Ontrak - Q2 2024

Executive Summary

• Q2 revenue was $2.45M, down 17% YoY and down sequentially from Q1; operating loss improved YoY to $(4.05)M; non-GAAP net loss per share improved YoY to $(0.09); gross margin held mid-60s as operations scaled (expected results subject to debt classification finalization).
• Management signed a two-year contract with a large Northeast regional health plan; initial eligibility is expected to approximately double the current outreach pool, with launch targeted within ~60 days, setting up contribution to begin ramping in Q4 and more meaningfully in 2025.
• Q3 revenue guidance was initiated at $2.4–$2.8M; Q2 revenue landed within the $2.4–$2.8M range guided in May, but PMPM fell given later-quarter enrollments and mix shift toward lower-revenue Engage solution.
• Liquidity: $7.29M cash at 6/30; drew $4.5M under demand notes in Q2 with $10.5M remaining subject to approval; $2.0M of warrants exercised in Q2; management highlighted an additional $15.9M potential from warrants if exercised.

What Went Well and What Went Wrong

• What Went Well

  • New customer win: two-year agreement with a leading Northeast regional plan using WholeHealth+ and Engage, expected to roughly double Ontrak’s outreach pool and launch within ~60 days. “Our initial analysis… suggests an outreach pool… that will approximately double our current outreach pool once launched”.
  • Evidence of ROI: finalized Medicaid study showed statistically significant gross medical cost savings of $721 PMPM for graduates over 24 months and $508 PMPM for non-graduates enrolled ≥5 months, reinforcing value proposition for payors.
  • Operational leverage: gross margin stayed mid-60s (65.7% in Q2 vs 63.6% in Q1) as AI-enabled Advanced Engagement System and process improvements scale; management expects margins at current levels with potential near-term launch-related dips.

• What Went Wrong

  • Top-line pressure: Q2 revenue declined 17% YoY to $2.45M driven by 7% lower average enrolled members YoY and lower PMPM ($463 vs $528 in Q2’23) due to later-quarter enrollments and a higher mix of Engage.
  • Member churn dynamics: Q2 average monthly disenrollment improved vs Q1 but remains a watch item; management cited lingering Medicaid redetermination and a customer non-renewal that spiked Q1 churn (22% vs 10% in Q2).
  • Net loss widened YoY on GAAP due largely to debt issuance and related warrant costs tied to demand notes; Q2 net loss $(10.29)M vs $(6.76)M in Q2’23 despite improved operating loss.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Ontrak Health second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Halsted. Please go ahead.

Ryan Halsted (Head of Investor Relations)

Thank you, operator, and thank you all for participating in today's call. Joining the call are Brandon LaVerne, Chief Executive Officer and Chief Operating Officer, Mary Lou Osborne, President and Chief Commercial Officer, and James Park, Chief Financial Officer. Earlier today, Ontrak released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website. Before we begin, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts, are forward-looking statements. The words anticipate, believes, estimates, expects, intends, guidance, confidence, targets, projects, and some other expressions typically are used to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance, but may involve and are subject to certain risks and uncertainties, other factors that may affect Ontrak's business, financial condition, and other operating results, which include, but are not limited to, the risk factors described in the Risk Factors section of the Form 10-K and Form 10-Q as filed with the SEC. Therefore, actual outcomes and results may differ materially from those expressed or implied by these forward-looking statements. Ontrak expressly disclaims any intent or obligation to update these forward-looking statements. With that, I'd like to turn the call over to Brandon.

Brandon LaVerne (CEO and COO)

Thank you, Ryan, and thank you everyone for being on our call today. I'd like to start with the exciting news we shared earlier today regarding the signing of a contract with our newest customer, a prestigious regional health plan in the Northeast. Our initial analysis of their enrollment and eligibility data suggests an outreach pool for WholeHealth+ that will approximately double our current outreach pool once launched, while also providing for our Engage solution in support of thousands of other members with behavioral health needs. This two-year agreement is yet another opportunity to collaborate with a new customer and deliver our recently enhanced Advanced Engagement System. We will also incorporate the newly adopted Comprehensive Healthcare Integration Framework that we announced last quarter. As Mary Lou will discuss in more detail, our pipeline of prospects is progressing nicely through our sales cycle.

With Community Care Plan launched last quarter and this new customer expected to launch around the end of this quarter, the proven clinical and financial outcomes that our solutions deliver are gaining traction among our customers and prospects and their respective members. At the same time, many Medicaid plans face funding and utilization challenges and are still dealing with the fallout of redeterminations post-pandemic. Our solution helps address these problems for our customers. For example, we just completed and announced our final study result with an existing Medicaid customer that demonstrated statistically significant difference-in-differences savings of $721 per member per month of all-cause medical costs over 24 full months for members in our program.

Additionally, the study resulted in statistically significant difference-in-differences medical cost savings of $508 per member per month for members that did not graduate from our program. These results solidify the strengths of our holistic approach and demonstrate our ability to make an impact on underserved populations in a short enrollment period, driving results for our customers. We are at an inflection point where significant growth in our prospects is beginning to convert to customers, and existing customers are seeking expansion. We are prepared for the company to operate at scale. First, our technology is designed to be flexible, allowing for seamless integration with the diverse systems and technological infrastructure that our customers may use. We have incorporated AI components and other advanced systems throughout our entire platform.

This comprehensive integration enables us to effectively combine behavioral and physical health services, facilitating the implementation of value-based care models and enhancing patient engagement. For example, the Mental Health Digital Twin technology that we announced earlier this quarter seamlessly fuses human empathy with data-driven insights to help integrate our care delivery. Second, we adopted the Comprehensive Healthcare Integration Framework, which prioritizes clinical and financial outcomes in our value-based care approach. This ensures tangible benefits for the members we serve and ultimately for our health plan customers. Third, we have improved the efficiency in how our frontline staff engage with and care for our members with the integration of various system tools, such as our Next-Best Action Engine, to prioritize and organize tasks across case loads, as well as leveraging AI to summarize completed calls.

With these and numerous other operational enhancements implemented over the past year and several more to come, we believe we are well equipped to operate at scale across all geographic markets and business lines efficiently. Now, I'd like to turn the call over to Mary Lou Osborne, our President and Chief Commercial Officer, who will speak more about our pipeline progress.

Mary Lou Osborne (President and Chief Commercial Officer)

Thanks, Brandon. As Brandon mentioned, and we announced this morning, for the second quarter in a row, I'm excited to share that we've signed a new health plan customer. Our focus with this newest customer is on improving access to quality behavioral health care that integrates with physical care, while also providing support and resources to empower members in achieving their health and wellness goals.

We are working with the customer to go live over the next 60 days, launching our WholeHealth+ program and our Engage coaching-only solution to their members in multiple lines of businesses, including Medicaid, HARP, and commercial. As a reminder, our WholeHealth+ solution uses advanced data analytics and risk assessment tools to identify high-cost, complex members with chronic comorbidities and underlying but unaddressed behavioral health conditions. Once identified, members are proactively engaged through a unique blend of human interaction, combined with augmented intelligence and offered personal care coaching support. Our Advanced Engagement System, coupled with an evidence-based clinical model, provides care coaching tailored to each member's specific circumstances, including behavioral health provider visits as needed, and is designed to improve clinical outcomes and produce significant savings.

Our Engage solution is a coaching-specific alternative for members not eligible for WholeHealth+, who would benefit from ongoing care coaching to help them address physical and behavioral health challenges and social needs without the need for provider intervention. While there is no guarantee of future expansions, we expect to achieve the desired clinical and financial outcomes to put ourselves in a position for future growth with this customer. In addition to this exciting new customer contract, we remain in the final contracting phase with another prominent health system in the West, representing approximately 80,000 Medicare Advantage lives. We have received approval of our financial proposal, and the statement of work is in final review.

This health system is seeking to start our engagement for their Medicare Advantage members, and once clinical and financial outcomes are achieved, the intent is to expand the partnership to a larger membership cohort across multiple lines of business, representing an opportunity over 1 million lives. Our pipeline remains strong, with approximately 26 active prospects, representing about 15 million members across all lines of business. Of these, there are three in addition to the one I mentioned earlier, that we feel have moved near the bottom of our pipeline funnel, representing over 500,000 lives in government lines of business. Finally, we are happy with our continued progress in expanding current customer relationships.

Our implementation with Community Care Plan has been successful, and we are now preparing to work with them on plans for their expanded membership in 2025, following the award of additional regions across the state of Florida. We also continue to have productive conversations with each of our other existing customers on expansion opportunities into additional lines of business. And now, I would like to turn the call over to our Chief Financial Officer, James Park.

James Park (CFO)

Thanks, Mary Lou. During the second quarter, we reported revenue of $2.5 million, a 17% year-over-year decrease, due primarily to a 7% decrease in total average enrolled members during the second quarter of 2024, compared to the same period in 2023. At the beginning of the quarter, we had 1,521 enrolled members and ended with 1,752 at the end of the quarter, for a simple average of 1,637. Of the enrolled members, 58 are members enrolled in our Engage program, which we launched this quarter with our new customer.

This equates to a revenue of about $463 per health plan enrolled member per month for the quarter, a decrease of, from $504 per health plan enrolled member per month in Q1 of 2024, and a decrease from $528 in Q2 of 2023. The decrease is primarily due to a large percentage of our new members being enrolled towards the end of the quarter, as well as the addition of engaged members, which will have a lower revenue per enrolled member. Through the remainder of the year, we expect the per member per month revenue to be lower on a year-over-year basis as we integrate new pricing strategies and an increase in mix of engaged members.

Regarding our Q2 member metrics, we enrolled a total of 881 members during the quarter, compared to 925 in Q1 of 2024, and 1,091 in Q2 of 2023. Dividing Q2 gross enrollments by our outreach pool, which averaged 5,764 for the quarter, it annualizes to a 61% enrollment rate, compared to a 108% enrollment rate in Q1 of 2024, and 43% in Q2 of 2023. We ended the quarter with an outreach pool of 8,100, and therefore expect member enrollments to increase nicely in the second half of the year as compared to the prior year and sequentially.

Our average monthly disenrollment rate was 10% in the current quarter, compared to 22% in Q1 of 2024 and 12% in Q2 of 2023. The prior quarter had higher disenrollment due to an expiring customer contract and would have otherwise normalized at 11%. Further, we graduated 178 enrolled members during the quarter. This equates about 12% of the enrolled members in the program at the beginning of the quarter, which is slightly higher than prior periods. The impact of all this was a net enrollment increase of 231 members during the quarter. Our gross margin for the first quarter was 65.7%, which increased slightly from 63.6% in Q1 of 2024, and decreased from 72.8% in second quarter of last year.

We expect our gross margins to remain at current levels, but can slightly decrease in periods when we launch new customer expansions as we hire member-facing employees in advance. Turning to the balance sheet and cash flow. Our cash flow from operations in the second quarter was negative $4.5 million, compared to negative $5.1 million in the second quarter of last year, and negative $3.3 million in Q1 of 2024. We ended the quarter with cash of $7.3 million, down from $9.7 million at the end of last year.

As previously announced, in Q1 of 2024, we completed an amendment to the Keep Well agreement that gives us access to up to $50 million of senior secured demand notes, which is set up as monthly drawdowns over the next year, subject to approval at the time of the draw. During the quarter, we drew down a total of $4.5 million of demand notes, leaving $10.5 million available for future draws, subject to approval. In addition, during the second quarter, we received cash proceeds of $2 million from the exercise of warrants, which continues to build our capital to execute on our pipeline. While we can't predict if and when the remaining warrants will be exercised, the total amount of warrants at their exercise price would equate to an additional $15.9 million in cash.

For Q3 2024, we anticipate revenues in the range of $2.4 million-$2.8 million, which doesn't include any revenue for the new customer we discussed, as we expect new member enrollments for this customer to commence in early Q4. To provide high-level view of our revenue model, applying our historical percentage of members that are typically eligible for our program, enrollment rates, average enrollment period, and other assumptions in line with our current and past customers, it equates to approximately $15-$20 of annual revenue per health plan member for the total population that we target for WholeHealth+. For example, a customer with 100,000 total lives would equate to approximately $1.5 million-$2 million of annual recurring revenue for our WholeHealth+ product.

Now, we will open up for questions. Thank you.

Operator (participant)

Thank you. At this time, we will conduct the question-and-answer session. Please stand by while we compile the Q&A roster. The first question comes from the line of Jonathan Aschoff of Roth Capital Partners. Your line is now open.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Thank you. Good afternoon, and congrats on the deal you announced in the middle of the day. The questions I have just kind of quickly, do you expect, you know, quarter-over-quarter revenue growth, you know, starting in the fourth quarter? Or is that fourth quarter still at the same risk of having the exact same revenue guidance that you gave for last quarter and currently just gave for this quarter?

James Park (CFO)

Hey, Jonathan, thanks for the question. We do expect revenue contribution to start in Q4, but it will still, will still be ramping up at that time. So the full rate will likely start kicking in earlier next year.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay. Yeah, let's see. You said that you had $4.5 million that you drew down from Keep Well, and you said there was $10.5 million left to withdraw. Is that accurate?

James Park (CFO)

That's correct. Yeah, the original amount was $15 million in total, so.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay, and so let's see. What is your, what is your pro forma debt? Like $66-something million?

James Park (CFO)

Yeah. Right at-

Jonathan Aschoff (Managing Director and Senior Research Analyst)

$6.7 million straight from the balance sheet, nothing, nothing extra after the quarter, or, or what is it-

James Park (CFO)

Yeah

Jonathan Aschoff (Managing Director and Senior Research Analyst)

- pro forma, including, since July first drawdown?

James Park (CFO)

It's $6.5 and a little bit of change for interest that we've accrued.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay. How about the total number of outstanding warrants?

James Park (CFO)

The total outstanding, that's $250 million, roughly.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay. That's close enough. How many future prospective clients do you have now? I had in a prior note that you had 26. I'm assuming we can knock one off for the Northeast deal that you did, but do you have 25, or is it more?

Mary Lou Osborne (President and Chief Commercial Officer)

Yeah, we are at 26.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

26.

Mary Lou Osborne (President and Chief Commercial Officer)

Hi, Jonathan. It's Mary Lou Osborne.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Hi.

Mary Lou Osborne (President and Chief Commercial Officer)

We're at 26 active prospects and about 15 million lives associated with that. And so, as you know, our new customer is coming off the list, we're adding new customers all the time. Prospects.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

That's great.

Mary Lou Osborne (President and Chief Commercial Officer)

Yeah.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Have you already started reaching out to CCP's eligible members in Florida, or have you not yet started doing that?

Mary Lou Osborne (President and Chief Commercial Officer)

Yes, we have. I'll ask James to jump in on this, but also, Jonathan, just so you know, we had a very successful implementation. We also got great satisfaction results from our new customer. As you know, we talked about this in our previous earnings call. Our customer was awarded five regions in the most recent Medicaid RFP, so they are projected to grow, you know, above where they are currently. That's some of the background, and I'll turn it over to James to talk more.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

And actually, right before you do that, so did-

Mary Lou Osborne (President and Chief Commercial Officer)

Yeah.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Is CCP still at one region, or is it two or three?

Mary Lou Osborne (President and Chief Commercial Officer)

Yeah, they are.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Anywhere from zero to five?

Mary Lou Osborne (President and Chief Commercial Officer)

Yeah, they are currently in one region, and they were awarded five regions, including the one they have, and that will start January 2025.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Start growing towards five, one at a time.

Mary Lou Osborne (President and Chief Commercial Officer)

It'll begin January one.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay.

Mary Lou Osborne (President and Chief Commercial Officer)

They will be live in five regions across the state of Florida.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Thank you. Okay. And then James?

James Park (CFO)

Oh, yeah, and we did successfully launch and started enrolling members. So, you know, I don't think we disclosed exactly how many, but, you know, it was a successful launch.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay, and one last-

Brandon LaVerne (CEO and COO)

Yeah, and I would just add, we're pretty much on forecast with the members we enrolled, both in WholeHealth+ as well as the Engage solution. So, both of those were launched and, so far so good, very successful.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay. And lastly, can you help me out with pro forma cash? You know, $7.3+, what have you raised since the end of the quarter?

James Park (CFO)

Sorry, are you asking how much we have?

Jonathan Aschoff (Managing Director and Senior Research Analyst)

How much cash did you raise since the end of the quarter? You know, to add to $7.3 gives you a total that is pro forma cash.

James Park (CFO)

Oh, I see. Well, we have the access, the 10 million of the people that we have—we still have access to the 15 point-

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Yeah

James Park (CFO)

... $9 million that we have access to of the warrants. So we're in active discussions to open up the capital for the, for that, for those amounts, as well as-

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Okay

James Park (CFO)

... you know, at other sources currently.

Jonathan Aschoff (Managing Director and Senior Research Analyst)

Thank you very much, guys.

Operator (participant)

Thank you, Jonathan. Thank you. This concludes the question and answer session. I would now like to turn it back to Brandon LaVerne, CEO, for closing remarks.

Brandon LaVerne (CEO and COO)

All right. Thank you, and thank you everyone for joining our call with us today. I hope you have a great day.