Richard Zubek - Investor Relations Lisa Im - Chief Executive Officer Ian Johnston - Chief Accounting Officer.

Michael Tarkan - Compass Point.

Greetings. And welcome to the Performant Financial Second Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, 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 second quarter 2017 results. If you have not, a copy is available on our website, www.performantcorp.com. Today's call will be lead by Lisa Im, Chief Executive Officer.

Before we begin, I would like to remind you that some of the comments made on today's call, including 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 revised 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. With the recent passing away of Hakan Orvell, CFO, I will be covering the financial section in addition to the regular business update. Also Ian Johnston, our Chief Accounting Officer is here with me.

Today, we're reporting results for the second quarter with revenues of $35.9 million, net loss of $2.4 million or $0.05 per share and adjusted EBITDA of $5.0 million. Beginning with our student lending business, revenues totaled $27.5 million, a decrease of $1.3 million, compared to the second quarter of last year.

During the quarter, Guaranty Agencies generated $26.2 million, up $4.4 million versus prior year, while the Department of Education accounted for $1.3 million of revenues, which is down $5.7 million.

With respect to our Guaranty Agency results, we benefited primarily from strong placement volumes that we received in the middle of last year, which at $1.3 billion was $0.4 billion higher versus second quarter of this year, during which we received $0.9 billion.

The decrease in our student lending revenues is due to the fact that we haven't received new student loan placements from the Department of Education since April of 2015. After three plus years the contract is still under procurement process.

As we said earlier this year, following our protest of the Department of Education contract award, the GAO issued its decision in late March sustaining both of our protest. The GAO determined that the process was fraud and recommended that the DOE at a minimum reevaluate the RFP process.

Since then the DOE has allowed for resubmission of proposals and stated that there timeframe for evaluation and awards is targeted for the end of August 2017. Even if we were to receive a contract award at that time, we would not anticipate it to have a material impact on our 2017 or 2018 results.

On June 15, 2017 we were very disappointed to announce that one of our principal customers Great Lakes Higher Education Guaranty Corporation notified us that it is terminating its student loan recovery contract with us.

Great Lakes which recently acquired the student loan portfolio of USA Funds, advised us that Great Lakes has decided to bundle all of its outsourced student loan servicing and student loan recovery work with a single third-party vendor. We do not provide student loan servicing.

We have been told that we will have the opportunity to continue to provide some student loan recovery services to Great Lakes on a subcontracting basis, although the terms and scope of any such arrangement are uncertain.

According to Richard George, CEO of Great Lakes, I, “Performant has been a critically important and valued vendor partner for 17 years, and they have master serviced our outsourced default portfolio since 2009.

Performant's success was reflected in their exceptional recovery performance, which was specifically tailored to Great Lakes requirements, compliance, customer-centric culture and values. If the decision on the current MSA placement were purely one of ongoing portfolio management, Performant would have no doubt continued as our MSA partner.

However, the decision to terminate our contract with Performant is in major part attributable to interrelated MSA and technology support negotiations with this student loan servicer, which Great Lakes believes will produce material near-term cost benefits.

We anticipate that Performant will continue to play a significant role with respect to our defaulted portfolio as a subcontractor going forward.” At this time we have received three 30-day extensions and we will continue to work with Great Lakes as long as they need prior to transitioning their entire portfolio of work.

Our healthcare revenues in the second quarter were $2.1 million, compared to $3.4 million in the second quarter of 2016. The decline in revenue is purely a result of the new CMS contract startup, as revenues from CMS were less than $100,000 down from $2.3 million in the prior year period.

However, our commercial healthcare business generated revenues of $2.0 million, up over $400,000 sequentially and up from $1.1 million in Q2 of 2016. Lastly, our other markets generated revenue of $6.4 million in Q2, compared to $5.9 million in the prior year period.

During Q2, both our CMS contracts, as well as the contract with the IRS were still in the very early stages of implementation with immaterial revenue during the last quarter. We expect that audit scope will initially be limited on these contracts, but longer-term we believe that these three contracts will contribute materially to our overall results.

Moving to our expenses, salaries and expense in the second quarter was $20.5 million, a slight increase of 1.9%, compared to $20.1 million in the prior year period. All other operating expenses for the quarter was $16.1 million versus $13.7 in Q2 of 2016. This increase of 17.1% is volume related.

For the second quarter of 2017, our reported net loss was $2.4 million or $0.05 per diluted share, compared to net income of $1.5 million or $0.03 per diluted share in the prior year period. Fully diluted weighted average outstanding shares were 50.6 million in the second quarter of 2017.

Our adjusted EBITDA in the second quarter was $5.0 million, compared to $8.9 million in the same period last year. Adjusted EBITDA margin was 13.9%. Our effective income tax rate changed to a negative 10.7% for the six months ended June 30, 2017 from 40% for the six months ended June 30, 2016.

The decrease in our effective tax rate is largely driven by the company's loss from operations and the impact of state taxes, which creates the fluctuations we are seeing over the past quarters. Cash flows from operating activities in the second quarter were $2.9 million.

Turning to the balance sheet, as of June 30, 2017, we had cash and cash equivalents of $21.3 million and our total outstanding debt was $44.1 million, reflecting our continued focus of paying down our long-term debt.

Our performance for the first half of the year will be higher than what we expect for the back half of the year, particularly in Q3, due to the higher placement volumes that we received at the end of second quarter in 2016.

After the current fiscal year, we are reiterating our 2017 revenue and adjusted EBITDA guidance ranges of $125 million to $145 million and $10 million to $13 million, respectively. As we mentioned earlier, we began the startup of the IRS recovery contract and both Region 1 and Region 5 CMS recovery audit contracts.

While still in the very early stages, we believe these will be strong long-term programs and in a time when federal government agencies are looking for ways to reduce expenses these programs achieve that objective through generating returns with a success fee-based structure.

Early this year we hired an investment bank and credit firm with substantial capital markets lending and restructuring experience, with our advisor we approached over 30 different financing sources.

But given the current situation with the Department of Education and subsequently the Great Lakes notice, it was very challenging to find a lending partner who could be flexible and competitive.

The Department of Education procurement process on which we do not have a clear view or how or when it will be ultimately concluded had become a strain on the arrangement with our current lending syndicate and on refinancing.

Despite these challenges, this week we entered into a new credit facility with an affiliate of one of our existing clients that will fully refinance our existing indebtedness.

The new credit facility provides for an initial senior secured term loan of $44 million and up to an additional $15 million of senior secured term loans that we may draw on within two years following the close of the initial term loan.

The initial term loan is scheduled to close this week, and as I said, the proceeds from the initial $44 million term loan under this new credit facility will be used to repay all outstanding borrowings under our prior credit agreement. The new credit facility has a three-year maturity with up to two one-year extension options.

In connection with the closing of the initial $44 million term loan, we will issue to the lender warrants to purchase approximately 3.9 million shares of our common stock, which represents approximately 7.5% of our diluted common equity.

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 period prior to the closing of the financing. If we draw down on the additional term loans then we will be obligated to issue additional warrants to our lender.

In addition to repaying all of our outstanding borrowings under our prior credit agreement, this refinancing provides runway for executing strategically, pays off the existing loan in full, provides capital for growth and secures a strategic client partner who is aligned with us to grow value for our shareholders.

With that, I'd like to open up the call for questions..

[Operator Instructions] The first question comes from Michael Tarkan with Compass Point. Please go ahead..

Thank you.

And just on Great Lakes, you mentioned the three 30-day extensions, are you still getting placements within that timeframe or is that just continuing the work on the existing portfolio?.

That is. We are continuing to receive placements, Michael, it's for all intensive purposes operationally it's as if nothing has changed..

Okay.

And where does the last -- the extension right now where does that take you until?.

It takes us through the middle of September..

Okay.

How should we think about, I know there is the long lead time for when you receive placements and put students in the funnel? How should we think about the impact of Great Lakes, I know you said, there will be some -- potentially some subcontracting work, but in terms of the cadence in 2018, is this really sort of the back half of ‘18 impact that we should be thinking about as opposed to anything other than that?.

That’s correct. And as you know, as we continue to get placements, as I mentioned from an operational standpoint nothing has changed. We will continue to work the business and in our view at this point just going through the last extension, we expected to have some impact in the latter part of ’18.

But, I mean, obviously, we will continue to work with Great Lakes as long as they need us to..

Do you have a sense for whether there -- as a subcontractor whether there is opportunities to pick off additional placements, but as a subcontractor, so the overall impact of being the primary collector maybe a little more muted than what we could be expecting?.

I think, certainly, we are hopeful that strong performance on the Great Lakes portfolio will allow us to expand our business with this servicer. I think we -- we are looking at overall subcontracting agreement as an opportunity to grow our business.

So we do think that there is an opportunity for us to at least mitigate, if not partially, at least any of the business that we were getting from Great Lakes on a normalized basis..

Okay. Thank you.

And on the Department of Education contract, I know they have the August 25th date out there, but we were hearing that there's a court case that maybe sort of delaying that, is your best guess right now still August 25th and nothing has change from that standpoint?.

Well, Michael, I think, if you -- there is an insideARM article that came out today that that probably put a little bit better light and kind of based on the fact that that August 25th date might be extended out further, based on the valuations that they're doing and the process that Department of Education has put forward.

So, my best guess is that they probably will go longer than August 25th, but I think, we don't know until we get to that point..

Okay. Yeah.

We saw that and from an expense standpoint, if that contract continues to get delayed, do you have more flexibility to manage expenses a little bit lower, while you await that decision?.

At this point, we really don't have much in the way of variable cost at all associated with that contract. So, I think, our opportunity for reducing costs that are directly related to that contract are pretty minimal. As you know, we are always looking for ways to drive greater productivity.

We are always looking for ways to reduce costs on a more permanent basis. So regardless of the contract we’re constantly looking for ways where we can reduce our expense load on the revenue that we have that we will continue to do so..

Okay. That’s helpful. Just two more quick ones for me, the healthcare contracts, I know, you talked about them being more long-term in nature and the scope is still limited today.

But can we expect those -- any kind of color as to when those can start picking up more materially -- is that 2018 or is it further than that?.

I think we are hopeful that by 2018 we will have a number of the issues approved. We do have at least, I think, close to three dozen issues that were starting to audit on.

So, as we have mentioned in the past, Michael, the centers from Medicare and Medicaid, they are trying to take a very thoughtful approach to this contract start, trying to bring in the provider community as well. I do think that they are fully behind, payment integrity and they -- and proper accurate payment.

So that said, obviously, it’s been a little slower start than what we hoped, but we are -- we believe based on our interactions so far that, that we think as we roll into 2018 we can expect to see a broader audit level. It won’t be back to where real contract was that we start in the near-term..

Got it. Okay.

And then last one on the new debt, any sense for where the coupon is or how should we think about run rate in terms of interest expense in 2018?.

Yes. Would you like to -- as you -- as I mentioned, Ian is here with me, so Ian, do you want to answer that question..

I believe, hi, this is Ian. I believe our [Technical Difficulty] LIBOR plus 7%..

LIBOR plus 7%. Okay. Thank you very much. I appreciated..

Thank you, Michael..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the conference back over to Lisa Im for closing remarks..

Thank you, Operator. As we’ve mentioned in the past and we really focused on building our culture around very intense client focus. We do strive to provide our best value and performance to all of our clients, while engaging constructively with our consumers.

We believe we can continue to strengthen our competitive advantage by focusing on innovation compliance and our customer-centric culture. Before I go I want to thank our clients for letting us serve them and thank our employees for bringing their best to our organization. Thank you for joining us today..

This concludes today's conference. You may disconnect your lines at this time. Thank you for participating and have a good day..