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, 2021
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
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¨Emerging growth company
Large accelerated filer¨Accelerated filer¨
Non-accelerated filer¨Smaller reporting companyx
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 14, 2021 was 50,961,377.
55,249,883.



PERFORMANT FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 20172020
INDEX



Page
Page
Item 3.
Item 4.
Item 5.
 



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





September 30,
2017
 December 31,
2016
March 31,
2021
December 31,
2020
(Unaudited)   (Unaudited) 
Assets   Assets
Current assets:   Current assets:
Cash and cash equivalents$23,179
 $32,982
Cash and cash equivalents$19,203 $16,043 
Restricted cash
 7,502
Restricted cash2,203 2,253 
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 $49 and $49, respectivelyTrade accounts receivable, net of allowance for doubtful accounts of $49 and $49, respectively20,600 23,216 
Contract assetsContract assets4,749 4,466 
Prepaid expenses and other current assets14,222
 12,686
Prepaid expenses and other current assets3,667 3,784 
Income tax receivable1,454
 2,027
Income tax receivable4,698 4,758 
Total current assets51,345
 72,012
Total current assets55,120 54,520 
Property, equipment, and leasehold improvements, net21,393
 23,735
Property, equipment, and leasehold improvements, net16,730 17,497 
Identifiable intangible assets, net5,066
 5,895
Identifiable intangible assets, net630 689 
Goodwill81,572
 82,522
Goodwill47,372 47,372 
Deferred income taxes3,534
 
Right-of-use assetsRight-of-use assets4,536 5,043 
Other assets897
 914
Other assets1,021 1,106 
Total assets$163,807
 $185,078
Total assets$125,409 $126,227 
Liabilities and Stockholders’ Equity   Liabilities and Stockholders’ Equity
Current liabilities:   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 $537 and $906, respectivelyCurrent maturities of notes payable to related party, net of unamortized debt issuance costs of $537 and $906, respectively$59,463 $59,957 
Accrued salaries and benefits5,640
 4,315
Accrued salaries and benefits9,598 8,799 
Accounts payable1,052
 628
Accounts payable865 407 
Other current liabilities3,860
 4,409
Other current liabilities4,128 3,841 
Estimated liability for appeals19,145
 19,305
Net payable to client12,669
 13,074
Deferred revenueDeferred revenue466 867 
Estimated liability for appeals, disputes, and refundsEstimated liability for appeals, disputes, and refunds4,373 1,014 
Lease liabilitiesLease liabilities2,264 2,327 
Total current liabilities43,878
 51,469
Total current liabilities81,157 77,212 
Notes payable, net of current portion and unamortized debt issuance costs of $3,549 and $272, respectively38,801
 43,878
Deferred income taxes
 1,130
Lease liabilitiesLease liabilities2,914 3,442 
Other liabilities2,099
 2,356
Other liabilities3,171 3,593 
Total liabilities84,778
 98,833
Total liabilities87,242 84,247 
Commitments and contingencies

 

Commitments and contingencies (note 3 and note 4)Commitments and contingencies (note 3 and note 4)00
Stockholders’ equity:   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, 2021 and December 31, 2020 respectively; issued and outstanding 54,825 and 54,764 shares at March 31, 2021 and December 31, 2020, respectivelyCommon stock, $0.0001 par value. Authorized, 500,000 shares at March 31, 2021 and December 31, 2020 respectively; issued and outstanding 54,825 and 54,764 shares at March 31, 2021 and December 31, 2020, respectively
Additional paid-in capital71,684
 65,650
Additional paid-in capital83,559 82,933 
Retained earnings7,340
 20,590
Accumulated deficitAccumulated deficit(45,397)(40,958)
Total stockholders’ equity79,029
 86,245
Total stockholders’ equity38,167 41,980 
Total liabilities and stockholders’ equity$163,807
 $185,078
Total liabilities and stockholders’ equity$125,409 $126,227 
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 20212020
Revenues $29,744
 $31,195
 $98,760
 $107,548
Revenues$31,390 $45,888 
Operating expenses:        Operating expenses:
Salaries and benefits 20,494
 18,710
 61,640
 60,107
Salaries and benefits24,090 28,805 
Other operating expenses 13,496
 12,311
 43,019
 40,401
Other operating expenses10,356 12,220 
Impairment of goodwillImpairment of goodwill19,000 
Total operating expenses 33,990
 31,021
 104,659
 100,508
Total operating expenses34,446 60,025 
Income (loss) from operations (4,246) 174
 (5,899) 7,040
Loss from operationsLoss from operations(3,056)(14,137)
Interest expense (2,459) (1,863) (5,683) (6,136)Interest expense(1,346)(2,227)
Income (loss) before provision for (benefit from) income taxes (6,705) (1,689) (11,582) 904
Interest incomeInterest income
Loss before provision for (benefit from) income taxesLoss before provision for (benefit from) income taxes(4,402)(16,358)
Provision for (benefit from) income taxes 1,146
 (974) 1,668
 62
Provision for (benefit from) income taxes37 (3,874)
Net income (loss) $(7,851) $(715) $(13,250) $842
Net income (loss) per share        
Net lossNet loss$(4,439)$(12,484)
Net loss per shareNet loss per share
Basic $(0.15) $(0.01) $(0.26) $0.02
Basic$(0.08)$(0.23)
Diluted $(0.15) $(0.01) $(0.26) $0.02
Diluted$(0.08)$(0.23)
Weighted average shares        Weighted average shares
Basic 50,852
 50,200
 50,581
 49,974
Basic54,813 53,943 
Diluted 50,852
 50,200
 50,581
 50,401
Diluted54,813 53,943 
See accompanying notes to consolidated financial statements.


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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, 2021Three Months Ended March 31, 2020
 Common StockAdditional
Paid-In
Capital
Accumulated DeficitTotalCommon StockAdditional
Paid-In
Capital
Accumulated DeficitTotal
 SharesAmountSharesAmount
Balances at beginning of period54,764 $$82,933 $(40,958)$41,980 53,900 $$80,589 $(26,969)$53,625 
Common stock issued under stock plans, net of shares withheld for employee taxes61 — (23)— (23)122 — (84)— (84)
Stock-based compensation expense— — 649 — 649 — — 691 — 691 
Net loss— — — (4,439)(4,439)— — — (12,484)(12,484)
Balances at end of period54,825 $$83,559 $(45,397)$38,167 54,022 $$81,196 $(39,453)$41,748 
See accompanying notes to consolidated financial statements.






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



 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)


Three Months Ended  
March 31,
Cash paid for income taxes$540
 $3,976
20212020
Cash flows from operating activities:Cash flows from operating activities:
Net lossNet loss$(4,439)$(12,484)
Adjustments to reconcile net loss to net cash provided by operating activities:Adjustments to reconcile net loss to net cash provided by operating activities:
Impairment of long-lived assetsImpairment of long-lived assets636 
Impairment of goodwillImpairment of goodwill19,000 
Depreciation and amortizationDepreciation and amortization1,016 1,540 
Right-of-use assets amortizationRight-of-use assets amortization507 599 
Stock-based compensationStock-based compensation649 691 
Interest expense from debt issuance costsInterest expense from debt issuance costs369 382 
Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Trade accounts receivableTrade accounts receivable2,616 (106)
Contract assetsContract assets(283)138 
Prepaid expenses and other current assets and other assetsPrepaid expenses and other current assets and other assets117 (451)
Income tax receivableIncome tax receivable60 (3,825)
Other assetsOther assets85 (11)
Accrued salaries and benefitsAccrued salaries and benefits799 1,550 
Accounts payableAccounts payable458 475 
Deferred revenue and other current liabilitiesDeferred revenue and other current liabilities(114)171 
Estimated liability for appeals, disputes, and refundsEstimated liability for appeals, disputes, and refunds3,359 151 
Lease liabilitiesLease liabilities(591)(677)
Other liabilitiesOther liabilities(422)78 
Net cash provided by operating activitiesNet cash provided by operating activities4,822 7,221 
Cash flows from investing activities:Cash flows from investing activities:
Purchase of property, equipment, and leasehold improvementsPurchase of property, equipment, and leasehold improvements(826)(1,073)
Net cash used in investing activitiesNet cash used in investing activities(826)(1,073)
Cash flows from financing activities:Cash flows from financing activities:
Repayment of notes payableRepayment of notes payable(863)(863)
Taxes paid related to net share settlement of stock awardsTaxes paid related to net share settlement of stock awards(23)(84)
Net cash used in financing activitiesNet cash used in financing activities(886)(947)
Net increase in cash, cash equivalents and restricted cashNet increase in cash, cash equivalents and restricted cash3,110 5,201 
Cash, cash equivalents and restricted cash at beginning of periodCash, cash equivalents and restricted cash at beginning of period18,296 4,995 
Cash, cash equivalents and restricted cash at end of periodCash, cash equivalents and restricted cash at end of period$21,406 $10,196 
Reconciliation of the Consolidated Statements of Cash Flows to the
Consolidated Balance Sheets:
Reconciliation of the Consolidated Statements of Cash Flows to the
Consolidated Balance Sheets:
Cash and cash equivalentsCash and cash equivalents$19,203 $8,574 
Restricted cashRestricted cash2,203 1,622 
Total cash, cash equivalents and restricted cash at end of periodTotal cash, cash equivalents and restricted cash at end of period$21,406 $10,196 
Supplemental disclosures of cash flow information:Supplemental disclosures of cash flow information:
Cash paid (received) for income taxesCash paid (received) for income taxes$432 $(72)
Cash paid for interest$2,835
 $4,797
Cash paid for interest$977 $1,845 
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, 2017 and 2016
(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, 2021, and the results of our operations for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 and cash flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. 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 2014.2020.
The CompanyPerformant Financial Corporation (the "Company" or "we") is a leading provider of technology-enabled audit, recovery, and analytics services in the United States.States with a focus in the healthcare industry. The Company'sCompany works with healthcare payers through claims auditing and eligibility-based (also known as coordination-of-benefits) services helpto identify improper payments, andpayments. The Company engages clients in some markets, restructure and recover delinquent or defaulted assets and improper payments for both government and private clients across differentcommercial markets. The Company'sCompany also has a call center which serves clients with complex consumer engagement needs. Clients of the Company typically operate in complex and highly regulated environments and outsourcecontract for their recoverypayment integrity needs in order to reduce losses on billions of dollars ofimproper healthcare payments. The Company historically worked in recovery markets such as 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 handle many or all aspectsreceivables, and commercial recovery. However, with the ongoing impact of the clients’ various processes.COVID-19 pandemic in 2020, and the continued pause on student loan recovery work through 2021, the Company announced on March 29, 2021, that it has signed an agreement to sell certain of its non-healthcare recovery contracts to a buyer that specializes in outsourced receivables solutions and that it does not plan to renew or restart existing contracts, nor pursue new non-healthcare recovery opportunities.
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 one1 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, deferred revenue, estimated liability for appeals, accrued expenses,disputes, and refunds, lease liabilities, 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 Appeals
Revenue(b)    Liquidity
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.
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The Company believes that its forecasted results 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, specifically the $60 million of loans outstanding at March 31, 2021, the Company has the option to extend the maturity of the loans for 2 additional one-year periods, subject to the satisfaction of customary conditions, including certain financial covenants. If the Company fails to satisfy the conditions required to exercise the option to extend the maturity of the loans, the full balance of the loans will come due on August 11, 2021, at which time, the Company may not have sufficient cash resources to satisfy its debt obligations and the Company may not be able to continue its operations as planned.
(c) Revenues, Accounts Receivable, Contract Assets, Contract Liabilities, Estimated Liability for Appeals, Disputes and Refunds
The Company derives its revenues primarily from providing audit and recovery 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; and
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.
The Company’s contracts are composed primarily of variable consideration. Fees earned under the Company’s audit and 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 bonuses determined based on its performance relative to the client’s other contractors providing similar services.
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 estimates variable consideration only if it can reasonably measure the progress toward complete satisfaction of the performance obligation using an output method based on reliable information, 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. Any change made to the measure of progress toward complete satisfaction of the Company’s performance obligation is recorded as a change in estimate. The Company exercises judgment to estimate the amount of constraint on variable consideration based on the facts and circumstances of the relevant contract operations and the availability and reliability of data. Although the Company believes the estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of variable consideration.
For contracts that contain a refund right, these amounts are considered variable consideration and the Company estimates its refund exposure and recognizes revenue net of such estimate.
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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 bonuses are considered variable and may be constrained by the Company until there is not a risk of a significant reversal.
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.
For certain recovery contracts, revenue is recognized uponwhen the collectionclients collect on amounts owed to them as a result of defaultedthe Company’s services. For student loan and debt payments. Loanrecovery services, loan rehabilitation revenue is recognized when the rehabilitated loans are sold (funded)funded by clients. Incentive revenue isBonuses are recognized upon receipt of official notification of incentive awardbonus awards from customers. Under
For healthcare claims-based audit contracts, the Company’s Medicare Recovery Audit Contractor,Company may recognize revenue upondelivering the results of claims audits, when sufficient reliable information is available to the Company for estimating the variable consideration earned based on an output metric that reasonably measures the Company's satisfaction of its performance obligation.
For eligibility-based or RAC, contract with Centers for Medicare and Medicaid Services,coordination-of-benefits contracts, the Company recognizes revenue when insurance companies or CMS,other responsible parties have remitted payments to its clients.
For customer care / outsourced services clients, the Company recognizes revenues whenbased on the healthcare provider has paid CMSvolume of processed transactions or the quantity of labor hours provided.
The following table presents revenue disaggregated by category for a given claim or has agreed to an offsetthe three months ended March 31, 2021 and 2020 (in thousands):
 Three Months Ended  
March 31,
 20212020
 (in thousands)
Healthcare13,286 17,524 
Recovery (1)
14,491 24,265 
Customer Care / Outsourced Services3,613 4,099 
Total Revenues$31,390 $45,888 
(1)Represents student lending, state and municipal tax authorities, IRS and Department of Treasury markets, as well as Premiere Credit of North America.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for doubtful accounts by specific identification. Account balances are charged off against other claims by the provider. Providersallowance after all means of collection have been exhausted and the potential for recovery is consider remote. The allowance for doubtful accounts was $49 thousand at March 31, 2021 and December 31, 2020.
Healthcare providers have the right to appeal a claimclaims audit findings and may pursue additional appeals if the initial appeal is found in favor of CMS. The Company accrues anhealthcare clients. For coordination-of-benefits contracts, insurance companies or other responsible parties may dispute the Company’s findings regarding our clients not being the primary payer of healthcare claims. Total estimated liability for appeals, at the time revenue is recognized based on the Company's estimatedisputes, and refunds was $4.4 million as of the amountMarch 31, 2021 and $1.0 million as 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 receivable 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, represent2020. This represents the Company’s best estimate of the amount probable amount of lossesbeing refunded to the Company’s healthcare clients. The $4.4 million liability includes a $3.3 million refund accrual to a healthcare client related to appealseligibility-based services, which is expected to be offset by the client against future commissions.
The Company determined that it does not have any material costs related to obtaining or fulfilling a contract that are recoverable and as such, these contract costs are generally expensed as incurred.
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Table of claims for which commissions were previously collected. In additionContents
Contract assets was $4.7 million and $4.5 million as of March 31, 2021 and December 31, 2020, respectively. Contract assets relate to the $19.1 million amount accruedCompany’s rights to consideration for services completed, but not invoiced at September 30, 2017,the reporting date, and receipt of payment is conditional upon factors other than the passage of time. Contract assets primarily consist of commissions the Company estimates that it has earned from completed claims audit findings submitted to healthcare clients. Generally, the Company’s right to payment occurs when contract assets are recorded to accounts receivable when the rights become unconditional, which is reasonably possible that it could be requiredgenerally healthcare providers have paid our healthcare clients. There was no impairment loss related to pay an additional amount up to approximately $5.4contract assets for the three months ended March 31, 2021.
Contract liabilities was $0.5 million and $0.9 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 accounts receivable at September 30, 2017 resulted from no customer receivables existing in an aged position which required a specific reserve; while the allowance at DecemberMarch 31, 2016 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 million and $13.1 million at September 30, 20172021 and December 31, 2016,2020, respectively, representand are included in deferred revenue on the excess of payablesconsolidated balance sheets. The Company’s contract liabilities mainly relate to an advance recovery commission payment received from a client, for overturned audits. Thewhich the Company expects that the net payableanticipates revenue to client balance will be paid to the client within the next twelve months.recognized as services are delivered. 
(d)Prepaid Expenses and Other Current Assets
(d) Prepaid Expenses and Other Current Assets
At September 30, 2017,March 31, 2021, prepaid expenses and other current assets includes $5.6were $3.7 million of amounts estimatedand included approximately $1.9 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, $1.0 million for prepaid insurance, and $0.8 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, 2020, prepaid expenses and other current assets includes a net receivable of $3.7were $3.8 million and included approximately $1.8 million related to prepaid software licenses and maintenance agreements, $1.4 million for subcontractor feesprepaid insurance, and $0.6 million for already overturned audits refundablevarious other prepaid expenses.
(e) Impairment of Goodwill and Long-Lived Assets
The balance of goodwill was $47.4 million as of March 31, 2021 and December 31, 2020. Goodwill is reviewed for impairment at least annually in December or as certain events or conditions arise. The Company may first assess qualitative factors for indicators of impairment to determine whether it is necessary to perform the quantitative goodwill impairment test. 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 refunds its feesbelieves the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of impairment. Based on management’s analysis, there was no impairment to the clientgoodwill as prime contractor. By comparison, at Decemberof March 31, 2016, prepaid expenses2021.
Long-lived assets and other currentintangible 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 refundablethat are subject 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, theThere was no 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 oneand a $0.6 million non-cash impairment charge to long-lived assets as of our subsidiaries, Performant Europe Ltd., due to the Company's decision to wind down activity in this business. The expense has beenMarch 31, 2021, included in other operating expenses in the consolidated statements of operations. There was no impairment expenseexpenses.
(f) Other Current Liabilities
At March 31, 2021, other current liabilities primarily included $3.6 million for goodwillservices received for which we have not received an invoice, $0.3 million for estimated workers' compensation claims incurred but not reported, and long-lived assets$0.2 million for the nine months ended September 30, 2016.
(f)Restricted Cash
On August 3, 2017, $6.0 million of restricted cash was paid to the administrative agent for the benefit of the lenders under our Prior Credit Agreement.third party fees. At September 30, 2017, and at December 31, 2016, restricted cash2020, other current liabilities primarily included in current assets on our consolidated balance sheet was $0.0$3.4 million for services received for which we have not received an invoice, $0.2 million for estimated workers' compensation claims incurred but not reported, and $7.5$0.2 million respectively.for 3rd party fees and equipment financing payables.
(g)
(g)    New Accounting Pronouncements
Recently Adopted Accounting StandardsPronouncements

In November 2015,December 2019, the FASB issued Accounting Standards Update (ASU) 2015-17,ASU 2019-12, "Income Taxes (Topic 740): Balance Sheet Classification of DeferredSimplifying the Accounting for Income Taxes"(". This ASU 2015-17"), whichclarifies and simplifies the reporting requirements of deferredaccounting for income taxes by requiring all organizations to classify all deferredeliminating certain exceptions for intra-period tax assetsallocation principles and liabilities, along with any related valuation allowance, as noncurrent. The guidancethe methodology for calculating income tax rates in an interim period, among other updates. This ASU 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, the FASB issued ASU 2016-02, “Leases”, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This new guidance 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,fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and2020, with early adoption is permitted. This new standard requires retrospectiveThe Company’s adoption with a provision for impracticability. We have not adopted this guidance early and are currently evaluating the effectof ASU 2019-12 as of January 1, 2021 had no material impact on our consolidated financial statements.position, results of operations, or cash flows.
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In January 2017,February 2020, the FASB issued ASU 2017-04, "Simplifying2020-02, “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU provides updated guidance on how an entity should measure credit losses on financial instruments, including trade receivables, held at the Testreporting date. The amendments make each Topic easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. It also addresses transition and open effective date information 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 isTopic 842. ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02 (collectively, “ASC 326”) are effective for annual reporting periods, and interim periods with goodwill impairment tests within thosepublic entities for fiscal years beginning after December 15, 2019, except for Smaller Reporting Companies. This ASU is effective for the Company for fiscal years, and early adoptioninterim periods within those fiscal years, beginning after December 15, 2022.

In March 2020, the FASB issued ASU No 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. ASU 2020-04 is permitted for testing periods after January 1, 2017. Weeffective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company does not expect ASU 2020-04 to have not adopted this guidance early and are currently evaluating thea material effect on our consolidatedthe Company’s current financial statements.position, results of operations or financial statement disclosures.


2. Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements consist of the following at September 30, 2017March 31, 2021 and December 31, 20162020 (in thousands):
September 30,
2017
 December 31,
2016
March 31,
2021
December 31,
2020
Land$1,122
 $1,122
Land$1,943 $1,943 
Building and leasehold improvements6,223
 6,203
Building and leasehold improvements7,593 7,591 
Furniture and equipment5,706
 5,656
Furniture and equipment5,928 5,922 
Computer hardware and software70,615
 67,861
Computer hardware and software80,307 80,358 
83,666
 80,842
95,771 95,814 
Less accumulated depreciation and amortization(62,273) (57,107)Less accumulated depreciation and amortization(79,041)(78,317)
Property, equipment and leasehold improvements, net$21,393
 $23,735
Property, equipment and leasehold improvements, net$16,730 $17,497 
Depreciation expense of property, equipment and leasehold improvements was $2.5$1.0 million and $2.4$1.5 million for the three months ended September 30, 2017March 31, 2021 and 2016, respectively, $7.7 million and $7.3 million for the nine months ended September 30, 2017 and 2016,2020, 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 NewInc, as the lender. Before 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 December 31, 2017. Approximately $2August 2021, (ii) increase the commitment for Additional Term Loans from $15 million to $25 million, (iii) extend the period during which Additional Term Loans were able to have been borrowed by one year to August 2020 and, (iv) not require compliance with the financial covenants in the Credit Agreement during the six fiscal quarters following our acquisition of Premiere.

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On March 21, 2019, we entered into Amendment No. 3 to the Credit Agreement to, among other things, extend the period during which we would not be required to comply with the financial covenants in the Credit Agreement until the quarter ending June 30, 2020. On September 19, 2019, we entered into Amendment No. 4 to the Credit Agreement to, among other things, designate one of our subsidiary guarantors under the Credit Agreement as a borrower and make corresponding changes and related to such change. As of September 30, 2019, the Company had borrowed all of the $25 million available as Additional Term Loans.

On March 23, 2021, we entered into Amendment No. 5 to the Credit Agreement (the “Fifth Amendment”). The effectiveness of the Fifth Amendment is subject to the satisfaction of certain conditions specified therein, including our having prepaid an aggregate amount of $6.0 million of contingent reimbursement obligations with respectthe Loans if and when we consummate the sale of certain of our assets. If such conditions to outstanding but undrawn lettersthe effectiveness of credit remainthe Fifth Amendment are satisfied, the maturity date of the Credit Agreement will automatically be extended until August 11, 2022 and the financial covenants will modified as described below.
As of March 31, 2021, $60.0 million was outstanding under the Prior Credit Agreement, however, those contingent reimbursement obligations will remain cash collateralized withAgreement. While this amount is classified in current liabilities, the administrative agent.
Thematurity of the Loans will mature onbe extended through August 11, 2022 if the third anniversary of the Closing Date, howeverFifth Amendment becomes effective, and we will haveretain an option to further extend the option tomaturity date for an additional one year period. If the Fifth Amendment does not become effective, we may extend the maturity of the Loans for two2 additional one yearone-year periods, in each case, 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 was 6.5% at LIBOR plus 7.0% per annum.March 31, 2021 and December 31, 2020. We will beare required to pay 5% of the original principal balance of the Loans annually in quarterly installments beginning March 31, 2018,(subject to adjustment in the event of any prepayment made in connection with the Fifth Amendment) 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 each case, subject to the lender's right to decline to receive such payments. If we make a prepayment of $6.0 million in connection with a change of control and the payment of a 1% premium,Fifth Amendment we will not be permittedrequired to voluntarily prepaymake mandatory prepayment on account of excess cash flow for the Loans until after the first anniversary of the Closing Date.  We will be permitted to prepay the Loans during the secondfiscal year after the Closing Date if accompanied by a prepayment premium of 1%.  Thereafter,ended December 31, 2020, however we will be permittedrequired to prepaymake a mandatory prepayment of at least $6.0 million on account of excess cash flow for the Loans withoutfiscal year ending December 31, 2021, subject to reduction in accordance with the Credit Agreement for any prepayment premium.other prepayments made prior the end of such fiscal year.
The New Credit Agreement contains certain restrictive financial covenants, which became effective on the Closing Date. Such covenants require, among other things, that we meetwe: (1) achieve a minimum fixed charge coverage ratio (A) prior to the effectiveness of 0.5the Fifth Amendment, of 1.0 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),and 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 August 2022; and (B) on and after the fifth anniversaryeffectiveness of the Closing Date. In addition, we will be requiredFifth Amendment; of 0.75 to 1.0 through December 31, 2021, 1.0 to 1.0 through June 30, 2022, and 1.25 to 1.0 thereafter and (2) maintain a maximum total debt to EBITDA ratio (A) prior to the effectiveness of the Fifth Amendment, of 6.00 to 1.00.1.00; and (B) on and after the effectiveness of the Fifth Amendment, of 8.0 to 1.0 through June 30, 2021, of 7.0 to 1.0 through September 30, 2021 and 6.0 to 1.0 thereafter. 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
borrowers.
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").
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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 the effectiveness of the Fifth Amendment and the extension of the maturity of the loans for an additional one year period, we will be required to issue additional warrants at the exercise price of $0.96 per share to purchase up to an aggregate of 515,110 additional shares of common stock of the Company and the “Exercise Price” for a portion of the existing warrants issued to ECMC to purchase 1,931,663 shares of common stock of the Company will be reduced from $1.92 to $0.96 per share. In addition, upon the effectiveness of the Fifth Amendment, we will be required to issue to ECMC 300,000 additional shares of common stock of the Company in connection with an amendment to that certain Agreement for Purchase of LLM Membership Interests between ECMC Holdings Corporation and the Company, dated as of August 9, 2018 (as amended), and the full satisfaction of certain earnouts pursuant to such agreement. If we extend maturity of the loans for an additional one year period, we will be required to issue additional warrants to ECMC at the exercise price of $0.96 per share, and to purchase up to an aggregate of 772,665 additional shares of common stock (which represent approximately 1.0% and 1.5% of our diluted common stock for the first extension exercised under the Fifth Amendment once it becomes effective, and second one year extension (if exercised), 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
Exercise price$1.92
Share price on date of issuance$1.85
Share price on date of issuance$1.85$1.93$2.24$1.75$1.11$1.10
Volatility50.0%Volatility50.0%55.0%57.5%67.5%
Risk-free interest rate1.83%Risk-free interest rate1.83%3.01%2.31%2.15%1.53%1.60%
Expected dividend yield%Expected dividend yield0%
Contractual term (in years)5
Contractual term (in years)5
Number of sharesNumber of shares3,863,326309,066386,333463,599386,333
Relative fair value of each warrantRelative 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):
March 31, 2021
Principal amount$60,000 
Less: unamortized discount and debt issuance costs(537)
Notes payable less unamortized discount and debt issuance costs59,463 
Less: current maturities, net of unamortized discount and debt issuance costs
Long-term notes payable, net of current maturities and unamortized discount and debt issuance costs$59,463 
11
 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

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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 20172021 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.
Future minimum rental commitments under non-cancelable leases asdo not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of September 30, 2017twelve months or less 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
not recorded on the balance sheet.
Operating lease expense was $0.6 million and $0.7$0.8 million for the three months ended September 30, 2017March 31, 2021 and 2016, respectively,2020, 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,
2021
March 31,
2020
Weighted Average Remaining Lease Term (in years)2.83.3
Weighted Average Discount Rate6.6%6.3%
Cash paid for amounts included in the measurement of operating lease liabilities$0.7 million$0.8 million
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2021 (in thousands):
Year Ending December 31,Amount
Remainder of 2021$1,979 
20221,939 
2023819 
2024585 
2025398 
Thereafter
Total undiscounted cash flows$5,720 
Less imputed interest(542)
Present value of lease liabilities$5,178 
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5. Stock-basedStock-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$0.6 million and $1.2$0.7 million for the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and $3.0 million and $3.5 million for the nine months ended September 30, 2017 and 2016,2020, 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, 2021:
 
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, 20201,815,561 $10.31 1.92$
Granted— 
Forfeited(63,235)9.57 — 
Exercised— 
Outstanding at March 31, 20211,752,326 $10.34 1.64$
Vested and exercisable at March 31, 20211,752,326 $10.34 1.64$
Exercisable at March 31, 20211,752,326 $10.34 1.64$
 
(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, 2021:
Number of AwardsWeighted
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, 2020Outstanding at December 31, 20204,592,644 $1.27 
Granted1,481,252
 2.41
Granted
Forfeited(371,800) 2.98
Forfeited(74,926)1.52 
Expired(40,500) 2.57
Vested and converted to shares, net of units withheld for taxes(533,872) 2.73
Vested and converted to shares, net of units withheld for taxes(61,156)1.49 
Units withheld for taxes(209,743) 2.73
Units withheld for taxes(20,662)1.49 
Outstanding at September 30, 20172,385,577
 $2.46
Expected to vest at September 30, 20172,266,348
 $2.46
Outstanding at March 31, 2021Outstanding at March 31, 20214,435,900 $1.26 
Expected to vest at March 31, 2021Expected to vest at March 31, 20214,228,500 $1.21 
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 year to four years.
6. Income Taxes

Our effective income tax rate changed to a negative rate of (14.4)(1)% for the ninethree months ended September 30, 2017March 31, 2021 from 6.9%24% for the ninethree months ended September 30, 2016.March 31, 2020. The decreasechange in the effective tax rate is primarily due to more significantdriven by overall 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 ninethree months ended September 30, 2016.March 31, 2021 for which no benefit is recognized due to valuation allowance compared to 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.

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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 2014,2017, 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.


7. EarningsNet Income (Loss) per Share
For the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020, basic net income (loss) 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, 2021 and nine months ended September 30, 2017, and the three months ended September 30, 2016, dilutive common share equivalents have been excluded, and2020, 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 20212020
Weighted average shares outstanding – basic 50,852
 50,200
 50,581
 49,974
Weighted average shares outstanding – basic54,813 53,943 
Dilutive effect of stock options 
 
 
 427
Dilutive effect of stock options
Weighted average shares outstanding – diluted 50,852
 50,200
 50,581
 50,401
Weighted average shares outstanding – diluted54,813 53,943 

8. Subsequent Events
We have evaluated subsequent events through the date these consolidated financial statements were issuedare filed 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.

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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 growththe markets in the student lending, healthcare and other markets;which we operate; anticipated trends and challenges in our business and competition in the markets in which we operate; our client relationships and our ability to maintain such client relationships; our ability to generate sufficient cash flows to fund our ongoing operations and other liquidity needs; our ability to maintain compliance with the covenants in our debt agreements; our ability to generate revenue following long implementation periods associated with new customer contracts; the adaptability of our technology platform to new markets and processes; our ability to invest in and utilize our data and analytics capabilities to expand our capabilities; 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, and related analytics services in the United States. OurStates with a focus in the healthcare industry. We work with healthcare payers through claims auditing and eligibility-based (also known as coordination-of-benefits) services helpto identify improper payments, andpayments. We engage clients in some markets, restructure and recover delinquent or defaulted assets and improper payments for both government and privatecommercial markets. We also have a call center which serves clients across different markets.with complex consumer engagement needs. Our clients typically operate in complex and highly regulated environments and outsourcecontract for their recoverypayment integrity needs in order to reduce losses on billions of dollars ofimproper healthcare payments. We historically worked in recovery markets such as defaulted student loans, improper healthcare payments and delinquent state tax and federal treasury receivables, and other receivables. We generally provide our servicescommercial recovery. However, with the ongoing impact of the COVID-19 pandemic in 2020, and the continued pause on student loan recovery work through 2021, we announced on March 29, 2021, that we have signed an outsourced basis, where we handle many or all aspectsagreement to sell certain of our clients’ various processes.non-healthcare recovery contracts to a buyer that specializes in outsourced receivables solutions and that we do not plan to renew or restart existing contracts, nor pursue new non-healthcare recovery opportunities.
Our revenue model is generally success-based as we earn fees on the aggregate correct audits and/or amount of 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 Update
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic resulted in various unprecedented national and international measures in an effort to contain the spread of the virus, including restrictions on travel, quarantines, mandatory business shut-downs, shelter-in-place and related emergency orders. We took proactive actions early on to protect the health of our employees and their families, including curtailing business travel and encouraging videoconferencing whenever possible, requiring most personnel to work remotely and we restricted access to our offices to personnel who are required to perform critical business continuity activities.
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While we continue to believe we have taken steps 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 continue to depend on future developments, some of which are out of our control. 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. The pause on our student loan recovery services has since been extended a few times, with the latest extension through September 30, 2021.
We continue to face uncertainty around the breadth and duration of business disruptions related to COVID-19 pandemic continues, as well as its impact on the U.S. economy, the ongoing business operations of our clients, and the results of our operations and financial condition. While our management team continues to actively monitor the impacts of the COVID-19 pandemic and may take further actions to our business operations that we determine are in the best interests of our employees and clients, or as required by federal, state, or local authorities, the continuing impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for fiscal year 2021 and beyond cannot be estimated atthis point.
The following discussions are subject to the effects of the COVID-19 pandemic 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 student lendingour two largest markets, healthcare and healthcare,recovery, as well as our other markets which include but are not limited to outsourced call center services, delinquent state and federal taxes and federal Treasurytreasury and other receivables.

 Three Months Ended  
March 31,
 20212020
 (in thousands)
Healthcare$13,286 $17,524 
Recovery (1)
14,491 24,265 
Customer Care / Outsourced Services3,613 4,099 
Total Revenues$31,390 $45,888 
(1)Represents student lending, state and municipal tax authorities, IRS and the Department of the Treasury markets, as well as Premiere Credit of North America.
 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 by providing healthcare payment integrity services, which include claims-based and eligibility-based services. Revenues earned under claims-based contracts in the healthcare market are driven by auditing, identifying, and sometimes recovering improperly paid claims through both automated and manual review of such claims. Eligibility-based services, which may also be referred to as coordination-of-benefits, involve identifying and recovering payments in situations where our client should not be the primary payer of healthcare claims because a member has other forms of insurance coverage. We are paid contingency fees by our clients based on a percentage of the dollar amount of improper claims recovered as a result of our efforts. The revenues we recognize are net of our estimate of claims that we believe will be overturned by appeal or disputed following payment by the provider.
For our healthcare business, our business strategy is focused on utilizing our technology-enabled services platform to provide claims-based, eligibility-based, and analytical services for healthcare payers. Revenues from our healthcare services were $13.3 million for the three months ended March 31, 2021 compared to revenues of $17.5 million that we earned from our healthcare clients during the three months ended March 31, 2020.
In 2017, we were awarded the Medicare Secondary Payer Commercial Payment Center (MSP) contract by the Centers for Medicare and Medicaid Services(“CMS"). Under this agreement, we are responsible for coordination-of-benefits, which includes identifying and recovering payments in situations where Medicare should not be the primary payer of healthcare claims because a beneficiary has other forms of insurance coverage, such as through an employer group health plan or certain other payers.
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In 2016, CMS awarded two new Medicare Recovery Audit Contractor (“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 Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) and home health and hospice within an 11 state region in the Northeast and Midwest. The Region 5 RAC contract provides for the post-payment review of DMEPOS and home health and hospice claims nationally.

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

Many of our healthcare clients are expanding the scope of services that we provide, and during 2021, we continued to renew contracts by way of competitive procurement. We believe this growth trend will continue as our suite of payment integrity services further matures and scales. Going forward, we anticipate that our healthcare revenues will drive the majority of overall company revenue growth.
Recovery
Historically, the recovery market revenues contributed a majority of our revenues. However, the COVID-19 pandemic had a significant impact on our recovery revenues. On March 29, 2021, we announced that we will continue to fulfill our current recovery contracts, but we do not plan to renew or restart existing contracts, nor pursue new non-healthcare recovery opportunities.
Recovery market revenues are derived from student lending, Internal Revenue Services (IRS), state and municipal tax authorities, the Department of the Treasury, and Premiere Credit of North America.
Since 2017, we have served as one of four companies to perform recovery services for the IRS 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 were not selected as a provider in connection with the recent IRS procurement process for the contract renewal becoming effective in September 2021. The award is currently under protest by another bidder. In its original procurement letter, the IRS stated that technical factors, when combined, were more important than the commission rate, but the IRS has discretion and does not have to automatically grant an award to the bidder that submits a bid receiving the highest technical rating.
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), 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, (GAs). In 2020, with the onset of the COVID-19 pandemic, student lending placement volumes reduced significantly, or GAs. In addition, we havestopped altogether, as a long historyresult of also providinggovernment mandates under the CARES Act to pause student lending recovery servicesactivities. We expect no additional placement volumes as a result of the most recent extension of the pause on student lending recovery activities to the Department of Education. However, in December 2016, the Department of Education awarded contracts for student loan recovery services to seven contractors andSeptember 30, 2021. While 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 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 key 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

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 RepaymentRecurring PaymentsRehabilitationLoan RestructuringWage 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 certainrecognize student loan servicesrelated revenue throughout 2020 due to our existing in-process borrower rehabilitation agreements, we have not processed many new loan rehabilitations since the pause went into effect. As a result, for three additional 30-day periods. In September 2017,2021, we entered intoanticipate that there will be a contract with Navient, who is now servicing the Great Lakes portfolio,significant reduction to act as aour annual recovery subcontractor for Navient. Under this arrangement, we expect to start recovery services for approximately 25%revenue.
17

Table 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.Contents
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 GAs

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.
HealthcareCustomer Care / Outsourced Services
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 default aversion and/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 auditparty call center 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 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 includesexpenses include expenses related to our use of subcontractors, other production related expenses, including costs associated with data processing, retrieval of medical records, printing and mailing services, amortization and other outside services, as well as general corporate and administrative expenses. 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 allocation of placement volume,costs associated with commencing new contracts, claim recovery volume, contingency fees, regulatory matters, client retentioncontract cancellation and macroeconomic factors.
AllocationCosts 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 Placementtime 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 Department of Education's contract procurement process in 2018, or delays associated with system implementations, such as the delays experienced with the implementation of our first RAC contracts with CMS. If we are not able to pay the upfront expenses out of cash from operations or availability of borrowings under our lending arrangements, we may scale back our operations or alter our business plans, either of which could prevent of us from earning future revenues under any such new client or new contract engagements.

Claim Recovery Volume
Our clients haveclaims-based audit business reflects the rightscale of claims which are deemed permissible to unilaterally set and increaseaudit by clients. Non-permissible claims may include client product lines which are determined to be out of scope, excluded providers or reduce the volume of defaulted student loansprovider groups, changes in policy, 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,such 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.geographies disrupted by natural disasters.
Typically, we are able 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,
Pursuant to the passageterms of the Student AidCARES Act enacted in March 2020, the U.S. federal government suspended payments, ceased accruing interest, and Fiscal Responsibility Act, or SAFRA, in 2010 had the effectstopped involuntary collections of transferring the origination of all government-supportedpayments (e.g., wage garnishments) for student loans toowned by 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 will over time shift the portfolio of defaulted student loans toward the Department of Education forthrough September 30, 2020, which we are no longer a contractor (subject to resolution of our recently upheld protest). was subsequently extended through September 30, 2021.

In addition, our entry into the healthcare market was facilitated by the passage of the Tax Relief and Health Care Act of 2006, which mandated CMS to contract with private firms to audit Medicare claims in an effort to increase the recovery of improper Medicare payments. Any changes to the regulations that affect the 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.
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Client RetentionContract Cancellation
Our revenues from the student loan market depend on our ability to maintain    Substantially 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. IfOur revenues could decline 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.clients.
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,For example, 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 majority    We derive our revenues primarily from providing recovery services and healthcare audit services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration expect to be entitled to in exchange for those services.
    We determine revenue recognition through the following steps:
Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the performance obligations are satisfied
    We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
    Our contracts generally contain a single performance obligation, delivered over time as a series of services that are substantially the same and have the same pattern of transfer to a client, as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
    Our contracts are composed primarily of variable consideration. Fees earned under our recovery service and healthcare audit service contracts consist primarily of contingency fees based on a specified percentage of the amount we enable our clients to recover. The contingency fee based. percentage for a particular recovery depends on the type of recovery or claim facilitated. In certain contracts, we can earn additional performance-based consideration determined based on its performance relative to a client’s other contractors providing similar services.

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We recognize revenues on these contingency fee based contracts when third-party payors remit paymentsgenerally either apply the as-invoiced practical expedient, where our right to consideration corresponds directly to our right to invoice our clients, or remit paymentsthe variable consideration allocation exception, where the variable consideration is attributable to usone or more, but not all, of the services promised in a series of distinct services that form part of a single performance obligation. As such, we have elected the optional exemptions related to the as-invoiced practical expedient and the variable consideration allocation exception, whereby the disclosure of the amount of transaction price allocated to the remaining performance obligations is not required.

We estimate variable consideration only if we can reasonably measure our progress toward complete satisfaction of the performance obligation using an output method based on behalfreliable information, and recognize such revenue over the performance period only if it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Any change made to the measure of progress toward complete satisfaction of our clients,performance obligation is recorded as a change in estimate. We exercise judgment to estimate the amount of constraint on variable consideration based on the facts and consequently,circumstances of the contingencyrelevant contract operations and availability and reliability of data. Although we believe the estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of variable consideration.

Under certain contracts, consideration can include periodic performance-based bonuses which can be awarded based on our performance under the specific contract. These performance-based awards are considered variable and may be constrained by us until there is deemednot 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 recognize revenue net of such estimate.
We have applied the as-invoiced practical expedient and the variable consideration allocation exception to have been satisfied. Under our RAC contracts with CMS, we recognize revenues when the healthcare provider has paid CMS forperformance obligations that have an average remaining duration of less than a claim or has agreed to an offset against other claims by the provider. year.
Healthcare providers have the right to appeal a claimclaims audit findings and may pursue additional level of appeals if the initial appeal is found in favor of CMS. We accrue anhealthcare clients. For coordination-of-benefits contracts, insurance companies or other responsible parties may dispute the Company’s findings regarding our clients not being the primary payer of healthcare claims. Total estimated liability for appeals, atdisputes, and refunds was $4.4 million as of March 31, 2021 and $1.0 million as of December 31, 2020. This represents the time revenue is recognized based on ourCompany’s best estimate of the amount of revenue probable of being returnedrefunded to CMS following successful appeal based on historical datathe Company’s healthcare clients. The $4.4 million liability includes a $3.3 million refund accrual to a healthcare client related to eligibility-based services, which is expected to be offset by the client against future commissions.
Contract assets was $4.7 million and $4.5 million as of March 31, 2021 and December 31, 2020, respectively. Contract assets relate to the Company’s rights to consideration for services completed, but not invoiced at the reporting date, and receipt of payment is conditional upon factors other trends relatingthan the passage of time. Contract assets primarily consist of commissions the Company estimates it has earned from completed claims audit findings submitted to such appeals. In addition, if our estimate of liability for appeals with respecthealthcare clients. Generally, the Company’s right to revenues recognized during a prior period changes, we increase or decreasepayment occurs when contract assets are recorded to accounts receivable when the estimated liability for appeals in the current period.
This estimated liability for appealsrights become unconditional, which 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,generally healthcare providers have increased their pursuit of appeals beyondpaid our healthcare clients. There was no impairment loss related to contract assets for the firstthree months ended March 31, 2021.
Contract liabilities was $0.5 million 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$0.9 million as of September 30, 2017 primarily dueMarch 31, 2021 and December 31, 2020, respectively, and are included in deferred revenue on the consolidated balance sheets. The Company’s contract liabilities mainly relate 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,an advance recovery commission payment received from a client, for which 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 theanticipates 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 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.
We are currently in the process of finalizing our assessment of the impact from the adoption of this guidance on our consolidated financial statements. As part of this process, we are considering our major revenue streams and evaluating our significant contracts therein for potential changes in the amounts and timing of revenue recognition under the new guidance. Based on the work performed to date, we have determined that the following areas are of primary focus: consideration of termination rights 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, applicability of the variable

consideration allocation exception to allocate purchase consideration to performance obligations considered to be a series, and ability to use 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, subject to the above determinations on areas most likely to be impacted by our adoption. We expect to have our evaluation, including the selection of an adoption method, completed by the end of 2017. We will adopt the new revenue recognition guidance in the first quarter of 2018.
Goodwill
We periodically review 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 basis 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 a reporting unit below 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 value 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 amount 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 that the carrying amount of such assets may not be recoverable. Depreciable intangible assets consist of client contracts 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. For the nine months ended September 30, 2017, an impairment expense of $0.1 million was recognized to account for the impairment charge in Performant Europe Ltd. due to the Company's decision to wind down this subsidiary, and 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 relating to the Department of Education customer relationship and was presented as a separate caption in the consolidated statements of operations.services are delivered. 
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.

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Results of Operations
Three Months Ended September 30, 2017March 31, 2021 compared to the Three Months Ended September 30, 2016March 31, 2020
The following table represents our historical operating results for the periods presented:
 Three Months Ended March 31,
 20212020$ Change% Change
 (in thousands)
Consolidated Statement of Operations Data:
Revenues$31,390 $45,888 $(14,498)(32)%
Operating expenses:
       Salaries and benefits24,090 28,805 (4,715)(16)%
       Other operating expenses10,356 12,220 (1,864)(15)%
Impairment of goodwill— 19,000 (19,000)(100)%
Total operating expenses34,446 60,025 (25,579)(43)%
Loss from operations(3,056)(14,137)11,081 78 %
       Interest expense(1,346)(2,227)881 40 %
       Interest income— (6)(100)%
Loss before provision for (benefit from) income taxes(4,402)(16,358)11,956 73 %
       Provision for (benefit from) income taxes37 (3,874)(3,911)101 %
Net income (loss)$(4,439)$(12,484)$8,045 64 %
 Three Months Ended September 30,
 2017 2016 $ Change % Change
 (in thousands)
Consolidated Statement of Operations Data:






Revenues$29,744
 $31,195
 $(1,451) (5)%
Operating expenses:       
       Salaries and benefits20,494
 18,710
 1,784
 10 %
       Other operating expenses13,496
 12,311
 1,185
 10 %
Total operating expenses33,990
 31,021
 2,969
 10 %
Income (loss) from operations(4,246) 174
 (4,420) (2,540)%
       Interest expense(2,459) (1,863) 596
 32 %
Loss before provision for (benefit from) income taxes(6,705) (1,689) 5,016
 297 %
       Provision for (benefit from) income taxes1,146
 (974) 2,120
 218 %
Net loss$(7,851) $(715) $7,136
 998 %

Revenues
RevenuesTotal revenues were $29.7$31.4 millionfor the three months ended September 30, 2017,March 31, 2021, a decrease of approximately 5%32%, compared to total revenues of $31.2$45.9 million for the three months ended September 30, 2016.March 31, 2020.
Student lendingHealthcare revenues were $19.8$13.3 million for the three months ended September 30, 2017,March 31, 2021, representing a decrease of $4.0$4.2 million, or 17%24%, compared to the three months ended September 30, 2016. TheMarch 31, 2020. This decrease in healthcare revenues was primarily attributable to a result of$3.3 million charge to revenue to accrue a refund liability to a client, which is expected to be offset by 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.client against future commissions.
Healthcare
Recovery revenues were $2.6$14.5 millionfor the three months ended September 30, 2017,March 31, 2021, representing a decrease of $0.4$9.8 million, or 13%40%, compared to the three months ended September 30, 2016. ThisMarch 31, 2020. The decrease was primarily due primarily to the wind downCOVID-19 pandemic that caused many of our first RAC contract and that we have not yet recognized significantcustomers to pause work on our recovery contracts.
Customer Care / Outsourced Services revenues underwere $3.6 million for the three months ended March 31, 2021, representing a decrease of $0.5 million, or 12%, compared to the three months ended March 31, 2020. The decrease was primarily due to reduced demand for our new RAC contracts.services as a result of the COVID-19 pandemic.
Salaries and Benefits
Salaries and benefits expense was $20.5$24.1 million for the three months ended September 30, 2017, an increaseMarch 31, 2021, a decrease of $1.8$4.7 million, or 10%16%, compared to salaries and benefits expense of $18.7$28.8 million for the three months ended September 30, 2016.March 31, 2020. The increasedecrease in salaries and benefits expense was primarily driven by furloughs of employees due to increased headcount.a pause in our services that resulted from the COVID-19 pandemic.
Other Operating Expenses
Other operating expenses were $13.5$10.4 million for the three months ended September 30, 2017, an increase of $1.2 million, or 10%,March 31, 2021, compared to other operating expenses of $12.3$12.2 million for the three months ended September 30, 2016.March 31, 2020. The increasedecrease in other operating expenses was primarily due to higher third party collection fees.lower activity levels resulting from the pause in recovery services provided.
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Income (loss)(Loss) from Operations
LossAs a result of the factors described above, loss from operations was $4.2$3.1 million for the three months ended September 30, 2017,March 31, 2021, compared to incomeloss from operations of $0.2$14.1 million for the three months ended September 30, 2016, representingMarch 31, 2020, a decrease in loss from operations of $4.4$11.1 million, or 2,540%. The decrease was primarily the result ofrelated to lower operating expenses combined with trailing student recovery revenues and increased salaries and benefits and other operating expenses.

from work performed previously.
Interest Expense
Interest expense was $2.5$1.3 million for the three months ended September 30, 2017,March 31, 2021, compared to $1.9$2.2 million for the three months ended September 30, 2016.March 31, 2020. Interest expense increaseddecreased by approximately $0.6$0.9 million or 32%40% for the three months ended March 31, 2021 due to a $1.0 million write-off of our unamortized debt issuance costs under our Prior Credit Agreement.lower interest rate in 2021 compared to 2020.
Income Taxes
We recognized an income tax expense of $1.1$0.04 million for the three months ended September 30, 2017,March 31, 2021, compared to an income tax benefit of $1.0$3.9 million for the three months ended September 30, 2016.March 31, 2020. Our effective income tax rate decreasedchanged to a negative rate of (17.1)(1)% for the three months ended September 30, 2017,March 31, 2021, from 57.7%24% for the three months ended September 30, 2016.March 31, 2020. The decreasechange in the effective tax rate is primarily due to more significantdriven by overall losses from operations generated 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.
Net Loss
AsMarch 31, 2021 for which no benefit is recognized due to valuation allowance compared to the net operating loss (“NOL”) carryback benefit recorded as a result of the factors described above, net loss was $7.9 millionnewly enacted provisions of the CARES Act for the three months ended September 30, 2017, which represented an increase of $7.1 million, or 998% compared to net loss of $0.7 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 RAC

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.March 31, 2020.
Net Income (Loss)
As a result of the factors described above, net loss was $13.3$4.4 million for the ninethree months ended September 30, 2017,March 31, 2021, which represented a decrease of $14.1approximately $8.0 million, or 1,674%64%, compared to net incomeloss of $0.8$12.5 million for the ninethree months ended September 30, 2016.March 31, 2020.




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Adjusted EBITDA and Adjusted Net Income
To provide investors with additional information regarding our financial results, we have disclosed in the table below adjusted EBITDA and adjusted net income, both of which are non-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.
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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,
20212020
(in thousands)
Adjusted EBITDA:
Net income (loss)$(4,439)$(12,484)
Provision for (benefit from) income taxes37 (3,874)
Interest expense (1)
1,346 2,227 
Interest income— (6)
Stock-based compensation649 691 
Depreciation and amortization1,016 1,540 
Impairment of goodwill (5)
— 19,000 
Impairment of long-lived assets636 — 
Transaction expenses (6)
511 — 
Adjusted EBITDA$(244)$7,094 
 Three Months Ended  
March 31,
 20212020
(in thousands)
Adjusted Net Income (Loss):
Net income (loss)$(4,439)$(12,484)
Stock-based compensation649 691 
Amortization of intangibles (2)
59 59 
Deferred financing amortization costs (3)
369 382 
Impairment of goodwill (5)
— 19,000 
Impairment of long-lived assets636 — 
Transaction expenses (6)
511 — 
Tax adjustments (4)
(611)(5,536)
Adjusted net income (loss)$(2,826)$2,112 

  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) $5,640
Three Months Ended  
March 31,
20212020
(in thousands)
Adjusted Net Income (Loss) Per Diluted Share:
Net income (loss)$(4,439)$(12,484)
Plus: Adjustment items per reconciliation of adjusted net income (loss)1,613 14,596 
Adjusted net income (loss)$(2,826)$2,112 
Adjusted net income (loss) per diluted share$(0.05)$0.04 
Diluted average shares outstanding (7)
54,813 54,166 
 
(1)Represents costs and expenses related to the refinancing of our existing indebtedness.
(2)Represents amortization of capitalized expenses 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.
(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.
(5)Represents restructuring costs and severance and termination expenses incurred in connection with termination of employees and consultants.
(6)Represents tax adjustments assuming a marginal tax rate of 40%.
(1)Represents interest expense and amortization of issuance costs related to the refinancing of our indebtedness
(2)Represents amortization of intangibles related to the acquisition of Performant by an affiliate of Parthenon Capital Partners in 2004.
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(3)Represents amortization of capitalized financing costs related to our Credit Agreement.
(4)Represents tax adjustments assuming a marginal tax rate of 27.5% at full profitability.
(5)Represents a noncash goodwill impairment charge in 2020 mainly due to the decrease of our market capitalization in the first half of 2020..
(6)Represents direct and incremental costs associated with expenses incurred in 2021 for a potential sale of recovery contracts.
(7)While net loss for the three months ended March 31, 2020 is ($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 $21.4 million as of March 31, 2021, 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.

$18.3 million as of December 31, 2020. The $9.8$3.1 million decreaseincrease in the balance of our cash and cash equivalents from December 31, 2016,2020 to March 31, 2021, was primarily due to principal repayments$4.8 million provided by operating activities, offset by $0.8 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. 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 COVID-19 pandemic led certain of our customers to delay the recovery and audit services that we provide as a result of the economic hardships that was faced by a large portion of the population. 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, which was most recently extended through September 30, 2021.

A pause by any of our clients as a result of the COVID-19 pause 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.
The impact of the COVID-19 pandemic on our business operations cannot be fully estimated at this point and the speed of economic recovery in the markets we serve is highly uncertain. While we currently believe our financial projections are attainable, considering the impact of the COVID-19 pandemic, there can be no assurances that our financial results will be recognized in a time frame necessary to meet our ongoing cash requirements. 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.
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Our Credit Agreement contains, and any agreements to refinance our debt likely will contain, certain financial covenants, including the maintenance of minimum fixed charge coverage ratio and total debt to EBITDA ratio, as well as restrictive covenants that require us to limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets. After considering a variety of potential effects the COVID-19 pandemic could have on our revenues and results of operations, as well as the actions we have already taken and other options available to us, we currently believe we will be in compliance with our covenants for the remainder of the term of the Credit Agreement. The impact of the COVID-19 pandemic on our business operations cannot be fully estimated at this point and the speed of economic recovery in the markets we serve is highly uncertain. If conditions change in the future due to the ongoing COVID-19 pandemic or for other reasons and we expect to be out of compliance as a result, we will likely seek waivers from our lender prior to any covenant violation. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain any such waivers in a timely manner, or on acceptable terms, or at all. Our failure to comply with these financial covenants or the restrictive covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or result in modifications to our credit terms. If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt 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$4.8 million for the ninethree months ended September 30, 2017, and included an increaseMarch 31, 2021, compared to cash used in accrued salaries and benefitsoperating activities of $1.3 million. Cash$7.2 million for the same period in 2020. The cash provided by operating activities infor the ninethree months ended September 30, 2016 was $20.5 million.March 31, 2021, is primarily a result of changes in trade accounts receivable.
Cash flows from investing activities
Cash used in investing activities of $5.4$0.8 million for the ninethree months ended September 30, 2017March 31, 2021 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, 2020 was $5.5$1.1 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, 2021 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.notes payable during the same period. Cash used inby financing activities in the ninethree months ended September 30, 2016March 31, 2020 was $37.9 million.$0.9 million primarily attributable to $0.9 million in repayments.
Restricted Cash
On August 3, 2017, $6.0 million    As of March 31, 2021, 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.
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$2.2 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.Notes Payable
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 NewInc, as the lender. Before 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 December 31, 2017. Approximately $2August 2021, (ii) increase the commitment for Additional Term Loans from $15 million to $25 million, (iii) extend the period during which Additional Term Loans were able to have been borrowed by one year to August 2020 and, (iv) not require compliance with the financial covenants in the Credit Agreement during the six fiscal quarters following our acquisition of Premiere.

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On March 21, 2019, we entered into Amendment No. 3 to the Credit Agreement to, among other things, extend the period during which we would not be required to comply with the financial covenants in the Credit Agreement until the quarter ending June 30, 2020. On September 19, 2019, we entered into Amendment No. 4 to the Credit Agreement to, among other things, designate one of our subsidiary guarantors under the Credit Agreement as a borrower and make corresponding changes and related to such change. As of September 30, 2019, the Company had borrowed all of the $25 million available as Additional Term Loans.

On March 23, 2021, we entered into Amendment No. 5 to the Credit Agreement (the “Fifth Amendment”). The effectiveness of the Fifth Amendment is subject to the satisfaction of certain conditions specified therein, including our having prepaid an aggregate amount of $6.0 million of contingent reimbursement obligations with respectthe Loans if and when we consummate the sale of certain of our assets. If such conditions to outstanding but undrawn lettersthe effectiveness of credit remainthe Fifth Amendment are satisfied, the maturity date of the Credit Agreement will automatically be extended until August 11, 2022 and the financial covenants will modified as described below.
As of March 31, 2021, $60.0 million was outstanding under the Prior Credit Agreement, however, those contingent reimbursement obligations will remain cash collateralized withAgreement. While this amount is classified in current liabilities, the administrative agent.
Thematurity of the Loans will mature onbe extended through August 11, 2022 if the third anniversary of the Closing Date, howeverFifth Amendment becomes effective, and we will haveretain an option to further extend the option tomaturity date for an additional one year period. If the Fifth Amendment does not become effective, we may extend the maturity of the Loans for two additional one yearone-year periods, in each case, 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 was 6.5% at LIBOR plus 7.0% per annum.March 31, 2021 and December 31, 2020. We will beare required to pay 5% of the original principal balance of the Loans annually in quarterly installments and(subject to offeradjustment in the event of any prepayment made in connection with the Fifth Amendment) and 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 each case, subject to the lender's right to decline to receive such payments. If we make a prepayment of $6.0 million in connection with a change of control and the payment of a 1% premium,Fifth Amendment we will not be permittedrequired to voluntarily prepaymake mandatory prepayment on account of excess cash flow for the Loans until after the first anniversary of the Closing Date.  We will be permitted to prepay the Loans during the secondfiscal year after the Closing Date if accompanied by a prepayment premium of 1%.  Thereafter,ended December 31, 2020, however we will be permittedrequired to prepaymake a mandatory prepayment of at least $6.0 million on account of excess cash flow for the Loans withoutfiscal year ending December 31, 2021, subject to reduction in accordance with the Credit Agreement for any prepayment premium.other prepayments made prior the end of such fiscal year.
The New Credit Agreement contains certain restrictive financial covenants, which became effective on the Closing Date. Such covenants, will require, among other things, that we meetwe: (1) achieve a minimum fixed charge coverage ratio (A) prior to the effectiveness of 0.5the Fifth Amendment, of 1.0 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),and 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 August 2022; and (B) on and after the fifth anniversaryeffectiveness of the Closing Date. In addition, we will be requiredFifth Amendment; of 0.75 to 1.0 through December 31, 2021, 1.0 to 1.0 through June 30, 2022, and 1.25 to 1.0 thereafter and (2) maintain a maximum total debt to EBITDA ratio (A) prior to the effectiveness of the Fifth Amendment, of 6.00 to 1.00.1.00; and (B) on and after the effectiveness of the Fifth Amendment, of 8.0 to 1.0 through June 30, 2021, of 7.0 to 1.0 through September 30, 2021 and 6.0 to 1.0 thereafter. The New Credit Agreement also contains covenants that will restrict ourthe Company's 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’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’s common stock (representing approximately up to 7.5% of 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. Upon our election to borrow any of the Additional Term Loans, 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 our 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.
The New Credit Agreement also requires us to meet certain financial covenants, including maintaining a total debt to EBITDA ratio and a fixed charge coverage ratio, as such terms are defined in our credit agreement. These financial covenants are tested at the end of each year, quarter or month, as applicable. The table below further describes these financial covenants, as well as our current status under these covenants as of September 30, 2017.borrowers.
27
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

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, 2021.
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, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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
Revenues generated from our three largest clients represented 55% of our revenues in both 2016 and 2015 and our relationships with two of these clients, the Department of Education and Great Lakes Higher Education Guaranty Corporation, have been terminated. Any termination of or deterioration in our relationship with any of our other significant clients would result in a further decline in our revenues.
We have derived a substantial majority of our revenues from a limited number of clients, including the Department of Education, and several Guaranty Agencies. Revenues from our three largest clients represented 55% of our revenues for the year ended December 31, 2016 and 55% 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. 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 student loans and other receivables, which represented approximately 94% of our revenues for the nine months ended September 30, 2017 and 92% of our revenues in the year ended December 31, 2016, 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 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 and cash flows and our ability to repay or refinance our indebtedness.
The Department of Education, our longstanding and significant client, recently announced that we would not receive a new contract for the recovery of student loans. While 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, our results of operations and cash flows will be harmed and it will be more difficult for us 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 loans 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% of our revenues, respectively.  Further, we expected the Department of Education 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 of 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, 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.
Over the course of our first RAC contract, there has been an increase in the number 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 fail to refund amounts that are due upon an appeal relating to claims that they were responsible for, we may be obligated to pay such amounts directly to CMS, which could have a material impact on our financial position.
Further, 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 date that we are permitted to start performing recovery services until we start to recognize revenues under our new RAC contracts. Accordingly, the start date 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.
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 has not indicated that those restrictions will be 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.
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 have earned under our RAC contract. The continued suspension of this type of review activitynovel coronavirus (COVID-19) pandemic has had and may continue to have a material adverse effectimpact on our future healthcare revenuesbusiness, results of operations and operatingfinancial 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 prolonged duration of COVID-19 pandemic and associated impacts will continue to adversely impact our business, results dependingof operations, and financial condition.

Our business and the businesses of our customers have been and may continue to be materially and adversely affected by the impact of the COVID-19 pandemic that has caused, and may 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 COVID-19 pandemic’s impact 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 admissionsour operations and more generally, the scope of improper claims that CMS allows us to pursue andfinancial performance, as well as its impact on our ability to successfully identify improper claimsexecute 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 the permitted scope.
We face significant competitionour control, including, but not limited, to: governmental and business actions that have been and continue to be taken 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 servicesresponse to the student loanpandemic; the impact of the COVID-19 pandemic and other receivables markets,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 economic 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 face competition from many other companies. Initially, we compete with these companiesprovide, and additional customers may choose to be one of typically several firms engaged to providesimilarly delay the audit and recovery services tothat we provide, either of which could have a particular client and, if we are successful in being engaged, we then face continuing competition from the client’s other retained firms basedmaterial negative impact 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. SomeFor 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. In January 2021, student loan relief was extended to September 30, 2021. The continued delay to the services that we provided, as a result of the COVID-19 pandemic, resulted in our decision to either divest or wind down certain portions of our currentexisting recovery business. Any additional disruptions to the services that we provide to our customers as a result of the COVID-19 pandemic or otherwise could result in a negative impact on our revenues and potential competitorsresults of operations

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 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 ourcredit markets may allow them to gain market strength. Increasing levelsalso limit the availability of competition infunding or increase the future may result in lower recovery fees, lower volumescost of contracted recovery services or higher costs for resources. Any inability to compete effectively in the markets that we servefunding, which could adversely affect our business, financial conditionposition 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.
The U.S. federal government accounts for
In addition, a significantlarge 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 toemployees continue to derive a significant portionbe subject to voluntary or mandated shelter-in-place or other quarantine orders, and the employees of our revenues from the U.S. federal government. For the year ended December 31, 2016, revenues under contracts with the U.S. federal government accounted for approximately 24%customers may also be subject to similar stay-at-home orders, either 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 could directly affect our financial performance. 
For example, 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 from 18.5% to 16.0% 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% of the outstanding loan balance as a fee for rehabilitation services. The reduction in compensation the GAs receive resulted in a decrease of approximately 25.0% in the contingency fee percentage that we receive from the GAs for assisting in the rehabilitation of defaulted student loans. 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 principal markets in which we provide our recovery 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, 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 30 government-supported GAs. This legislation, and 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 result 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 loansother disruptions in our GA client portfolios, and the larger percentage of defaulted student loans that have been previously rehabilitated, may result in a decreased revenues from our GA clients,ongoing business operations, which could negatively impact 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 Corporation and Pennsylvania Higher Education Assistance Authority were responsible for 24% and 16%, respectively, of revenues for the year ended December 31, 2016. 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 including the result of our recent successful appeal against the Department of Education’s contract award decision;
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;
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 couldwould harm our business and results of operations.
Various macroeconomic factors influence If the COVID-19 pandemic continues for an extended period, it will continue to impact our businessrevenues 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 materially and resultsadversely.

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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 agreementCredit 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.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 agreementCredit 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.Credit Agreement with ECMC. 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,Credit Agreement contains, 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.

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. We incur significant expenses associated with new contracts before we receive corresponding revenues under any such new contract, because we operate under a model in which we generally hire employees to provide services to a new client once a contract is signed and otherwise incur significant upfront implementation expenses. 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.

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.
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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. We no longer have any remaining borrowing capacity under our existing Credit Agreement. As a result, 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.

Revenues generated from our three largest clients represented 53% of our revenues for the year ended December 31, 2020, and 45% of our revenues for the year ended December 31, 2019. 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 portion of our revenues from a limited number of clients. Revenues from our three largest clients represented 53% of our revenues for the year ended December 31, 2020, and 45% of our revenues for the year ended December 31, 2019. 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 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.

Many of our existing contracts enable our clients to terminate their contractual relationship with us at any time without penalty, potentially leading to loss of business or renegotiation of terms. Further, most of our contracts allow our clients to unilaterally change the amount of work available to us or the payment terms at any given time. In addition, many of our contracts are not exclusive, with our clients retaining multiple service providers with whom we must continue to compete for additional work. 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 work. For example, in March 2020, our GA clients significantly reduced placement volumes due to the COVID-19 pandemic, and as a result, we expect our 2021 revenues from these clients will be significantly reduced. If any of our clients modify terms of service, including the success fees we are able to earn, or any of these clients establish more favorable relationships with our competitors, our future revenues may be adversely affected.

We may not be able to manage our potential growth effectively and our results of operations could be negatively affected.

Our RAC contracts, MSP contract, and other commercial healthcare contracts continue to provide the opportunity to restore growth in our business. However, our focus on growth and the expansion of our healthcare and other businesses 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.

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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 highly competitive markets and in providing our services to the healthcare and recovery markets, we face increasing competition from many other companies. Accordingly, maintaining high levels of audit and 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 could result in lower fees, lower volumes of contracted 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.

Our ability to derive revenues under our current 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 these restrictions have not been relaxed under our current RAC contracts. Accordingly, the long-term growth of the revenues we derive under our two newly awarded RAC contracts will depend on the scope of improper claims that CMS allows us to pursue and our ability to successfully identify improper claims within the permitted scope. Revenues from our RAC contracts with CMS during the year ended December 31, 2020 were $8.6 million.

In particular, under our first RAC contracts, 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 could not 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 had earned under our prior RAC contract. The continued suspension of this type of review activity had a material adverse effect on our healthcare revenues and operating results at that time.

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 2020 and 2019, revenues under contracts with the U.S. federal government accounted for approximately 49% and 36%, 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 winning competitive bidding processes, changes in federal government spending, the availability of adequate funding for the applicable federal government agency, 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, we were not selected as a provider in connection with the recent IRS procurement process for the contract renewal becoming effective in September 2021. The award is currently under protest by another bidder. In its original procurement letter, the IRS stated that technical factors, when combined, were more important than the commission rate, but the IRS has discretion and does not have to automatically grant an award to the bidder that submits a bid receiving the highest technical rating. 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.

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Table of Contents
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, but are not limited to, the following:

    • 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;

    • our ability to maintain contractual commitments after the expenses we incur during our 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.

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
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Table of our management team or other key employees.Contents
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, 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 contract 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 requires 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, 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, 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, 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.

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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
Risks Related to Regulations and Legislation

Future legislative or regulatory changes affecting the markets in which we operate could impair our business and operations.

Two of the principal markets in which we provide our recovery and audit services, federal and state receivables and the Medicare program, are a subject of significant legislative and regulatory focus and we cannot anticipate how future changes in government policy may make acquisitionsaffect our business and operations. For example, Student 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 the remaining government-supported GAs. 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 operating results. Any future changes in the legislation and regulations that prove unsuccessful, strain or divertgovern these markets, may require us to adapt our resources and harm our results of operations and stock price.
We may consider acquisitions of other companies in our industry or inbusiness to the 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 owncircumstances and we may be unable to do so in a manner that does not adversely affect our business and operations.

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, 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 contracts 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 require that we incur significant expenses, which could increase in the future as a result of additional regulations, all of which adversely affects our standards, controlsresults of operations. Failure to comply with these laws and policies. Further, acquisitionsregulations can result in penalties and in some cases expose us to civil lawsuits.

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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 place additional constraintssubject 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 (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 (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 resources by diverting the attention of our management from otherstudent loan recovery business concerns. Moreover, any acquisition may result in a potentially dilutive issuancesignificant costs, including litigation costs. We are also subject to regulations promulgated by the United States Consumer Financial Protection Bureau (CFPB), which, among other things, establishes 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 equity securities,consumer debts. Due to the incurrenceCOVID-19 pandemic, the Department of additional debtEducation paused all student loan payments and amortizationrecovery efforts beginning in March of expenses related2020. Moreover, this pause has been extended through September of 2021. There is significant risk to intangible assets, allthe student loan recovery revenue portion of which could adversely affect our resultsbusiness if the administration continues the pause or forgives large amounts of operations and stock price.the borrowers outstanding loans.

Risks Related to our Common Stock

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$0.54 on March 16, 2017June 1, 2020 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, Prescott Group Management, L.L.C., ECMC Group, Inc., and Invesco Ltd.Mill Road Capital Management LLC beneficially owned approximately 26.5%24.6%, 22.9% 11.5%, and 17.4%6.6% of our common stock, respectively, as of September 30, 2017.March 31, 2021. As a result of their ownership, Parthenon Capital Partners and Invesco Ltd.these significant stockholders 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, Prescott Group Management, L.L.C., ECMC Group, Inc., and Invesco Ltd.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 and Invesco Ltd.these three significant stockholders 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.
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In addition, even though Parthenon Capital Partners hasdoes not currently have a representative sitting on our Board of Directors, Parthenon Capital Partners does have 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.

General Risks

We may undertake strategic transactions or other corporate restructuring that prove unsuccessful, strain or divert our resources and harm our results of operations and stock price.

We may consider strategic transactions or other corporate restructurings that could include the acquisition of other companies in our industry or in new markets, or the sale or divestiture of, or the wind down of existing portions of our business. We may not be able to successfully complete any such strategic transaction and, if completed, any such acquisition or divestiture 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, the amortization 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. Further, despite any projected cost savings related to any proposed divestiture or wind down of any existing portion of our business, any such divestiture or wind down could result in an adverse effect on our revenues and results of operations.

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.

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.


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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered SecuritiesNone.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
NoneNone.
ITEM 5. OTHER INFORMATION
None    None.



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ITEM 6. EXHIBITS
(A) Exhibits:
(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.

(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.


(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 17, 2021
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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