ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We support payers in the healthcare industry in identifying, preventing, and recovering waste and improper payments by leveraging advanced technology, analytics and proprietary data assets. We work with leading national and regional healthcare payers to provide eligibility-based, also known as coordination-of-benefits (COB), services, as well as claims-based services, which include the audit and identification of improperly paid claims. We are a leading provider of these services in both government and commercial healthcare markets. We also provide advanced reporting capabilities, support services, customer care, and stakeholder training programs designed to mitigate future instances of improper payments.
Our revenue model is generally success-based as we earn fees based on the aggregate amount of funds that we enable our clients to recover from our services. Our services do not require significant upfront investments by our clients and we offer our clients the opportunity to recover significant funds that may otherwise be lost. Because our model is based upon the success of our efforts, our business objectives are aligned with those of our clients.
Sources of Revenues
We derive a majority of our revenues from services provided to our clients in the healthcare market. We also derive revenues from our outsourced call center services.
Year Ended December 31,
(in thousands)
Eligibility-based
Claims-based
Healthcare Total
Recovery
Customer Care / Outsourced Services
Total Revenues
Healthcare Revenues
We derive revenues from both commercial and government clients by providing healthcare payment integrity services, which include claims-based and eligibility-based services. Revenues earned under claims-based contracts in the healthcare market are driven by auditing, identifying, and sometimes recovering improperly paid claims through both automated and manual review of such claims. Eligibility-based services, which may also be referred to as coordination-of-benefits, involve identifying and recovering payments in situations where our client should not be the primary payer of healthcare claims because a member has other forms of insurance coverage. We are paid contingency fees by our clients based on a percentage of the dollar amount of improper claims recovered as a result of our efforts. The contingency fee percentage depends on the methods of recovery and, in some cases, the type of improper payment that we identify. The revenues we recognize are net of our estimate of that may be by appeal or following payment by the provider.
For our healthcare business, our business strategy is focused on utilizing our technology-enabled services platform to provide claims-based, eligibility-based, and analytical services for healthcare payers.
In 2016, the Center for Medicare and Medicaid Services (CMS) awarded two new Medicare Recovery Audit Contractor (RAC) contracts to us for Regions 1 and 5. The RAC contract for Region 1 involves the audit of improper payments for claims made under Medicare Parts A and B in Region 1, which consists of eleven states (Connecticut, Michigan, Indiana, Maine, Massachusetts, New Hampshire, New York, Ohio, Kentucky, Rhode Island and Vermont). In March 2021, we were re-awarded the CMS Region 1 contract with a term of eight-and-a-half years. The RAC contract for Region 5 involves post-payment review of claims related to DMEPOS (Durable Medical Equipment, Prosthetics, Orthotics and Supplies) and home health and hospice on a nation-wide basis. The Region 5 RAC contract has an initial nine-year term consisting of one base year and eight additional one-year options, and expires in 2025. We expect that CMS will run a competitive procurement process for a new Region 5 contract in 2025, in which we plan to seek a new contract award.
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In November 2022, we were awarded the RAC contract to audit improper payments for claims made under Medicare Parts A and B in Region 2, which consists of 14 states (Illinois, Minnesota, Wisconsin, Nebraska, Iowa, Kansas, Missouri, Colorado, New Mexico, Texas, Oklahoma, Arkansas, Louisiana, and Mississippi). Our RAC contract for Region 2 has a term of eight-and-a-half years.
In 2017, CMS awarded the national exclusive MSP contract to us. Under this MSP contract, we are responsible for coordination-of-benefits claims, which includes identifying and recovering payments in situations where Medicare should not be the primary payer of healthcare claims because a beneficiary has other forms of insurance coverage, such as through an employer group health plan or certain other payers. We were re-awarded this contract in December 2022 and it has a six-year term, consisting of one base year and five additional one-year options.
In January 2022, the U.S. Department of Health and Human Services, Office of the Inspector General (HHS OIG) awarded the indefinite delivery, indefinite quantity contract to us, which has a base term of one year and four additional one-year options. Under this contract, we provide medical review and consultative services associated with the oversight activities of the HHS OIG, primarily assessing services and claims for Medicare fee-for-service payments for Part A and Part B. This contract was awarded via a full-and-open competitive procurement.
Within the State Medicaid market, we were recently awarded a contract to provide RAC services for the New York State Office of the Medicaid Inspector General (OMIG) which are similar to those provided under our RAC contracts with CMS. We anticipate our services under this contract to commence in 2025.
In the commercial healthcare market, we utilize our technology-enabled services platform to provide claims-based and eligibility-based services for commercial payers in the healthcare industry. Our experience from our contracts with CMS has helped establish our presence in the commercial healthcare market by providing us the opportunity to provide audit and eligibility services for several national and regional commercial health plans.
The scope of services that we provide to our healthcare clients continues to expand as we continue to implement new programs for existing and new healthcare clients. We believe this growth trend should continue as our suite of payment integrity services and our customer relationships continue to mature.
Year Ended December 31,
(in thousands)
Government
Commercial
Total Healthcare revenues
Customer Care / Outsourced Services
We derive revenues from our first party call center and other outsourced services. Our revenues for these services include contingency fees, fees based on dedicated headcount and tasks completed on behalf of our clients. Toward the end of 2024, we made the decision to de-emphasize our Customer Care and Outsourced Services and do not anticipate to have meaningful revenues in this market from 2025 onward.
Costs and Expenses
We generally report two categories of operating expenses: salaries and benefits and other operating expense. Salaries and benefits expenses consist primarily of salaries and performance incentives paid and benefits provided to our employees. Other operating expenses include expenses related to our use of subcontractors, other production related expenses, including costs associated with data processing, retrieval of medical records, printing and mailing services, amortization and other outside services, as well as general corporate and administrative expenses.
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Factors Affecting Our Operating Results
Our results of operations are influenced by a number of factors, including costs associated with commencing and implementing new contracts, claim volume, contingency fees, regulatory matters, client contract cancellation, technology innovation expenses, and macroeconomic factors.
Costs Associated with Commencing and Implementing New Contracts
When we obtain an engagement with a new client or a new contract with an existing client, it typically takes a long period of time to plan our services in detail, which includes integrating our technology, processes and resources with the client’s operations and hiring new employees, before we receive any revenues from the new client or new contract. Due to the upfront costs we incur in connection with the implementation of new contracts, which may not be recoverable in the event of contract termination, and the delays we face in recognizing initial revenue from any such new contracts, our profitability can be negatively impacted by any delays associated with new contract implementations. Further, due to the upfront implementation time associated with new contract implementations, we face delays in recognizing the full amount of revenue that we may earn under these new contracts until they reach a more mature or “steady state” status. Our clients may also experience delays in obtaining approvals or managing protests from unsuccessful bidders or associated with system implementations, as we had experienced before with certain clients. We may incur upfront implementation expenses without receiving corresponding revenue under a contract award that is subsequently as a result of a from an bidder. If we are not to pay the upfront expenses out of cash from operations or availability of borrowings under our lending arrangements, we may need to scale back our operations or alter our business plans, either of which could have a effect on future revenues that we may earn under any such new client or new contract engagements.
Claims Volume
The number of claims that we are allowed or permitted to audit on behalf of our healthcare clients within our claims-based services has a direct impact on our revenues. Most of our contracts in our claims-based services permit our clients to unilaterally change the amount of claims that we are able to audit on the client’s behalf at any given time. Further, the type and scale of claims which are deemed permissible for us to audit by certain of our healthcare clients may change from time-to-time. Non-permissible claims may result from client product lines which are determined by our clients to be out of scope of our audit services, claims related to excluded providers or excluded provider groups, changes in applicable regulations or policy, or other factors such as natural disasters, cybersecurity incident, or global health emergencies.
The level of claims volume provided by our healthcare clients also impacts the revenues we earn from our eligibility-based services. To the extent the claim volume that we are allowed or permitted to audit on behalf of our healthcare clients is negatively impacted by any of the factors set forth above, the revenues we earn as a result of both our claims-based services and eligibility-based services may be negatively impacted, which could result in an adverse impact on our results of operations.
Contingency Fees
Our revenues consist primarily of contract-based contingency fees. The contingency fee percentages that we earn are set by our clients or agreed upon during the bid process and may change from time to time either under the terms of existing contracts or pursuant to the terms of contract renewals. Changes in contingency fee percentages set by our clients may have a material effect on our revenues and results of operations.
Regulatory Matters
Each of the markets which we serve is highly regulated. Accordingly, changes in regulations or governmental policy that affect the types of receivables and claims that we are able to service or audit or the manner in which any such receivables and claims can be recovered will affect our revenues and results of operations.
In addition, our entry into the healthcare market was facilitated by the passage of the Tax Relief and Health Care Act of 2006, which mandated CMS to contract with private firms to audit Medicare claims in an effort to increase the recovery of improper Medicare payments. Any changes to the regulations or governmental policies that affect the Medicare program or state Medicaid programs, or the audit and recovery of Medicare claims or state Medicaid claims could have a significant impact on our revenues and results of operations.
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Client Contract Cancellation or Non-Renewal
We derive a substantial portion of our revenues from contracts with a limited number of our largest clients. Substantially all of our contracts (i) entitle our clients to unilaterally terminate their contractual relationship with us at any time without penalty and (ii) are subject to competitive procurement or renewal processes from time to time. Our revenues could decline if we lose one or more of our significant clients, either due to a contract cancellation or our inability to be awarded a new contract in connection with a competitive renewal process. Further, our revenues could be negatively impacted if one or more of our significant clients decides to limit the amount of claims that we are allowed to audit or reduces the level of placements provided under an existing contract, or if the terms of compensation for our services change under any existing contracts, or if any of our significant clients is acquired by an entity that does not wish to continue use our services.
Technology Innovation Expenses
Our ability to remain competitive within the markets we serve and our profitability depends in part on our ability to provide our services in a cost-effective and efficient manner. This in turn requires investment in identified technology initiatives to better serve our current and future clients in a more cost-effective manner. Because a material portion of our technology innovation expenses may be incurred before the benefits of any such innovations may be recognized, our operating expenses may increase from time to time and profitability may be negatively impacted when these technology innovation expenses are incurred.
Macroeconomic Factors
A variety of macroeconomic factors may influence our business and results of operations. These macroeconomic factors include fluctuations in Medicare expenditures or claims made to private healthcare providers resulting from changes in healthcare costs or the healthcare industry taken as a whole, as well as changes to fiscal budgets of federal, state and local governments as a result of general economic weakness and lower tax revenues.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant area involving management’s judgment and estimates.
Revenue Recognition
We derive our revenues primarily from providing audit, recovery, and analytics services. Revenues are recognized upon completion of these services for our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We determine revenue recognition through the following steps:
• Identification of the contract with a customer.
• Identification of the performance obligations in the contract.
• Determination of the transaction price.
• Allocation of the transaction price to the performance obligations in the contract.
• Recognition of revenue when, or as, the performance obligations are satisfied.
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We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Our contracts generally contain a single performance obligation, delivered over time as a series of services that are substantially the same and have the same pattern of transfer to a client, as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
Our contracts are composed primarily of variable consideration. Fees earned under our audit and recovery service contracts consist primarily of contingency fees based on a specified percentage of the amount we enable our clients to recover. The contingency fee percentage for a particular recovery depends on the type of recovery or claim facilitated. Our inability to correctly estimate the variable consideration could adversely affect our revenues in future periods.
We generally either apply the as-invoiced practical expedient, where our right to consideration corresponds directly to our right to invoice our clients, or the variable consideration allocation exception, where the variable consideration is attributable to one or more, but not all, of the services promised in a series of distinct services that form part of a single performance obligation. As such, we have elected the optional exemptions related to the as-invoiced practical expedient and the variable consideration allocation exception, whereby the disclosure of the amount of transaction price allocated to the remaining performance obligations is not required.
We have applied the as-invoiced practical expedient and the variable consideration allocation exception to contracts with performance obligations that have an average remaining duration of less than one year.
We estimate variable consideration only if we can reasonably measure our progress toward complete satisfaction of the performance obligation using an output method based on reliable information, and recognize such revenue over the performance period only if it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Any change made to the measure of progress toward complete satisfaction of our performance obligation is recorded as a change in estimate. We exercise judgment to estimate the amount of constraint on variable consideration based on the facts and circumstances of the relevant contract operations and availability and reliability of data. We review the constraint on variable consideration quarterly. While we believe the estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the amount of variable consideration recognized.
For healthcare claims audit contracts, we may recognize revenue upon delivering our findings from claims audits to our clients, when sufficient reliable information is available for estimating the variable consideration earned.
For eligibility-based or COB contracts, we may recognize revenue upon delivering our findings to our clients or to our client’s counterparties (insurance companies or other responsible parties that appear to have primary responsibility to pay the claims).
For contracts that contain a refund right, these amounts are considered variable consideration, and we estimate our refund liability for each claim and recognize revenue net of such estimate. Our inability to correctly estimate the refund liabilities could adversely affect our revenues in future periods.
Under certain contracts, consideration can include periodic performance-based bonuses which can be awarded based on our performance under the specific contract. These performance-based awards are considered variable and may be constrained by us until there is not a risk of a material reversal.
For customer care / outsourced services clients, we recognize revenue based on the volume of processed transactions or the quantity of labor hours provided.
Results of Operations
Year Ended December 31, 2024 compared to the Year Ended December 31, 2023
The following table represents our historical operating results for the periods presented:
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Year Ended December 31,
Favorable (Unfavorable)
$ Change
% Change
(in thousands)
Consolidated Statements of Operations Data:
Revenues
Operating expenses:
Salaries and benefits
Other operating expense
Total operating expenses
Loss from operations
Gain on sale of certain recovery contracts
Interest expense
Interest income
Loss before provision for income taxes
Benefit from income taxes
Net Loss
Revenues
Total revenues were $123.0 million for the year ended December 31, 2024, an increase of $9.2 million or 8%, compared to total revenues of $113.7 million for the year ended December 31, 2023.
Healthcare revenues were $118.3 million for the year ended December 31, 2024, representing an increase of $11.8 million, or 11%, compared to the year ended December 31, 2023. The increase in healthcare revenues was primarily driven by the ongoing growth from prior implementations of commercial statements of work, the CMS Region 2 contract, and an increase in the scope of services for several of our commercial statements of work. Revenues from claims-based services during the year ended December 31, 2024 were $56.4 million, or 25% higher than the year ended December 31, 2023. Revenues from eligibility-based services during the year ended December 31, 2024 were $61.9 million, or 1%, higher than the year ended December 31, 2023.
Customer Care / Outsourced Services revenues were $4.7 million for the year ended December 31, 2024, representing a decrease of $2.6 million, or 35%, compared to the year ended December 31, 2023. The decrease was primarily due to a decrease in demand for our outsourced services and our decision to de-emphasize our Customer Care / Outsourced Services toward the end of 2024. We do not anticipate having meaningful revenues in this market from 2025 onward.
Salaries and Benefits
Salaries and benefits expense was $100.4 million for the year ended December 31, 2024, an increase of $10.0 million, or 11%, compared to salaries and benefits expense of $90.4 million for the year ended December 31, 2023. The increase in salaries and benefits expense was due to the continued growth in our healthcare services.
Other Operating Expense
Other operating expense was $32.1 million for the year ended December 31, 2024, an increase of $2.6 million, or 9%, compared to other operating expense of $29.4 million for the year ended December 31, 2023. The increase in other operating expenses was primarily due to increased expenses associated with technology innovation as well as higher depreciation expenses and an increase in our communication and postage expenses, partially offset by lower rent expenses.
Loss from Operations
As a result of the factors described above, loss from operations was $9.5 million for the year ended December 31, 2024, compared to loss from operations of $6.1 million for the year ended December 31, 2023, representing an increase in the loss from operations of $3.4 million.
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Interest Expense
Interest expense was $1.1 million for the year ended December 31, 2024 compared to $2.0 million for the year ended December 31, 2023, representing a decrease of 44%. This decrease was due primarily to the write off of debt issuance costs in connection with the refinancing of our prior credit agreement in October 2023 as well as a lower principal balance and lower interest rates during 2024.
Income Taxes
The income tax benefit was $0.4 million for the year ended December 31, 2024 compared to an income tax benefit of $0.3 million for the year ended December 31, 2023. Our effective income tax rate was 4% for each of the years ended December 31, 2024 and 2023. The effective tax rate for 2024 was primarily driven by the recognition of previously unrecognized tax benefits as a result of the expiration of statute limitations. The effective tax rate for 2023 was primarily driven by the recognition of previously unrecognized tax benefits as a result of an audit closing, and receipt of interest on tax refunds during the year.
Net Loss
As a result of the factors described above, net loss was $9.9 million for the year ended December 31, 2024, which represented an increase in net loss of $2.4 million compared to net loss of $7.5 million for the year ended December 31, 2023.
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 $9.3 million as of December 31, 2024, compared to $7.3 million as of December 31, 2023. The $2.0 million increase in the balance of our cash and cash equivalents was primarily due to $6.2 million provided by operating activities, $2.8 million provided by financing activities primarily as a result of $3.0 million borrowings from our revolving loan, offset by $7.0 million used in investing activities during 2024.
On October 27, 2023, we entered into a new credit agreement with Wells Fargo Bank, National Association (the "Credit Agreement"). The Credit Agreement includes a $25 million revolving loan commitment, subject to borrowing base limitations based on a percentage of applicable eligible receivables and contract assets, of which $5.0 million was advanced on the closing date of the Credit Agreement. A portion of the revolving loan commitment of up to $2.5 million is available for the issuance of letters of credit. As of December 31, 2024, $8.0 million was outstanding under the Credit Agreement and we had $11.8 million of additional borrowings available under the Credit Agreement.
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 and cash equivalents on hand. Our current financial projections show that we expect to be able to maintain a level of cash flows from operating activities sufficient to permit us to fund our ongoing and planned business operations and to fund our other liquidity needs. If, however, we are required to obtain additional borrowings to fund our ongoing or future business operations, there can be no assurance that we will be successful in obtaining such additional borrowings or upon terms that are acceptable to us.
Our Credit Agreement contains, and any agreements to refinance our debt likely will contain, certain financial covenants, including the maintenance of minimum fixed charge coverage ratio and total debt to EBITDA ratio, as well as restrictive covenants that require us to limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets. As of December 31, 2024, we were in compliance with all financial covenants 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.
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Year Ended December 31,
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Cash flows from operating activities
Cash provided by operating activities was $6.2 million for the year ended December 31, 2024, and was primarily a result of decreases in trade accounts receivable and income tax receivable, and an increase in accrued salaries and benefits.
Cash provided by operating activities was $3.9 million during the year ended December 31, 2023, and was primarily a result of decreases in income tax receivable and contract assets, partially offset by an increase in trade accounts receivable.
Cash flows from investing activities
Cash used in investing activities of $7.0 million for the year ended December 31, 2024 related to cash used in capital expenditures related to information technology software, data storage, hardware, telecommunication systems, and security enhancements to our information technology systems.
Cash used in investing activities of $4.1 million during the year ended December 31, 2023 related to cash used in capital expenditures related to information technology software, data storage, hardware, telecommunication systems, and security enhancements to our information technology systems.
Cash flows from financing activities
Cash provided by financing activities of $2.8 million for the year ended December 31, 2024 was primarily attributable to $3.0 million in borrowings from our revolving loan facility.
Cash used in financing activities of $15.9 million for the year ended December 31, 2023 was primarily attributable to $19.5 million in repayments of notes payable under our prior credit agreement and $1.2 million in debt issuance costs, offset by $5.0 million in borrowings from our revolving loan facility.
Loan Payable
On October 27, 2023, we entered into the Credit Agreement with Wells Fargo Bank, National Association. The Credit Agreement includes a $25 million revolving loan commitment, subject to borrowing base limitations based on a percentage of applicable eligible receivables and contract assets. 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, our existing and future, direct or indirect, domestic subsidiaries will be jointly and severally obligated as borrowers or guarantors for the obligations under the Credit Agreement. The obligations of the Company under the Credit Agreement are secured by liens on substantially all of our assets and each of our existing subsidiaries (and subject to customary exceptions, will be secured by the assets of future subsidiaries).
A portion of the proceeds from the initial borrowing under the Credit Agreement were used, together with cash on hand, to repay our outstanding notes payable under our prior credit agreement, and to pay fees and expenses in connection with the Credit Agreement. As a result, all our outstanding obligations under our prior credit agreement have been paid.
As of December 31, 2024, $8.0 million was outstanding under the Credit Agreement and we had $11.8 million of additional borrowings available under the Credit Agreement. Our annual interest rate under the Credit Agreement as at December 31, 2024 was 7.5%.
The Credit Agreement matures and all outstanding borrowings are due on October 27, 2026.
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We may, at our option, prepay 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 under the Credit Agreement are also subject to mandatory prepayment in the event that outstanding borrowings and letter of credit usage exceed the lesser of the aggregate revolving loan commitments and the borrowing base then in effect.
We may also increase commitments under the Credit Agreement in an aggregate principal amount of up to $10 million by obtaining additional commitments from lenders, subject to obtaining commitments from any participating lenders and certain other conditions. Under the Credit Agreement, loans generally may bear interest based on term SOFR (the secured overnight financing right) or an annual base rate, as applicable, plus, in each case, an applicable margin based on our average borrowing availability each quarter under the Credit Agreement that may range between 2.50% per annum and 3.00% per annum, in the case of term SOFR loans and between 1.50% per annum and 2.00% per annum in the case of base rate loans. In addition, a commitment fee of 0.50% per annum based on unused availability of the credit facility is also payable.
The Credit Agreement contains certain customary representations, warranties, and affirmative and negative covenants that restrict our 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 our business. The Credit Agreement also contains financial covenants, which require us to maintain a minimum amount of liquidity and a consolidated fixed charge coverage ratio of not less than 1.25 to 1.00, provided that the fixed charge coverage ratio is only applicable when borrowing availability falls below a certain threshold. 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 , cross to other material indebtedness, arising in connection with changes in control, and other customary events of .
As of December 31, 2024, we were in compliance with all financial covenants under the Credit Agreement.
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2024:
Payments Due by Period
Contractual Obligations
Total
Less
Than
1 Year
Years
Years
More
Than
5 Years
Long-term loan payable
Interest payments
Operating lease obligations
Purchase obligations
Total
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Adjusted EBITDA and Adjusted Net Income (Loss)
To provide investors with additional information regarding our financial results, we have disclosed in the table below and within this report adjusted EBITDA, adjusted net income (loss), and adjusted earnings (loss) per diluted share, all of which are non-GAAP financial measures. We have provided a reconciliation below of adjusted EBITDA to net income (loss) and adjusted net income (loss) to net loss, and adjusted earnings (loss) per diluted share to net loss, the most directly comparable GAAP financial measure to these non-GAAP financial measures.
We have included these non-GAAP financial measures in this report because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends and to prepare and approve our annual budget. Accordingly, we believe that these non-GAAP financial measures provide useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA, adjusted net income (loss), and adjusted earnings (loss) per diluted share, has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
• adjusted EBITDA does not reflect interest expense on our indebtedness;
• adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• adjusted EBITDA does not reflect tax payments;
• adjusted EBITDA and adjusted net income (loss) do not reflect the potentially dilutive impact of equity-based compensation;
• adjusted EBITDA and adjusted net income (loss) do not reflect the impact of certain non-operating expenses resulting from matters we do not consider to be indicative of our core operating performance; and
• other companies may calculate adjusted EBITDA and adjusted net income (loss) differently than we do, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider these non-GAAP financial measures alongside other financial performance measures, including net income (loss) and our other GAAP results.
The following tables present a reconciliation of adjusted EBITDA, adjusted net income (loss), and adjusted earnings (loss) per diluted share, for the years ended December 31, 2024 and 2023 to actual net income (loss) for these periods, respectively:
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Year Ended December 31,
(in thousands)
Reconciliation of Adjusted EBITDA:
Net income (loss)
Provision for (benefit from) income taxes
Interest expense (1)
Interest income
Stock based compensation
Depreciation and amortization
Severance expenses (3)
Non-core operating expenses (4)
Gain on sale of certain recovery contracts (5)
Adjusted EBITDA
Year Ended December 31,
(in thousands)
Reconciliation of Adjusted Net Income (Loss):
Net income (loss)
Stock based compensation
Amortization of debt issuance costs (2)
Severance expenses (3)
Non-core operating expenses (4)
Gain on sale of certain recovery contracts (5)
Tax adjustments (6)
Adjusted net income (loss)
Year Ended December 31,
Adjusted Earnings (Loss) Per Diluted Share:
Net income (loss)
Plus: Adjusted items per reconciliation of adjusted net income (loss)
Adjusted net income (loss)
Adjusted earnings (loss) per diluted share
Diluted average shares outstanding
(1) Represents interest expense and amortization of debt issuance costs related to our Credit Agreement and prior credit agreement.
(2) Represents amortization of debt issuance costs related to our Credit Agreement and prior credit agreement.
(3) Represents severance expenses incurred in connection with a reduction in force for our nonhealthcare services.
(4) Represents payments primarily related to legacy recovery business.
(5) Represents gain on the sale of certain non-healthcare recovery contracts.
(6) Represents tax adjustments assuming a marginal tax rate of 27.5% at full profitability.
Recent Accounting Pronouncements
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See "New Accounting Pronouncements" in Note 1 of the Consolidated Financial Statements included in Part IV - Item 15 of this report.
