PFMT - Performant Financial: Company Starts 2023 On A Weak Note Avoid

2023-05-16 19:39:26 ET

Summary

• Last week, Performant Financial Corporation reported weaker-than-expected first quarter results, with core healthcare revenues down both sequentially and year-over-year but reaffirmed full-year expectations.
• Ongoing lack of profitability required the company to proactively amend its credit agreement with MUFG. In exchange for some limited covenant relief, available liquidity has been reduced substantially.
• At the end of Q1, 11.75 million was outstanding under the amended credit agreement while unrestricted cash and cash equivalents were almost cut in half to $12.3 million.
• The company also announced a number of management changes, with CEO Lisa Im being replaced by the company's President Simeon Kohl, and the Vice President of Finance and Strategy Rohit Ramchandani being appointed to CFO.
• Considering near-term execution risks, management turnover, ongoing profitability issues and substantially reduced liquidity, risk/reward has become increasingly unfavorable. As a result, investors should avoid Performant Financial Corporation common shares or even consider selling existing positions.

Note:

I have covered Performant Financial Corporation ( PFMT ) previously, so investors should view this as an update to my earlier articles on the company.

More than two years ago, I praised the Performant Financial Corporation 's ("Performant Financial") decision to abandon its legacy student loan recovery business and focus on the rapidly growing healthcare segment:

Unfortunately, the performance of the new core business has not lived up to expectations in recent quarters. This required PFMT to proactively amend its credit agreement with MUFG Union Bank, which was originally scheduled to mature on December 17, 2026, as stated in Performant Financial's quarterly report on form 10-Q (emphasis added by author):

On December 17, 2021, the Company entered into a Credit Agreement with MUFG Union Bank, N.A. The Credit Agreement includes a $20 million term loan commitment, which was fully advanced at closing and a $15 million revolving loan commitment.

On March 13, 2023, the Company entered into a First Amendment to the Credit Agreement (the “First Amendment”) to amend the Credit Agreement to, among other things, terminate the revolving loan commitment in full and to establish a new maturity date of December 31, 2024 for the term loan. As a result of the First Amendment to the Credit Agreement, the Company does not have any further borrowing capacity under the Credit Agreement . In connection with the First Amendment, the Company voluntarily prepaid $7.5 million of the outstanding principal of the term loan .

In exchange for the $7.5 million prepayment, termination of the revolving loan commitment, higher applicable margins, and advancing the maturity date by two years, MUFG agreed to modify certain covenants to provide the company additional time to improve profitability and move closer to management's targeted Adjusted EBITDA margin of 20%+.

At the end of Q1, 11.75 million was outstanding under the amended credit agreement, while unrestricted cash and cash equivalents were almost cut in half to $12.3 million on a quarter-over-quarter basis.

Taking into account the credit agreement's $2.0 million minimum liquidity requirement, available liquidity at the end of Q1 was down to $10.3 million.

Last week, the company reported rather disappointing first quarter results , with core healthcare revenue down both sequentially and year-over-year:

Adjusted EBITDA was negative $1.7 million and operating activities consumed approximately $2.2 million in cash.

Management blamed the underperformance on lower-than-expected available demands from the Medicare Secondary Payer Commercial Repayment Center ("MSP CRC") but also highlighted a return to expected levels towards the end of the quarter sufficient to reiterate full-year expectations:

Based on the combination of the return to expected demand volumes along with the increased pace of implementations we saw this quarter, we currently anticipate that healthcare revenues for 2023 will remain in line with our previous guidance.

(...)

"Our first quarter 2023 results remain on track for our continued goals of growing our healthcare market operations and we remain pleased with what we are seeing in terms of continued implementations and volume growth,” stated Rohit Ramchandani, Chief Financial Officer of Performant. “We are excited to continue growing the business and have our eye on both our revenue growth targets and the expansion of our EBITDA margins. As such, we are reiterating our guidance for 2023 healthcare revenues to be in the range of $105 million to $110 million and for full year 2023 adjusted EBITDA to be in the range of $2 million to $5 million."

Given the weak start to the year, reiterating guidance appears to be a little bit of a stretch here, but there's still plenty of time to recover the ground lost in Q1.

The company also announced a number of management changes with CEO Lisa Im being replaced by the company's President, Simeon Kohl, and the Vice President of Finance and Strategy, Rohit Ramchandani, being appointed to CFO.

Finally, the company's Chief Compliance Officer, Hal Leach is leaving Performant Financial, with no replacement being named.

Bottom Line

Clearly, the company's weak start to the year will make it more challenging for Performant Financial Corporation's newly appointed leadership team to achieve the financial targets laid out at the beginning of 2023.

Considering near-term execution risks, management turnover, ongoing profitability issues and substantially reduced liquidity, the Performant Financial Corporation risk/reward has become increasingly unfavorable.

As a result, investors should avoid Performant Financial Corporation common shares or even consider selling existing positions.

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