August 8, 2017

Performant Financial Corporation Announces Financial Results for Second Quarter 2017

Performant Also Announces Refinancing of Credit Agreement

LIVERMORE, Calif., Aug. 08, 2017 (GLOBE NEWSWIRE) -- Performant Financial Corporation (Nasdaq:PFMT), a leading provider of technology-enabled recovery and related analytics services in the United States, today reported the following financial results for its second quarter ended June 30, 2017:

Second Quarter Financial Highlights

  • Total revenues of $35.9 million, compared to revenues of $38.1 million in the prior year period, down 5.8%
  • Net loss of $2.4 million, or $(0.05) per diluted share, compared to a net income of $1.5 million, or $0.03 per diluted share, in the prior year period
  • Adjusted EBITDA of $5.0 million, compared to adjusted EBITDA of $8.9 million in the prior year period
  • Adjusted net loss of $0.5 million, or $(0.01) per diluted share, compared to an adjusted net income of $2.9 million or $0.06 per diluted share in the prior year period

Second Quarter 2017 Results

Student lending revenues in the second quarter were $27.5 million, a decrease of 4.5% from revenues of $28.8 million in the prior year period. Our Guaranty Agency clients and the U.S. Department of Education accounted for revenues of $26.2 million and $1.3 million, respectively, in the second quarter of 2017, compared to $21.8 million and $7.0 million in the prior year period.  Student loan placement volume (defined below) during the quarter totaled $0.9 billion, compared to $1.3 billion in the prior year period.

Healthcare revenues in the second quarter were $2.1 million, down from $3.4 million in the prior year period. Medicare audit recovery revenues were $0.1 million in the second quarter, a decrease of $2.2 million from the prior year period, as the Company's recovery activities are just beginning on the two new RAC contracts awarded to the Company for Region 1 and Region 5. Commercial healthcare clients contributed revenues of $2.0 million, an increase of $0.9 million or 81.8% from the prior year period.

Other revenues in the second quarter were $6.4 million, up from $5.9 million in the prior year period.

As of June 30, 2017, the Company had cash and cash equivalents of approximately $21.3 million.

The Company also announced that it has entered into an agreement to refinance its existing credit facility with a new facility that will initially provide a senior secured term loan of $44 million.  The new facility also provides the Company with the ability to draw down up to an additional $15 million of senior secured term loans within 2 years.  The new credit facility is expected to close this week.  The initial term loan will have a three-year maturity with two, one year extension options available to the Company, subject to customary conditions.  In connection with the closing of the initial $44 million term loan, the Company will issue to the lender warrants to purchase up to 3,863,326 shares of Company common stock, representing approximately 7.5% of the diluted common stock outstanding.  These warrants will have an exercise price of $1.92 per share, which is based on the volume weighted average price of the Company's shares for a representative period prior to entering into the new credit facility.  If the Company draws down on the additional term loans, it will issue the lender additional warrants at the same exercise price to purchase 77,267 shares for each $1 million of additional borrowings.  Approximately $38.0 million of the proceeds from the new term loan and $6 million of restricted cash will be used to repay all outstanding amounts under the prior credit agreement.

Business Outlook

"As we look ahead, our focus remains on executing on contracts, growing share with our clients, and effectively managing ongoing expenses.  We are excited to have a lender partner who knows our business and shares an interest in creating shareholder value, and we look forward to executing strategically to achieve that objective. Our competitive differentiation continues to be: overarching client-centric focus, a compelling service value proposition, consumer sensitivity and deep commitment to regulatory compliance.  For 2017, we are reiterating our guidance for revenue in the range of $125-145 million with adjusted EBITDA in the range of $10-13 million," concluded Im.

Terms used in this Press Release

Student Loan Placement Volume refers to the dollar volume of defaulted student loans first placed with us during the specified period by public and private clients for recovery. Placement Volume allows us to measure and track trends in the amount of inventory our clients in the student lending market are placing with us during any period. The revenue associated with the recovery of a portion of these loans may be recognized in subsequent accounting periods, which assists management in estimating future revenues and in allocating resources necessary to address current Placement Volumes.

Earnings Conference Call

The Company will hold a conference call to discuss its second quarter results today at 5:00 p.m. Eastern.  A live webcast of the call may be accessed on the Investor Relations section of the Company's website at investors.performantcorp.com. The conference call is also available by dialing 877-705-6003 (domestic) or 201-493-6725 (international).

A replay of the call will be available on the Company's website or by dialing 844-512-2921 (domestic) or 412-317-6671 (international) and entering the passcode 13666436. The telephonic replay will be available approximately three hours after the call, through August 15, 2017.

About Performant Financial Corporation

Performant helps government and commercial organizations enhance revenue and contain costs by preventing, identifying and recovering waste, improper payments and defaulted assets. Performant is a leading provider of these services in several industries, including healthcare, student loans and government. Performant has been providing recovery audit services for more than nine years to both commercial and government clients, including serving as a Recovery Auditor for the Centers for Medicare and Medicaid Services.

Powered by a proprietary analytic platform and workflow technology, Performant also provides professional services related to the recovery effort, including reporting capabilities, support services, customer care and stakeholder training programs meant to mitigate future instances of improper payments. Founded in 1976, Performant is headquartered in Livermore, California.

Note Regarding Use of Non-GAAP Financial Measures

In this press release, to supplement our consolidated financial statements, the company presents adjusted EBITDA and adjusted net income/(loss). These measures are not in accordance with generally accepted accounting principles (GAAP) and accordingly reconciliations of adjusted EBITDA and adjusted net income/(loss) to net income/(loss) determined in accordance with GAAP are included in the "Reconciliation of Non-GAAP Results" table at the end of this press release. We have included adjusted EBITDA and adjusted net income/(loss) in this press release because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends and to prepare and approve our annual budget. Accordingly, we believe that adjusted EBITDA and adjusted net income/(loss) provide useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and board of directors. Our use of adjusted EBITDA and adjusted net income/(loss) has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In particular, many of the adjustments to our GAAP financial measures reflect the exclusion of items, specifically interest, tax and depreciation and amortization expenses, equity-based compensation expense and certain other non-operating expenses, that are recurring and will be reflected in our financial results for the foreseeable future. In addition, these measures may be calculated differently from similarly titled non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.

Forward Looking Statements

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our outlook for revenues and adjusted EBITDA in 2017. These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change and actual results may differ materially from the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, that the contracts with our large clients may be changed or terminated unilaterally and on short notice, that our contracts with two of our largest customers, Great Lakes Higher Education and the U.S. Department of Education, have been terminated, that while our protest of Department of Education contract award decision was upheld, there is no assurance that we will receive a new contract award from the Department of Education in the future, that continuing limitations on the scope of our audit activity under our RAC contracts have significantly reduced our revenue opportunities with this client, that the amount of commissions we are required to return to CMS due to successful appeals by providers could exceed our estimated appeals reserve, that we have significant indebtedness and may not be able to avoid a breach of the covenants and other provisions of our credit agreement which would cause us to be in default, that the Company faces significant competition in all of its markets, that the U.S. federal government accounts for a significant portion of the Company's revenues, that future legislative and regulatory changes may have significant effects on the Company's business, that failure of the Company's or third parties' operating systems and technology infrastructure could disrupt the operation of the Company's business and the threat of breach of the Company's security measures or failure or unauthorized access to confidential data that the Company possesses. More information on potential factors that could affect the Company's financial condition and operating results is included from time to time in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the Company's annual report on Form 10-K for the year ended December 31, 2016, Form 10-Q for the quarter ended June 30, 2017 and subsequently filed reports on Forms 10-Q and 8-K. The forward-looking statements are made as of the date of this press release and the Company does not undertake to update any forward-looking statements to conform these statements to actual results or revised expectations.

 
PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share amounts)
 
 June 30,
 2017
 December 31,
 2016
 (Unaudited)  
Assets   
Current assets:   
Cash and cash equivalents$21,260  $32,982 
Restricted cash6,000  7,502 
Trade accounts receivable, net of allowance for doubtful accounts of $0 and $224, respectively11,267  11,484 
Deferred income taxes  5,331 
Prepaid expenses and other current assets14,492  12,686 
Income tax receivable2,637  2,027 
Total current assets55,656  72,012 
Property, equipment, and leasehold improvements, net22,805  23,735 
Identifiable intangible assets, net5,269  5,895 
Goodwill81,572  82,522 
Deferred income taxes3,534   
Other assets915  914 
Total assets$169,751  $185,078 
Liabilities and Stockholders' Equity   
Current liabilities:   
Current maturities of notes payable, net of unamortized debt issuance costs of $29 and $1,294, respectively$1,071  $9,738 
Accrued salaries and benefits4,509  4,315 
Accounts payable715  628 
Other current liabilities4,186  4,409 
Estimated liability for appeals19,179  19,305 
Net payable to client13,104  13,074 
Total current liabilities42,764  51,469 
Notes payable, net of current portion and unamortized debt issuance costs of $1,136 and $272, respectively41,878  43,878 
Deferred income taxes  1,130 
Other liabilities2,285  2,356 
Total liabilities86,927  98,833 
Commitments and contingencies   
Stockholders' equity:   
Common stock, $0.0001 par value. Authorized, 500,000 shares at June 30, 2017 and December 31, 2016; issued and outstanding 50,785 and 50,234 shares at June 30, 2017 and December 31, 2016, respectively5  5 
Additional paid-in capital67,628  65,650 
Retained earnings15,191  20,590 
Total stockholders' equity82,824  86,245 
Total liabilities and stockholders' equity$169,751  $185,078 
        


PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
  Three Months Ended
 June 30,
 Six Months Ended
 June 30,
  2017 2016 2017 2016
Revenues $35,907  $38,074  $69,016  $76,353 
Operating expenses:        
Salaries and benefits 20,450  20,060  41,146  41,397 
Other operating expenses 16,082  13,733  29,523  28,090 
Total operating expenses 36,532  33,793  70,669  69,487 
Income (loss) from operations (625) 4,281  (1,653) 6,866 
Interest expense (1,618) (1,841) (3,224) (4,273)
Income (loss) before provision for income taxes (2,243) 2,440  (4,877) 2,593 
Provision for income taxes 197  963  522  1,036 
Net income (loss) $(2,440) $1,477  $(5,399) $1,557 
Net income (loss) per share        
Basic $(0.05) $0.03  $(0.11) $0.03 
Diluted $(0.05) $0.03  $(0.11) $0.03 
Weighted average shares        
Basic 50,579  50,075  50,443  49,860 
Diluted 50,579  50,527  50,443  50,347 
             


PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 Six Months Ended
 June 30,
Cash flows from operating activities:2017 2016
Net income (loss)$(5,399) $1,557 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Loss on disposal of assets10  9 
Impairment of goodwill and intangible assets1,081   
Depreciation and amortization5,668  6,806 
Deferred income taxes667  (1,247)
Stock-based compensation2,290  2,340 
Interest expense from debt issuance costs696  550 
Write-off unamortized debt issuance costs  468 
Interest expense paid in kind217   
Changes in operating assets and liabilities:   
Trade accounts receivable217  6,359 
Prepaid expenses and other current assets(1,806) 228 
Income tax receivable(610)  
Other assets(1) 8 
Accrued salaries and benefits194  2,479 
Accounts payable87  195 
Other current liabilities(221) 268 
Income taxes payable  63 
Estimated liability for appeals(126) 287 
Net payable to client30  393 
Other liabilities(71) (110)
Net cash provided by operating activities2,923  20,653 
Cash flows from investing activities:   
Purchase of property, equipment, and leasehold improvements(4,253) (3,645)
Net cash used in investing activities(4,253) (3,645)
Cash flows from financing activities:   
Repayment of notes payable(11,285) (27,038)
Debt issuance costs paid(296) (410)
Restricted cash for repayment of notes payable1,502  (7,511)
Taxes paid related to net share settlement of stock awards(339) (205)
Proceeds from exercise of stock options31  330 
Income tax benefit from employee stock options  99 
Payment of purchase obligation  (292)
Net cash used in financing activities(10,387) (35,027)
Effect of foreign currency exchange rate changes on cash(5) 25 
Net decrease in cash and cash equivalents(11,722) (17,994)
Cash and cash equivalents at beginning of period32,982  71,182 
Cash and cash equivalents at end of period$21,260  $53,188 
Supplemental disclosures of cash flow information:   
Cash paid for income taxes$439  $2,096 
Cash paid for interest$2,328  $3,258 
        


PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Reconciliation of Non-GAAP Results
(In thousands, except per share amount)
(Unaudited)
 
  Three Months Ended
 June 30,
 Six Months Ended
 June 30,
  2017 2016 2017 2016
Adjusted Earnings Per Diluted Share:        
Net income (loss) $(2,440) $1,477  $(5,399) $1,557 
Plus: Adjustment items per reconciliation of adjusted net income 1,955  1,435  2,999  3,306 
Adjusted net income (loss) (485) 2,912  (2,400) 4,863 
Adjusted Earnings Per Diluted Share $(0.01) $0.06  $(0.05) $0.10 
Diluted avg shares outstanding 50,579  50,527  50,443  50,347 
     
  Three Months Ended
 June 30,
 Six Months Ended
 June 30,
  2017 2016 2017 2016
Adjusted EBITDA:        
Net income (loss) $(2,440) $1,477  $(5,399) $1,557 
Provision for income taxes 197  963  522  1,036 
Interest expense 1,618  1,841  3,224  4,273 
Transaction expenses (1) 444    444   
Restructuring and other expenses (5)   51    283 
Depreciation and amortization 2,894  3,416  5,668  6,806 
Impairment of goodwill and customer relationship (3) 1,081    1,081   
Stock-based compensation 1,187  1,136  2,290  2,340 
Adjusted EBITDA $4,981  $8,884  $7,830  $16,295 
                 
  Three Months Ended
 June 30,
 Six Months Ended
 June 30,
  2017 2016 2017 2016
Adjusted Net Income (Loss):        
Net income (loss) $(2,440) $1,477  $(5,399) $1,557 
Transaction expenses (1) 444    444   
Stock-based compensation 1,187  1,136  2,290  2,340 
Amortization of intangibles (2) 217  933  488  1,869 
Impairment of goodwill and customer relationship (3) 1,081    1,081   
Deferred financing amortization costs (4) 330  272  696  1,018 
Restructuring and other expenses (5)   51    283 
Tax adjustments (6) (1,304) (957) (2,000) (2,204)
Adjusted Net Income (Loss) $(485) $2,912  $(2,400) $4,863 
                 

 

(1) Represents costs and expenses related to the refinancing of our existing indebtedness.

(2) Represents amortization of capitalized expenses related to the acquisition of Performant by an affiliate of Parthenon Capital Partners in 2004, and also an acquisition in the first quarter of 2012 to enhance our analytics capabilities.

(3) Represents goodwill and impairment charges related to our Performant Europe Ltd. subsidiary.

(4) Represents amortization of capitalized financing costs related to financing conducted in 2012 and costs related to the amendments of the terms of the note payable in 2014, 2016 and 2017.

(5) Represents restructuring costs and severance and termination expenses incurred in connection with termination of employees and consultants.

(6) Represents tax adjustments assuming a marginal tax rate of 40%.

 
 
PERFORMANT FINANCIAL CORPORATION AND SUBSIDIARIES
Reconciliation of Non-GAAP Results
(In thousands, except per share amount)
(Unaudited)
 
We are providing the following preliminary estimates of our financial results for the year ended December 31, 2017:
 
  Six Months Ended Year Ended
  June 30,
2017
 December 31,
2017
 December 31,
2016
 December 31,
2017
  Actual Estimate Actual Estimate
Adjusted EBITDA:        
Net income (loss) $(5,399) $  (1,610) to (1,910) $(11,453) $ (7,009) to (7,309)
Provision for income taxes 522  (5,194) to (5,394) (4,370) (4,672) to (4,872)
Interest expense 3,224  2,876 to 3,876 7,897  6,100 to 7,100
Transaction expenses (1) 444  56 to 556   500 to 1000
Restructuring and other expenses (5)     329   
Depreciation and amortization 5,668  5,082 to 6,082 13,380  10,750 to 11,750
Impairment of goodwill and customer relationship (3) 1,081    15,438  1,081 
Stock-based compensation 2,290  960 to 1,960 4,713  3,250 to 4,250
Adjusted EBITDA $7,830  $  2,170 to 5,170 $25,934  $  10,000 to 13,000
             

(1) Represents costs and expenses related to the refinancing of our existing indebtedness.

(3) Represents goodwill and impairment charges related to our Performant Europe Ltd. subsidiary.

(5) Represents restructuring costs and severance and termination expenses incurred in connection with termination of employees and consultants.

Contact Information
Richard Zubek
Investor Relations
925-960-4988
investors@performantcorp.com


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