited to outsourced call center services, delinquent state and federal taxes and federal Treasurytreasury and other receivables.
 Three Months Ended 
 March 31,
 2020 
2019 (2)
 (in thousands)
Healthcare17,524
 9,020
Recovery (1)
24,265
 21,375
Customer Care / Outsourced Services4,099
 4,481
Total Revenues$45,888
 $34,876
(1)Represents student lending, state and municipal tax authorities, IRS and Department of Treasury markets, select financial institutions, as well as Premiere Credit of North America.
(2)Revenue amounts by category for the first quarter of 2019 have been revised to conform to the 2020 presentation format adopted in the second quarter of 2019.



 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
 2017 2016 2017 2016
 (in thousands) (in thousands)
Student Lending:       
                Department of Education$635
 $3,906
 $3,579
 $18,243
                Guaranty Agencies and Other19,178
 19,891
 68,242
 63,964
                            Total of Student Lending19,813
 23,797
 71,821
 82,207
Healthcare:       
                CMS RAC821
 1,717
 969
 5,180
                Commercial1,806
 1,262
 5,393
 3,878
                            Total of Healthcare2,627
 2,979
 6,362
 9,058
Other:7,304
 4,419
 20,577
 16,283
Total Revenues$29,744
 $31,195
 $98,760
 $107,548

Student LendingHealthcare
We derive revenues from both commercial and government clients in the majorityhealthcare market. Revenues earned under 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. 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 following payment by the provider.
For our commercial healthcare business, our business strategy is focused on utilizing our technology-enabled services platform to provide audit, third-party liability recovery and analytical services for private healthcare payers. Revenues from our commercial healthcare clients were $6.5 million for the three months ended March 31, 2020 compared to revenues of $3.1 million that we earned from our commercial healthcare clients during the three months ended March 31, 2019.
On October 5, 2017, we announced that we were awarded the MSP CRC contract by the CMS. Under this agreement, we are responsible for 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.
On October 26, 2016, CMS awarded two new RAC contracts, 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 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. While audit and recovery activity under these contracts commenced in April 2017, the scope of audit permitted by CMS has been limited to 0.5% of claims.
Healthcare providers have the right to appeal a claim and may pursue additional appeals if the initial appeal is found in favor of the healthcare providers. In addition, healthcare providers or other insurers may dispute our findings regarding Medicare not being the primary payer of healthcare claims. Our total estimated liability for appeals and disputes was $1.2 million and $1.0 million as of March 31, 2020 and December 31, 2019, respectively. This represents our best estimate of the amount probable of being refunded to our healthcare clients following successful appeals of claims for which commissions were previously collected.
Recovery
Recovery market revenues are derived from student lending, Internal Revenue Services (IRS), state and municipal tax authorities, the Department of Treasury, select financial institutions and Premiere Credit of North America.
In the Spring of 2017, the IRS named us as one of four companies to perform recovery services under its private collection program. This program, authorized under a federal law, calls for the use of private companies to recover outstanding inactive tax receivables on the government's behalf.
We also service the federal agency market, which consists of government debt subrogated to the Department of the Treasury by numerous different federal agencies, comprising a mix of commercial and individual obligations and a diverse range of receivables. These debts are managed by the Bureau of the Fiscal Service (formerly the Department of Financial Management Service), or FS, a bureau of the Department of the Treasury.
For state and municipal tax authorities, we analyze a portfolio of delinquent tax and other receivables placed with us, develop a recovery plan and execute a recovery process designed to maximize the recovery of funds. In some instances, we have also run state tax amnesty programs, which provide one-time relief for delinquent tax obligations, and other debtor management services for our clients. We currently have relationships with numerous state and municipal governments. Delinquent obligations are placed with us by our clients and we utilize a process that is similar to the student loans. Theseloan recovery process for recovering these obligations.

Student lending revenues are contract-based and consist primarily of contingency fees based on a specified percentage of the amount we enable our clients to recover. Our contingency fee percentage for a particular recovery depends on the type of recovery facilitated. Our clients in the student loan recovery market mainly consist of several of the largest guaranty agencies, or GAs. In addition, we have a long history of also providing recovery services to the Department of Education. However, in December 2016, the Department of Education awarded contracts for student loan recovery services to seven contractors and we were not a recipient of one of these contract awards. We, along with 19 other contractors who did not receive contract awards from the Department of Education, filed protests with the GAO regarding the Department of Education’s award of these contracts. In March 2017, the GAO upheld our protest. The Department of Education requested resubmittal of new contract proposals and is currently undergoing a re-evaluation process with respect to such proposals. The Department of Education has recently announced that it has completed its review and assessment for the award of the new contracts. However, we do not know when the awards of the new contracts will be made. Further, there may be appeals and challenges to the contract awards when granted, which could delay the actual start date for the new contracts. We have been one of the Department of Education’s unrestricted student loan recovery contractors for more than 20 years until our prior contract expired in April 2015.
We believe the size and the composition of our student loan inventory at any point provides us with a significant degree of revenue visibility for our student loan revenues. Based on data compiled from over two decades of experience with the recovery of defaulted student loans, at the time we receive a placement of student loans, we are able to make a reasonably accurate estimate of the recovery outcomes likely to be derived from such placement and the revenues we are likely able to generate based on the anticipated recovery outcomes.
Our keyAn important metric in evaluating our student lending business is Placement Volume. Our Placement Volume represents the dollar volume of defaulted student loans first placed with us during the specified period by public and private clients for recovery. Placement Volume allows us to measure and track trends in the amount of inventory our clients in the student lending market are placing with us during any period. The revenues associated with the recovery of a portion of these loans may be recognized in subsequent accounting periods, which assists management in estimating future revenues and in allocating resources necessary to address current Placement Volumes.
  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
  2017 2016 2017 2016
  (in thousands) (in thousands)
Student Lending Placement Volume:        
          Department of Education $—
 $—
 $—
 $5,082
          Guaranty Agencies and Other 647,088
 678,910
 2,221,748
 2,539,998
Total Student Lending Placement Volume $647,088
 $678,910
 $2,221,748
 $2,545,080

As a result of the Department of Education’s termination of our January 2018 contract and its last procurement in its entirety, all of our Placement Volume is currently coming from GAs. For the three months ended March 31, 2020 and 2019, the placement volume was $189.2 million, and $1.1 billion, respectively.
There are five potential outcomes to the student loan recovery process from which we generate revenues. These outcomes include: full repayment, recurring payments, rehabilitation, loan restructuring and wage garnishment. Of these five potential outcomes, our ability to rehabilitate defaulted student loans is the most significant component of our revenues in this market. Generally, a loan is considered successfully rehabilitated after the student loan borrower has made nine consecutive qualifying monthly payments and our client has notified us that it is recalling the loan. Once we have structured and implemented a repayment program for a defaulted borrower, we (i) earn a percentage of each periodic payment collected up to and including the final periodic payment prior to the loan being considered “rehabilitated” by our clients, and (ii) if the loan is “rehabilitated,” then we are paid a one-time percentage of the total amount of the remaining unpaid balance except that beginning in July 2015, our contract with the Department of Education has provided for a fixed fee of $1,710 for each rehabilitated loan. The fees we are paid vary by recovery outcome as well as by contract. In addition, under our contracts with our GA clients, we generally recognize revenue when our GA clients rehabilitate and recall the loans which has been placed with us. At times, our GA clients may be delayed in recalling loans or may wait to rehabilitate loans based on events that are not in our control. For non-government-supported student loans we are generally only paid contingency fees on two outcomes: full repayment or recurring repayments. The table below describes our typical fee structure for each of these five outcomes.
Student Loan Recovery Outcomes
Full Repayment Recurring Payments Rehabilitation Loan Restructuring Wage Garnishment
•    Repayment in full of the loan •    Regular structured payments, typically according to a renegotiated payment plan •    After a defaulted borrower has made nine consecutive recurring payments, the loan is eligible for rehabilitation •    Restructure and consolidate a number of outstanding loans into a single loan, typically with one monthly payment and an extended maturity •    If we are unable to obtain voluntary repayment, payments may be obtained through wage garnishment after certain administrative requirements are met
     
•    We are paid a percentage of the full payment that is made •    We are paid a percentage of each payment •    We are paid based on a percentage of the overall value of the rehabilitated loan or for the Department of Education, a fixed fee •    We are paid based on a percentage of overall value of the restructured loan •    We are paid a percentage of each payment
For certain guaranty agency, or GA, clients, we have entered into Master Service Agreements, or MSAs. Under these agreements, clients provided their entire inventory of outsourced loans or receivables to us for recovery on an exclusive basis, in contrast with traditional contracts that are split among various service providers. In certain circumstances, we engage subcontractors to assist in the recovery of a portion of the client’s portfolio. We also receive success fees for the recovery of loans under MSAs and our revenues under MSA arrangements include fees earned by the activities of our subcontractors. On June 15, 2017, we received a termination notice from one of our significant GA clients, Great Lakes Higher Education Guaranty Corporation. The termination of this contract was based on Great Lake’s decision to bundle its student loan servicing work, a service that we currently do not provide, along with its student loan recovery work to a single third party vendor. Since we received the initial termination notice from Great Lakes, we received additional notices from Great Lakes to allow us to continue to provide certain student loan services for three additional 30-day periods. In September 2017, we entered into a contract with Navient, who is now servicing the Great Lakes portfolio, to act as a recovery subcontractor for Navient. Under this arrangement, we expect to start recovery services for approximately 25% of the Great Lakes portfolio, and we believe we will have the opportunity to increase this percentage based on our performance. This contract also provides us with the right to service a small portion of an additional portfolio managed by Navient. This contract has no set term, and Navient has the right to terminate the contract at will.
In October 2014, the Department of Education announced a change in the structure for the payment of fees to recovery contractors upon rehabilitation of student loans under the existing recovery contract. The new fee structure provides for a fixed fee of $1,710 for each loan that is rehabilitated. Previously, the fee had been based on a percentage of the principal amount of the rehabilitated loan. The change to the fee structure became effective for student loans rehabilitated on or following July 1, 2015. 
Further, the Bipartisan Budget Act of 2013 reduced the compensation paid to GAs for the rehabilitation of student loans, effective July 1, 2014. This “revenue enhancement” measure reduced the amount that GAs can charge borrowers from 18.5% to 16.0% of the outstanding loan balance, when a rehabilitated loan is sold by the GA and eliminated entirely the GAs retention of 18.5% of the outstanding loan balance as a fee for rehabilitation services. The reduction in compensation the GAsCustomer Care / Outsourced Services

receive resulted in a decrease in the contingency fee percentage that we receive from the GAs for assisting in the rehabilitation of defaulted student loans.
Healthcare
We derive revenues from the healthcare market from our commercial healthcare contracts and our RAC contracts. For clients in both commercial and government healthcare markets, we are responsible for identifying incorrectly paid claims through both complex and automated forms of audit review. For our RAC contracts, we audit Medicare payments to detect improperly paid Part A and Part B Medicare claims.  Revenues earned under the healthcare contracts are driven by the identification of improperly paid claims through both automated and manual review of such claims. We are paid contingency fees by our clients based on a percentage of the dollar amount of improper claims we identify that are recovered by our clients. We currently recognize revenue when the provider pays our client or incurs an offset against future claims. The revenues we recognize are net of our estimate of claims that we believe may be overturned by appeal following payment by the provider.
On October 5, 2017, we announced that we were awarded the Medicare Secondary Payer Commercial Repayment Center (CRC) contract by the Centers for Medicare and Medicaid. Under this agreement, we are responsible for 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.
Our first RAC contract was wound down and then terminated in 2016 in connection with CMS's plan to award new contracts. On October 26, 2016, CMS awarded new RAC contracts and we received RAC contracts 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 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. While audit and recovery activity under the new contracts commenced in April 2017, there is uncertainty regarding the scope of audit that will be permitted by CMS under the new RAC contracts. In connection with the wind down of our first RAC contract, CMS adopted a series of contract transition procedures and other restrictions, beginning in 2013, that limited the types of claims we are permitted to audit and our ability to request medical records for audit and CMS suspended our ability to perform any audit services for certain periods of time, thus materially adversely affecting our revenues under that contract. In May 2016, CMS announced that the recovery audit contractors would not be able to request documents from providers for audit after May 16, 2016 and would not be able to submit claims for improper payments after July 29, 2016, effectively terminating additional revenue generating activity under our first RAC contract. Revenues for the year ended December 31, 2016 from our first RAC contract were $5.7 million, compared with $12.5 million for 2015 and $29.2 million in 2014. To date we have not recognized significant revenues from the newly awarded RAC contracts meaning that these new contracts will not have a significant impact on 2017 revenues, although we have incurred start-up related expenses during 2017.
In connection with our first RAC contract, CMS announced a settlement offer to pay hospitals 68% of what they have billed Medicare to settle a backlog of pending appeals challenging Medicare's denials of reimbursement for certain types of short-term care. The implication of this settlement offer related to claims for which fees have already been paid to recovery auditors under existing RAC contracts is unclear at this time, but we may be obligated to repay certain amounts that we previously received from CMS depending on the final terms of any such settlement. We accrue an estimated liability for appeals based on the amount of commissions received which are subject to appeal and which we estimate are probable of being returned to providers following successful appeal.  The $18.8 million balance as of September 30, 2017, represents our best estimate of the probable amount we may be required to refund related to appeals of claims for which commissions were previously collected. We estimate that it is reasonably possible that we could be required to pay an additional amount up to approximately $5.4 million as a result of potentially successful appeals in excess of the amount we accrued as of September 30, 2017.
In connection with the award of our first RAC contract, we outsourced certain aspects of our healthcare recovery process to three different subcontractors. Two of these subcontractors provided a specific service to us in connection with our claims recovery process, with the third subcontractor, whose services were terminated in December 2016, formerly providing all of the audit and recovery services for claims within a portion of our region. We recognize all of the revenues generated by the claims recovered through our subcontractor relationships, and we recognize the fees that we pay to these subcontractors in our expenses.
For our commercial healthcare business, our business strategy is focused on utilizing our technology-enabled services platform to provide audit, analytical, and in some cases, recovery services for private healthcare payors. We have entered into contracts with several private payors, although these contracts are in the early stage of implementation. Revenues from our

commercial healthcare clients were $1.8 million for the quarter ended September 30, 2017, compared to revenues of $1.3 million that we earned from our commercial healthcare clients in the quarter ended September 30, 2016.
Other
We also derive revenues from the recovery of delinquent state taxes, and federal Treasury and other receivables, specialty administrative customer care functions, default aversion and/or first party call center services for certain clients including financial institutions and the licensing of hosted technology solutions to certain clients. For our hosted technology services, we license our system and integrate our technology into our clients’ operations, for which we are paid a licensing fee. Our revenues for these services include contingency fees, fees based on dedicated headcount to our clients and hosted technology licensing fees.

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 expense includes 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. We expect a significant portion of our expenses to increase as we grow our business. However, we expect certain expenses, including our corporate and general administrative expenses, to grow at a slower rate than our revenues over the long term. As a result, we expect our overall expenses to modestly decline as a percentage of revenues.
Factors Affecting Our Operating Results
Our results of operations are influenced by a number of factors, including costs associated with commencing contract operations, allocation of placement volume, claim recovery volume, contingency fees, regulatory matters, client retentioncontract 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, such as the lengthy protests on the most recent contract procurement from the Department of Education, or delays associated with system implementations, such as the delays experienced with the implementation of our first RAC contract 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.

Allocation of Placement Volume
Our clients have the right to unilaterally set and increase or reduce the volume of defaulted student loans or other receivables that we service at any given time. In addition, many of our recovery contracts for student loans and other receivables are not exclusive, with our clients retaining multiple service providers to service portions of their portfolios. Accordingly, the number of delinquent student loans or other receivables that are placed with us may vary from time to time, which may have a significant effect on the amount and timing of our revenues. We believe the major factors that influence the number of placements we receive from our clients in the student loan market include our performance under our existing contracts and our ability to perform well against competitors for a particular client. To the extent that we perform well under our existing contracts and differentiate our services from those of our competitors, we may receive a relatively greater number of placements under these existing contracts and may improve our ability to obtain future contracts from these clients and other potential clients. Further, delays in placement volume, as well as acceleration of placement volume, from any of our large clients may cause our revenues and operating results to vary from quarter to quarter.
Typically, we are ableattempt to anticipate with reasonable accuracy the timing and volume of placements of defaulted student loans and other receivables based on historical patterns and regular communication with our clients. Occasionally, however, placements are delayed due to factors outside of our control.
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. For example, the fees that we earned under our contractual arrangement with the Department of Education were subject to unilateral change by the Department of Education as a result of the Department of Education’s decision to have its recovery vendors promote IBR to defaulted student loans. In connection with the implementation of the IBR program, the Department of Education reduced the contingency fee rate that we receive for rehabilitating student loans by approximately 13% effective March 1, 2013.

Further, the Department of Education changed its fee structure to a fixed recovery fee of $1,710 for each rehabilitated loan, effective as of July 1, 2015. The fixed recovery fee is payable for each loan that is rehabilitated and replaced a recovery fee structure that historically had been based on a percentage of the balance of the rehabilitated loan.



Regulatory Matters
Each of the markets which we serve is highly regulated. Accordingly, changes in regulations that affect the types of loans, receivables and claims that we are able to service or the manner in which any such delinquent loans, receivables and claims can be recovered will affect our revenues and results of operations. For example, the passage of the Student Aid and Fiscal Responsibility Act, or SAFRA, in 2010 had the effect of transferring the origination of all government-supported student loans to the Department of Education, thereby ending all student loan originations guaranteed by the GAs. Loans guaranteed by the GAs represented approximately 70% of government-supported student loans originated in 2009. While the GAs will continue to service existing outstanding student loans for years to come, this legislation means that there will over time shift the portfoliobe no further growth in student loans held by GAs. Further, we are seeing a larger amount of defaulted student loans toward the Department of Educationin our GA clients' portfolios that have been previously rehabilitated and by regulation are not subject to rehabilitation for which we are no longer a contractor (subject to resolution of our recently upheld protest).second time. In addition, our entry into the healthcare market was facilitated by 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 student loan industry or the recovery of defaulted student loans or the Medicare program generally or the audit and recovery of Medicare claims could have a significant impact on our revenues and results of operations.
Client RetentionContract Cancellation
Our revenues from the student loan market depend on our ability to maintainSubstantially all of our contracts with some of the largest providers of student loans. In 2016 and 2015, three providers of student loans each accounted for more than 10% ofentitle our revenues and they collectively accounted for 55% of our total revenues in each year. Our contract with the Department of Education, which generated 16% of our revenues in 2016, expired in April 2015 and we were not selected as a vendor on the new contract announced in December 2016. We, along with 19 other contractors who did not receive contract awards from the Department of Education, filed protests regarding the Department of Education’s award of these contracts. In March 2017, our protest was upheld. The Department of Education requested resubmittal of new contract proposals and is currently undergoing a re-evaluation process with respect to such proposals. The Department of Education recently announced that it has completed its review and assessment for the award of the new contracts. However, we do not know when the award of the new contracts will be made. Further, there may be further appeals and challenges to the contract awards when granted, which could delay the actual start date for the new contracts. If we are not successful in obtaining a new contract as a result of a conclusive award process, the absence of a contract with the Department of Education will have a material adverse effect on our financial condition and results of operations in 2018 and beyond. Our contracts with our other large clients entitle them to unilaterally terminate their contractual relationship with us at any time without penalty. In June 2017, one of our principal customers, Great Lakes Higher Education Guaranty Corporation, notified us that it is terminating our student loan recovery contract. If we lose one or more of our other significant clients, including if one of our significant clients is consolidatedacquired by an entity that does not use our services, 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, our revenues could decline.
The award of our two new RAC contracts in October 2016 has removed the uncertainty related to the retention of our relationship with CMS. However, while audit and recovery activity under the new contracts has commenced, the scope of our permitted audit activity remains uncertain. To date, we have not recognized significant revenues from the newly awarded RAC contracts.
Macroeconomic Factors
Certain macroeconomic factors influence our business and results of operations. These include the increasing volume of student loan originations in the U.S. as a result of increased tuition costs and student enrollment, the default rate of student loan borrowers, the growth in Medicare expenditures or claims made to private healthcare providers resulting from increasingchanges 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 accounting principles 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
The majorityWe derive our revenues primarily from providing recovery services and healthcare audit services. Revenues are recognized when control of our contracts are contingency fee based. We recognize revenues on these contingency fee based contracts when third-party payors remit paymentsservices is transferred to our clients or remit payments to us on behalf of our clients, and, consequently, the contingency is deemed to have been satisfied. Under our RAC contracts with CMS, we recognize revenues when the healthcare provider has paid CMS for a claim or has agreed to an offset against other claims by the provider. Healthcare providers have the right to appeal a claim and may pursue additional level of appeals if the initial appeal is found in favor of CMS. We accrue an estimated liability for appeals at the time revenue is recognized based on our estimate of the amount of revenue probable of being returned to CMS following successful appeal based on historical data and other trends relating to such appeals. In addition, if our estimate of liability for appeals with respect to revenues recognized during a prior period changes, we increase or decrease the estimated liability for appeals in the current period.
This estimated liability for appeals is an offset to revenues on our income statement. Resolution of appeals can take a very long time to resolve and there is a significant backlog in the system for resolving appeals, as over the course of our existing RAC contract, healthcare providers have increased their pursuit of appeals beyond the first and second levels of appeal to the third level of appeal, where cases are heard by administrative law judges, or ALJs. In our experience, decisions at the third level of appeal are the least favorable as ALJs exercise greater discretion and there is less predictability in the ALJ decisions as compared to appeals at the first or second levels. This increase of ALJ appeals and backlog of claims at the third level of appeal is the primary reason our total estimated liability for appeals (consisting of the estimated liability for appeals plus the contra-accounts-receivable estimated allowance for appeals) has remained at a consistent level despite decreasing revenue from CMS. The balance of the estimated liability for appeals remained at $18.8 million as of September 30, 2017 primarily due to the relatively slow pace of the decisions at the ALJ level. In addition to the $18.8 million related to the RAC contract with CMS, the Company has accrued $0.3 million of additional estimated liability for appeals related to other healthcare contracts. The total accrued liability for appeals is therefore $19.1 million at September 30, 2017.
The $19.1 million balance as of September 30, 2017, represents our best estimate of the probable amount of losses related to appeals of claims for which commissions were previously collected. We estimate that it is reasonably possible that we could be required to pay up to an additional approximately $5.4 million as a result of potentially successful appeals. To the extent that required payments by us related to successful appeals exceed the amount accrued, revenues in the applicable period would be reduced by the amount of the excess.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an ASU that amends the FASB ASC by creating a new Topic 606, Revenue from Contracts with Customers. The new guidance will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance on revenue recognition throughout the Industry Topics of the Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration to which the entity expectsexpect to be entitled to in exchange for those goodsservices.
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
Recognition of revenue when, or services. To achieveas, 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 core principle, an entity should applyare substantially the same and have the same pattern of transfer to a five step model for recognizingclient, as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, measuring revenue fromtherefore, not distinct. For contracts with customers.multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct service in the contract. We determine the standalone selling prices by taking into consideration the value of the services being provided, the client type and how similar services are priced in other contracts on a standalone basis.
Our contracts are composed primarily of variable consideration. Fees earned under our 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. In addition,certain contracts we can earn additional performance-based consideration determined based on its performance relative to a client’s other contractors providing similar services.
Revenue from contingency fees earned upon recovery of funds is generally recognized as amounts are invoiced based on either the ‘as-invoiced’ practical expedient when such amounts reflect the value of the services completed to-date, or an entity should disclose sufficient qualitativeoutput measure based on milestones which is used to measure progress of the satisfaction of its performance obligation. We estimate any performance-based variable consideration and quantitative information to enable usersrecognizes such revenue over the performance period only if it is probable that a significant reversal in the amount of financial statements to understandcumulative revenue recognized will not occur. Under certain contracts, consideration can include periodic performance-based bonuses which can be awarded based on our performance under the nature, amount, timingspecific contract. These performance-based awards are considered variable and uncertaintymay be constrained by us until there is not a risk of a material reversal.
For contracts that contain a refund right, these amounts are considered variable consideration, and we estimate our refund liability for each claim and recognizes revenue and cash flows arising from contracts with customers. The new revenue recognition guidance, including subsequent amendments, is effective for annual reporting periods beginning on or after December 15, 2017, including interim periods within that reporting period, with the option to early adopt the standard for annual periods beginning on or after December 15, 2016.net of such estimate.
We are currently ingenerally either apply the process of finalizingas-invoiced practical expedient where our assessmentright 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 impact from the adoptionservices promised in a series of this guidance on our consolidated financial statements. Asdistinct services that form part of this process,a single performance obligation. As such, we are considering our major revenue streamshave elected the optional exemptions related to the as-invoiced practical expedient and evaluating our significant contracts therein for potential changes in the amounts and timingvariable consideration allocation exception whereby the disclosure of revenue recognition under the new guidance. Basedamount of transaction price allocated to the remaining performance obligations is not required. We exercise judgment to estimate the amount of constraint on variable consideration based on the work performed to date, we have determined that the following areas are of primary focus: consideration of termination rightsfacts and resulting impact on the duration of a contract, applicability of treatment as variable consideration for refund rights and certain incentive payments, including the impact of constraints, applicabilitycircumstances of the relevant contract operations and availability of data. Although we believe the estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of variable consideration.

We have applied the as-invoiced practical expedient and the variable consideration allocation exception to allocate purchase consideration tocontracts with performance obligations considered to bethat have an average remaining duration of less than a series,year.


Goodwill
Goodwill represents the excess of purchase price and ability to userelated costs over the ‘right to invoice’ practical expedient for measuring satisfaction of performance obligations within certain contracts. We are also in the process of finalizing our evaluation of our various commission and bonus programs to identify costs that may be subject to potential deferral and amortization as costs to obtain a contract. In addition, we are evaluating the disclosure requirements of the new guidance, subjectfair value assigned to the above determinations on areas most likelynet assets of businesses acquired. Goodwill is reviewed for impairment annually in December, or more frequently if certain indicators are present. We may first assess qualitative factors for indicators of impairment to be impacted by our adoption. We expectdetermine whether it is necessary to have our evaluation, includingperform the selection of an adoption method, completed byquantitative goodwill impairment test.
Per the end of 2017. We will adopt the new revenue recognition guidance in the first quarter of 2018.
Goodwill
We periodically reviewquantitative goodwill test, goodwill is considered impaired if the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether an impairment may exist. GAAP requires that goodwill and certain intangible assets not subject to amortization be assessed annually for impairment using fair value measurement techniques.
We assess goodwill for impairment on an annual basisthe Company, as of November 30 of each year or more frequently if an event occurs or changes in circumstances would more likely than not reduce the fair value of aone reporting unit, belowexceeds its carrying amount. We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we can support the conclusion that it is more likely than not that the fair valuevalue. The amount of a reporting unit is greater than its carrying amount, then we would not need to perform the two-step impairment test. If we cannot support such a conclusion, or we do not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. We performed a qualitative assessment of whether it is more likely than not that the reporting unit fair value is less than its carrying amount as of June 30, 2017, and concluded that based on our decision to wind down the activity of Performant Europe Ltd., the fair value is more likely than not less than its carrying amount. Accordingly, the goodwill balance for the healthcare audit acquisition was $0.9 million, and we recognized a goodwill impairment loss of this amountis measured as of June 30, 2017. Based on our qualitative analysis, there was no need to perform an additional impairment test. We performed a qualitative assessment of whether it is more likely than not that the reporting unit fair value is less than its carrying amount as of September 30, 2017, and concluded that there was no need to perform an impairment test.
Impairments of Depreciable Intangible Assets
The balance of depreciable intangible assets was $5.1 million as of September 30, 2017. We evaluate depreciable intangible assets for impairment whenever events or changes in circumstances indicate thatdifference between the carrying amount of such assets may not be recoverable. Depreciable intangible assets consist of client contractsvalue and related relationships, and are being amortized over their estimated useful life, which is generally 20 years. We evaluate the client contracts intangible at the individual contract level. The recoverability of such assets is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Forreporting unit. Impairment testing is based upon the nine months ended September 30, 2017,best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, our market capitalization, projecting future cash flows and other assumptions, to estimate the fair value of the reporting unit including goodwill. Although we believe the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of impairment.

We recorded an impairment expenseto goodwill of $0.1$19.0 million was recognized to account for the impairment charge in Performant Europe Ltd.as of March 31, 2020. This is mainly due to the Company's decision to wind down this subsidiary,decrease in our stock price and associated market capitalization. There has been included in other operating expenses in the consolidated statements of operations. For the year ended December 31, 2016, an impairment expense of $15.4 million was recognized relatingsignificant negative impact to the Department of Education customer relationshipglobal economy and was presentedthe public securities markets as a separate captionresult of the COVID-19 pandemic. As a result, our goodwill is at elevated risk of additional impairment should there be further decline in the consolidated statements of operations.our stock price and associated market capitalization, which may result in potentially material non-cash charge to our earnings.
Recent Accounting Pronouncements
See "Recent"New Accounting Pronouncements" in Note 1(g) of the Consolidated Financial Statements included in Part I - Item 1 of this report.

Results of Operations
Three Months Ended September 30, 2017March 31, 2020 compared to the Three Months Ended September 30, 2016March 31, 2019
The following table represents our historical operating results for the periods presented: 
Three Months Ended September 30,Three Months Ended March 31,
2017 2016 $ Change % Change2020 2019 $ Change % Change
(in thousands)(in thousands)
Consolidated Statement of Operations Data:






       
Revenues$29,744
 $31,195
 $(1,451) (5)%$45,888
 $34,876
 $11,012
 32 %
Operating expenses:              
Salaries and benefits20,494
 18,710
 1,784
 10 %28,805
 29,116
 311
 1 %
Other operating expenses13,496
 12,311
 1,185
 10 %12,220
 12,953
 733
 6 %
Impairment of goodwill19,000
 —
 (19,000) —
Total operating expenses33,990
 31,021
 2,969
 10 %60,025
 42,069
 (17,956) (43)%
Income (loss) from operations(4,246) 174
 (4,420) (2,540)%
Loss from operations(14,137) (7,193) (6,944) (97)%
Interest expense(2,459) (1,863) 596
 32 %(2,227) (1,136) (1,091) (96)%
Interest income6
 11
 (5) (45)%
Loss before provision for (benefit from) income taxes(6,705) (1,689) 5,016
 297 %(16,358) (8,318) (8,040) (97)%
Provision for (benefit from) income taxes1,146
 (974) 2,120
 218 %(3,874) 171
 4,045
 2,365 %
Net loss$(7,851) $(715) $7,136
 998 %$(12,484) $(8,489) $(3,995) (47)%

Revenues
RevenuesTotal revenues were $29.7$45.9 million for the three months ended September 30, 2017, a decreaseMarch 31, 2020, an increase of approximately 5%32%, compared to revenues of $31.2$34.9 million for the three months ended September 30, 2016.March 31, 2019.
Student lendingHealthcare revenues were $19.8$17.5 millionfor the three months ended September 30, 2017,March 31, 2020, representing a decreasean increase of $4.0$8.5 million, or 17%94%, compared to the three months ended September 30, 2016. The decrease wasMarch 31, 2019. This increase in healthcare revenues is primarily attributable to a result of$5.2 million increase in revenues earned under our CMS RAC and MSP CRC contracts, and a $3.3 million increase in revenues attributable to our commercial healthcare clients during the reduction of revenues from the Department of Education as we have not received new placements of student loans from the Department of Education since our contact expired in April 2015.quarter.
HealthcareRecovery revenues were $2.6$24.3 millionfor the three months ended September 30, 2017,March 31, 2020, representing a decreasean increase of $0.4$2.9 million, or 13%14%, compared to the three months ended September 30, 2016. ThisMarch 31, 2019. The increase was primarily the result of higher revenues earned under our IRS contract.
Customer Care / Outsourced Services revenues were $4.1 million for the three months ended March 31, 2020, representing a slight decrease was due primarilyof $0.4 million, or 9%, compared to the wind down of our first RAC contract and that we have not yet recognized significant revenues under our new RAC contracts.three months ended March 31, 2019.
Salaries and Benefits
Salaries and benefits expense was $20.5$28.8 million for the three months ended September 30, 2017, an increaseMarch 31, 2020, a decrease of $1.8$0.3 million, or 10%1%, compared to salaries and benefits expense of $18.7$29.1 million for the three months ended September 30, 2016.March 31, 2019. The increasedecrease in salaries and benefits expense was primarily due to increaseddriven by lower headcount.
Other Operating Expenses
Other operating expenses were $13.5$12.2 million for the three months ended September 30, 2017, an increase of $1.2 million, or 10%,March 31, 2020, compared to other operating expenses of $12.3$13.0 million for the three months ended September 30, 2016.March 31, 2019. The increasedecrease in other operating expenses was primarily due to higher third party collection fees.lower third-party subcontracting expenses.
Income (loss) from OperationsImpairment of Goodwill
Loss from operationsImpairment of goodwill was $4.2$19.0 million for the three months ended September 30, 2017,March 31, 2020, compared to incomenone for the three months ended March 31, 2019. The impairment was due to a non-cash charge of $19.0 million recognized related to goodwill, due to the decrease in our stock price and associated market capitalization.
Loss from Operations
As a result of the factors described above, loss from operations was $14.1 million for the three months ended March 31, 2020, compared to loss from operations of $7.2 million for the three months ended March 31, 2019, representing an increased loss of $6.9 million.
Interest Expense
Interest expense was $2.2 million for the three months ended March 31, 2020, compared to $1.1 million for the three months ended March 31, 2019. Interest expense increased by approximately $1.1 million or 96% for the three months ended March 31, 2020, due to a higher outstanding loan balance as a result of additional term loan borrowings, and a higher interest rate in 2020 compared to 2019.
Income Taxes
We recognized an income tax benefit of $3.9 million for the three months ended March 31, 2020, compared to an income tax expense of $0.2 million for the three months ended September 30, 2016, representing a decrease of $4.4 million or 2,540%. The decrease was primarily the result of lower revenues and increased salaries and benefits and other operating expenses.

Interest Expense
Interest expense was $2.5 millionMarch 31, 2019. Our effective income tax rate changed to 24% for the three months ended September 30, 2017, compared to $1.9 million for the three months ended September 30, 2016. Interest expense increased by approximately $0.6 million or 32% due to a $1.0 million write-off of our unamortized debt issuance costs under our Prior Credit Agreement.
Income Taxes
We recognized an income tax expense of $1.1 million for the three months ended September 30, 2017, compared to an income tax benefit of $1.0 million for the three months ended September 30, 2016. Our effective income tax rate decreased to a negative rate of (17.1)March 31, 2020, from (2)% for the three months ended September 30, 2017, from 57.7% for the three months ended September 30, 2016.March 31, 2019. The decreasechange in the effective tax rate is primarily duedriven by the net operating loss (“NOL”) carryback benefit recorded as a result of the newly enacted provisions of the CARES Act for the three months ended March 31, 2020,

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. This modification significantly impacts the Company by allowing for the carryback of 2018 and 2019 NOL to tax years 2013 and 2014, respectively. These NOL carryforwards had been represented in the December 31, 2019 financial statements by deferred tax assets (“DTA”) for which a valuation allowance had been recorded as the Company did not expect that these DTA would be more significant losses from operations generatedlikely than not realizable in future periods. As a result of carrying back the NOL, the Company is recognizing an income tax benefit of $3.9 million associated with these previously unrecognized DTA in the three months ended September 30, 2017 for which no tax benefit is recognized compared to the income tax benefit recorded on the loss from operations for the three months ended September 30, 2016.March 31, 2020.

Net Loss
As a result of the factors described above, net loss was $7.9$12.5 million for the three months ended September 30, 2017,March 31, 2020, which represented an increase of $7.1$4.0 million, or 998%47% compared to net loss of $0.7$8.5 million for the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016
The following table represents our historical operating results for the periods presented:
 Nine Months Ended September 30,
 2017 2016 $ Change % Change
 (in thousands)
Consolidated Statement of Operations Data:       
Revenues$98,760
 $107,548
 $(8,788) (8)%
Operating expenses:       
       Salaries and benefits61,640
 60,107
 1,533
 3 %
       Other operating expenses43,019
 40,401
 2,618
 6 %
Total operating expenses104,659
 100,508
 4,151
 4 %
Income (loss) from operations(5,899) 7,040
 (12,939) (184)%
       Interest expense(5,683) (6,136) (453) (7)%
Income (loss) before provision for (benefit from) income taxes(11,582) 904
 (12,486) (1,381)%
       Provision for income taxes1,668
 62
 1,606
 2,590 %
Net income (loss)$(13,250) $842
 $(14,092) (1,674)%
Revenues
Revenues were $98.8 million for the nine months ended September 30, 2017, a decrease of approximately 8%, compared to revenues of $107.5 million for the nine months ended September 30, 2016.
Student lending revenues were $71.8 million for the nine months ended September 30, 2017, representing a decrease of $10.4 million, or 13%, compared to the nine months ended September 30, 2016. The decrease was primarily a result of the reduction of revenues from the Department of Education due to the lack of placements of new student loans from the Department of Education since our contract expired in April 2015, which was partially offset by an increase in the number of borrowers that are participating in the rehabilitation programs with our Guaranty Agency clients.
Healthcare revenues were $6.4 million for the nine months ended September 30, 2017, representing a decrease of $2.7 million, or 30%, compared to the nine months ended September 30, 2016. This decrease was due primarily to the CMS RACMarch 31, 2019.

contract transition, partially offset by an approximately $1.5 million increase in revenues from commercial healthcare customers.
Salaries and Benefits
Salaries and benefits expense was $61.6 million for the nine months ended September 30, 2017, an increase of $1.5 million, or 3%, compared to salaries and benefits expense of $60.1 million for the nine months ended September 30, 2016. This increase in salaries and benefits expense was primarily due to increased headcount.
Other Operating Expenses
Other operating expenses were $43.0 million for the nine months ended September 30, 2017, an increase of $2.6 million, or 6%, compared to other operating expenses of $40.4 million for the nine months ended September 30, 2016. The increase in other operating expenses was primarily due to higher outside services consulting expenses and third party collection fees, which was offset by lower amortization related to a $15.4 million Department of Education customer relationship intangible impairment charge in 2016.
Income (Loss) from Operations
Loss from operations was $5.9 million for the nine months ended September 30, 2017, compared to income from operations of $7.0 million for the nine months ended September 30, 2016, representing a decrease of $12.9 million which was primarily due to the reduction in revenues as discussed above.
Interest Expense
Interest expense was $5.7 million for the nine months ended September 30, 2017, compared to $6.1 million for the nine months ended September 30, 2016. Interest expense decreased $0.5 million due to repayments of principal under our previous credit agreement, resulting in a lower outstanding balance.
Income Taxes
We recognized an income tax expense of $1.7 million for the nine months ended September 30, 2017, compared to an income tax expense of $0.1 million for the nine months ended September 30, 2016. Our effective income tax decreased to a negative rate of (14.4)% for the nine months ended September 30, 2017, from 6.9% for the nine months ended September 30, 2016. The decrease in the effective tax rate is primarily due to more significant losses from operations generated in the nine months ended September 30, 2017 for which no tax benefit is recognized compared to the income tax expense recorded on income from operations for the nine months ended September 30, 2016.
Net Income (Loss)
As a result of the factors described above, net loss was $13.3 million for the nine months ended September 30, 2017, which represented a decrease of $14.1 million, or 1,674% compared to net income of $0.8 million for the nine months ended September 30, 2016.
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-GAAPnon-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-GAAPnon-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:
  Three Months Ended 
 March 31,
  2020 2019
  (in thousands)
Adjusted EBITDA:    
Net loss $(12,484) $(8,489)
Provision for (benefit from) income taxes (3,874) 171
Interest expense (1)
 2,227
 1,136
Interest income (6) (11)
Depreciation and amortization 1,540
 2,312
Impairment of goodwill (5)
 19,000
 —
Stock-based compensation 691
 499
Adjusted EBITDA $7,094
 $(4,382)
     
     
  Three Months Ended 
 March 31,
  2020 2019
  (in thousands)
Adjusted Net Income (Loss):    
Net loss $(12,484) $(8,489)
Stock-based compensation 691
 499
Amortization of intangibles (2)
 59
 59
Impairment of goodwill (5)
 19,000
 —
Deferred financing amortization costs (3)
 382
 232
Tax adjustments (4)
 (5,536) (217)
Adjusted Net Income (Loss) $2,112
 $(7,916)

  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
  2017 2016 2017 2016
  (in thousands) (in thousands)
Adjusted EBITDA:        
Net income (loss) $(7,851) $(715) $(13,250) $842
Provision for (benefit from) income taxes 1,146
 (974) 1,668
 62
Interest expense 2,459
 1,863
 5,683
 6,136
Transaction expenses (1)
 132
 —
 576
 —
Restructuring and other expenses (5)
 —
 26
 —
 309
Depreciation and amortization 2,713
 3,292
 8,381
 10,098
Impairment of goodwill and customer relationship (3)
 —
 —
 1,081
 —
Stock-based compensation 737
 1,206
 3,027
 3,546
Adjusted EBITDA $(664) $4,698
 $7,166
 $20,993
         
  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
  2017 2016 2017 2016
  (in thousands) (in thousands)
Adjusted Net Income (Loss):        
Net income (loss) $(7,851) $(715) $(13,250) $842
Transaction expenses (1)
 132
 —
 576
 —
Stock-based compensation 737
 1,206
 3,027
 3,546
Amortization of intangibles (2)
 203
 931
 691
 2,800
Impairment of goodwill and customer relationship (3)
 —
 —
 1,081
 —
Deferred financing amortization costs (4)
 1,343
 324
 2,039
 1,342
Restructuring and other expenses (5)
 —
 26
 —
 309
Tax adjustments (6)
 (966) (995) (2,966) (3,199)
Adjusted Net Income (Loss) $(6,402) $777
 $(8,802) $5,640
  Three Months Ended 
 March 31,
  2020 2019
Adjusted Net Income (Loss) Per Diluted Share:    
Net loss $(12,484) $(8,489)
Plus: Adjustment items per reconciliation of adjusted net (loss) income 14,596
 573
Adjusted net income (loss) 2,112
 (7,916)
Adjusted Loss Per Diluted Share $0.04
 $(0.15)
Diluted avg shares outstanding (6)
 54,166
 53,059

 
(1)Represents costsinterest expense and expensesamortization of issuance costs related to the refinancing of our existing indebtedness.
(2)Represents amortization of capitalized expensesintangibles related to the acquisition of Performant by an affiliate of Parthenon Capital Partners in 2004, and also an acquisition in the first quarter of 2012 to enhance our analytics capabilities.2004.
(3)Represents goodwill and impairment charges related to our Performant Europe Ltd. subsidiary.
(4)Represents amortization of capitalized financing costs related to our New Credit Agreement, and the write-off of deferred financing costs related to our Prior Credit Agreement in August 2017.Agreement.
(5)Represents restructuring costs and severance and termination expenses incurred in connection with termination of employees and consultants.
(6)(4)Represents tax adjustments assuming a marginal tax rate of 40%.27.5% at full profitability.
(5)Represents a noncash goodwill impairment charge in 2020 mainly due to the decrease of our market capitalization.

(6)While Net income (loss) for the three months ended March 31, 2020 reflects a net loss of ($12,484), the computation of adjusted net income results in adjusted net income of $2,112. Therefore, the calculation of the adjusted earnings per diluted share for the three months ended March 31, 2020 includes dilutive common share equivalents of 223 added to the basic weighted average shares of 53,943.
Liquidity and Capital Resources
Our primary sourcesources of liquidity is cash on hand andare cash flows from operations.operations, and cash and cash equivalents on hand. Cash and cash equivalents, totaled $23.2 million as of September 30, 2017,which includes restricted cash and consists primarily of cash on deposit with banks. Duebanks, totaled $10.2 million as of March 31, 2020, compared to our operating cash flows and our existing cash and cash equivalents and our ability to restructure both our variable and fixed expenses, we believe that we have the ability to meet our working capital and capital expenditure needs for the foreseeable future.

$6.0 million as of March 31, 2019. The $9.8$5.2 million decreaseincrease in the balance of our cash and cash equivalents from December 31, 2016,2019 to March 31, 2020, was primarily due to principal repayments$7.2 million provided by operating activities, offset by $1.1 million used in investing activities and $0.9 million repayment of $55.5 millionnotes payable.
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 existing lending facility. Following our $5 million Additional Term Loan draw on September 25, 2019, we no longer have any remaining borrowing capacity under our existing 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 recent COVID-19 pandemic has led certain of our customers to delay the recovery and audit services that we provide as a result of the economic hardships that may be faced by a large portion of the population, which may have a material negative impact on our cash flow from operations. For example, pursuant to the terms of the CARES Act enacted in March 2020, the U.S. Federal government suspended payments, ceased accruing interest, and stopped involuntary collections of payments (e.g., wage garnishments) for student loans owned by the Department of Education through September 30, 2020. Further, a prolonged period of generating lower cash flows from operations as a result of the COVID-19 pandemic could adversely affect our financial condition and the achievement of our strategic objectives. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position and results of operations.
While we believe our financial projections are attainable, considering the impact of COVID-19, there can be no assurances that our financial results will be recognized in a time frame necessary to meet our ongoing cash requirements. If our cash flows and capital resources are insufficient to fund our planned business operations or to fund our other liquidity needs, we may need to reduce or delay capital expenditures, alter our business plans, curtail the services we provide to our current or future clients, execute additional reductions in workforce (both through furloughs and layoffs), sell assets or operations, seek additional capital, restructure or refinance our indebtedness, any of which could have an adverse effect on our financial condition and results of operations.
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. 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 offset by new debt of $44.0 million.obligations and we may not be able to continue our operations as planned.
Cash flows from operating activities
Cash provided by operating activities was $0.8$7.2 million for the ninethree months ended September 30, 2017, and included an increaseMarch 31, 2020, compared to cash used in accrued salaries and benefitsoperating activities of $1.3 million. Cash$0.4 million for the same period in 2019. The cash provided by operating activities inas of March 31, 2020, is primarily a result of our income from operations of $4.9 million, excluding the nine months ended September 30, 2016 was $20.5noncash impairment to goodwill of $19.0 million.



Cash flows from investing activities
Cash used in investing activities of $5.4$1.1 million for the ninethree months ended September 30, 2017March 31, 2020 was mainly for capital expenditures related to information technology, data storage, hardware, telecommunication systems and security enhancements to our information technology systems. Cash used in investing activities for similar purposes in the ninethree months ended September 30, 2016March 31, 2019 was $5.5$1.5 million.
Cash flows from financing activities
Cash used in financing activities of $5.2$0.9 million for the ninethree months ended September 30, 2017March 31, 2020 was primarily attributable to repayments of principal of $55.5 million on long-term debt under our Prior Credit Agreement, which was offset by a $44.0 million increase in borrowings from notes payable under our New Credit Agreement and $7.5$0.9 million in repayments of principal from restricted cash.long-term debt during the same period. Cash used in financing activities in the ninethree months ended September 30, 2016March 31, 2019 was $37.9 million.$0.1 million primarily attributable to taxes paid related to net share settlement of stock awards.
Restricted Cash
On August 3, 2017, $6.0 millionAs of March 31, 2020, restricted cash included in current assets on our consolidated balance sheet was paid to the administrative agent for the benefit of the lenders under our Prior Credit Agreement. As of September 30, 2017, we had $0.0 million in restricted cash.
Estimated liability for appeals and net payable to client
The September 30, 2017 balances of $19.1 million and $12.7 million for the estimated liability for appeals and the net payable to client, respectively, represent obligations that we expect to pay in the near term, although it is difficult to predict the precise timing of the associated cash outflows as they are dependent on the processing and resolution of audit appeals.$1.6 million.
Long-term Debt
On March 19, 2012, we, through our wholly owned subsidiary, entered into a $147.5 million credit agreement, as amended and restated, with Madison Capital Funding LLC as administrative agent, ING Capital LLC as syndication agent, and other lenders party thereto (as amended, the "Prior Credit Agreement"). The senior credit facility consists of (i) a $57.0 million Term A loan that matured and was fully paid in March 2017, (ii) a $79.5 million Term B loan that matures in June 2018, and (iii) a $11.0 million revolving credit facility that expired and was fully paid in March 2017. On June 28, 2012, we amended the Credit Agreement to increase the amount of our borrowings under our Term B loan by $19.5 million.
On November 4, 2014, February 19, 2016, July 26, 2016, October 27, 2016, and March 22, 2017, the Prior Credit Agreement was further amended to, among other things, modify a number of existing covenants and add new covenants requiring the Company to maintain a minimum cash balance, comply with an interest coverage ratio and achieve minimum EBITDA levels. On May 3, 2017, we further amended the credit agreement (the "Eighth Amendment") to extend the maturity date of the Term B loan to June 19, 2018. As a result of this extension, regularly scheduled quarterly amortization payments of $247,500 were also extended through March 31, 2018, with the remaining outstanding principal amount being due on the June 19, 2018 maturity date. Interest on the Term B loan charged under the credit agreement was also increased by 3.00% per annum, however the amount of such increased interest will be payable in kind. Pursuant to the Eighth Amendment, the quarterly and annual financial reporting covenants were also modified to require that the Company’s financial statements not contain a qualification, if required by GAAP, with respect to our ability to continue as a going concern.
On August 7, 2017, we, through our wholly-owned subsidiary Performant Business Services, Inc. (the “Borrower”"Borrower"), entered into a new credit agreement (as amended, the “Credit Agreement”) with ECMC Group, Inc. (the “New Credit Agreement”("ECMC"). The NewBefore the amendment described below, the Credit Agreement providesprovided for a term loan facility in the initial amount of $44 million (the “Initial Term Loan”) and for up to $15 million of additional term loans (“Additional Term Loans”; and together with the Initial Term Loan, the “Loans”) which original Additional Term

Loans maywere initially able to be drawn until the second anniversary of the funding of the Initial Term Loans, subject to the satisfaction of customary conditions. On August 11, 2017, the Initial Term Loan was advanced (the “Closing Date”) and the proceeds were applied to repay all outstanding amounts under the Prior Credit Agreement.  On September 29, 2017,31, 2018, we entered into Amendment No. 12 to the New Credit Agreement to among other things (i) extend the initial interest payment duematurity date of the Initial Term Loan and any Additional Term Loans by one year to DecemberAugust 2021, (ii) expand the Additional Term Loans commitment from $15 million to $25 million, (iii) extend the period during which the Additional Term Loans can be borrowed by one year to August 2020, and (iv) relieve the Borrower from its obligation to comply with the financial covenants in the Credit Agreement during the six fiscal quarters following the Premiere acquisition.
On March 21, 2019, we entered into Amendment No. 3 to the Credit Agreement to among other things relieve the Borrower from its obligation to comply with the financial covenants in the Credit Agreement until the quarter ending June 30, 2020. As of September 30, 2019, the Company has borrowed all of the $25 million available as Additional Term Loans.
As of March 31, 2017. Approximately $22020, $63.5 million of contingent reimbursement obligations with respect to outstanding but undrawn letters of credit remainwas outstanding under the Prior Credit Agreement, however, those contingent reimbursement obligations will remain cash collateralized with the administrative agent.Agreement.
The Loans will mature on the third anniversary of the Closing Date, however we willWe have the option to extend the maturity of the Loans for two additional one yearone-year periods, subject to the satisfaction of customary conditions. The Loans will bear interest at the one-month LIBOR rate (subject to a 1% per annum floor) plus a margin which may vary from 5.5% per annum to 10.0% per annum based on our total debt to EBITDA ratio. The Initial Term Loans will initially bearOur annual interest rate at LIBOR plus 7.0% per annum.March 31, 2020 was 11.0%, and 11.8% at December 31, 2019. We will beare required to pay 5% of the original principal balance of the Loans annually in quarterly installments and to offer to make mandatory prepayments of the Loans with a percentage of our excess cash flow which may vary between 75% and 0% depending on our total debt to EBITDA ratio.  In addition to mandatory prepayments for excess cash flow, we will also be required to offer to prepay the Loans withratio and from the net cash proceeds of certain asset dispositions and with the issuance of debt not otherwise permitted under the New Credit Agreement.  ExceptAgreement, in connection with a change of control andeach case, subject to the payment of a 1% premium, we will not be permittedlender's right to voluntarily prepay the Loans until after the first anniversary of the Closing Date.  We will be permitteddecline to prepay the Loans during the second year after the Closing Date if accompanied by a prepayment premium of 1%.  Thereafter, we will be permitted to prepay the Loans without any prepayment premium.receive such payments.
The New Credit Agreement contains certain restrictive financial covenants which becameare not effective onuntil the Closing Date. Such covenants,quarter ending June 30, 2020, at which point, we will require, among other things, that we meetbe required to (1) achieve a minimum fixed charge coverage ratio of 0.51.0 to 1.0 through December 31, 2019, 1.0 to 1.0 through June 30, 2020, (or until December 31, 2020 if the maturity date of the Loans is extended until the fourth anniversary of the Closing Date), 1.25 to 1.0 through June 30, 2021, if the maturity date of the Loans is extended until the fourth anniversary of the Closing Date and 1.25 to 1.0 through June 30, 2022 if the maturity date of the Loans is extended until the fifth anniversary of the Closing Date. In addition, we will be required toDate and (2) maintain a maximum total debt to EBITDA ratio of 6.00 to 1.00. The New Credit Agreement also contains covenants that will restrict ourthe Company and ourits subsidiaries’ ability to incur certain types or amounts of indebtedness, incur liens on certain assets, make material changes in corporate structure or the nature of its business, dispose of material assets, engage in a change in control transaction, make certain foreign investments, enter into certain restrictive agreements, or engage in certain transactions with affiliates. The Credit Agreement also contains various customary events of default, including with respect to change of control of the Company or its ownership of the Borrower.
The obligations under the New Credit Agreement are secured by substantially all of our United States domestic subsidiaries’ assets and are guaranteed by the Company and its United States domestic subsidiaries, other than the Borrower.
As a result of our entry into our New Credit Agreement, and the repayment of all amounts owed under the Prior Credit Agreement, we wrote off debt issuance costs related to the Prior Credit Agreement of approximately $1.0 million in August 2017.
In consideration for, and concurrently with, the extension of the Initial Term Loan in accordance with the terms of the New Credit Agreement, we issued a warrant to the lender to purchase up to an aggregate of 3,863,326 shares of the Company’sour common stock (representing approximately up to 7.5% of our diluted common stock as calculated using the “treasury stock” method as defined under U.S. GAAP for the most recent fiscal quarter)quarter, with an exercise price of $1.92 per share. share (the "Exercise Price")).
Upon our election to borrow anyborrowing of the Additional Term Loans, we will bewere required to issue additional warrants at the same exercise priceExercise Price to purchase up to an aggregate of 77,267 additional shares of common stock (which represents approximately 0.15% of our diluted common stock calculated using the “treasury stock” method as defined under U.S. GAAP for the most recent fiscal quarter)quarter ended June 30, 2017) for each $1,000,000$1.0 million of such Additional Term Loans.
The New Credit Agreement also requires us Similarly, upon our election to meet certain financial covenants, including maintaining a total debtextend the maturity of the Loans for additional one year periods, we will be required to EBITDA ratio and a fixed charge coverage ratio, as such terms are defined in our credit agreement. These financial covenants are testedissue additional warrants at the endsame Exercise Price to purchase up to an aggregate of each year,515,110 additional shares of common stock for the first year’s extension, and to purchase up to an aggregate of 772,665 additional shares of common stock for the second year’s extension (which represent approximately 1.0% and 1.5% of our diluted common stock for the first and second years, respectively, calculated using the “treasury stock” method as defined under U.S. GAAP for the fiscal quarter or month, as applicable. The table below further describes these financial covenants, as well as our current status under these covenants as of Septemberended June 30, 2017.
Financial Covenant
Covenant
Requirement
Actual Ratio at
September 30, 2017
Total debt to EBITDA ratio (maximum)6.00 to 1.003.39
Fixed charge coverage ratio (minimum)0.5 to 1.00.94

2017).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold or issue financial instruments for trading purposes. We conduct all of our business in U.S. currency and therefore do not have any material direct foreign currency risk. We do have exposure to changes in interest rates with respect to the borrowings under our senior secured credit facility, which bear interest at a variable rate based on LIBOR. For example, if the interest rate on our borrowings increased 100 basis points (1%) from the credit facility floor of 1.0%, our annual interest expense would increase by approximately $0.4$0.6 million.
While we currently hold our excess cash in an operating account, in the future we may invest all or a portion of our excess cash in short-term investments, including money market accounts, where returns may reflect current interest rates. As a result, market interest rate changes impact our interest expense and interest income. This impact will depend on variables such as the magnitude of interest rate changes and the level of our borrowings under our credit facility or excess cash balances.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and the Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management, with the participation of our Chief Executive Officer and our Chief Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, as of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were functioning effectively at the reasonable assurance level as of September 30, 2017.March 31, 2020.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the quarter ended September 30, 2017,March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings that arise from our normal business operations. These actions generally derive from our student loan recovery services, and generally assert claims for violations of the Fair Debt Collection Practices Act or similar federal and state consumer credit laws. While litigation is inherently unpredictable, we believe that none of these legal proceedings, individually or collectively, will have a material adverse effect on our financial condition or our results of operations.
ITEM 1A. RISK FACTORS
Our business, financial condition, results of operations and liquidity are subject to various risks and uncertainties, including those described below, and as a result, the trading price of our common stock could decline.
Risks Related to Our Business
The novel coronavirus (COVID-19) pandemic has had, and will likely continue to have, a material adverse impact on our business, results of operations and financial condition, as well as on the operations and financial performance of many of our customers. We are unable to predict the extent to which the COVID-19 pandemic and related impacts will continue to adversely impact our business, results of operations and financial condition.

Our business and the businesses of our customers have been materially and adversely affected by the impact of the COVID-19 pandemic that has caused, and is expected to continue to cause, the global slowdown in economic activity. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental and business actions that have been and continue to be taken in response to the pandemic; the impact of the COVID-19 pandemic and actions taken in response on global and regional economies and economic activity; the availability of federal, state or local funding programs; general economic uncertainty and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides.
Given the economic hardships that may be faced by a large portion of the population as a result of the COVID-19 pandemic, certain of our customers have chosen to delay the recovery and audit services that we provide, and additional customers may choose to similarly delay the audit and recovery services that we provide, either of which could have a material negative impact on our revenues and results of operations. For example, pursuant to the terms of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted in March 2020, the U.S. federal government suspended payments, ceased accruing interest, and stopped involuntary collections of payments (e.g., wage garnishments) for student loans owned by the Department of Education through September 30, 2020. To date, we have furloughed over 500 employees in our recovery business in response to the suspension of certain of our customer contracts.

Further, a prolonged period of generating lower cash flows from operations as a result of the COVID-19 pandemic could adversely affect our financial condition and the achievement of our strategic objectives. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position and results of operations. While we believe our financial projections are attainable, there can be no assurances that our financial results will be recognized in a timeframe necessary to meet our ongoing cash requirements.

In addition, a large portion of our employees continue to be subject to voluntary or mandated shelter-in-place or other quarantine orders, and the employees of our customers may also be subject to similar stay-at-home orders, either of which may result in the complete or partial closure of one or more of our recovery call centers or other disruptions in our ongoing business operations, which would harm our business and results of operations. If the impact of the COVID-19 pandemic continues for an extended period, it will continue to materially adversely impact our revenues and financial condition.


We may not have sufficient cash flows from operations or availability of funds under our lending arrangements to fund our ongoing operations and our other liquidity needs, which could adversely affect our business and financial condition.

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 existing lending facility. Following our $5 million Additional Term Loan draw on September 25, 2019, we no longer have any remaining borrowing capacity under our existing Credit Agreement. As a result of no further borrowing capacity under our Credit Agreement, we cannot make assurances that we will 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. The recent COVID-19 pandemic has led certain of our customers to delay the recovery and audit services that we provide as a result of the economic hardships that may be faced by a large portion of the population, which may have a material negative impact on our cash flow from operations. If 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. While we believe our financial projections are attainable, there can be no assurances that our financial results will be recognized in a timeframe necessary to meet our ongoing cash requirements. If our cash flows and capital resources are insufficient to fund our planned business operations or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, alter our business plans, curtail the services we provide to our current or future clients, sell assets or operations, seek additional capital or restructure or refinance our indebtedness, any of which could have an adverse effect on our financial condition and results of operations.

Our indebtedness could adversely affect our business and financial condition and reduce the funds available to us for other purposes, and our failure to comply with the covenants contained in our Credit Agreement could result in an event of default that could adversely affect our results of operations.

Our ability to make scheduled payments under our Credit Agreement 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, such as the recent global economic downturn as the result of the COVID-19 pandemic. We cannot make assurances that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness and to fund our other liquidity needs. If our cash flows and capital resources are insufficient to fund our debt service obligations and allow us to maintain compliance with the covenants under our Credit Agreement or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, alter our business plans, curtail the services we provide to our current or future clients, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot ensure that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our Credit Agreement with ECMC. If we cannot make scheduled payments on our debt or remain in compliance with our covenants, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable, and foreclose against the assets securing our borrowings and we could be forced into bankruptcy or liquidation.

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, and restrictive covenants that 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. Our failure to comply with these 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.


Downturns in domestic or global economic conditions and other macroeconomic factors could harm our business and results of operations.

Various macroeconomic factors influence our business and results of operations. These include the volume of student loan originations in the United States, together with tuition costs and student enrollment rates, the default rate of student loan borrowers, which is impacted by domestic and global economic conditions, rates of unemployment and similar factors, and 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. Changes in the overall economy could lead to a reduction in overall recovery rates by our clients, which in turn could adversely affect our business, financial condition and results of operations. For example, our business and the businesses of our customers have been materially and adversely affected by the impact of the COVID-19 pandemic that has caused, and is expected to continue to cause, the global slowdown in economic activity, which has resulted in a significant negative impact on our financial condition and results of operations.


We typically face a long period to start up a new contract which may cause us to incur expenses before we receive revenues from new client relationships.

If we are successful in obtaining an engagement with a new client or a new contract with an existing client, we typically have a subsequent long implementation period in which the services are planned in detail and we integrate our technology, processes and resources with the client’s operations. If we enter into a contract with a new client, we typically will not receive revenues until implementation is completed and work under the contract actually begins, which can be a substantial period of time. Our clients may also experience delays in obtaining approvals or managing protests from unsuccessful bidders, such as the lengthy protests regarding the most recent contract procurement from the Department of Education, or delays associated with technology or system implementations, such as the delays experienced with the implementation of our first RAC contract with CMS. Because we generally begin to hire new employees to provide services to a new client once a contract is signed and otherwise incur significant upfront implantation expenses, we incur significant expenses associated with new contracts before we receive corresponding revenues under any such new contract. If we are not able to pay the upfront expenses for commencing new contracts out of cash from operations or availability of borrowings under our lending arrangements, we may be required to scale back our operations or alter our business plans to account for cash shortages, either of which could prevent us from earning future revenues under any such new client or contract engagements. Further, if we are not successful in maintaining contractual commitments after the expenses we incur during our typically long implementation cycle, our cash flows and results of operations could be adversely affected.

Revenues generated from our three largest clients represented 55%45% of our revenues in both 2016for the year ended December 31, 2019, and 2015 and61% of our relationships with two of these clients,revenues for the Department of Education and Great Lakes Higher Education Guaranty Corporation, have been terminated.year ended 2018. Any termination of or deterioration in our relationship with any of these or our other significant clients would result in a further decline in our revenues.

We have derived a substantial majorityportion of our revenues from a limited number of clients, including the Department of Education, and several Guaranty Agencies.clients. Revenues from our three largest clients represented 55%45% of our revenues for the year ended December 31, 20162019, and 55%61% of our revenues for the year ended December 31, 2015. The Department of Education was responsible for approximately 16% of our revenues for the year ended December 31, 2016 and the Department of Education announced in December 2016 that we were not selected as one of the contractors under its new student loan recovery contract. While our protest of this contract decision was recently upheld by the GAO, there is no assurance that this decision will result in our ultimately obtaining a contract award. The Department of Education has requested resubmittal of new contract proposals and is currently undergoing a re-evaluation process with respect to such proposals. The Department of Education has recently announced that it has completed its review and assessment for the award of the new contracts. However, we do not know when the awards of the new contracts will be made. During 2016, we had numerous relationships with GAs in the U.S. including Great Lakes Higher Education Guaranty Corporation and Pennsylvania Higher Education Assistance Authority, which were responsible for 24% and 16%, respectively, of our revenues for the year ended December 31, 2016. On June 15, 2017, we received a 30-day termination notice, with respect to our contract with Great Lakes Higher Education Guaranty Corporation. The termination of this contract was based on Great Lakes’ decision to bundle its student loan servicing work, a service that we currently do not provide, along with its student loan recovery work to a single third party vendor.
If we are not ultimately successful in obtaining a new contract award from the Department of Education in the bid re-evaluation process referred to above, our business will become even more dependent on our business relationships with our GA clients and there is no assurance that we will be able to maintain these relationships.2018. All of our contracts with our significant clients are subject to periodic renewal and re-bidding processes and if we lose one of these clients or if the terms of our relationships with any of these clients become less favorable to us, our revenues would decline, which would harm our business, financial condition and results of operations.


Many of our contracts with our clients for the recovery of student loans and other receivables are not exclusive and do not commit our clients to provide specified volumes of business. In addition, the terms of these contracts may be changed unilaterally and on short notice by our clients. As a consequence, there is no assurance that we will be able to maintain our revenues and operating results.

Substantially all of our existing contracts for the recovery of delinquent receivables (including student loans, state taxes, federal taxes and other receivables,Treasury-related receivables), which represented approximately 94%71% of our revenues for the nine monthsyear ended September 30, 2017December 31, 2019, and 92%64% of our revenues infor the year ended December 31, 2016,2018, enable our clients to unilaterally terminate their contractual relationship with us at any time without penalty, potentially leading to loss of business or renegotiation of terms. These include our contracts with Great Lakes Higher Education Guaranty Corporation and Pennsylvania Higher Education Assistance Authority, which were responsible for 24% and 16%, respectively, of our revenues for the year ended December 31, 2016. As stated above, in June 2017, Great Lakes Higher Education Guaranty Corporation gave us notice of the termination of our contract. Further, most of our contracts in these markets allow our clients to unilaterally change the volume of loans and other receivables that are placed with us or the

payment terms at any given time. In addition, most of our contracts are not exclusive, with our clients retaining multiple service providers with whom we must compete for placements of loans or other obligations. Therefore, despite our contractual relationships with our clients, our contracts do not provide assurance that we will generate a minimum amount of revenues or that we will receive a specific volume of placements.
Our revenues and operating results would be negatively affected if our student loan and receivables clients which include our five largest clients in 2016 and four of our five largest clients in 2015, reduce the volume of student loan placements provided to us, modify the terms of service, including the success fees we are able to earn upon recovery of defaulted student loans, or any of these clients establish more favorable relationships with our competitors. For example, effective July 1, 2015, the Department of Education implemented a fixed fee of $1,710 payable for each loan that is rehabilitated in place of a recovery fee that historically had been based on a percentage of the balance of the rehabilitated loan. Further, in December 2016, the Department of Education announced the award of seven new contracts

We may not be able to manage our potential growth effectively and we did not receive one of the new awards. We, along with 19 other contractors who did not receive contract awards from the Department of Education, filed protests with the GAO regarding the Department of Education’s award of these contracts. While our protest of this contract decision was recently upheld by the GAO, there is no assurance that this decision will result in our ultimately obtaining a contract award. If we are not successful in obtaining a contract award from the Department of Education through this process, the volume of student loan placements to us will be significantly harmed, which will result in a material negative impact on our results of operations could be negatively affected.

Our RAC contracts, MSP CRC contract, and cash flowsother commercial healthcare contracts provide the opportunity to restore growth in our business. However, our focus on growth and the expansion of our abilitybusiness may place additional demands on our management, operations and financial resources and will require us to repay or refinance our indebtedness.
The Department of Education, our longstanding and significant client, recently announcedincur additional expenses. We cannot be sure that we would not receive awill be able to manage our performance under any significant new contract for the recovery of student loans. Whilecontracts effectively. In order to successfully perform under any significant new contracts, our expenses will increase to recruit, train and manage additional qualified employees and subcontractors and to expand and enhance our administrative infrastructure and continue to improve our management, financial and information systems and controls. If we were successful with the protest we filed in connection with the original contract decision, if we are not successful in obtaining a contract award from the Department of Education through this process,cannot manage our growth effectively, our expenses may increase, and our results of operations could be negatively affected.

We face significant competition in connection with obtaining, retaining and cash flowsperforming under our client contracts, and an inability to compete effectively in the future could harm our relationships with our clients, which would impact our ability to maintain our revenues and operating results.

We operate in very competitive markets and in providing our services to the student loan and healthcare markets, we face competition from many other companies. Initially, we compete with these companies to be one of typically several firms engaged to provide recovery and audit services to a particular client and, if we are successful in being engaged, we then face continuing competition from the client’s other retained firms based on the client’s benchmarking of the recovery rates of its several vendors. In addition, those recovery and audit vendors who produce the highest recovery or audit rates from a client often will be harmedallocated additional placements and, it will be more difficult for usin some cases, additional success fees. Accordingly, maintaining high levels of recovery and audit performance, and doing so in a cost-effective manner, are important factors in our ability to repay or refinance our indebtedness.
We have had a more than 25 year relationship with the Department of Education as a key contractor in the recovery of student loansmaintain and this relationship has been responsible for a significant portion of our annual revenues.  Our revenues from the Department of Education were $21.9 million in 2016, $37.9 million in 2015 and $53.2 million in 2014, representing 15.5%, 23.8% and 27.2% ofgrow our revenues respectively.  Further, we expectedand net income and the Department of Educationfailure to become an increasingly important client because all federally-supported student loans have been originated by the Department of Education since 2010, meaning that there will be no further growth in student loans held by the GAs. Our most recent contract with the Department of Education expired in April 2015, and we have not received new placements of student loans from the Department of Education since that time pending the award of new contracts.   
In December 2016, the Department of Education announced the award of seven new contracts and we did not receive one of the new awards. We, along with 19 other contractors who did not receive contract awards from the Department of Education, filed protests with the GAO regarding the Department of Education’s award ofachieve these contracts. In March 2017, the GAO upheld this protest. The Department of Education requested resubmittal of new contract proposals and is currently undergoing a re-evaluation process with respect to such proposals. The Department of Education has recently announced that it has completed its review and assessment for the award of the new contracts. However, we do not know when the award of the new contracts will be made. Further, there may be further appeals and challenges to the contract awards when granted, whichobjectives could delay the actual start date for the new contracts. If we are not successful in obtaining a new contract as a result of a conclusive award process, the absence of a contract with the Department of Education will have a material adverse effect onharm our business, financial condition and results of operations in 2018 and beyond.
Over the courseoperations. Some of our first RAC contract, there has been an increasecurrent and potential competitors in the numbermarkets in which we operate may have greater financial, marketing, technological or other resources than we do. The ability of appeals by healthcare providers to the third, or ALJ, level of appeal relating to claims we have audited, and there can be no assurance that our estimated liability for such appeals will be adequate.
Under our RAC contract with CMS, we recognize revenues when the healthcare provider has paid CMS for a claim or has agreed to an offset against other claims by the provider. Healthcare providers have the right to appeal a claim and may pursue additional levels of appeal if the initial appeal is found in favor of CMS. We accrue an estimated liability for appeals at the time revenue is recognized based on our estimate of the amount of revenue probable of being refunded to CMS following successful appeal based on historical data and other trends relating to such appeals. In addition, if our estimate of liability for appeals with respect to revenues recognized during a prior period changes, we increase or decrease the estimated liability reserve in the current period. Over the course of our first RAC contract, healthcare providers have increased their pursuit of appeals beyond the first and second levels of appeal to the third level of appeal, where cases are heard by administrative law judges, or ALJs. In our experience, decisions at the third level of appeal are the least favorable as ALJs exercise greater discretion and there is less predictability in the ALJ decisions as compared to appeals at the first or second levels. The pursuit

of third level appeals by healthcare providers has also resulted in a backlog of claims at that level of appeal. This increase of ALJ appeals and backlog of claims at the third level of appeal is the primary reason our total estimated liability for appeals (consisting of the estimated liability for appeals plus the contra-accounts-receivable estimated allowance for appeals) has grown from a balance of $16.4 million at December 31, 2013 to $18.6 million as of December 31, 2014 to $19.0 million as of both December 31, 2015, and December 31, 2016, and decreased to $18.8 million as of September 30, 2017. Our estimates for our appeal reserve are subject to uncertainties, and accordingly we may underestimate the number of successful appeals or the financial impact of successful appeals in a given year or period. To the extent that the amount of commissions that we are required to return to CMS as a result of successful appeals exceeds our estimated appeals reserve, our revenues in the applicable period will be reduced by the amount of such excess. If we underestimate the amount of commissions that are subject to successful appeal, our revenues in future periods could be adversely affected. In addition, each of the subcontractors we engaged to assist in the recovery services under our RAC contract are similarly obligated to refund fees that they received from claims that are later overturned on appeal. To the extent any of our subcontractors failcompetitors and potential competitors to refund amounts that are due upon an appeal relatingadopt new and effective technology to claims that they were responsiblebetter serve our markets may allow them to gain market strength. Increasing levels of competition in the future may result in lower recovery or audit fees, lower volumes of contracted recovery or audit services or higher costs for we may be obligatedresources. Any inability to pay such amounts directly to CMS, which could have a material impact on our financial position.
Further,compete effectively in August 2014 CMS offered to pay hospitals 68% of what they have billed Medicare to settle a backlog of pending appeals challenging Medicare’s denials of reimbursement for certain types of short‑term care. The implication of these settlement offers related to claims for which recovery auditors have already been paid under the first RAC contracts remain uncertain at this time. Any payments we are required to make to CMS under our first RAC contract in connection with such settlement offers may be significant and in excess of the amount we have reserved for appeals, which could have a material negative impact our financial position and liquidity.
Limitations on the scope of recovery services we can provide under our new RAC contract will have a material impact on our revenues and these limitations may continue under the newly awarded RAC contracts.
Our ability to make claims under the first RAC contract was limited during each of the last three years by restrictions imposed on the scope of our audit activities and by contract transition rules announced by CMS that involved periodic suspension of audit activities. These limitations had a material adverse effect on our revenues and operating results. Our revenues from CMS during the nine months ended September 30, 2017 were $1.0 million compared to $5.2 million during the same period in 2016. While we have been awarded two new RAC contracts, we are uncertain about the scope of permitted audit and if the scope of audit is not increased, our revenues and the value of the new RAC contracts will be constrained. In addition, we expect there will be an approximately four to six-month period from the datemarkets that we are permitted to start performing recovery services until we start to recognize revenues underserve could adversely affect our new RAC contracts. Accordingly, the start datebusiness, financial condition and results of April 2017 for the new RAC contracts means that these new contracts will not have a significant impact on our 2017 revenues, although we will incur related start-up expenses in 2017.operations.


Our ability to derive revenues under our new RAC contracts will depend in part on the number and types of potentially improper claims that we are allowed to pursue by CMS, and our results of operations may be harmed if the scope of claims that we are allowed to pursue and be compensated for is limited.

Under CMS’s Medicare recovery audit program, RAC contractors have not been permitted to seek the recovery of an improper claim unless that particular type of claim has been pre-approved by CMS to ensure compliance with applicable Medicare payment policies, as well as national and local coverage determinations. As work under the first RAC contract progressed, CMS placed increasing restrictions on the scope of audits permitted by RAC contractors and hasthese restrictions have not indicated that those restrictions will bebeen relaxed when work commences under the newly awarded RAC contracts. Accordingly, the long-term growth of the revenues we derive under our two newly awarded RAC contracts will also depend in significant part on the scope of potentially improper claims that we are allowed to pursue. Revenues from our RAC contracts with CMS during the year ended December 31, 2018 were $1.7 million (excluding the effects of the release of the $28.4 million appeal reserve in connection with the termination of our first CMS RAC contract).

In particular, in September 2013, CMS implemented rules that prevent RAC contractors from being able to review and audit (i) whether inpatient care delivered to patients with hospital stays lasting less than two midnights was medically necessary and therefore deserving of the higher reimbursement levels under Medicare Part A or (ii) whether inpatient treatment was medically necessary for admissions spanning more than two midnights. In connection with these restrictions, hospitals cannot bill CMS for outpatient services on hospital stays lasting less than two midnights during such period. Fees associated with recoveries initiated by us based upon improper claims for inpatient reimbursement of these short stays had represented a substantial portion of the revenues we havehad earned under our prior RAC contract. The continued suspension of this type of review activity has had and may continue to have a material adverse effect on our future healthcare revenues and operating results, depending on a variety of factors including, among other things, CMS’s evaluation of provider compliance with the new rules, the rules ultimately adopted by CMS with respect to medical necessity reviews of Medicare reimbursement claims associated

with short stay inpatient admissions and, more generally, the scope of improper claims that CMS allows us to pursue and our ability to successfully identify improper claims within the permitted scope.
We face significant competition in connection with obtaining, retaining and performing under our client contracts, and an inability to compete effectively in the future could harm our relationships with our clients, which would impact our ability to maintain our revenues and operating results.
We operate in very competitive markets. In providing our services to the student loan and other receivables markets, we face competition from many other companies. Initially, we compete with these companies to be one of typically several firms engaged to provide recovery services to a particular client and, if we are successful in being engaged, we then face continuing competition from the client’s other retained firms based on the client’s benchmarking of the recovery rates of its several vendors. In addition, those recovery vendors who produce the highest recovery rates from a client often will be allocated additional placements and in some cases additional success fees. Accordingly, maintaining high levels of recovery performance, and doing so in a cost-effective manner, are important factors in our ability to maintain and grow our revenues and net income and the failure to achieve these objectives could harm our business, financial condition and results of operations. Some of our current and potential competitors in the markets in which we operate may have greater financial, marketing, technological or other resources than we do. The ability of any of our competitors and potential competitors to adopt new and effective technology to better serve our markets may allow them to gain market strength. Increasing levels of competition in the future may result in lower recovery fees, lower volumes of contracted recovery services or higher costs for resources. Any inability to compete effectively in the markets that we serve could adversely affect our business, financial condition and results of operations.
The U.S. federal government accounts for a significant portion of our revenues, and any loss of business from, or change in our relationship with, the U.S. federal government would result in a significant decrease in our revenues and operating results.

We have historically derived and are likely to continue to derive a significant portion of our revenues from the U.S. federal government. For the year ended December 31, 2016,2019 and 2018, revenues under contracts with the U.S. federal government accounted for approximately 24%36% and 35%, respectively, of our total revenues. The continuation and exercise of renewal options on government contracts and any new government contracts are, among other things, contingent upon the availability of adequate funding for the applicable federal government agency. Changes in federal government spending, or other regulatory changes such as the recent decisions by several governmental agencies to suspend collection efforts in the near term as a result of the COVID-19 pandemic, could directly affect our financial performance.

For example, although the Bipartisan Budget ActDepartment of 2013 reducedEducation announced in January 2018 that we were selected as one of two recovery contractors under its award for new student loan recovery contracts, we were notified on May 3, 2018 that the compensation paidDepartment of Education has decided to GAs forcancel the rehabilitation of student loans, effective July 1, 2014. This “revenue enhancement” measure reduced from 18.5% to 16.0%current procurement in its entirety, and as a result terminated our contract award. Protests have been filed by certain of the outstanding loan balance, the amount that GAs can charge borrowers when a rehabilitated loan is sold by the GA and eliminated entirely the GAs retention of 18.5%unsuccessful bidders of the outstanding loan balance as a fee for rehabilitation services. The reduction in compensationprocurement of the GAs receive resulted in a decrease of approximately 25.0% in the contingency fee percentage that we receivenew contracts from the GAs for assisting inDepartment of Education, and at this time, we cannot speculate on the rehabilitationoutcome of defaulted student loans.any such protest or when work will begin under our new contract award. The loss of business from the U.S. federal government, or significant policy changes or financial pressures within the agencies of the U.S. federal government that we serve would result in a significant decrease in our revenues, which would adversely affect our business, financial condition and results of operations.


Future legislative or regulatory changes affecting the markets in which we operate could impair our business and operations.
The two
Two of the principal markets in which we provide our recovery and audit services, government-supported student loans and the Medicare program, are a subject of significant legislative and regulatory focus and we cannot anticipate how future changes in government policy may affect our business and operations. For example, SAFRAStudent Aid and Fiscal Responsibility Act, (SAFRA) significantly changed the structure of the government-supported student loan market by assigning responsibility for all new government-supported student loan originations to the Department of Education, rather than originations by private institutions and backed by one of 30the remaining 24 government-supported GAs. This legislation,Further. the Department of Education’s decision to cancel the current procurement in its entirety in 2018, terminated our contract award, which has significantly reduced our revenues in the student loan market. Lastly, the continued suspension of the type of review activity we are allowed to conduct under our contracts with CMS has resulted in limitation on our healthcare revenues and anyoperating results. Any future changes in the legislation and regulations that govern these markets, may require us to adapt our business to the new circumstances and we may be unable to do so in a manner that does not adversely affect our business and operations.

The reduction in the number of government-supported student loans originated by our GA clients may resulthas resulted in a lower amount of student loans that we are able to rehabilitate, and may result in the consolidation among the GAs, either of which would decrease our revenues.

As a result of SAFRA, which terminated the ability of the GAs to originate government-supported student loans, the overall number of defaulted student loans that we are able to service on behalf of our GA clients has begun to decline. Further, we are seeing a larger amount of defaulted student loans within our GA client portfolios that have previously been rehabilitated, which, according to current regulations, prevents us from rehabilitating any such student loan for a second time. This overall reduction in the number of defaulted student loans in our GA client portfolios, and the larger percentage of defaulted student loans that have been previously rehabilitated, may resulttogether with the cessation of placements of defaulted student loans from the Department of Education, has resulted in a decreaseddecrease in revenues from our GA clients, which couldhas negatively impactimpacted our business, financial condition and results of operations.

Further, some have speculated that there may be consolidation among the remaining GAs. This speculation has heightened as a result of the reduction of fees that the GAs will receive for rehabilitating student loans as a result of the Bipartisan Budget Act of 2013. If GAs that are our clients are combined with GAs with whom we do not have a relationship, we could suffer a loss of business. Two of our GA clients were each responsible for more than 10% of our total revenues in the year ended December 31, 2016: Great Lakes Higher Education Guaranty Corporation22% and Pennsylvania Higher Education Assistance Authority were responsible for 24% and 16%33%, respectively, of revenues for the yearyears ended December 31, 2016.2019 and 2018. The consolidation of our GA clients with others and the failure to provide recovery services to the consolidated entity could decrease our revenues, which could negatively impact our business, financial condition and results of operations.


Our results of operations may fluctuate on a quarterly or annual basis and cause volatility in the price of our stock.

Our revenues and operating results could vary significantly from period-to-period and may fail to match our past performance because of a variety of factors, some of which are outside of our control. Any of these factors could cause the price of our common stock to fluctuate. Factors that could contribute to the variability of our operating results include:

• the amount of defaulted student loans and other receivables that our clients place with us for recovery;

• the timing of placements of student loans and other receivables which are entirely in the discretion of our clients;

• the schedules of government agencies for awarding contracts includingcontracts;

• our ability to maintain contractual commitments after the result ofexpenses we incur during our recent successful appeal against the Department of Education’s contract award decision;typically long implementation cycle for new customer contracts;

• our ability to successfully identify improper Medicare claims and the number and type of potentially improper
claims that CMS authorizes us to pursue under our RAC contact;

• our ability to continue to generate revenues under our private healthcare contracts;

• the loss or gain of significant clients or changes in the contingency fee rates or other significant terms of our
business arrangements with our significant clients;

• technological and operational issues that may affect our clients and regulatory changes in the markets we service;
and

• general industry and macroeconomic conditions.
Downturns in domestic or global economic conditions and other macroeconomic factors could harm our business and results of operations.
Various macroeconomic factors influence our business and results of operations. These include the volume of student loan originations in the United States, together with tuition costs and student enrollment rates, the default rate of student loan borrowers, which is impacted by domestic and global economic conditions, rates of unemployment and similar factors, and the growth in Medicare expenditures resulting from changes in healthcare costs. For example, during the global financial crisis beginning in 2008, the market for securitized student loan portfolios was disrupted, resulting in delays in the ability of some GA clients to resell rehabilitated student loans and, as a result, delays our ability to recognize revenues from these rehabilitated loans. Changes in the overall economy could lead to a reduction in overall recovery rates by our clients, which in turn could adversely affect our business, financial condition and results of operations.
We may not be able to manage our potential growth effectively and our results of operations could be negatively affected.
Our newly awarded RAC contracts provide the potential opportunity to restore the growth in our business. However, our focus on growth and the expansion of our business may place additional demands on our management, operations and financial resources and will require us to incur additional expenses. We cannot be sure that we will be able to manage our

performance under any significant new contracts effectively. In order to successfully perform under any significant new contracts, our expenses will increase to recruit, train and manage additional qualified employees and subcontractors and to expand and enhance our administrative infrastructure and continue to improve our management, financial and information systems and controls. If we cannot manage our growth effectively, our expenses may increase and our results of operations could be negatively affected.
Our indebtedness could adversely affect our business and financial condition and reduce the funds available to us for other purposes, and our failure to comply with the covenants contained in our credit agreement could result in an event of default that could adversely affect our results of operations.
Our ability to make scheduled payments 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. We cannot make assurances that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness and to fund our other liquidity needs. If our cash flows and capital resources are insufficient to fund our debt service obligations and allow us to maintain compliance with the covenants under our credit agreement or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot ensure that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our credit agreement. If we cannot make scheduled payments on our debt, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable, the lenders under our credit agreement could terminate their commitments to lend us money and foreclose against the assets securing our borrowings and we could be forced into bankruptcy or liquidation.
Our debt agreements contain, and any agreements to refinance our debt likely will contain, certain financial and restrictive covenants that 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. Our failure to comply with these 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.
A failure of our operating systems or technology infrastructure, or those of our third-party vendors and subcontractors, could disrupt the operation of our business.

A failure of our operating systems or technology infrastructure, or those of our third-party vendors and subcontractors, could disrupt our operations. Our operating systems and technology infrastructure are susceptible to damage or interruption from various causes, including acts of God and other natural disasters, power losses, computer systems failures, Internet and telecommunications or data network failures, global health crises, operator error, computer viruses, losses of and corruption of data and similar events. The occurrence of any of these events could result in interruptions, delays or cessations in service to our clients, reduce the attractiveness of our recovery services to current or potential clients and adversely impact our financial condition and results of operations. While we have backup systems in many of our operating facilities, an extended outage of utility or network services may harm our ability to operate our business. Further, the situations we plan for and the amount of insurance coverage we maintain for losses as result of failures of our operating systems and infrastructure may not be adequate in any particular case.

If our security measures are breached or fail and unauthorized access is obtained to our clients’ confidential data, our services may be perceived as insecure, the attractiveness of our recovery services to current or potential clients may be reduced, and we may incur significant liabilities.

Our recovery services involve the storage and transmission of confidential information relating to our clients and their customers, including health, financial, credit, payment and other personal or confidential information. Although our data security procedures are designed to protect against unauthorized access to confidential information, our computer systems, software and networks may be vulnerable to unauthorized access and disclosure of our clients’ confidential information. Further, we may not effectively adapt our security measures to evolving security risks, address the security and privacy concerns of existing or potential clients as they change over time, or be compliant with federal, state, and local laws and regulations with respect to securing confidential information. Unauthorized access to confidential information relating to our clients and their customers could lead to reputational damage which could deter our clients and potential clients from selecting

our recovery services, or result in termination of contracts with those clients affected by any such breach, regulatory action, and claims against us.


In the event of any unauthorized access to personal or other confidential information, we may be required to expend significant resources to investigate and remediate vulnerabilities in our security procedures, and we may be subject to fines, penalties, litigation costs, and financial losses that are either not insured against or not fully covered through any insurance maintained by us. If one or more of such failures in our security and privacy measures were to occur, our business, financial condition and results of operations could suffer.

Our business may be harmed if we lose members of our management team or other key employees.

We are highly dependent on members of our management team and other key employees and our future success depends in part on our ability to retain these people. Our inability to continue to attract and retain members of our management team and other key employees could adversely affect our business, financial condition and results of operations.

The growth of our healthcare business will require us to hire and retain employees with specialized skills and failure to do so could harm our ability to grow our business.

The growth of our healthcare business will depend in part on our ability to recruit, train and manage additional qualified employees. Our healthcare-related operations require us to hire registered nurses and experts in Medicare coding. Finding, attracting and retaining employees with these skills is a critical component of providing our healthcare-related recovery and audit services, and our inability to staff these operations appropriately represents a risk to our healthcare service offering and associated revenues. An inability to hire qualified personnel, particularly to serve our healthcare clients, may restrain the growth of our business.

We rely on subcontractors to provide services to our clients and the failure of subcontractors to perform as expected could harm our business operations and our relationships with our clients.

We engage subcontractors to provide certain services to our clients. These subcontractors participate to varying degrees in our recovery activities with regards to all of the services we provide. While we believe that we perform appropriate due diligence before we hire subcontractors, our subcontractors may not provide adequate service or otherwise comply with the terms set forth in their agreements. In the event a subcontractor provides deficient performance to one or more of our clients, any such client may reduce the volume of services we are providing under an existing contract or may terminate the relevant contract entirely and we may face claims for breach of contract. Any such disruption in our relations with our clients as a result of services provided by any of our subcontractors could adversely affect our revenues and operating results.

If our software vendors or utility and network providers fail to deliver or perform as expected our business operations could be adversely affected.

Our recovery services depend in part on third-party providers, including software vendors and utility and network providers. Our ability to service our clients depends on these third-party providers meeting our expectations and contractual obligations in a timely and effective manner. Our business could be materially and adversely affected, and we might incur significant additional liabilities, if the services provided by these third-party providers do not meet our expectations or if they terminate or refuse to renew their relationships with us on similar contractual terms.


We are subject to extensive regulations regarding the use and disclosure of confidential personal information and failure to comply with these regulations could cause us to incur liabilities and expenses.

We are subject to a wide array of federal and state laws and regulations regarding the use and disclosure of confidential personal information and security. For example, the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, or HIPAA, and related state laws subject us to substantial restrictions and requirements with respect to the use and disclosure of the personal health information that we obtain in connection with our audit and recovery services under our contractcontracts with CMS and we must establish administrative, physical and technical safeguards to protect the confidentiality of this information. Similar protections extend to the type of personal financial and other information we acquire from our student loan, state tax and federal receivables clients. We are required to notify affected individuals and government agencies of data security breaches involving protected health and certain personally identifiable information. These laws and regulations also require that we develop, implement and maintain written, comprehensive information security programs containing safeguards that are appropriate to protect personally identifiable information or health information against unauthorized access, misuse, destruction or modification. Federal law generally does not preempt state law in the area of protection of personal information,

and as a result we must also comply with state laws and regulations. Regulation of privacy, data use and security requiresrequire that we incur significant expenses, which could increase in the future as a result of additional regulations, all of which adversely affects our results of operations. Failure to comply with these laws and regulations can result in penalties and in some cases expose us to civil lawsuits.

Our student loan recovery business is subject to extensive regulation and consumer protection laws and our failure to comply with these regulations and laws may subject us to liability and result in significant costs.

Our student loan recovery business is subject to regulation and oversight by various state and federal agencies, particularly in the area of consumer protection. The Fair Debt Collection Practices Act or FDCPA,(FDCPA), and related state laws provide specific guidelines that we must follow in communicating with holders of student loans and regulates the manner in which we can recover defaulted student loans. Some state attorney generals have been active in this area of consumer protection regulation. We are subject, and may be subject in the future, to inquiries and audits from state and federal regulators, as well as frequent litigation from private plaintiffs regarding compliance under the FDCPA and related state regulations. We are also subject to the Fair Credit Reporting Act or FCRA,(FCRA), which regulates consumer credit reporting and may impose liability on us to the extent adverse credit information reported to a credit bureau is false or inaccurate. Our compliance with the FDCPA, FCRA and other federal and state regulations that affect our student loan recovery business may result in significant costs, including litigation costs. We may also become subject to regulations promulgated by the United States Consumer Financial Protection Bureau or CFPB,(CFPB), which was established in July 2011 as part of the Dodd-Frank Act to, among other things, establish regulations regarding consumer financial protection laws. In addition, the CFPB has investigatory and enforcement authority with respect to whether persons are engaged in unlawful acts or practices in connection with the collection of consumer debts.

Litigation may result in substantial costs of defense, damages or settlement, any of which could subject us to significant costs and expenses.

We are party to lawsuits in the normal course of business, particularly in connection with our student loan recovery services. For example, we are regularly subject to claims that we have violated the guidelines and procedures that must be followed under federal and state laws in communicating with consumer debtors. We may not ultimately prevail or otherwise be able to satisfactorily resolve any pending or future litigation, which may result in substantial costs of defense, damages or settlement. In the future, we may be required to alter our business practices or pay substantial damages or settlement costs as a result of litigation proceedings, which could adversely affect our business operations and results of operations.
We typically face a long period to implement a new contract which may cause us to incur expenses before we receive revenues from new client relationships.
If we are successful in obtaining an engagement with a new client or a new contract with an existing client, we typically have a subsequent long implementation period in which the services are planned in detail and we integrate our technology, processes and resources with the client’s operations. If we enter into a contract with a new client, we typically will not receive revenues until implementation is completed and work under the contract actually begins. Our clients may also experience delays in obtaining approvals or delays associated with technology or system implementations, such as the delays experienced with the implementation of our first RAC contract with CMS due to an appeal by competitors who were unsuccessful in bidding on the contract. Because we generally begin to hire new employees to provide services to a new client once a contract is signed, we may incur significant expenses associated with these additional hires before we receive corresponding revenues under any such new contract. If we are not successful in maintaining contractual commitments after the expenses we incur during our typically long implementation cycle, our results of operations could be adversely affected.
If we are unable to adequately protect our proprietary technology, our competitive position could be harmed, or we could be required to incur significant costs to enforce our rights.

The success of our business depends in part upon our proprietary technology platform. We rely on a combination of copyright, patent, trademark, and trade secret laws, as well as on confidentiality procedures and non-compete agreements, to establish and protect our proprietary technology rights. The steps we have taken to deter misappropriation of our proprietary technology may be insufficient to protect our proprietary information. In particular, we may not be able to protect our trade secrets, know‑howknow-how and other proprietary information adequately. Although we use reasonable efforts to protect this proprietary information and technology, our employees, consultants and other parties may unintentionally or willfully disclose our information or technology to competitors. Enforcing a claim that a third party illegally obtained and is using any of our proprietary information or technology is expensive and time consuming, and the outcome is unpredictable. We rely, in part, on non‑disclosure,nondisclosure, confidentiality and invention assignment agreements with our employees, consultants and other parties to

protect our trade secrets, know‑howknow-how and other intellectual property and proprietary information. These agreements may not be self‑executing,self-executing, or they may be breached, and we may not have adequate remedies for such breach. Moreover, third parties may independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know‑howknow-how and other proprietary information. Any infringement, misappropriation or other violation of our patents, trademarks, copyrights, trade secrets, or other intellectual property rights could adversely affect any competitive advantage we currently derive or may derive from our proprietary technology platform and we may incur significant costs associated with litigation that may be necessary to enforce our intellectual property rights.

Claims by others that we infringe their intellectual property could force us to incur significant costs or revise the way we conduct our business.

Our competitors protect their proprietary rights by means of patents, trade secrets, copyrights, trademarks and other intellectual property. Any party asserting that we infringe, misappropriate or violate their intellectual property rights may force us to defend ourselves, and potentially our clients, against the alleged claim. These claims and any resulting lawsuit, if successful, could be time-consuming and expensive to defend, subject us to significant liability for damages or invalidation of our proprietary rights, prevent us from operating all or a portion of our business or force us to redesign our services or technology platform or cause an interruption or cessation of our business operations, any of which could adversely affect our business and operating results. In addition, any litigation relating to the infringement of intellectual property rights could harm our relationships with current and prospective clients. The risk of such claims and lawsuits could increase if we increase the size and scope of our services in our existing markets or expand into new markets.

We may make acquisitions that prove unsuccessful, strain or divert our resources and harm our results of operations and stock price.

We may consider acquisitions of other companies in our industry or in new markets. We may not be able to successfully complete any such acquisition and, if completed, any such acquisition may fail to achieve the intended financial results. We may not be able to successfully integrate any acquired businesses with our own and we may be unable to maintain our standards, controls and policies. Further, acquisitions may place additional constraints on our resources by diverting the attention of our management from other business concerns. Moreover, any acquisition may result in a potentially dilutive issuance of equity securities, the incurrence of additional debt, andthe amortization of expenses related to intangible assets, and the potential impairment charges related to intangible assets or goodwill, all of which could adversely affect our results of operations and stock price.

The price of our common stock could be volatile, and you may not be able to sell your shares at or above the public offering price.

Since our initial public offering in August 2012, the price of our common stock, as reported by NASDAQ Global Select Market, has ranged from a low sales price of $1.50$0.79 on March 16, 2017December 9, 2019 to a high sales price of $14.09 on March 4, 2013. The trading price of our common stock may be significantly affected by various factors, including: quarterly fluctuations in our operating results; the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; changes in investors’ and analysts’ perception of the business risks and conditions of our business; our ability to meet the earnings estimates and other performance expectations of financial analysts or investors; unfavorable commentary or downgrades of our stock by equity research analysts; changes in our capital structure, such as future issuances of debt or equity securities; our success or failure to obtain new contract awards; lawsuits threatened or filed against us; strategic actions by us or our competitors, such as acquisitions or restructurings; new legislation or regulatory actions; changes in our relationship with any of our significant clients; fluctuations in the stock prices of our peer companies or in stock markets in general; and general economic conditions.

Our significant stockholders have the ability to influence significant corporate activities and our significant stockholders' interests may not coincide with yours.

Parthenon Capital Partners, andPrescott Group Management, LLC, Invesco Ltd., and Mill Road Capital Management LLC beneficially owned approximately 26.5%25.0%, 23.2%, 19.0%, and 17.4%6.4% of our common stock, respectively, as of September 30, 2017.March 31, 2020. As a result of their ownership, Parthenon Capital Partners, andPrescott Group Management, LLC, Invesco Ltd., and Mill Road Capital Management LLC have the ability to influence the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to influence decision‑decision making with respect to our business direction and policies. Parthenon Capital Partners, andPrescott Group Management, LLC, Invesco Ltd., and Mill Road Capital Management LLC may have interests different from our other stockholders’ interests and may vote in a manner adverse to those interests. Matters over which Parthenon Capital Partners, andPrescott Group Management, LLC, Invesco Ltd., and Mill Road Capital Management LLC can, directly or indirectly, exercise influence include:

• mergers and other business combination transactions, including proposed transactions that would result in our
stockholders receiving a premium price for their shares;

• other acquisitions or dispositions of businesses or assets;

• incurrence of indebtedness and the issuance of equity securities;

• repurchase of stock and payment of dividends; and

• the issuance of shares to management under our equity incentive plans.

In addition, Parthenon Capital Partners has a contractual right to designate a number of directors proportionate to its stock ownership. Further, under our amended and restated certificate of incorporation, Parthenon Capital Partners does not have any obligation to present to us, and Parthenon Capital Partners may separately pursue, corporate opportunities of which it becomes aware, even if those opportunities are ones that we would have pursued if granted the opportunity.

Anti-takeover provisions contained in our certificate of incorporation and bylaws could impair a takeover attempt that our stockholders may find beneficial.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include the following provisions: establishing a classified board of directors so that not all members of our board are elected at one time; providing that directors may be removed by stockholders only for cause; authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock; limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting; limiting our ability to engage in certain business combinations with any “interested stockholder,” other than Parthenon Capital Partners, for a three-year period following the time that the stockholder became an interested stockholder; requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; requiring a super majority vote for certain amendments to our amended and restated certificate of incorporation and amended and restated bylaws; and limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on the board, to our board of directors then in office. These provisions, alone or together, could have the effect of delaying or deterring a change in control, could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
On August 7, 2017, in consideration for, and concurrently with, the extension of the loans in accordance with the terms of our new credit agreement with ECMC Group, Inc., we issued a warrant to ECMC to purchase up to an aggregate of 3,863,326 shares of the Company’s common stock (representing approximately up to 7.5% of the our diluted common stock as calculated using the “treasury stock” method as defined under GAAP for the most recent fiscal quarter) with an exercise price of $1.92 per share. The warrant was issued in a private placement exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. Upon our election to borrow any of the additional term loans under the new credit agreement, we will be required to issue additional warrants at the same exercise price to purchase up to an aggregate of 77,267 additional shares of common stock (which represents approximately 0.15% of the diluted common stock calculated using the “treasury stock” method as defined under GAAP for the most recent fiscal quarter) for each $1,000,000 of such additional term loans. Subsequent to the closing of our new credit agreement, we executed a registration rights agreement with ECMC Group, Inc. and we filed a registration statement to register the resale of shares of our common stock acquired upon exercise of the warrants described above.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
NoneNone.
ITEM 5. OTHER INFORMATION
NoneNone.


ITEM 6. EXHIBITS
(A) Exhibits:
Exhibit No.Description
10.1
Amendment No. 1 to Credit Agreement, dated as of September 29, 2017, by and among Performant Business Services, Inc.
  
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
  
31.2
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
  
32.1(1)
Certification of the Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
32.2(1)
Certification of the Principal Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101.INS(2)
XBRL Instance Document
  
101.SCH(2)
XBRL Taxonomy Extension Scheme
  
101.CAL(2)
XBRL Taxonomy Extension Calculation Linkbase
  
101.DEF(2)
XBRL Taxonomy Extension Definition Linkbase Document
  
101.LAB(2)
XBRL Taxonomy Extension Label Linkbase
  
101.PRE(2)
XBRL Taxonomy Extension Presentation Linkbase
 
(1)The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.

(2)In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act.

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SIGNATURES


Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   PERFORMANT FINANCIAL CORPORATION
Date:November 13, 2017May 28, 2020    
   By: /s/ Lisa Im
     Lisa Im
    
     Chief Executive Officer (Principal Executive Officer)
     
   By: /s/ Ian Johnston
     Ian Johnston
     
     Vice President and Chief Accounting Officer

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