Turns out the company needed the money – bad luck.
When Shah was negotiating a deal with Goldman Sachs, Google and other investors, he worried that the company would be toppled by the debt it had taken on for the acquisition, according to an voice memo. said was broadcast Thursday during the fraud trial of Shah, co-founder Shradha Agarwal and former chief executive Brad Purdy.
Shah is asking head of sales Ashik Desai about his forecast showing quarterly revenue below target. “It’s very worrying, because we haven’t been forecasting much growth and frankly it’s getting to the point where I’m not sure we can afford to correct that,” Shah told Desai. . “Brad thinks it might be in violation of a leverage covenant that will be tested on March 31, and, you know, basically, at that point, we’ll lose the company. Now, it’s clear. Obviously we’re going to be scrambling for equity before that happens, but, um, you know, which we didn’t really anticipate.”
The result just borrowed $325 million to buy a rival, Accent Health. The company had forecast revenue of about $41 million in the first quarter, but is currently struggling to hit $37 million, according to the voice memo.
“I just wanted to ask you what’s going on and why we’re failing this time… and the possibility of getting back to where we expected. One or two million makes a big difference. Four million makes up big difference. He’s really shaken about it, and so am I.”
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In a separate memo about the investment he’s trying to line up with Goldman and others, Shah told Purdy: “Getting this done is the single most important thing we can do to stay out of crisis. financial crisis in the first six to nine months of the year. months of the year.”
Desai, who was sponsored by the Shah, pleaded guilty to fraud and became a key government witness in a case against his former bosses in exchange for a reduced sentence.
He was at the center of an alleged fraud scheme in which Outcome Health overcharged customers to run ads on TV and tablet screens in more doctors’ offices than the company’s network. company. The problem dates back to the company’s early days, Desai and other witnesses testified. It boiled over as Outcome Health raised money from Goldman Sachs and other investors with a plan to go public within a few years. In the meantime, Shah and Agarwal will pocket about half of the new capital into the company.
When Outcome borrowed money from banks and sought money from investors with the goal of an IPO, the company decided to clean up its payments operations. In a memo Desai sent to Shah and Purdy the same day that Shah received an investment proposal from Goldman Sachs for $100 million, he posed the issue.
The company billed customers from its sales tracking software, based on the number of contracted ads, not necessarily what was delivered. In some cases, Outcome Health has for years billed customers for more monitors than it currently has. And the company couldn’t quickly increase the number of doctor’s offices to meet contract terms.
“It’s not that they’re buying more, they’re buying the same footprint,” Desai said in his memo. “So starting to draw attention to the large inventory gap in their contracts then opens up a whole and historical legacy of potential issues that we have to address. “
This story first appeared in Crain’s Chicago Business.
