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

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations, and cash and cash equivalents on hand. Cash and cash equivalents, which includes restricted cash and consists primarily of cash on deposit with banks, totaled ~~$18.2~~$12.4 million as of ~~June 30, 2022 and $19.6~~March 31, 2023 compared to $23.5 million as of December 31, ~~2021.~~ 2022. The $11.1 million decrease in the balance of our cash and cash equivalents from December 31, 2022 to March 31, 2023, was primarily due to $8.0 million used in financing activities, $2.1 million used in operating activities, and $0.9 million used in investing activities. The $8.0 million in cash used in financing activities was primarily the result of $7.5 million in prepayment of outstanding principal in connection with an amendment to our Credit Agreement.

On December 17, 2021, we entered into the Credit Agreement with MUFG Union Bank, N.A. The Credit Agreement ~~includes~~originally included a $20 million term loan commitment, which was fully advanced at closing, and a $15 million revolving loan commitment, which ~~remains~~was undrawn as of ~~June 30, 2022. A portion of~~March 31, 2023. On March 13, 2023, we entered into a First Amendment to the Credit Agreement to amend the Credit Agreement to, among other things, terminate the revolving loan commitment in full and to establish a new maturity date of ~~up to $2.5 million is available~~December 31, 2024 for the ~~issuance~~term loan. In connection with the First Amendment to the Credit Agreement, we voluntarily prepaid $7.5 million of ~~letters~~the outstanding principal of ~~credit.~~the term loan.

Our Credit Agreement contains, and any agreements to refinance our debt likely will contain, certain financial covenants, including the maintenance of minimum fixed charge coverage ratio and total debt to EBITDA ratio, as well as restrictive covenants that require us to limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets. We ~~currently believe we will be~~are in compliance with our covenants ~~for the remainder of the term of~~under the Credit Agreement. However, conditions may change for a variety of reasons in the future that may affect our ability to maintain compliance with our financial or restrictive covenants. Our failure to comply with these financial covenants or the restrictive covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or result in modifications to our credit terms.

~~Table of Contents~~

Cash flows from operating activities

Cash used in operating activities was ~~$5.5~~$2.1 million for the ~~six~~three months ended ~~June 30,~~March 31, 2023, primarily as a result of the net loss, a decrease in accrued salaries and benefits, offset by a decrease in contract assets during the period. Cash used in operating activities was $4.7 million for the three months ended March 31, 2022, ~~was~~ primarily as a result of changes in ~~contract assets,~~ accrued salaries and benefits and contract liabilities and other current liabilities during the period. ~~Cash provided by operating activities was $1.5 million for the six months ended June 30, 2021, was primarily as a result of changes in trade accounts receivable, offset by contract assets.~~

Cash flows from investing activities

Cash used in investing activities of ~~$1.2~~$0.9 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 primarily related to capital expenditures for information technology, data storage, hardware, telecommunication systems and security enhancements to our information technology systems. Cash used in investing activities for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 was ~~$0.8~~$0.7 million, which was used primarily for similar ~~purposes.~~cash expenditure purposes as set forth above.

Cash flows from financing activities

Cash used in financing activities of $8.0 million for the three months ended March 31, 2023 was primarily attributable to repayments of notes payable during the period. Cash provided by financing activities ~~of $5.3 million~~ for the ~~six~~three months ended ~~June 30,~~March 31, 2022 was $5.4 million, primarily attributable to $5.6 million in proceeds from the exercise of warrants by ECMC, offset by ~~$0.3~~$0.1 million in repayments of notes payable. ~~Cash used in financing activities for the six months ended June 30, 2021 was $8.4 million, primarily attributable to repayments of notes payable during the period.~~

Restricted Cash

As of ~~June 30, 2022,~~March 31, 2023, restricted cash included in current assets on our consolidated balance sheet was ~~$2.2~~$0.1 million.

Table of Contents

Notes Payable

On December 17, 2021, we entered into the Credit ~~Agreement~~Agreement with MUFG Union Bank, N.A. The Credit Agreement ~~includes~~originally included a $20 million term loan commitment, which was fully advanced at closing and a $15 million revolving loan commitment ~~which remains undrawn as of June 30, 2022. A portion of the revolving loan commitment of up to $2.5 million is available for the issuance of letters of credit.~~ . Subject to certain customary exceptions, the obligations under the Credit Agreement are, or will be, guaranteed by each of our existing and future, direct or indirect, domestic ~~subsidiaries. Our obligations under the Credit Agreement are secured by liens on substantially all of our assets and each of our domestic~~ subsidiaries that are guarantors under the Credit Agreement.

On March 13, 2023, we entered into a First Amendment to the Credit Agreement to amend the Credit Agreement to, among other things, terminate the revolving loan commitment in full and to establish a new maturity date of December 31, 2024 for the term loan. As a result of the First Amendment to the Credit Agreement, we do not have any further borrowing capacity under the Credit Agreement.

As of ~~June 30, 2022, $19.8~~March 31, 2023, $11.8 million was outstanding under the Credit Agreement. The Company’s annual interest rate at ~~June 30, 2022~~March 31, 2023 was ~~3.8%~~8.5%.

The Credit Agreement matures on December 17, 2026. The proceeds from the term loan under the Credit Agreement were used, together with cash on hand, to refinance its credit agreement dated as of August 17, 2017, with ECMC Group, Inc. (as amended, the Prior Credit Agreement), and to pay fees and expenses in In connection with the ~~Credit Agreement.~~First Amendment described above, we voluntarily prepaid $7.5 million of the outstanding principal of the term loan.

Pursuant to the Credit Agreement, after giving effect to the First Amendment described above, we are required to repay the aggregate outstanding principal amount of the term loan under the Credit Agreement in quarterly installments ~~commencing~~which commenced on March 31, 2022 in an amount that would result in amortization of (a) 2.5% of the original term loan principal in the first full year following commencement of amortization, (b) 5.0% of the original term loan principal in the second full year following commencement of amortization, and (c) ~~7.5%~~10% of the ~~term loan principal in each of the third and fourth full years following commencement of amortization, and (d) 10% of the~~original term loan principal in the ~~fifth~~third full year ~~(or portion thereof)~~ following commencement of amortization. In addition, we must make mandatory prepayments of the term loan principal under the Credit Agreement with the net cash proceeds received in connection with certain specified events, including certain asset sales, casualty and condemnation events (subject to customary reinvestment rights). Any remaining outstanding principal balance of the term loan under the Credit Agreement is repayable on the maturity date. Amounts repaid or prepaid with respect to the term loan under the Credit Agreement cannot be reborrowed.

We may, at our option, prepay any revolving loan borrowings under the Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). Borrowings of revolving loans under the Credit Agreement are also subject to mandatory prepayment in the event that outstanding borrowings and letter of credit usage exceed aggregate revolving loan commitments then in effect.

~~Table of Contents~~

Under the Credit Agreement, ~~loans~~after giving effect to the First Amendment described above, the term loan generally may bear interest based on term SOFR (the secured overnight financing right) or an annual base rate, as applicable, plus an applicable margin based on our leverage ratio each quarter that may range between 2.50% per annum and ~~3.00%~~4.00% per annum in the case of term SOFR loans, and between 1.50% per annum and ~~2.00%~~3.00% per annum in the case of base rate loans. In addition, a commitment fee based on unused availability ~~of the~~if there are outstanding revolving ~~credit facility~~loan commitments is also payable which may vary from 0.30% per annum to ~~0.40%~~0.50% per annum, also based on our leverage ~~ratio.~~ratio, however, the revolving commitment was terminated in connection with the First Amendment described above.

The Credit Agreement contains certain customary representations, warranties, and affirmative and negative covenants by us and our subsidiaries that restrict the Company’s and its subsidiaries’ ability to take certain actions, including, incurrence of indebtedness, creation of liens, making certain investments, mergers or consolidations, dispositions of assets, assignments, sales or transfers of equity in subsidiaries, repurchase or redemption of capital stock, entering into certain transactions with affiliates, or changing the nature of the Company’s business. The Credit Agreement, after giving effect to the First Amendment described above, also contains ~~two~~ financial covenants, which require us to maintain, as of the last day of each fiscal quarter commencing ~~with March 31, 2022,~~ (a) as of September 30, 2023, a total leverage ratio of not greater than ~~(i) 3.00~~10.00 to 1.00, ~~through September 30, 2022~~(b) as of December 31, 2023 and ~~(ii)~~as of the last day of each fiscal quarter thereafter, (i) a total leverage ratio of not greater than 2.50 to 1.00, ~~thereafter~~ and ~~(b)~~(ii) a fixed charge coverage ratio of not less than 1.20 to ~~1.00.~~1.00 and (c) prior to the earlier December 31, 2023 and the date that the Company’s leverage ratio is not greater than 2.50 to 1.00 and its fixed charge coverage ratio is not less than 1.20 to 1.00, a minimum amount of unrestricted cash subject to a perfected security interest in favor of MUFG Union Bank more specifically set forth in the Credit Agreement. The obligations under the Credit Agreement may be accelerated or the commitments terminated upon the occurrence of events of default under the Credit Agreement, which include payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to other material indebtedness, defaults arising in connection with changes in control, and other customary events of default.

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

~~The obligations under the Credit Agreement are secured by substantially all of our subsidiaries' assets and are guaranteed by the Company and its subsidiaries, other than the borrowers.~~

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 SOFR. 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 ~~$0.2~~$0.1 million.

Table of Contents

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 may impact our interest expense and interest income. This impact, if applicable, 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, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable not absolute, assurance of achieving the desired control objectives. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing ~~disclosure~~internal controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

~~Table of Contents~~

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~~not effective at the reasonable assurance level as of ~~June 30, 2022.~~March 31, 2023.

As described in Item 9A of our Annual Report on the Form 10-K for the year ended December 31, 2022, management identified control deficiencies related to the design and operation of information technology general controls (“ITGCs”) around user access and change management for certain information technology (“IT”) systems which resulted in a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness did not result in any material misstatement of our consolidated financial statements for the periods presented. Subsequent to the identification of the material weakness, we performed supplemental procedures and found no evidence of improper changes or changes with direct or consequential impact on internal controls over financial reporting.

We have started the process of designing and implementing effective internal control measures to improve the Company’s internal controls over financial reporting and to remediate this material weakness. Our efforts include modifying ITGCs over user access and change management, enhancing our documentation to evidence execution of these ITGCs, and implementing additional controls designed to detect issues that could arise over users with elevated access rights. We are planning to complete such enhancements in 2023.

We believe that these actions, collectively, will remediate the material weakness. However, the material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot provide assurance that such improvements will be sufficient to provide us with effective internal control over financial reporting.

Changes in Internal Control over Financial Reporting

~~There was~~Other than the information provided above, there were no ~~change~~changes in our internal control over financial reporting that occurred during the first quarter ~~ended June 30, 2022,~~of 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

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~~derived from ~~our~~ student loan recovery services we provided historically, 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

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~~clients or new contract 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, or delays associated with technology or system implementations, such as the delays experienced with the implementation of our ~~first~~ RAC ~~contract~~contracts 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 cash on hand or borrowings under our lending arrangements, we may be required to scale back our operations or alter our business plans to account for cash shortages, either of which could prevent us from earning future revenues under any such new client or contract engagements. Further, if we are not successful in maintaining contractual commitments after the expenses we incur during our typically long implementation cycle, our cash flows and results of operations could be adversely affected.

Revenues generated from a limited number of our largest clients represent a substantial majority of our revenues. Any termination of or deterioration in our relationship with any of our significant clients would result in a decline in our revenues.

We derive a substantial portion of our revenues from a limited number of our largest clients. Substantially all of our contracts (i) entitle our clients to unilaterally terminate their contractual relationship with us at any time without penalty and (ii) are subject to competitive procurement or renewal processes from time to time. ~~For example, we were recently notified by CMS of a “request for quote” or contract renewal process related to our existing MSP contract.~~ Further, substantially all of our contracts allow our clients to unilaterally change the amount of work available to us. If one of our largest clients terminates any of our existing contracts, or chooses not to renew an existing contract in connection with a competitive procurement or renewal process, our revenues and results ~~and~~ of operations may be materially harmed. Further, if one of our significant clients decides to limit the amount of claims that we are allowed to audit or if the terms of compensation for our services change or if there is a reduction in the level of placements provided by any of these clients, our revenues could decline, which would harm our business, financial condition and results of operations. Lastly, our revenues could be adversely affected if one of our significant clients is acquired by an entity that does not wish to continue to use our services.

2927

Table of Contents

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, CMS paused medical review activities under our ~~two~~then current RAC contracts related to the COVID-19 pandemic, which were later resumed in August 2020. This pause in medical review activities under our RAC contracts had a negative impact on our 2020 and 2021 results of operations. 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.

Our ability to derive revenues under our current healthcare contracts will depend in part on the number and types of potentially improper claims that we are allowed to audit or otherwise pursue by our clients, 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.

Our revenues under our current healthcare contracts depend in part on the number and types of potentially improper claims that we are allowed to audit or otherwise pursue on behalf of our clients. For example, 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 revenues we derive under our three existing RAC contracts, or any additional contracts we may enter into with CMS, 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.

In addition, our commercial healthcare clients also have the ability to unilaterally restrict or expand the type and volume of claims we are allowed to audit or otherwise provide services. Any future limitations on the type or volume of claims that we are permitted to audit or otherwise review on behalf of our clients in the healthcare market could have a material negative impact on our business, financial condition and results of operations.

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

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

Table of Contents

Our 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.

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. We currently hold ~~four~~five contracts with agencies of the U.S. federal government within our healthcare business. The continuation and exercise of renewal options on our U.S. federal government contracts and any new U.S. federal government contracts are, among other things, contingent upon succeeding within 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 pause in activities under our RAC contracts in 2020 as a result of the COVID-19 pandemic, could adversely affect our financial performance. 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.

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 overall healthcare spending in the U.S. and the volume of healthcare claims that we audit on behalf of our clients, which are both impacted by domestic and global economic conditions, rates of unemployment and similar factors, movements in interest rates, and changes in healthcare costs, governmental policies toward Medicare expenditures 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~~been/were materially and adversely affected by recent inflationary trends and the impact of the COVID-19 pandemic ~~that has~~which have caused, and ~~is expected to~~may continue to cause, ~~the global~~a slowdown in global economic activity, which has resulted in a significant negative impact on our financial condition and results of operations. Political tensions resulting in economic instability, such as due to military activity or civil hostilities among Russia and Ukraine and the related response, including sanctions or other restrictive actions, by the United States and/or other countries, or other similar events, may have an adverse impact on our business, financial condition, and results of operations.

~~Table of Contents~~

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 cash on hand and borrowings under our existing lending facility. As a result of the First Amendment to our Credit Agreement with MUFG Union Bank, which became effective March 13, 2023, we do not have any further borrowing capacity under the Credit Agreement. We cannot make assurances that we will maintain a level of cash flows from operating activities sufficient to permit us to fund our ongoing and planned business operations and to fund our other liquidity needs. The 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 borrowings to fund our ongoing or future business operations, there can be no assurance that we will be successful in obtaining such 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.

Table of Contents

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

We believe our RAC contracts, MSP CRC contract, and other commercial healthcare contracts continue to provide the opportunity for 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.

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 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 face significant competition from other companies in providing our services and sourcing contracts with new clients or new contracts with existing clients. Accordingly, maintaining high levels of service under our contracts, and doing so in a cost-effective manner, are important factors in our ability to maintain existing contracts and obtain new contracts and grow our revenues and net income.Any failure to achieve these objectives could result in the loss of existing contractual relationships either by a client’s decision to terminate existing contractual relationship or in connection with a competitive contract re-bidding process, or the inability to obtain new client contracts, any of which 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.

~~Table of Contents~~

The novel coronavirus (COVID-19) pandemic has had and may continue to have a material adverse impact on our business, results of operations and financial condition, as well as on the operations and financial performance of many of our customers. We are unable to predict the extent to which the prolonged duration of COVID-19 pandemic as well as any new coronavirus variants, and associated impacts will continue to adversely impact our business, results of 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 our operations and financial performance, as well as its impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited to: governmental and business actions that have been and continue to be taken in response to the pandemic; the impact of the COVID-19 pandemic and actions taken in response on global and regional economies and economic activity; the availability of federal, state or local funding programs; general economic uncertainty and financial market volatility; global economic conditions and levels of economic growth; and the pace of economic recovery when the COVID-19 pandemic subsides.

Table of Contents

Given the economic hardships ~~that may be faced by a large portion of the population~~caused as a result of the COVID-19 pandemic, certain of our customers ~~had~~have chosen and may continue to choose to delay the ~~recovery, audit and customer care~~ services that we provide, and additional customers may choose to similarly delay the audit and recovery services that we provide, either of which could have a material negative impact on our revenues and results of operations. For example, the U.S. federal government initially 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, with such suspension subsequently extended to August 31, 2022. 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 not continue certain portions of our non-healthcare recovery business. In addition, the COVID-19 pandemic has also had a negative impact on overall hospital utilization rates in the United States. This negative impact on overall hospital utilization rates has caused delays with the healthcare industry as a whole, which in turn has had a negative impact on our healthcare business. 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 results 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 financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position and results of operations. While we believe our financial projections are attainable, there can be no assurances that our financial results will be recognized in a timeframe necessary to meet our ongoing cash requirements.

Our revenues under our current healthcare contracts depend in part on the number and types of potentially improper claims that we are allowed to audit or otherwise pursue on behalf of our clients. For example, 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 revenues we derive under our two existing RAC contracts, or any additional contracts we may enter into with CMS, 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.

~~Table of Contents~~

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

~~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 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;~~contracts;

• 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.

~~Table of Contents~~

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.

Table of Contents

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 services to current or potential clients may be reduced, and we may incur significant liabilities.

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

Our business is increasingly dependent on critical, complex, and interdependent information technology (IT) systems, including internet-based systems, some of which are managed or hosted by third parties, to support business processes as well as internal and external communications. The size and complexity of our IT systems make us potentially vulnerable to IT system breakdowns, malicious intrusion, and computer viruses, which may result in the impairment of our ability to operate our business effectively. In addition, having a significant portion of our employees work remotely due to the COVID-19 pandemic can strain our information technology infrastructure, which may affect our ability to operate effectively, may make us more susceptible to communications disruptions, and expose us to greater cybersecurity risks.

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.

~~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.~~

~~Table of Contents~~

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.

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.

Table of Contents

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, 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-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 nondisclosure, confidentiality and invention assignment agreements with our employees, consultants and other parties to protect our trade secrets, know-how and other intellectual property and proprietary information. These agreements may not be 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-how and other proprietary information. Any infringement, misappropriation or other violation of our patents, trademarks, copyrights, trade secrets, or other intellectual property rights could adversely affect any competitive advantage we currently derive or may derive from our proprietary technology platform and we may incur significant costs associated with litigation that may be necessary to enforce our intellectual property rights.

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

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

Risks Related to Regulations and Legislation

We identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, or if we experience additional material weaknesses or other deficiencies in the future, or otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial results, which could result in loss of investor confidence and adversely impact our stock price.

Table of Contents

~~Risks Related~~Internal controls related to ~~Regulations~~the operation of technology systems are critical to maintaining adequate internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, during the fourth quarter of fiscal 2022, management identified a material weakness in the design and ~~Legislation~~operation of internal control related to information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support our financial reporting processes. We have begun the process of designing and implementing measures to improve our internal controls over financial reporting and to remediate this material weakness. While there can be no assurance that our efforts will be successful, we plan to remediate this material weakness during fiscal 2023. Our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting and data systems and controls across our company. We expect these systems and controls to involve significant expenditures and to may become more complex as our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls, and our reporting systems and procedures. Our inability to successfully remediate our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting or any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations or result in material misstatements in our financial statements, which could limit our liquidity and access to capital markets, adversely affect our business and investor confidence in our financial statements, and adversely impact our stock price.

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

The markets in which we operate are highly regulated, and any future changes in the regulatory landscape could have a material effect on our business and financial condition. For example, the Medicare program, is a subject of significant legislative and regulatory focus, and we cannot anticipate how future changes in government policy may affect our business and operations. 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.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley would impair our ability to produce accurate and reliable financial statements, which would harm our stock price.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act and other applicable securities rules and regulations. In particular, we are subject to reporting obligations under Section 404 of the Sarbanes-Oxley Act that require us to include a management report on our internal control over financial reporting in our annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. In addition, commencing in fiscal year 2021, we were required to adhere to the auditor attestation requirements with respect to the to the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. Compliance with such auditor attestation requirements has resulted in significant increases in both the time devoted to and the expenses incurred in connection with our financial reporting obligations. Our management may conclude that our internal control over our financial reporting is not effective. If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, we may not be able to produce reliable financial reports or help prevent fraud. Our failure to achieve and maintain effective internal control over financial reporting could prevent us from filing our periodic reports on a timely basis, which could result in the loss of investor confidence in the reliability of our financial statements, harm our business and negatively impact the trading price of our common stock.

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 results of operations. Failure to comply with these laws and regulations can result in penalties and in some cases expose us to civil lawsuits.

3634

Table of Contents

Our legacy 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 (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 student loan recovery business may result in significant 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 consumer debts.

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 $0.54 on June 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.

Prescott Group Management, L.L.C., ~~Parthenon Capital Partners,~~ First Light Asset Management, LLC, ~~ECMC Group, Inc.,~~Parthenon Capital Partners, and Mill Road Capital Management LLC beneficially owned approximately 20.9%, ~~7.8%~~10.3%, ~~6.8%, 6.4%,~~6.0% and ~~4.7%~~4.6% of our common stock, respectively, as of ~~June 30, 2022.~~March 31, 2023. As a result of their ownership, 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 making with respect to our business direction and policies. Mill Road Capital Management LLC currently has a representative sitting on our Board of Directors. These significant stockholders may have interests different from our other stockholders’ interests and may vote in a manner adverse to those interests. Matters over which these 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.

3735

Table of Contents

In addition, even though Parthenon Capital Partners does 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 if and when Parthenon owns greater than 10% of our common stock. 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.

3836

Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

~~None.~~Not Applicable.

ITEM 5. OTHER INFORMATION

None.

3937

Table of Contents

ITEM 6. EXHIBITS

(A) Exhibits:


Exhibit No.			Description

31.1			Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)

31.2			Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)

32.1(1)			Certification of the Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2(1)			Certification of the Principal Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS(2)			XBRL Instance Document

101.SCH(2)			XBRL Taxonomy Extension Scheme

101.CAL(2)			XBRL Taxonomy Extension Calculation Linkbase

101.DEF(2)			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB(2)			XBRL Taxonomy Extension Label Linkbase

101.PRE(2)			XBRL Taxonomy Extension Presentation Linkbase

104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

(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.

4038

Table of Contents

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:

~~August 9, 2022~~May 10, 2023

By:

/s/ Simeon M. Kohl

~~Lisa Im~~Simeon M. Kohl

Chief Executive Officer (Principal Executive Officer)

By:

/s/Rohit Ramchandani

~~Ian Johnston~~Rohit Ramchandani

~~Vice President and~~ Chief ~~Accounting~~Financial Officer

4139


Delaware						20-0484934
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, par value $.0001 per share	PFMT	The Nasdaq Stock Market LLC


		Page
PART I—Financial Information

Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets — ~~June 30, 2022 (unaudited)~~March 31, 2023 and December 31, ~~2021~~2022 (unaudited)	1
	Consolidated Statements of Operations — Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	2
	Consolidated Statements of Changes in Stockholders' Equity — Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	3
	Consolidated Statements of Cash Flows — ~~Six~~Three Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2725
Item 4.	Disclosure Controls and Procedures	2726

PART II—Other Information		2927

Item 1.	Legal Proceedings	2927
Item 1A.	Risk Factors	2927
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3937
Item 3.	Defaults Upon Senior Securities	3937
Item 4.	Mine Safety Disclosures	3937
Item 5.	Other Information	3937
Item 6.	Exhibits	4038
Signatures		4139


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(Unaudited)					(Unaudited)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	15,973	$	17,347	Cash and cash equivalents	$	12,335	$	23,384
Restricted cash	Restricted cash	2,203		2,203		Restricted cash	81		81
Trade accounts receivable, net of allowance for doubtful accounts of $29 and $0, respectively		19,880		20,808
Trade accounts receivable						Trade accounts receivable	15,636		15,794
Contract assets	Contract assets	9,197		8,113		Contract assets	8,993		11,460

Prepaid expenses and other current assets	Prepaid expenses and other current assets	3,334		3,077		Prepaid expenses and other current assets	3,623		3,665
Income tax receivable	Income tax receivable	3,248		3,159		Income tax receivable	3,083		3,123

Total current assets	Total current assets	53,835		54,707		Total current assets	43,751		57,507
Property, equipment, and leasehold improvements, net	Property, equipment, and leasehold improvements, net	15,036		15,708		Property, equipment, and leasehold improvements, net	10,527		10,897

Goodwill	Goodwill	47,372		47,372		Goodwill	47,372		47,372

Right-of-use assets	Right-of-use assets	2,647		3,235		Right-of-use assets	794		2,057
Other assets	Other assets	969		963		Other assets	1,194		1,000
Total assets	Total assets	$	119,859	$	121,985	Total assets	$	103,638	$	118,833
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Current maturities of notes payable, net of unamortized debt issuance costs of $14 and $11, respectively		$	736	$	489
Current maturities of notes payable, net of unamortized debt issuance costs of $58 and $17, respectively						Current maturities of notes payable, net of unamortized debt issuance costs of $58 and $17, respectively	$	1,192	$	983
Accrued salaries and benefits	Accrued salaries and benefits	7,395		8,476		Accrued salaries and benefits	5,818		6,938
Accounts payable	Accounts payable	963		1,124		Accounts payable	971		1,262
Other current liabilities	Other current liabilities	2,124		3,732		Other current liabilities	2,017		2,252

Contract liabilities	Contract liabilities	366		634		Contract liabilities	—		438
Estimated liability for appeals and disputes	Estimated liability for appeals and disputes	1,076		1,190		Estimated liability for appeals and disputes	863		1,106
Lease liabilities	Lease liabilities	1,404		1,862		Lease liabilities	623		1,228
Total current liabilities	Total current liabilities	14,064		17,507		Total current liabilities	11,484		14,207
Notes payable, net of current portion and unamortized debt issuance costs of $366 and $416, respectively		18,634		19,084
Notes payable, net of current portion and unamortized debt issuance costs of $484 and $316, respectively						Notes payable, net of current portion and unamortized debt issuance costs of $484 and $316, respectively	10,016		18,184

Lease liabilities	Lease liabilities	1,557		1,803		Lease liabilities	189		1,076
Other liabilities	Other liabilities	1,179		1,168		Other liabilities	887		881
Total liabilities	Total liabilities	35,434		39,562		Total liabilities	22,576		34,348
Commitments and contingencies (note 3 and note 4)	Commitments and contingencies (note 3 and note 4)	0		0		Commitments and contingencies (note 3 and note 4)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, $0.0001 par value. Authorized, 500,000 shares at June 30, 2022 and December 31, 2021 respectively; issued and outstanding 73,818 and 69,281 shares at June 30, 2022 and December 31, 2021, respectively		7		7
Common stock, $0.0001 par value. Authorized, 500,000 shares at March 31, 2023 and December 31, 2022 respectively; issued and outstanding 75,505 and 75,505 shares at March 31, 2023 and December 31, 2022, respectively						Common stock, $0.0001 par value. Authorized, 500,000 shares at March 31, 2023 and December 31, 2022 respectively; issued and outstanding 75,505 and 75,505 shares at March 31, 2023 and December 31, 2022, respectively	7		7
Additional paid-in capital	Additional paid-in capital	140,506		133,662		Additional paid-in capital	143,059		142,261
Accumulated deficit	Accumulated deficit	(56,088)		(51,246)		Accumulated deficit	(62,004)		(57,783)
Total stockholders’ equity	Total stockholders’ equity	84,425		82,423		Total stockholders’ equity	81,062		84,485
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	119,859	$	121,985	Total liabilities and stockholders’ equity	$	103,638	$	118,833


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Revenues	Revenues	$	25,681	$	32,842	$	52,764	$	64,232	Revenues	$	25,729	$	27,083
Operating expenses:	Operating expenses:									Operating expenses:
Salaries and benefits	Salaries and benefits	20,903		23,295		41,342		47,385		Salaries and benefits	22,449		20,439
Other operating expenses	Other operating expenses	8,081		10,759		16,212		21,115		Other operating expenses	7,069		8,131

Total operating expenses	Total operating expenses	28,984		34,054		57,554		68,500		Total operating expenses	29,518		28,570
Loss from operations	Loss from operations	(3,303)		(1,212)		(4,790)		(4,268)		Loss from operations	(3,789)		(1,487)
Gain on sale of certain recovery contracts	Gain on sale of certain recovery contracts	382		1,849		382		1,849		Gain on sale of certain recovery contracts	3		—

Interest expense	Interest expense	(216)		(2,126)		(371)		(3,472)		Interest expense	(414)		(155)

Loss before provision for income taxes	Loss before provision for income taxes	(3,137)		(1,489)		(4,779)		(5,891)		Loss before provision for income taxes	(4,200)		(1,642)
Provision for income taxes	Provision for income taxes	32		33		63		70		Provision for income taxes	21		31
Net loss	Net loss	$	(3,169)	$	(1,522)	$	(4,842)	$	(5,961)	Net loss	$	(4,221)	$	(1,673)
Net loss per share	Net loss per share									Net loss per share
Basic	Basic	$	(0.04)	$	(0.03)	$	(0.07)	$	(0.11)	Basic	$	(0.06)	$	(0.02)
Diluted	Diluted	$	(0.04)	$	(0.03)	$	(0.07)	$	(0.11)	Diluted	$	(0.06)	$	(0.02)
Weighted average shares	Weighted average shares									Weighted average shares
Basic	Basic	73,502		55,516		71,698		55,167		Basic	75,505		69,873
Diluted	Diluted	73,502		55,516		71,698		55,167		Diluted	75,505		69,873


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		Three Months Ended June 30, 2022															Three Months Ended June 30, 2021																				Three Months Ended March 31, 2023																				Three Months Ended March 31, 2022
		Common Stock			Additional Paid-In Capital				Accumulated Deficit				Total				Common Stock						Additional Paid-In Capital			Accumulated Deficit					Total						Common Stock								Additional Paid-In Capital				Accumulated Deficit				Total				Common Stock					Additional Paid-In Capital				Accumulated Deficit				Total
		Shares	Amount												Shares			Amount							Shares									Amount								Shares													Amount
Balances at beginning of period	Balances at beginning of period	73,144	$	7			$	139,783			$	(52,919)			86,871			54,825			$	5						$	83,559				$	(45,397)				$	38,167	Balances at beginning of period				75,705			$	7			$	142,261			$	(57,783)		84,485			69,281			$	7			$	133,662			$	(51,246)	$	82,423
Common stock issued under stock plans, net of shares withheld for employee taxes		674	—		—				—				—				1,276		1				(587)			—					(586)

Stock-based compensation expense	Stock-based compensation expense	—	—		723				—				723				—		—				774			—					774			Stock-based compensation expense			—					—			798				—				798				—		—			558				—				558
Recognition of warrants associated with notes payable		—	—		—				—				—				—		—				5,237			—					5,237
Proceeds from exercise of stock options																																		Proceeds from exercise of stock options			—					—			—				—				—				3,863		—			5,563				—				5,563

Recognition of earnout shares issued		—	—		—				—				—				300		—				801			—					801

Net loss	Net loss	—	—		—				(3,169)				(3,169)				—		—				—			(1,522)					(1,522)			Net loss			—					—			—				(4,221)				(4,221)				—		—			—				(1,673)				(1,673)
Balances at end of period	Balances at end of period	73,818	$	7	$	140,506			$	(56,088)			$	84,425			56,401		$	6			$	89,784		$	(46,919)				$	42,871		Balances at end of period			75,705					$	7		$	143,059			$	(62,004)			$	81,062			73,144		$	7		$	139,783			$	(52,919)			$	86,871

		Six Months Ended June 30, 2022															Six Months Ended June 30, 2021
		Common Stock			Additional Paid-In Capital				Accumulated Deficit				Total				Common Stock						Additional Paid-In Capital			Accumulated Deficit					Total
		Shares	Amount												Shares			Amount
Balances at beginning of period		69,281	$	7			$	133,662			$	(51,246)			$	82,423		54,764			$	5							$	82,933					$	(40,958)				$	41,980
Common stock issued under stock plans, net of shares withheld for employee taxes		674	—		—				—				—				1,337		1				(610)			—					(609)
Stock-based compensation expense		—	—		1,281				—				1,281				—		—				1,423			—					1,423
Recognition of warrants associated with notes payable		—	—		—				—				—				—		—				5,237			—					5,237
Recognition of earnout shares issued		—	—		—				—				—				300		—				801			—					801
Proceeds from exercise of warrants		3,863	—		5,563				—				5,563				—		—				—			—					—

Net loss		—	—		—				(4,842)				(4,842)				—		—				—			(5,961)					(5,961)
Balances at end of period		73,818	$	7	$	140,506			$	(56,088)			$	84,425			56,401		$	6			$	89,784		$	(46,919)				$	42,871


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Principal amount	Principal amount	$	19,750	$	20,000	Principal amount	$	11,750	$	19,500
Less unamortized discount and issuance costs	Less unamortized discount and issuance costs	(380)		(427)		Less unamortized discount and issuance costs	(541)		(333)
Notes payable, net of unamortized discount and issuance costs	Notes payable, net of unamortized discount and issuance costs	19,370		19,573		Notes payable, net of unamortized discount and issuance costs	11,209		19,167
Less current maturities, net of unamortized discount and issuance costs	Less current maturities, net of unamortized discount and issuance costs	(736)		(489)		Less current maturities, net of unamortized discount and issuance costs	(1,193)		(983)
Long-term notes payable, net of current maturities and unamortized discount and issuance costs	Long-term notes payable, net of current maturities and unamortized discount and issuance costs	$	18,634	$	19,084	Long-term notes payable, net of current maturities and unamortized discount and issuance costs	$	10,016	$	18,184


Year Ending December 31,	Amount
Remainder of 2022	$	250
2023	1,000
2024	1,500
2025	1,500
2026	15,500
Total notes payable	$	19,750


Year Ending December 31,	Amount
Remainder of 2023	$	750
2024	11,000



Total notes payable	$	11,750


	Outstanding Options	Weighted average exercise price per share		Weighted average remaining contractual life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2021	1,593,101	$	10.51	0.82	$	7
Granted	—	—			—
Forfeited	(106,069)	9.98			—
Exercised	—	—			—
Outstanding at June 30, 2022	1,487,032	$	10.55	0.33	$	9
Vested, exercisable, expected to vest(1) at June 30, 2022	1,487,032	$	10.55	0.33	$	9
Exercisable at June 30, 2022	1,487,032	$	10.55	0.33	$	9


		Number of Awards	Weighted average grant date fair value per share			Number of Awards	Weighted average grant date fair value per share
Outstanding at December 31, 2021		2,935,351	$	2.85
Outstanding at December 31, 2022					Outstanding at December 31, 2022	3,904,606	$	2.85
Granted	Granted	238,295	2.22		Granted	16,000	3.23
Forfeited	Forfeited	(172,177)	2.45		Forfeited	(28,898)	3.29
Vested and converted to shares, net of units withheld for taxes	Vested and converted to shares, net of units withheld for taxes	(673,791)	1.63		Vested and converted to shares, net of units withheld for taxes	—

Outstanding at June 30, 2022		2,327,678	$	3.16
Expected to vest at June 30, 2022		2,050,768	$	3.16
Outstanding at March 31, 2023					Outstanding at March 31, 2023	3,891,708	$	2.85
Expected to vest at March 31, 2023					Expected to vest at March 31, 2023	3,427,154	$	2.85


					Three Months Ended March 31,
		June 30, 2022	June 30, 2021		2023	2022
Options to purchase common stock	Options to purchase common stock	1,487	1,711	Options to purchase common stock	154	1,529
RSUs	RSUs	2,328	2,551	RSUs	3,892	2,950
Warrants outstanding	Warrants outstanding	2,447	6,310	Warrants outstanding	—	2,447
Total	Total	6,262	10,572	Total	4,046	6,926


		Three Months Ended June 30,									Three Months Ended March 31,
		2022		2021		$ Change		% Change			2023		2022		$ Change		% Change
		(in thousands)									(in thousands)
Consolidated Statement of Operations Data:	Consolidated Statement of Operations Data:									Consolidated Statement of Operations Data:
Revenues	Revenues	$	25,681	$	32,842	$	(7,161)	(22)	%	Revenues	$	25,729	$	27,083	$	(1,354)	(5)	%
Operating expenses:	Operating expenses:									Operating expenses:
Salaries and benefits	Salaries and benefits	20,903		23,295		2,392		10	%	Salaries and benefits	22,449		20,439		2,010		10	%
Other operating expenses	Other operating expenses	8,081		10,759		2,678		25	%	Other operating expenses	7,069		8,131		(1,062)		(13)	%

Total operating expenses	Total operating expenses	28,984		34,054		5,070		15	%	Total operating expenses	29,518		28,570		948		3	%
Loss from operations		(3,303)		(1,212)		(2,091)		(173)	%
Income (loss) from operations										Income (loss) from operations	(3,789)		(1,487)		(2,302)		(155)	%
Gain on sale of certain recovery contracts	Gain on sale of certain recovery contracts	382		1,849		(1,467)		(79)	%	Gain on sale of certain recovery contracts	3		—		3		100	%

Interest expense	Interest expense	(216)		(2,126)		1,910		90	%	Interest expense	(414)		(155)		(259)		(167)	%

Loss before provision for income taxes	Loss before provision for income taxes	(3,137)		(1,489)		(1,648)		(111)	%	Loss before provision for income taxes	(4,200)		(1,642)		(2,558)		156	%
Provision for income taxes	Provision for income taxes	32		33		1		3	%	Provision for income taxes	21		31		10		32	%
Net loss	Net loss	$	(3,169)	$	(1,522)	$	(1,647)	(108)	%	Net loss	$	(4,221)	$	(1,673)	$	(2,548)	(152)	%


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(in thousands)				(in thousands)					(in thousands)
Eligibility-based	Eligibility-based	$	12,417	$	11,577	26,632		19,488		Eligibility-based	$	12,480	$	14,215
Claims-based	Claims-based	9,339		7,025		18,488		12,400		Claims-based	10,412		9,149
Healthcare Total	Healthcare Total	21,756		18,602		45,120		31,888		Healthcare Total	22,892		23,364
Recovery (1)	Recovery (1)	7		11,091		124		25,582		Recovery (1)	19		118
Customer Care / Outsourced Services	Customer Care / Outsourced Services	3,918		3,149		7,520		6,762		Customer Care / Outsourced Services	2,818		3,601
Total Revenues	Total Revenues	$	25,681	$	32,842	$	52,764	$	64,232	Total Revenues	$	25,729	$	27,083


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Eligibility-based	$	12,480	$	14,215
Claims-based	10,412		9,149
Healthcare Total	22,892		23,364
Recovery (1)	19		118
Customer Care / Outsourced Services	2,818		3,601
Total Revenues	$	25,729	$	27,083


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


	Six Months Ended June 30,
	2022		2021		$ Change		% Change
	(in thousands)
Consolidated Statement of Operations Data:
Revenues	$	52,764	$	64,232	$	(11,468)	(18)	%
Operating expenses:
Salaries and benefits	41,342		47,385		6,043		13	%
Other operating expenses	16,212		21,115		4,903		23	%

Total operating expenses	57,554		68,500		10,946		16	%
Loss from operations	(4,790)		(4,268)		(522)		(12)	%
Gain on sale of certain recovery contracts	382		1,849		(1,467)		(79)	%
Interest expense	(371)		(3,472)		3,101		89	%

Loss before provision for income taxes	(4,779)		(5,891)		1,112		19	%
Provision for income taxes	63		70		7		10	%
Net loss	$	(4,842)	$	(5,961)	$	1,119	19	%