Performant Financial (PFMT) - 2022 Q4 - Annual Report

Part I Business Performant Financial Corporation provides technology-enabled audit, recovery, and analytics services primarily to the U.S. healthcare industry - The company's primary business is providing technology-enabled audit, recovery, and analytics services to the healthcare industry, serving both government and commercial clients[18] - Performant has strategically shifted away from its historical recovery markets, such as defaulted student loans and tax receivables, to concentrate on healthcare payment integrity[19] FY 2022 Financial Highlights | Metric | Value (in millions) | | :--- | :--- | | Revenues | $109.2 | | Net Loss | $6.5 | | Adjusted EBITDA | $0.9 | | Adjusted Net Loss | $5.2 | Our Markets The company primarily operates in the U.S. healthcare market, characterized by high spending and improper payments, having exited former recovery markets - U.S. healthcare spending reached $4.3 trillion in 2021, representing 18.3% of GDP, with projections to reach nearly $6.2 trillion by 2028[24] - In 2020, CMS estimated that approximately $25.7 billion (6.3%) of Medicare Part A and Part B spending was improper, highlighting the need for payment integrity services[26] - The company sold certain non-healthcare recovery contracts in 2021 and no longer derives significant revenues from student lending, state tax, or federal agency recovery markets[28] Our Competitive Strengths and Growth Strategy Performant leverages its scalable technology, data analytics, and client relationships to expand healthcare payment integrity services and pursue strategic growth - Key strengths include a scalable technology platform, advanced workflow processes, strong data analytics, long-standing client relationships (e.g., over 14 years with CMS), and extensive domain expertise[30][33] - The primary growth strategy is to expand payment integrity services in the healthcare market, targeting national, mid-tier, and smaller health plans for both pre- and post-payment services[32] - The company may selectively pursue strategic alliances and acquisitions to enhance capabilities, enter new markets, and expand product offerings[32] Our Platform and Services The company's proprietary platform delivers healthcare payment integrity services, including claims auditing and coordination-of-benefits, for government and commercial payers Service Offerings | Service Area | Description | | :--- | :--- | | Healthcare | Audit, eligibility, and recovery services to identify improper payments for public and private clients. Fees are contingent and success-based | | Customer Care / Outsourced Services | First-party call center and other outsourced services. Fees are based on volume, headcount, or transactions | | Analytics Capabilities (Performant Insight) | Enhanced data analytics for pre- and post-payment audits, fraud/waste/abuse detection, and coordination of benefits | - The company holds multiple Recovery Audit Contractor (RAC) contracts with CMS for Regions 1, 2, and 5, as well as the national exclusive Medicare Secondary Payer (MSP) contract[41][43] - In January 2022, Performant was awarded a contract by the HHS Office of the Inspector General (OIG) to provide medical review and consultative services[44] Competition and Regulation Performant navigates intense competition and a highly regulated environment, adhering to data privacy laws and maintaining security certifications - Key competitors in the private healthcare market include other RAC service providers like Cotiviti, LLC, and various healthcare consulting and information services companies, many with greater resources[61] - The company must adhere to a complex array of laws, including HIPAA for protected health information, the Privacy Act of 1974 for government data, and FDCPA for any applicable recovery activities[62] - Performant holds key industry and government security certifications, including HITRUST, SOC 1 Type II, and Authorization to Operate (ATO) licenses for its CMS and HHS OIG contracts[59][79][80] Human Capital As of December 31, 2022, Performant employed 1,023 full-time staff, maintaining good employee relations and competitive benefits - As of December 31, 2022, the company had 1,023 full-time employees[87] - None of the employees are part of a labor union, and employee relations are considered good[87] Risk Factors The company faces risks from client concentration, long contract implementations, regulatory changes, and identified material weaknesses in IT internal controls - A substantial majority of revenue comes from a limited number of large clients, and the loss or deterioration of these relationships would significantly harm revenues[94] - The U.S. federal government accounts for a significant portion of revenue, making the company vulnerable to changes in government spending, policy, or contract renewals[100] - A material weakness in internal control over financial reporting related to IT general controls (user access and change management) was identified in Q4 2022[121][122] - The business is subject to extensive regulations regarding confidential data (e.g., HIPAA), and security breaches could result in significant liabilities and reputational damage[112][125] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[134] Properties As of December 31, 2022, the company operated five U.S. office locations, including its Livermore, CA headquarters, deemed adequate for operations - The company operates five office locations in the U.S., with its corporate headquarters in Livermore, CA[135] - Facilities are considered adequate for current operations[136] Legal Proceedings The company is involved in legal proceedings, primarily from legacy student loan recovery, but management expects no material adverse effect - The company is involved in various legal proceedings from normal business operations, mainly from legacy student loan recovery services[137] - Management does not expect these legal actions to have a material adverse effect on its financial condition or operations[137] Mine Safety Disclosures This item is not applicable to the company - Not applicable[138] Part II 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 dividend intent due to Credit Agreement prohibitions - The company's common stock trades on NASDAQ under the symbol PFMT[140] - The board does not currently intend to pay dividends, and the company's Credit Agreement prohibits them[142] Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenues decreased in 2022 due to exiting non-healthcare recovery, offset by healthcare growth, resulting in a reduced net loss due to lower interest expense Revenue by Service Line (in thousands) | Service Line | 2022 | 2021 | | :--- | :--- | :--- | | Eligibility-based | $53,284 | $48,276 | | Claims-based | $41,382 | $29,178 | | Healthcare Total | $94,666 | $77,454 | | Recovery | $241 | $33,405 | | Customer Care / Outsourced Services | $14,277 | $13,534 | | Total Revenues | $109,184 | $124,393 | - The company's strategic focus is on its healthcare business, which saw revenues grow by $17.2 million (22%) in 2022 compared to 2021[157] - The company continues to face uncertainty related to the COVID-19 pandemic's impact on business operations and the broader economy[152] Results of Operations Total revenues decreased by 12% in 2022 due to exiting recovery business, despite healthcare revenue growth, leading to a smaller net loss due to reduced interest expense Consolidated Statements of Operations Data (in thousands) | | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $109,184 | $124,393 | $(15,209) | (12)% | | Total operating expenses | $116,084 | $125,709 | $9,625 | 8% | | Loss from operations | $(6,900) | $(1,316) | $(5,584) | (424)% | | Interest expense | $(1,007) | $(11,313) | $10,306 | 91% | | Net Loss | $(6,537) | $(10,288) | $3,751 | 36% | - Healthcare revenues increased by $17.2 million (22%) in 2022, driven by growth in both claims-based (up 42%) and eligibility-based (up 10%) services[196] - Recovery revenues decreased by $33.2 million (99%) due to the company's 2021 decision to exit the non-healthcare recovery business[197] - Interest expense decreased by 91% due to a debt refinancing in December 2021 at a lower principal and interest rate, which significantly contributed to the reduction in net loss[204] Liquidity and Capital Resources Liquidity is maintained through cash from operations and cash on hand, with a recent credit agreement amendment involving term loan prepayment and revolving facility termination Cash Flow Summary (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,877) | $916 | | Net cash provided by (used in) investing activities | $1,731 | $(270) | | Net cash provided by financing activities | $5,061 | $608 | - As of December 31, 2022, the company had $19.5 million outstanding under its Credit Agreement with MUFG Union Bank[222] - In March 2023, the company amended its credit agreement, voluntarily prepaying $7.5 million of the term loan and terminating its $15 million revolving loan commitment[208][221] Adjusted EBITDA and Adjusted Net Income (Loss) Adjusted EBITDA significantly decreased to $0.9 million in 2022, while Adjusted Net Loss widened to $5.2 million, reflecting core operating performance Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net loss | $(6,537) | $(10,288) | | Provision for income taxes | 132 | 62 | | Interest expense | 1,007 | 11,313 | | Stock based compensation | 3,036 | 2,640 | | Depreciation and amortization | 4,524 | 5,188 | | Other adjustments (severance, gains, etc.) | (1,314) | 2,911 | | Adjusted EBITDA | $944 | $11,896 | Reconciliation of Net Loss to Adjusted Net Loss (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net loss | $(6,537) | $(10,288) | | Stock based compensation | 3,036 | 2,640 | | Amortization of debt issuance costs | 95 | 3,586 | | Other adjustments (severance, gains, taxes, etc.) | (1,744) | 958 | | Adjusted net loss | $(5,150) | $(3,102) | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure on its variable-rate credit facility, with no material direct foreign currency risk - The company is exposed to interest rate risk from its variable-rate credit facility based on SOFR[247] - A hypothetical 1% increase in interest rates would increase annual interest expense by about $0.2 million[247] Controls and Procedures Management identified a material weakness in IT general controls, rendering disclosure controls ineffective as of December 31, 2022, with remediation underway - Management identified a material weakness in the design and operation of IT general controls (ITGCs) related to user access and program change-management[257][258] - Specifically, certain developers had excessive access rights, and the logging and monitoring of system changes were not effectively designed[258] - As a result of this material weakness, the CEO and CAO concluded that disclosure controls and procedures were not effective as of December 31, 2022[253] - A remediation plan is in process, which includes modifying ITGCs and enhancing documentation, with completion planned for 2023[263] Other Information On March 13, 2023, the company amended its Credit Agreement, terminating its revolving loan and prepaying $7.5 million of its term loan - On March 13, 2023, the company amended its Credit Agreement, terminating the revolving loan commitment and prepaying $7.5 million of its term loan[265] - The amendment established a new maturity date for the term loan of December 31, 2024[265] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the Registrant's 2023 Proxy Statement - This item is incorporated by reference to the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[271] Executive Compensation Information for this item is incorporated by reference from the Registrant's 2023 Proxy Statement - This item is incorporated by reference to the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[272] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the Registrant's 2023 Proxy Statement - This item is incorporated by reference to the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[273] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the Registrant's 2023 Proxy Statement - This item is incorporated by reference to the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[274] Principal Accounting Fees and Services Information for this item is incorporated by reference from the Registrant's 2023 Proxy Statement - This item is incorporated by reference to the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders[275] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section contains the list of all financial statements, schedules, and exhibits filed with the report[277][278] Form 10-K Summary This item is not applicable to the company - Not applicable[283]