Outcome health fraud trial: Startup was in serious debt

It turned out that the company needed money – badly.

As Shah was negotiating a deal with Goldman Sachs, Google and other investors, he worried that the debt taken on for the acquisition would sink the company, a voice memo played Thursday at co-founder Shah’s fraud trial showed. According to Shraddha Agarwal and former chief operating officer Brad Purdy.

Shah was asking sales head Ashiq Desai about his forecast of falling short of the quarterly revenue target. Shah told Desai, “It’s very worrying, because we weren’t predicting much growth and frankly, it’s getting to a point where I’m not sure we can make amends.” “Brad thinks it may violate a leveraged contract that will be tested on March 31st, and, you know, we basically lose the company at that point. Now, obviously, we can prevent that from happening. Will scramble to bring equity first, but, um, you know, something we weren’t really anticipating.”

Outcome just borrowed $325 million to buy rival Accent Health. According to the voice memo, the company had forecast revenue of around $41 million in the first quarter, but was now struggling to reach $37 million.

“I just wanted to ask you what’s going on and why we had this slip… and the chances of going back to where we expected to be. A million or two makes a big difference. Four makes a big difference.” makes. He’s really shaken about it, and I am too.”

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In a separate memo regarding the investment that he was trying to hook up with Goldman and others, Shah told Purdy: “The most important thing we can do is work out that financial capability in the first six to nine May there be trouble in. months of the year.”

Desai, who had been Shah’s protégé, pleaded guilty to fraud charges and became the government’s key witness in the case against his former bosses in exchange for a reduced sentence recommendation.

He is at the center of an alleged fraud scheme in which Outcome Health overbilled clients to run ads on television screens and tablet computers in more doctor’s offices than the company had in its network. The problem dates back to the early days of the company, Desai and other witnesses testified. Outcome Health raised money from Goldman Sachs and other investors with plans to go public within a few years. Meanwhile, Shah and Agarwal will hold about half of the new capital coming into the company.

When Outcome saw money borrowed from banks and money from investors eyeing an IPO, the company decided to clean up its billing practices. On the same day that Shah received a $100 million investment offer from Goldman Sachs, Desai sent a memo to Shah and Purdy outlining the problem.

The company billed customers based on the contracted amount of ads from its sales-tracking software, not necessarily what was delivered. In some cases, Outcome Health had been billing customers for more screens than it had for years. And the company could not increase the number of doctors’ offices fast enough to meet the terms of the contract.

“It’s not that they’re buying more, they’re buying the same footprint,” Desai said in his memo. “So starting to look at the massive inventory gap in their contracts opens up a whole other and historical legacy of potential issues that we have to address.”

This story first appeared in Crain’s Chicago Business.

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