Performant Healthcare Inc (PHLT) 2016 Q3 法說會逐字稿

Thank you for standby. This is the conference operator. Welcome to the Performant Financial Third Quarter 2016 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Richard Zubek, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the Company's third quarter 2016 results. If you have not, a copy is available on our website www.performantcorp.com. Today's speakers are Lisa Im, Chief Executive Officer; and Hakan Orvell, Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call including our financial guidance are forward-looking statements. These statements are subject to risks and uncertainties including those described in the Company's filings with the SEC. Actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today and the Company does not undertake to update any forward-looking statements based on new circumstances or revise expectations. Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.

I would now like to turn the call over to Lisa Im. Lisa?

Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. Today, I'll provide you with an overview of our operational results and update you on the procurement status for the awards with the Department of Education, CMS and a new contract award from the Internal Revenue Service. Then, after Hakan walks you through the financials, I'll provide additional thoughts on 2016.

For Q3 2016, we reported overall revenues and adjusted EBITDA of $31.2 million and $4.7 million, which were lower than prior year by $7.3 million and $1.8 million, respectively. While expenses are substantially lower than the prior year, declines in ED and RAC revenues caused an overall reduction in EBITDA.

As we look specifically at our key markets, total revenues from student lending market were $23.8 million, which is down from last year by $4.7 million. Healthcare revenues in Q3 were $3 million, down $2.1 million from 2015, primarily due to the termination of the prior RAC contract.

On the Department of Education procurement update, the complete RFP responses were submitted at the end of February. At this time, there are no commitments from ED on when the contracts will be awarded, start or how many vendors they will select.

That said, we are pleased to announce some contract awards. We were recently awarded one of the four positions on the IRS recovery contract. This program is a paid for in the December 2015 highway transportation bill. We are honored to be one of the initial vendors and believe that this contract has the potential to be very successful based on collaborative efforts with the client to accomplish their objectives. The timeline for implementation is Q2 of 2017.

Also, you may have seen CMS announced the new Recovery Audit Contract awards earlier this week. Performant was selected to be the Recovery Audit Contractor for both Region 1 and Region 5. Region 1 is the reconstructed Northeast, Performant serviced a large portion of this region under the previous contract.

You may recall that CMS equalized the size of each of the regions for the new contract. Region 5 is the newly created region and is the National Durable Medical Equipment or DME and Home Health and Hospice contract. At this time, we do not have a specific startup date for these new contracts, but hope that the activity will begin sometime in the first half of 2017.

Revenue from other operations were $4.4 million, down about $500,000 from prior year.

With that, I'd like to turn the call over to Hakan to walk you through the financials. Hakan?

Thank you, Lisa, and good afternoon, everyone. Today, we're reporting results for the third quarter with revenues of $31.2 million, net loss of $0.7 million or 0.01 per share and adjusted EBIT of $4.7 million.

Beginning with our student lending business, revenues totaled $23.8 million, a decrease of $4.7 million compared to the third quarter of last year. During the quarter, the Department of Education accounted for $3.9 million of revenues, while Guaranty Agencies generated $19.9 million. These amounts represent declines of $2.1 million and $2.6 million, respectively, when compared to the third quarter of 2015.

The decrease in our student lending revenues is largely a reflection of the continued delays in the Department of Education contracting process, with the result that we haven't received new student loan placements from the Department of Education since April 2015.

While we remain optimistic, we have not heard any update regarding the timing of when the new contract will startup and when the new contractors can expect to receive new placements.

With respect our Guaranty Agency results, we benefited primarily from strong placement volumes that we received at the end of last year. Student loan placements during the third quarter of 2016 totaled $0.7 billion, up from $0.5 billion in the third quarter of 2015.

Our healthcare revenues in the third quarter were $3 million, compared to $5.1 million in the third quarter of last year. Revenue from our work with the Centers for Medicare and Medicaid was $1.7 million, down from $3.5 million in the prior year. And our commercial healthcare business generated revenues of $1.3 million, a decline from the third quarter of 2015.

As Lisa mentioned, CMS recently announced the awards for its Medicare Fee-for-Service Recovery Audit Program contracts and Performant was awarded Region 1, the same region we had on the previous contract and Region 5, which is the new National Durable Medical Equipment and Home Health contract. We don't have any further detail regarding exact startup time given that the contracts were just awarded earlier this week, but we expect that the startup should be fairly soon.

As a reminder, as part of the contract transition, May 16, 2016 was the last day that we and the other recovery auditors could send additional documentation request or ADR, letters or semi-automated notification letters to provide to hospitals, with July 29 being the last day we could submit a notification of an improper payment to proprietaries. These limitations will have a negative impact on our healthcare revenues for the remainder of 2016. Lastly, our other markets generated revenues of $4.4 million in the third quarter compared to $4.9 million in the prior-year period.

Moving to our expenses, salaries and benefits expense in the third quarter was $18.7 million, a decrease of 13.9% compared to $21.7 million in the prior-year period. Other operating expense for the quarter was $12.3 million, a decrease of 12.7% compared to the third quarter of 2015, primarily due to a reduction in volume related costs and other completed cost reduction initiatives. During this period of contract uncertainty, we have remained focused on improving our productivity, executing on our business development initiatives and thoughtfully engaging in expense restructuring.

For the third quarter 2016, our reported net loss was $0.7 million or $0.01 per diluted share, compared to a net loss of $0.3 million or $0.01 per diluted share in the prior year. Adjusted net income in the quarter was $0.8 million or $0.02 per diluted share, compared to an adjusted net income of $0.8 million or $0.02 per diluted share in the prior year period.

Fully diluted weighted average outstanding shares were 50.9 million shares in the third quarter of 2016. Our adjusted EBITDA in the third quarter was $4.7 million, compared to $6.5 million in the same period last year. Adjusted EBITDA margin was 15.1%.

Our effective income tax rate changed to 6.9% for the nine months ended September 30, 2016 from 18.1% for the nine months ended September 30, 2015. Cash flows from operating activities in the third quarter were $20.5 million.

Turning to the balance sheet as of September 30, 2016, we had cash, and cash equivalents of $48.3 million and our total outstanding debt was $65 million, reflecting our continued focus of paying down our long-term debt.

Lastly, in light of the prolonged delays related to the contract awards and other timing issues, we have very recently entered into an amendment of our credit agreement adjusting several of our covenants through Q4 of 2017. This amendment is expected to provide us with additional flexibility to operate our business through these delays. As part of the amendment, we also paid down debt by an additional $7.5 million.

Now I'll turn the call back to Lisa for some concluding remarks.

Thanks, Hakan. As we head into the last quarter of this year, we're excited to be in the early implementation stages of the IRS and two RAC contracts. As we mentioned in last quarter's call, we did expect softness in Q3 and Q4, compared to the first half of 2016, primarily attributable to the prior CMS RAC contract closeout and lower Department of Education runoff revenue from the old contract.

However, we have better-than-expected financial results in Q3 as we continued to execute solvency in our student loan business and expense reduction programs. As we head into Q4, we expect to continue strong expense management. We are maintaining our revenue guidance at $135 million to $145 million and raising our adjusted EBITDA guidance from $18 million to $22 million, up to $22 million to $25 million.

As we mentioned last quarter, our guidance excludes the impact of any new contract awards in 2016 due to the uncertainty of contracts start date. Even though we received two awards from CMS, we do not expect 2016 results to be materially impacted as a result. Additionally, as we are still in the early stages and remain in discussions with CMS as it relates to startup time, we are not commenting on any potential impact to the 2017 results today. However, we will provide additional detail after we've had the opportunity to have more clarifying conversations with CMS.

Now with that, we'd like to open up the call for questions.

(Operator Instructions) Michael Tarkan, Compass Point.

Hey. This is actually Andrew on for Mike. Thank you for taking my questions. So, first one, on the new rack contract. Can you sort of just talk about how we should think about fees under the new contract, I mean, we saw that the stated fee is a little bit lower than the previous contract, but is that sort of representative of what you think you are earning under that contract?

Hi, Andrew. Yes, the fee structure in the new contract is very different than the old. In the old contract, we had one fee for all services that we are providing. In the new contract, we bid basically four different work streams and the fee that you see published is the blended fee for all the work streams.

So if you look at it, net-net, obviously as we look at the work stream that involves more work, complex auditing work et cetera, we obviously price that to reflect the additional work that would be required. But if you look at it net-net, the fees are quite comparable in the new contract to the old contract, as you kind of net everything together.

Okay. Thank you. And then so, I know you wouldn't really comment on 2017, but for the RAC contracts, can we just sort of talk about, do you have any initial ideas about the structure of the contracts, mainly scope in ADR limit, anything like that?

Andrew, I think it's a little bit early, largely because we just haven't even met with CMS yet, we do expect a meeting with them some time mid-dish November, I think we'll have a better idea of how we start, when we start to scope. Obviously the national contract is very different from the region contract, so I just think we need a little more time to get back with CMS. But we -- when we know we have certainty around that we'll certainly let you folks know.

Okay. And can you talk about, switching to IRS, so I'm sorry, can you talk about the overall opportunity there and maybe when you expect it to start contributing to results?

I think the overall opportunity longer term is fairly substantial. We look at -- I think in 2011 was the last sort of published estimate, but about $160 billion or so of delinquent taxes at the IRS. Initially, we do expect there to be a slower start, we want to make sure that the program is successful that we are working again, as I mentioned, very collaboratively with IRS that we're being very sensitive to consumers and any concerns that there may be about ensuring a very, I would say, programs with high regulatory compliance.

We want to make sure that we and the other vendors are stepping through how to make that program more successful. So I think at this point, I don't think we have a projection yet for 2017, it will be a bit of a slower start simply to make sure that we are getting off on the right foot. But we do think longer term that there is a fair, I mean, it's a big opportunity, if we can get this right.

Okay. And sort of in that same vein, so you won the three contracts really, can you just sort of talk about how we should expect expenses to sort of flow as you ramp up on these contracts, I mean, I know you guys have done a really good job of managing expenses and the uncertainty without a contract. But can you sort of just walk us through what your expectations for, in terms like hiring and variable expenses how that should flow throughout next year, maybe a little bit longer term too?

Sure. So as we look at next year, next year which will be an investment year, as you look at these contracts, but let me take them one by one. So first of all, as you look at the IRS contract and we have a fair amount of tax clients that we do this type of work with. So we have been -- we have a good appreciation for what the revenue cycle is.

And that typically lot of the revenue is achieved, obviously we get a contingency fee based on what we recover and a lot of it is payment plans that we enter default to taxpayers into. So what you're looking at is that you're building that funnel up and the full lump rate -- the full ramp you can see until maybe 9 months to 12 months later and it's actually going to be investing in -- we will have people that will be investing into do this work.

So it's very similar to the student lending business from that perspective as look at the kind of the investment stage and then we cloud actually start seeing some of the revenue. So again, that contract would be an investment here in next year. As we look at the RAC contracts and the RAC contracts obviously if we have good experience with, based on what we have done here with CMS on that over the past five plus years, there is -- the rev RAC there is typically about four months or so after we start sending out document request and so forth. So you have a shorter investment period involved with those contracts.

And that's for the Region 1, since we're going to be remaining in Region 1, there is some realignment of faith and so forth. But we are ready to hit that contract and obviously have a lot of good experience based on the work that we've already done with Region 1.

The DME national home health contract is going to have a bit of a longer ramp as we ramp that up on a national basis. But again, we will make sure to be very mindful of expenses that we incur as we ramp on that contract as well. So hopefully that's helpful color there.

Yes. That's helpful. And then so on the debt plus capital side, it's obvious that you obviously amended the credit agreement, so you have a little bit more coverage there. But now that you've got three contracts in hand and forward outlooks are a little bit more favorable, can you talk about maybe plans to refinance or pay down that that debt near term, can you just talk about that a little bit please?

Sure. Yes, I mean, that's definitely on our radar. We have a good cash position today and if you look at debt, we paid down debt associated with this amendment by $7.5 million. But as we look at our capital structure we are definitely looking to address that. And are holding off at this stage until we see the Department of Education contract awards be made and again we see that as a key driver to achieve a really good capital structure going forward long-term.

And this is sort of an obvious question, but I know you said you don't have any update on the ED contracts, but is there anything else that you can offer there in terms of color?

I think the only thing we can -- that we know is, they continue to make sure that they are going through the process, so just specific questions, administrative kinds of details. So we do believe that they are going through a very thorough and good process and they are still progressing through that.

Obviously, we're hopeful that it will be soon, but that's about it all the information we have at this time.

Okay. That's it from me. Thank you.

Thank you.

Brian Hogan, William Blair.

Good afternoon. A follow up to that last question --

Hi, Brian.

Hi, Brian.

Hello. A follow up to that last question, I mean, what was the last time you've actually had conversations with ED, I mean, is it a fluid dialogue or what is, it's radio silence or just waiting?

Well, we haven't heard I mean, we don't talk to them about when they expect to award the contract. But we obviously continue to talk with them as they validate specific parts of our response or ask us just to firm up or confirm information that they have on file for us.

So, for example, confirming our addresses that sort of thing. So we do have dialogue with them, it's not a radio silent relationship, but we don't have confirmation or specific dialogue around when do you think you'll make the awards. They are being very thorough in the process that they are going through.

Okay. Nice. The commercial healthcare business, just probably safe to say it's been disappointing, especially ramp. And I guess, what is your strategy around that, what you frame the opportunity as, how much are you investing there obviously several questions there, just kind of want to know more about the commercial healthcare opportunity?

Sure. So earlier this year we restructured the entire business and just in terms of how we think about it, we are down versus prior year. But largely because we had some commercial RAC related kinds of products that are, obviously, in a bit of a down slide as the RAC contract closed out.

But as we look at the work that we've done, we actually feel like we've built a really good foundation. So for example, in terms of product that we have in the market, we went from something in the high single-digit year-over-year to about over 20 products that we are implementing with the clients. It does take time to recognize the revenue, but we are actually feeling pretty good about a very strong foundation that we've put in place and believe that as we -- we are not ready to call 2017 yet, but as we roll into next year, we should actually start to see the kind of growth that we expected a couple years ago, but it take some work.

We did have to restructure and reorganize, bringing some strong subject-matter experts across some of the commercial areas. But I think as we sit here today while we would have love, I would have love to have the numbers hit much higher figures as we went into this year, but I do believe that as we go into next year, we're already working on all of the different types of audits and contract SOWs that will drive revenue, that will help us recognize revenue as we head into 2017. And as far as investment goes, it is -- it's not an investment, it's fully paying for itself.

Okay. The other revenue, again that will be lumpy by quarter, anything in there this quarter and what do you expect kind of going forward? Is there other growth opportunities here, I mean, long time ago you had announced relationship with like Grant Thornton, anything playing out there?

Yes, we have -- first of all, as we look at this going forward, the IRS opportunity will be reported under other, so obviously we expect that to be a material contributor to growth in our other reporting lines, specifically as we look at the quarter, the quarter was soft, some of that had to do with an amnesty program that we were running at the beginning of the year. And typically what happens with the amnesty program and there is a reset as we head start working the business in a more normalized fashion.

So Q3 is definitely lower than -- we see where the revenue is going to come in in future quarters, we expect future quarters to be at a more normalized level versus what we have seen from an average. And then obviously you have the IRS opportunity that will start make contributions next year. And there are some other opportunities as well that we are pursuing and that will contribute to this going forward, which we will address when we give guidance that for 2017.

Sure. On the IRS contract, what is the contingency fee rate?

I don't believe that they made that public at this point. But it's a competitive rate that we have on that contract.

On your other IRS -- or other tax contracts, is it going to be similar to that and what kind of rates do you remit relative to directionally compare that to, say, the RAC contract or the student loan contract?

Yes, it's definitely a higher fee then we're looking on the RAC contract and also on the student lending side, and it's a different type of business and service that we provide there. So the fees are definitely higher than.

All right. And then on the contingency fees or stated fees for the five regions on fbo.gov. On Region 4, it looked like it was materially higher, a little more than double your stated rate. It was obviously additions that were contingency. Is there an explanation for that? Why would one region be that much higher than everything else? I'm just kind of curious.

So looking how we speculate as to the bid on the recent four contracts, the way the procurement process was structured was very specific to preferred vendors and then fee related. We believe that our fee structure was not only competitive, but that we could -- that would still be a good business model for us.

With respect to the type of fee by law, the law that put this program in place, this has to be a pay from proceeds contract, so we don't understand how that would be different from how the law structures the contract.

I think our concern would have been if we had bid a very high fee that there is a possibility that we would not be competitive. And again as we sort through and modeled out what this contract meant, we bid fees on the different categories of audits where we thought it would still be a very good business model for us, but also that would make us competitive. I can't speculate as to how Region 4 fee was calculated and bid and the priority of these contracts to that organization.

Okay. Then Hakan you said that the realized contingency fee rate will be likely similar to the prior contract. Do you expect to earn similar margins under that prior one, now that you have kind of, I would say, really reworked your expense base and maybe you become more efficient is that -- is it going to be higher margin, similar margins or what kind of an outlook?

Well, [rule of it] as I've stated the fees are going to be a quite comparable, so as you look at it from a margin perspective it will be comparable as well. Obviously, we continue to put a lot of focus on driving a high level of efficiency in what we do, so we do see that there are opportunities to improve and what you're looking at is through the investment that we have done in the commercial side, is an example. We have a strategic focus on DME and doing Durable Medical Equipment work and Home Health. And so we have capabilities there that we have in the hand that we see or it's going to be sort of good use to this new contract we would see in that. So net-net we do see that there is opportunities, but I think the onset here is, it's going to be fairly similar margins.

All right. Thanks.

Thank you.

Andrew Wessel, Sterling Capital.

Hey, guys. I was just looking kind of on the back of that question about the CMS contracts, so in 2013 you generated [$67 million] in revenue in the healthcare business and that's kind of before all the changes started and everything kind of started going down. But, -- and I understand that given the Caremark capital research coverage themselves is pretty lackluster at the moment, but the published reports out there have kind of estimated that your kind of revenue/EBITDA opportunity in that business is less than half of what you used to achieve on one contract despite winning two contracts.

So I just think it's hard for people who are new to the story, probably looking at it and saying hey, this company has got a great balance sheet, they've got some runway ahead of them in terms of revenue growth, to kind of get a framework for understanding what that revenue growth could look like given that published reports are pretty scattershot about what that opportunity could be. So it would be helpful just for me and maybe others on the call or others reading the transcript later to understand what your revenue really opportunity is from the two contracts put together versus maybe -- not giving a specific number, but just kind of saying, well, if the fee rates are going to be similar, the margin rates are going to be similar, is your overall, is the claims rate going to be similar, is their capture rate going to be similar, I mean, just kind of thinking about things on that level would be helpful?

So you have to understand that this contract going forward is very different from the last one and I don't if you follow the events around the last contract, but there was quite a bit of controversy from the hospital association, there was a reduction in scope, there were some changes to the way the Medicare program viewed certain types of claims and reimbursements to hospitals and physicians.

So a lot of change occurred in that program, as a result of the former recovery audit contract So as we step through the new contract starting up, there are couple of things to keep in mind, one is there is sort of short-term and there is longer-term and the short term is CMS, their objective is to make sure we start this in a way that's really good for the program, but also good for the constituents that they have to work with including the provider.

So if we think about the short term we want to make sure that we are developing the program in a way that has not only long-term sustainability but the ability to grow, again, in a way that keeps in mind the objective which is good program integrity, good opportunity for the vendors, but also good for the constituents involved in the program. So those are all factors as we think about the short-term.

When we think about longer term, if we can accomplish those short-term objectives, we do see this program has a strong ability to grow, as you may know the error rate in the Medicare program itself for Part A and B continues to be around $60 billion a year or about 12%. So we do think there are opportunities to work with the client longer-term to create a much stronger program.

But we have to step through the short-term objectives first, make sure they are successful and then we think we -- no longer term what do I think, it's hard to say at this point, but we think it continues to be a very big market, there continues to be higher error rates in the Medicare program, error rate, not deliberate fraud or falsification, but just error rate. And so we do think longer-term it does present still a strong opportunity.

Okay. And then kind of on the DME contract specifically, just looking at that, I mean, that is -- that looks like a very different opportunity in terms of, according to CMS publications that the improper payment rate on DME is above 50%, whereas Medicare Part A and B, probably more like a 11%.

So, and you average all that together and it ends up being 12% or 13% or whenever it was. So, from the DME side, do you feel like that your kind of ability to identify, I mean, if you take 53% that's says if you throw a dart, one out of two times, right, you're going to find in improper payment.

Do you think that the hit rate will tend to be higher or maybe or the recapture rate will be higher, because in the past the RACs are maybe recovering 4% to 5% of the total estimated improper payment pool or was this DME contract, it looks like a little bit different animal, could you kind of provide some detail on that?

Sure. And I think you hit it right on that the error rate is higher, which means as a result that we expect our hit rate to be better. And on the other side the average finding rate associated with DME tends to be lower, so you put it all together you have the higher hit rate, which again is a plus, but again a lower average finding rate versus what we are seeing on some of the complex work and so forth if we do on the regional basis.

So it's somewhat comparable from that perspective. But overall we see that this is a contract that we wanted has been a greater -- huge opportunity for us as we look at this from a national perspective.

Okay. And then how these contracts, obviously going through this whole reforming process, how are these contracts set up in terms of term and options for renewal?

On the CMS contract, it's a five-year contract and the IRS contract is also a five-year contract.

Okay. And there is -- do they have renewal options at the end or they just go -- get put up RFP again at the end of five years?

I actually -- I don't know that.

Okay.

I don't know that. I think we'll get greater clarification as we think about -- as we meet with CMS. With IRS, the pay for timeline was about 10 years, so that maybe a difference -- that maybe a different path. Again, assuming that we can make it a very successful program.

Okay. And then, when you -- the question about the refi of your debt, obviously the debt cost is one thing to think about, but the covenants are so restrictive in terms of what you can do with your capital structure. And so from the perspective of that refinancing opportunity whenever it comes if you wait for the ED contract to come out, that's fine. But once you've refied your debt and it's maybe a lot less restrictive than your current debt is, as the Board thought about what the proper level of leverage is against this business. And from that basis you have almost no net debt today, you have very low CapEx requirement at least historically, so there seems to be a pretty exceptional opportunity to repurchase shares. And not at all of this today, but just from a long-term planning perspective, the stock is at [$3] and maybe we're kind of moving back towards a company that has a similar or if not better revenue set up than it had kind of three years ago. What are the thoughts around that?

Overall, I mean, we have had an active dialogue with our Board as it relates to refinancing our debt at appropriate capital restructuring. As you know we haven't done any acquisitions in the past and that's something that we see could be a great contributor to again exaggerate our growth in certain parts of our business. So we're kind of looking at the debt structure kind of very holistically and similarly having a discussion with the Board as far as potential to share repurchases and so forth. So again it's an active discussion at this point as we look and see how these contracts again unfold which you are not sort of to doing.

And then my last one to just finish up is just kind of on an overall margin profile for the business, again longer term 2017 is going to be what it is and 2018 may still be ramp here, we don't know. In terms of (inaudible) track implementation and how that all goes. But when you kind of hit a normalized level or stabilized level based on the revenue opportunity you see today, I mean, is it reasonable to assume especially after admirable you have done cutting expenses and restructuring the business. Is it reasonable to assume that you can achieve EBITDA margins that you achieve historically before you went into this kind of recompete biz?

I would say, I mean, if you go back to our peak years in 2013 and 2014, it's good -- it was a different environment at that point. As you look at in the student lending side we have taken some adjustments in its overall fee structure and also in the type of work that we are doing. So I don't see what we see today that we're going to be back at those elevated levels. But as you have seen, we have been very focused on driving a high level of EBITDA in the business as we go through these transitions. And as we look at it, it's fully ramped up stage, we do see opportunities to be above where we are today. But we would not, at this point, to the levels that we saw in 2013.

Alright. Well, great, thanks for answering the questions.

(Operator Instructions) Michael Cohen, Opportunistic Research.

Hi. I just have a couple of quick questions. The $7.5 million of restricted cash that is what's aimed at paying down the debt, is that correct?

Yes, I mean, the $7.5 million that restricted is, we extended the timeline for that until the end of February. And again, one of the key things there is having cash available, we have been very mindful of having cash available to ramp on, in particular, the Department of Education contract that is going to be an investment once that contract is awarded. We are incurring expenses for nine months plus until we start recognizing meaningful amount of revenue.

So again, we have been very mindful of making sure that we maintain strong balance sheet and strong cash position to be able to do that. Then those have been very supportive of that as well.

So the restricted cash is not, I thought you had alluded to some of the cash on the balance sheet being used to pay down debt in the future or has that already occurred in addition to what's obviously weakened cash (multiple speakers).

Yes. So as part of this amendment that we just executed, we did pay down debt by $7.5m, it's I guess, printed until that it is the same amount that we have in the restricted cash account. So we paid down debt of $7.5m. And then we continue to have $7.5m restricted. We extended the time period for that restriction from the end of October to end of February again to allow for time for the Department of Education contract to be awarded.

Understood. Okay. That's very helpful. And then you had sort of mentioned that obviously as part of the CMS contract award that the regions would be significantly more equalized or normalized relative to one another. If I look at some of the reports from -- some historical reports on performance, not Performant, for each of the respective regions of the existing contract, there does appear to be quite a big disparity between you guys and some of the other providers. Are you expecting those numbers to kind of normalize to one another meaning in, as a percentage, is that what you are suggesting?

Well, so one of the things you have to take into consideration is in our old region we had a high volume of provider of PIP hospitals which -- periodic interim providers and they had a special arrangement with CMS. So the kinds of providers they are and where they get reimbursed for Medicare, we were not allowed to audit those hospitals in our region and they comprised about 30% of the revenue opportunity for us.

So we just had a region that was structured very differently. Now with the realignment of dates in our region we should be close to 25% of the country. And as we look at the kind of providers what we think is that we will have a fewer percentage, a smaller percentage of those PIP providers in our region. So we do expect there to be a bit more of an alignment with respect to proportionate returns.

So in terms of if you were to kind of size the market opportunity by region, would you say that your region is 25% of the revenue opportunity, 20% or less?

It should be close, I think, we're about 23%, I think that's the way the region kind of shook out. So each of the regions is somewhere between 23% to 26%. CMS really made an effort to try to keep them at close to 25% as possible. So as we think about our region, we should be close to contributing whatever the proportionate is which, I think, is about 23% of whatever the entire (inaudible).

And in the past, it was probably -- the region that you had was maybe half of that maybe 10% to 15%, is that fair to say?

I think, our workable claims would probably closer to 16%, 17%, even though we had 24% of Medicare dollars, what we could work and the providers that we could actually audit brought us down to about 16%, 17%.

Great. Thank you. All my questions have been answered otherwise.

This concludes the question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

Thank you. Our Q3 results exceeded our expectations largely due to improvements in productivity and a very effective expense reduction program. We are very excited about the IRS and RAC contract awards, and we believe that this continue to evidence our ability to exceed in our market. We continue to focus on clients first, that is the basis on which we go to market. We believe we can drive a good value proposition. We have great consumer sensitivity and a deep commitment to regulatory compliance. We're very excited to begin the implementation of these key contract awards as we head into 2017. But before I go, I do want to thank our clients for letting us serve them and thank our employees for continuing to bring their best efforts to our organization. Thank you all very much for being with us today.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.