Performant Financial (PFMT) - 2021 Q4 - Annual Report

PART I ITEM 1. Business Performant Financial Corporation delivers technology-enabled audit, recovery, and analytics services, primarily in healthcare payment integrity, shifting from non-healthcare markets due to pandemic and policy changes, operating on a success-based fee model - Performant Financial Corporation specializes in technology-enabled audit, recovery, and analytics services, primarily focusing on the healthcare industry to identify improper payments for both government and commercial payers[19] - The company strategically exited non-healthcare recovery markets, such as defaulted student loans, due to the COVID-19 pandemic and Department of Education policy changes, selling or not renewing related contracts[20][36] - The revenue model is generally success-based, with fees earned on recovered improper payments, aligning business objectives with client outcomes[22] Key Financial Highlights (2021) | Metric | Amount (Millions USD) | | :----- | :-------------------- | | Revenues | $124.4 | | Net Loss | $10.3 | | Adjusted EBITDA | $11.9 | | Adjusted Net Loss | $3.1 | - Competitive strengths include a scalable technology platform, advanced workflow processes, strong data analytics (Performant Insight), long-standing client relationships (e.g., CMS for over twelve years), extensive domain expertise, and an experienced management team[37][38] - Growth strategy focuses on expanding healthcare payment integrity services, targeting various health plans, and pursuing strategic alliances or acquisitions to enhance capabilities and diversify revenues[42] Overview COVID-19 Pandemic Update Our Markets Healthcare Market Recovery Market Our Competitive Strengths Our Growth Strategy Our Platform Data Management Expertise Data Analytics Capabilities Workflow Processes Our Services Healthcare Recovery Customer Care / Outsourced Services Analytics Capabilities Our Clients CMS Private Healthcare Sales and Marketing Technology Operations Competition Government Regulation HIPAA and Related State Laws Privacy Act of 1974 Certification, Accreditation, and Security FDCPA and Related Laws TCPA FCRA CFPB State Laws Intellectual Property Human Capital Available Information ITEM 1A. Risk Factors The company faces substantial risks from the COVID-19 pandemic, indebtedness, client concentration, intense competition, operational failures, data security breaches, extensive government regulation, and stock price volatility - The COVID-19 pandemic has had and may continue to have a material adverse impact on the company's business, results of operations, and financial condition, leading to customer delays in recovery and audit services[100][101][102] - The company's indebtedness and potential failure to comply with restrictive covenants in its Credit Agreement could adversely affect its business and financial condition, limiting funds for other purposes[106][107] - A substantial portion of revenues is derived from a limited number of clients; for the year ended December 31, 2021, 70% of revenues came from the three largest clients, making the company vulnerable to contract termination or unfavorable changes[111] - The company operates in highly competitive markets, facing competition from other service providers, and an inability to compete effectively could harm client relationships and financial results[115] - Operational risks include potential failures of operating systems or technology infrastructure, data security breaches leading to liabilities and reputational damage, and the challenge of hiring and retaining employees with specialized skills for healthcare business growth[122][123][126] - The business is subject to extensive federal and state regulations (e.g., HIPAA, FDCPA, TCPA, FCRA, CFPB), and failure to comply could result in significant liabilities, penalties, and expenses[134][136] Risks Related to Our Business Risks Related to Regulations and Legislation Risks Related to our Common Stock General Risks ITEM 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[144] ITEM 2. Properties As of December 31, 2021, Performant operated seven U.S. office locations, including its Livermore, California headquarters, with a mix of leased and owned data center facilities deemed adequate - As of December 31, 2021, the company operated seven office locations in the United States[146] - The corporate headquarters in Livermore, California, is approximately 50,000 square feet and also functions as a data center and production location, with its lease expiring in November 2022[146] - The company leases facilities in California, Florida, Tennessee, and Texas, and owns production/data centers in Oregon and Indiana[146] ITEM 3. Legal Proceedings Performant is involved in routine legal proceedings, mainly from student loan recovery, with management believing no material adverse effect on financial condition or operations - The company is involved in various legal proceedings in the normal course of business, primarily stemming from student loan recovery services[148] - These legal actions generally assert claims for violations of the Fair Debt Collection Practices Act (FDCPA) or similar federal and state consumer credit laws[148] - Management and legal counsel believe that none of these legal proceedings, individually or collectively, will have a material adverse effect on the company's financial condition or results of operations[148] ITEM 4. Mine Safety Disclosures This item is not applicable to Performant Financial Corporation - The disclosure regarding mine safety is not applicable to the registrant[149] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Performant's common stock trades on NASDAQ (PFMT), with no current intent to pay dividends due to board policy and credit agreement restrictions, and no issuer equity purchases were made - Performant's common stock is traded on the NASDAQ under the symbol PFMT[151] - As of December 31, 2021, there were approximately 19 holders of record for the common stock[152] - The board of directors does not currently intend to pay regular dividends on common stock, and the Credit Agreement contains a covenant prohibiting cash dividends[153] - No issuer purchases of equity securities were made[158] ITEM 6. Selected Financial Data This section summarizes Performant's consolidated financial data from 2017-2021, highlighting key revenues, expenses, net loss, and balance sheet items, noting revenue decrease and net loss increase from 2020 to 2021 Consolidated Statement of Operations Data (in thousands, except per share amounts) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :---------------------------------- | :----- | :----- | :----- | :----- | :----- | | Revenues | $124,393 | $155,937 | $150,432 | $155,668 | $132,049 | | Total operating expenses | 125,709 | 169,902 | 170,081 | 157,465 | 139,135 | | Loss from operations | (1,316) | (13,965) | (19,649) | (1,797) | (7,086) | | Net loss | (10,288) | (13,989) | (26,820) | (8,010) | (12,729) | | Basic Net loss per share | (0.17) | (0.26) | (0.50) | (0.15) | (0.25) | | Diluted Net loss per share | (0.17) | (0.26) | (0.50) | (0.15) | (0.25) | Consolidated Balance Sheet Data (in thousands) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :------------------------ | :----- | :----- | :----- | :----- | :----- | | Cash and cash equivalents | $17,347 | $16,043 | $3,373 | $5,462 | $21,731 | | Total assets | 121,985 | 126,227 | 138,872 | 137,759 | 164,436 | | Total notes payable | 20,000 | 60,863 | 64,313 | 45,800 | 44,000 | | Total liabilities | 39,562 | 84,247 | 85,247 | 60,533 | 84,111 | | Total stockholders' equity | 82,423 | 41,980 | 53,625 | 77,226 | 80,325 | ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Performant's 2021 financial performance reflects a strategic shift from non-healthcare recovery, resulting in a 20% revenue decrease to $124.4 million, a 26% net loss improvement to $10.3 million, and a significant drop in operating cash flow, alongside debt refinancing - Performant's business model is success-based, earning contingency fees on recovered improper payments, primarily in healthcare payment integrity services[165] - The company exited non-healthcare recovery markets (e.g., student loans) in 2021 due to the COVID-19 pandemic and the Department of Education's pause on student loan recovery, leading to a significant decline in recovery revenues[164][177][178] Revenue Breakdown (in thousands) | Revenue Category | 2021 | 2020 | Change ($) | Change (%) | | :-------------------------- | :----- | :----- | :--------- | :--------- | | Eligibility-based | $48,276 | $49,844 | $(1,568) | (3)% | | Claims-based | $29,178 | $18,704 | $10,474 | 56% | | Healthcare Total | $77,454 | $68,548 | $8,906 | 13% | | Recovery | $33,405 | $73,396 | $(39,991) | (54)% | | Customer Care / Outsourced Services | $13,534 | $13,993 | $(459) | (3)% | | Total Revenues | $124,393 | $155,937 | $(31,544) | (20)% | Key Operating Results (in thousands) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :---------------------------------- | :----- | :----- | :--------- | :--------- | | Revenues | $124,393 | $155,937 | $(31,544) | (20)% | | Salaries and benefits | $87,440 | $100,654 | $13,214 | 13% | | Other operating expense | $38,269 | $42,248 | $3,979 | 9% | | Impairment of goodwill | $0 | $27,000 | $27,000 | 100% | | Loss from operations | $(1,316) | $(13,965) | $12,649 | 91% | | Interest expense | $(11,313) | $(7,227) | $(4,086) | (57)% | | Net Loss | $(10,288) | $(13,989) | $3,701 | 26% | Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Net cash provided by operating activities | $916 | $20,809 | | Net cash used in investing activities | $(270) | $(3,792) | | Net cash provided by (used in) financing activities | $608 | $(3,716) | - The company entered into a new Credit Agreement on December 17, 2021, including a $20 million term loan and a $15 million undrawn revolving loan commitment, maturing on December 17, 2026, with proceeds used to refinance the prior credit agreement[234][235] Adjusted EBITDA and Adjusted Net Income (Loss) (in thousands) | Metric | 2021 | 2020 | | :------------------------ | :----- | :----- | | Net loss | $(10,288) | $(13,989) | | Adjusted EBITDA | $11,896 | $20,464 | | Adjusted net income (loss) | $(3,102) | $8,469 | | Adjusted earnings per diluted share | $(0.05) | $0.16 | Overview COVID-19 Pandemic Update Sources of Revenues Healthcare Recovery Customer Care / Outsourced Services Costs and Expenses Factors Affecting Our Operating Results Costs Associated with Commencing New Client Contracts Claim Recovery Volume Contingency Fees Regulatory Matters Client Contract Cancellation Macroeconomic Factors Critical Accounting Policies Revenue Recognition Results of Operations Revenues Salaries and Benefits Other Operating Expense Impairment of Goodwill Loss from Operations Interest Expense Income Taxes Net Loss Liquidity and Capital Resources Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Restricted Cash Notes Payable Contractual Obligations Off-Balance Sheet Arrangements Adjusted EBITDA and Adjusted Net Income (Loss) ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Performant faces primary market risk from interest rate changes on its variable-rate credit facility, with a 100 basis point increase potentially raising annual interest expense by $0.2 million, while having no direct foreign currency risk - The company does not hold or issue financial instruments for trading purposes and has no direct foreign currency risk as all business is conducted in U.S. currency[250] - Primary market risk is exposure to changes in interest rates on its variable-rate senior secured credit facility, which is based on SOFR[250] - A 100 basis point (1%) increase in the interest rate on borrowings from the credit facility floor of 1.0% would increase annual interest expense by approximately $0.2 million[250] ITEM 8. Financial Statements and Supplementary Data This section incorporates by reference the consolidated financial statements, notes, and Baker Tilly US, LLP reports, as detailed in the Item 15 Index to Financial Statements - The consolidated financial statements, notes, and reports of Baker Tilly US, LLP are incorporated by reference from the Index to Financial Statements under Item 15[252] ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants regarding accounting and financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[253] ITEM 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the year, as audited by Baker Tilly US, LLP - Management concluded that the company's disclosure controls and procedures were functioning effectively at the reasonable assurance level as of December 31, 2021[255] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2021, based on the 2013 COSO Framework, with this assessment audited by Baker Tilly US, LLP[256] - There were no material changes in internal control over financial reporting during the year ended December 31, 2021[257] Evaluation of Disclosure Controls and Procedures Management's Report on Internal Control over Financial Reporting Changes in Internal Control over Financial Reporting ITEM 9B. Other Information The company reported no other information required for disclosure under this item - There is no other information to report under this item[258] ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Performant Financial Corporation - The disclosure regarding foreign jurisdictions that prevent inspections is not applicable[260] PART III ITEM 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement on Schedule 14A - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement[261] ITEM 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2022 Proxy Statement on Schedule 14A - Information on executive compensation is incorporated by reference from the 2022 Proxy Statement[262] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, and related stockholder matters, is incorporated by reference from the 2022 Proxy Statement on Schedule 14A - Information on security ownership of certain beneficial owners and management is incorporated by reference from the 2022 Proxy Statement[263] ITEM 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement on Schedule 14A - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the 2022 Proxy Statement[264] ITEM 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement on Schedule 14A - Information on principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement[265] PART IV ITEM 15. Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, referencing the Index to Consolidated Financial Statements and detailing incorporated exhibits - The financial statements filed as part of this report are identified in the Index to Consolidated Financial Statements[267] - A list of exhibits, including the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and the Credit Agreement, are filed herewith or incorporated by reference[269][270][271] Financial Statements Exhibits Financial Statements and Schedules ITEM 16. Form 10-K Summary This item indicates that a Form 10-K Summary is not applicable for this report - The Form 10-K Summary is not applicable[273] Consolidated Financial Statements Index to Consolidated Financial Statements This section indexes Performant Financial Corporation's consolidated financial statements for 2021 and 2020, including auditor reports, balance sheets, statements of operations, equity changes, cash flows, and notes - The index lists the Consolidated Financial Statements of Performant Financial Corporation and Subsidiaries for the years ended December 31, 2021, and 2020[275] - It includes Reports of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[275] Reports of Independent Registered Public Accounting Firm Baker Tilly US, LLP issued unqualified opinions on Performant's 2021 and 2020 consolidated financial statements and 2021 internal control over financial reporting, noting complex healthcare revenue recognition as a critical audit matter - Baker Tilly US, LLP issued an unqualified opinion on the consolidated financial statements of Performant Financial Corporation as of December 31, 2021 and 2020, stating they are presented fairly in all material respects in conformity with U.S. GAAP[278] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 COSO Framework[290] - A critical audit matter involved the complex and highly judgmental revenue recognition for certain healthcare contracts using an output method, which requires assessing eligibility for the method and estimating future collections for submitted claims[281][283][284] Opinion on the Consolidated Financial Statements Basis for Opinion Critical Audit Matters Opinion on Internal Control over Financial Reporting Basis for Opinion Definition and Limitations of Internal Control over Financial Reporting Consolidated Balance Sheets Performant's consolidated balance sheets for 2021 and 2020 show a slight asset decrease, a significant 53% reduction in total liabilities to $39.6 million, and a 96% increase in stockholders' equity to $82.4 million, driven by a public offering Consolidated Balance Sheet Data (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :-------------------------------------------------------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $17,347 | $16,043 | | Total current assets | $54,707 | $54,520 | | Total assets | $121,985 | $126,227 | | Current maturities of notes payable, net | $489 | $59,957 | | Total current liabilities | $17,507 | $77,212 | | Total liabilities | $39,562 | $84,247 | | Total stockholders' equity | $82,423 | $41,980 | - Total liabilities decreased significantly by $44.685 million (53%) from $84.247 million in 2020 to $39.562 million in 2021, primarily due to a reduction in current maturities of notes payable[298] - Total stockholders' equity increased by $40.443 million (96%) from $41.980 million in 2020 to $82.423 million in 2021, largely influenced by proceeds from a public offering and recognition of warrants[298][304] Consolidated Statements of Operations Performant's consolidated statements of operations show a 20% revenue decrease to $124.4 million in 2021, but a 26% net loss improvement to $10.3 million, largely due to the absence of a 2020 goodwill impairment charge Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | 2021 | 2020 | | :-------------------------------------------------- | :----- | :----- | | Revenues | $124,393 | $155,937 | | Salaries and benefits | 87,440 | 100,654 | | Other operating expenses | 38,269 | 42,248 | | Impairment of goodwill | — | 27,000 | | Total operating expenses | 125,709 | 169,902 | | Loss from operations | (1,316) | (13,965) | | Gain on sale of certain recovery contracts | 2,403 | — | | Interest expense | (11,313) | (7,227) | | Net loss | $(10,288) | $(13,989) | | Basic net loss per share | $(0.17) | $(0.26) | | Diluted net loss per share | $(0.17) | $(0.26) | - Revenues decreased by $31.544 million (20%) from $155.937 million in 2020 to $124.393 million in 2021[301] - Net loss improved by $3.701 million (26%) from $(13.989) million in 2020 to $(10.288) million in 2021, primarily due to the absence of a $27.0 million goodwill impairment charge in 2021[301] Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity significantly increased by 96% to $82.4 million in 2021, primarily due to $42.6 million from a public offering and $5.2 million from warrant recognition, partially offset by a net loss Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Item | Balance, January 1, 2020 | Balance, December 31, 2020 | Balance, December 31, 2021 | | :------------------------------------------ | :----------------------- | :----------------------- | :----------------------- | | Total Stockholders' Equity | $53,625 | $41,980 | $82,423 | | Net loss | $(13,989) | $(10,288) | | Proceeds from public offering, net of costs | — | $42,644 | | Recognition of warrants associated with notes payable | — | $5,237 | | Stock-based compensation expense | $2,610 | $2,640 | - Total stockholders' equity increased by $40.443 million (96%) from $41.980 million at December 31, 2020, to $82.423 million at December 31, 2021[304] - Key contributors to the increase in 2021 were $42.644 million from a public offering (net of costs) and $5.237 million from the recognition of warrants associated with notes payable[304] Consolidated Statements of Cash Flows Cash, cash equivalents, and restricted cash increased by $1.254 million in 2021, with operating cash flow sharply declining, investing outflows decreasing, and financing activities turning positive due to a public offering and new borrowings Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | | Net cash provided by operating activities | $916 | $20,809 | | Net cash used in investing activities | $(270) | $(3,792) | | Net cash provided by (used in) financing activities | $608 | $(3,716) | | Net increase in cash, cash equivalents and restricted cash | $1,254 | $13,301 | | Cash, cash equivalents and restricted cash at end of year | $19,550 | $18,296 | - Cash provided by operating activities decreased significantly from $20.809 million in 2020 to $0.916 million in 2021, primarily due to reductions in trade accounts receivable and income tax receivable, offset by an increase in contract assets[307][227] - Financing activities provided $0.608 million in 2021, a shift from a $3.716 million outflow in 2020, driven by $42.644 million from a public offering and $20.0 million in new borrowings, partially offset by $60.863 million in debt repayments[307][231] Notes to Consolidated Financial Statements The notes detail Performant's accounting policies, financial line items, and significant events for 2021 and 2020, covering the strategic shift to healthcare, COVID-19 impact, revenue recognition, debt changes, goodwill impairment, and stock-based compensation - Performant Financial Corporation is a leading provider of technology-enabled audit, recovery, and analytics services, with a strategic focus on the healthcare payment integrity industry[310] - The company exited non-healthcare recovery markets (e.g., student loans) in 2021 due to the COVID-19 pandemic and policy changes, selling or not renewing related contracts[311] - Revenue recognition is primarily based on contingency fees from healthcare audit and eligibility services, with variable consideration estimated when progress can be reliably measured[328][330][332] Revenue Disaggregation (in thousands) | Category | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Eligibility-based | $48,276 | $49,844 | | Claims-based | $29,178 | $18,704 | | Healthcare Total | $77,454 | $68,548 | | Recovery | $33,405 | $73,396 | | Customer Care / Outsourced Services | $13,534 | $13,993 | | Total Revenues | $124,393 | $155,937 | - The company recognized a non-cash goodwill impairment charge of $27.0 million in 2020 due to the negative economic impact of the COVID-19 pandemic and a decrease in market capitalization[363] - A new Credit Agreement was entered into on December 17, 2021, with MUFG Union Bank, N.A., including a $20 million term loan and a $15 million revolving loan, replacing the prior agreement with ECMC Group, Inc[366][367] - Total stock-based compensation expense was $2.6 million for both 2021 and 2020, with restricted stock units being the primary component[387] 1. Summary of Significant Accounting Policies (a) Organization and Nature of Business (b) Principles of Consolidation (c) Use of Estimates in the Preparation of Consolidated Financial Statements (d) Cash and Cash Equivalents (e) Restricted Cash (f) Property, Equipment, and Leasehold Improvements (g) Goodwill and Other Intangible Assets (h) Impairment of Long-Lived Assets (i) System Developments (j) Debt Issuance Costs (k) Revenues, Accounts Receivable, Contract Assets, Contract Liabilities, and Estimated Liability for Appeals and Disputes (l) Prepaid Expenses and Other Current Assets (m) Other Current Liabilities (n) Legal Expenses (o) Fair Value of Financial Instruments (p) Income Taxes (q) Stock-based Compensation (r) Loss per Share (s) New Accounting Pronouncements 2. Property, Equipment, and Leasehold Improvements 3. Goodwill and Identifiable Intangible Assets 4. Credit Agreement 5. Related Party Transactions 6. Leases 7. Capital Stock 8. Stock-based Compensation (a) Stock Options (b) Restricted Stock Units 9. Employee Benefit Plan 10. Income Taxes 11. Other Commitments and Contingencies (a) Trust Funds (b) Litigation 12. Subsequent Events SIGNATURES SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS