Ontrak, Inc. (OTRK) Q1 2022 Earnings Call Transcript

Ontrak, Inc. (OTRK -3.15%)
Q1 2022 Earnings Call
May 11, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ontrak first quarter 2022 earnings call. [Operator instructions] I would now like to hand the conference over to your host, Caroline Paul, investor relations.

Caroline Paul -- Investor Relations

Thank you and thank you all for participating in today's call. Joining me today are Jonathan Mayhew, chief executive officer; and Brandon LaVerne, chief financial officer. Earlier today, Ontrak released financial results for the quarter and year ended March 31, 2022. 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, intend, 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 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 Jonathan.

Jonathan Mayhew -- Chief Executive Officer

Thanks, Carolyn. Good afternoon, everyone, and thanks for joining us today. Since its founding, Ontrak, health has always been a mission-oriented organization with a focus on improving the health and saving the lives of as many people as possible. People like the Ontrak member Dominic, a Medicaid beneficiary who suffered from multiple chronic comorbidities, including diabetes, hypertension, chronic pain, anxiety, depression and substance use disorder.

Ontrak helped Dominic to stop binge drinking and connected him with a therapist and psychiatrist who worked with him to address chronic trauma and better manages mental health. With the dedicated support from his Ontrak coach, Dominic was engaged with his behavioral and primary care providers in adhering to his treatment plans, resulting in a $42,000 reduction in annual claim costs at graduation, a 71% savings compared to the 12 months prior to enrolling in our program. Ontrak understands that the best way to help vulnerable individuals like Dominic, who have complex chronic conditions and face barriers to care is through a sustained, evidence-based, collaborative, whole-person coaching and behavioral health provider model that maximizes the effectiveness of behavior change programs and treatment plans. Today, our vision is to transform the healthcare journey for people with complex physical, mental and social care needs through our AI-infused evidence-based care model.

It's the story we've been telling customers and prospects as we fortify our value proposition and move to a growth trajectory. Let's start there with an update on our pipeline and our growth agenda. Our sales cycle has traditionally been long, up to about 18 months, and includes a series of key steps beginning with the initial meetings, a signed non-disclosure agreement, then usually proceeding to data exchange followed by final contract negotiations and signatures. Since our last call, we've seen a strong acceleration of these steps with various prospects and can see a path to shorter sales cycles if we stay on the current path of development.

I'm pleased to share we have a new multi-state health plan prospect that's in the contracting status and that speaks to the confidence in our enhanced model. We also have two health plan prospects in the data exchange phase with us with term sheets in contracting the next steps toward our final engagements. We touched on one of these in our last earnings call, a multi-state health plan. The other is a prominent plan in one of the nation's largest states.

Together, these potential customers represent over 4 million lives across all lines of business that are highly suited for a whole-person evidence-based model. We anticipate going live in the second half of 2022 with each of these customers and with most of that revenue being realized in 2023. Nearly all of the remaining 13 health plan prospects we highlighted during our last call, remain actively engaged with us, including two who have signed NDAs, which is a pre-requisite for the data exchange, and we have seven more to the list, bringing our active health plan pipeline to 19. In addition, we're collaborating with existing customers on various growth initiatives, including assistance with their RFP submissions for new state contracts, expanding our relationships to cover new geographies and lines of business and launching the Ontrak mobile app, which will help promote higher enrollment rates and more engagement with our care coaches and providers.

We believe the key to this encouraging momentum and our future success lies in the advances we've made in our clinical model and the technology that's underpinning it. Ontrak is developing an industry-first solution. We refer to it as Whole Health Plus that combines a rigorous evidence-based clinical model applied to our health coaching and provider treatment plans with deep augmented intelligence capabilities infused into every step of the member journey from program eligibility through graduation. Our enhanced clinical model incorporates evidence-based coaching techniques and treatment plans, smart goal setting, standardized assessments, gaps in care, interventions and bidirectional communications between care coaches and mental health providers.

As part of our model, we're creating an evidence-based provider network that combines both our own Ontrak providers for maximum control and collaboration and other preferred providers, which will accelerate referrals and appointments, promote integration of care and improve the member experience. Supporting this is an industry-first advanced engagement engine that uses augmented intelligence to integrate health plan provider and Ontrak data, allowing us to implement real-time measurement feedback that optimizes every coach and provider interaction. Our AI measurement feedback system in conjunction with our evidence-based model will optimize member engagement, coaching interactions and provider visits, facilitate real-time bidirectional communication between care coaches and mental health providers, assess fidelity measurement to evidence-based methodologies, and most importantly, deliver optimal value-based outcomes, like improved access, quality and reduced cost to our customers. It's our orchestration of these different AI capabilities and the data it generates that we believe customers value as a driver of better outcomes and return on investment.

Now, an update on our low acuity well-being solution, LifeDojo, which offers an app-based coaching model to commercial employers. We have been conducting outreach to the top 100 broker consultants in the employer benefit space, have secured a preferred vendor status with several and are providing proof of concept testing with a large professional employer organization or PEO before making the app available to their 8,000 client companies. We've secured meetings with prospects that vary from the Railroad Workers' Union to large library systems. We're encouraged with the progress that each of our products is making in the marketplace; Ontrak Whole Health Plus as our core health plan offering representing most of our historical and future revenue opportunities and LifeDojo, our app-based well-being solution targeting employers.

With the sales activity and enhanced product in place, we continue to have a path to profitability that anticipates positive monthly EBITDA in the first quarter of 2023 with positive operating cash flows a quarter later. In the meantime, we have received updated near-term covenant flexibility from our existing debt finance partner, as well as back-stop commitments from our founder and executive chairman, while we seek longer-term replacement financing sources in the near-term. Now, I'd like to turn the call over to Brandon LaVerne, our chief financial officer. Brandon?

Brandon LaVerne -- Chief Financial Officer

Thanks, Jonathan. During the first quarter, we recorded revenue of $5.3 million, an 82% year-over-year decrease due primarily to the loss of the two large customers. We expect near-term quarterly revenues from our existing customer contracts to remain at approximately $4 million to $5 million over the next few quarters as we look to execute on our pipeline opportunities, including potential customer expansions that we believe may increase revenues late in the year and especially in 2023. At the beginning of the quarter, we had 3,795 enrolled members and ended with 2,867 at the end of the quarter or a simple average of 3,331.

That equates to revenue of about $526 per enrolled member per month for the quarter compared to $626 per enrolled member per month in Q1 2021 and $522 per enrolled member per month in the fourth quarter of 2021. The lower revenue per enrolled member year over year was partially due to the number of members disenrolled from the two terminated clients, as well as new pricing models implemented as we previously discussed in prior quarters. To go a bit deeper into Q1 enrollment, we enrolled a total of 446 members during the quarter compared to 5,900 in Q1 last year. Dividing Q1 '22 gross enrollment by our outreach pool, which leveraged approximately 4,700 for the quarter, it annualizes to a 38% enrollment rate compared to the 28% annualized enrollment rate we saw during 2021.

Our average monthly disenrollment rate during the quarter was 10%, which is consistent with the improving trend over the past few quarters. Further, we graduated 313 enrolled members during the quarter, which equates to about 8% of the enrolled members in the program at the beginning of the quarter. The impact of all that was a net enrollment decrease of 928 members in the first quarter. Our gross margin in the first quarter was 45.9%, a decrease from 55.6% in the first quarter of last year.

The decrease in our gross margin is due to the decrease in our revenue related to the loss of two of our customers, as well as the new pricing models previously discussed. We expect our gross margins to remain in the mid-to-low-40s until our revenue volume increases. We ended the quarter with 88 care community and member engagement team members included in cost of revenue, down 30% sequentially from 125 at the end of Q4 due to our reduction in response to the customer loss and our strategic cost reduction efforts. This has also put us in a position to take on new revenue and new members without adding headcount to the member engagement and care community in the short to mid-term that we expect would help increase our gross margin.

Turning to the balance sheet and cash flow. Our cash flow from operations in the first quarter was a negative $10.5 million compared to a positive $6.4 million in the first quarter last year. We ended the quarter with cash and cash equivalents of $27.2 million, down from $58.8 million at fourth quarter end last year. Including restricted cash, total cash was $32.1 million, down from $65.9 million at fourth quarter end last year.

During the quarter, we paid down $20 million of principal debt balance, reducing the remaining book balance to $16 million. Subsequent to quarter end, one of our former customers paid the remaining balance due for the commercial business of $4.7 million, which combined with other amounts we expect to come in, in the near-term, will help reduce our Q2 burn significantly. Further, as pipeline opportunities begin to contribute to revenues in the second half, we believe we would have decreased cash burn from current levels in the third and especially fourth quarters, with a return to cash flow positivity as early as the second quarter of 2023. As previously mentioned, we've been continuously focused on ensuring we have sufficient capital and financing to bring our robust pipeline to fruition and have set ourselves up for future growth.

On April 15, this year, we entered into a note purchase agreement with our executive chairman and largest stockholder, pursuant to which we may borrow up to $25 million through September 1, 2023, which is not included in our current cash balance, but remains available to us. To be clear, this is effectively a back-stop for financing needs provided by our executive chairman, given his strong belief in the company's management and prospects, while we continue to work through additional debt and equity financing opportunities and helps provide support to execute on our strategy in the near-term. Regarding our outlook for 2022, as I indicated earlier, we expect near-term quarterly revenues from our existing customer contracts to be in the $4 million to $5 million range for the second quarter of 2022 before we begin to see pipeline revenues contribute in late 2022 and more significantly in 2023. As a result, we continue to expect 2022 annual revenues in the range of $25 million to $30 million with a projected run rate entering 2023 more than double that amount.

I'd now like to turn the call back to Jonathan.

Jonathan Mayhew -- Chief Executive Officer

Thanks, Brandon. As we move forward, this year and next, we're committed to an integrated evidence-based whole-person coaching and behavioral health provider and care model as our core Ontrak product offering, which maximizes the effectiveness of behavior change programs and treatment plans and delivers durable value-based outcomes for medically complex populations who face a myriad of barriers to their care. We're beginning to see the receptivity of this differentiated value proposition in the sales pipeline and look forward to converting this momentum in 2022. Now, I'd like to open it up for questions.

Operator?

Questions & Answers:

Operator

[Operator instructions] For our first question, we have Richard Close from Canaccord. Richard, your line is open. 

Richard Close -- Canaccord Genuity -- Analyst

Yeah. Thanks for the question. Brandon, I was wondering if you could go through that revenue exiting the year. I thought you said two times -- run rate two times the level of the 25.

Is that correct? Or --

Brandon LaVerne -- Chief Financial Officer

Yeah. That's correct. So the two times $25 million to $30 million that we see for the annual period of 2022, we would believe we're exiting 2022 effectively with a run rate revenue. So annualized off of the end of 2020, like the month end of 2022, more than double the $25 million to $30 million.

Richard Close -- Canaccord Genuity -- Analyst

OK. So not the fourth quarter annualized?

Brandon LaVerne -- Chief Financial Officer

That's correct.

Richard Close -- Canaccord Genuity -- Analyst

OK. All right. So curious, it's somewhat vague or maybe I'm just not understanding. With respect to adding new clients, do you think new clients will be launched in 2022 or is there going to be any -- do you think any revenue contribution this year from new clients?

Brandon LaVerne -- Chief Financial Officer

Richard, that -- go ahead, sorry.

Jonathan Mayhew -- Chief Executive Officer

No, I was going to say, we're in some final stages with regard to contracting and the financial analysis that's associated with the proposals. As we -- I think we've mentioned in prior calls, we would anticipate from the time that we get the contract, it might take us 90 days to launch. So as we're approaching those stages of conversation, you can imagine that there would be those kinds of activities occurring in the second half of the year, which would begin the process of creating revenue in the second half of this year.

Richard Close -- Canaccord Genuity -- Analyst

OK.

Jonathan Mayhew -- Chief Executive Officer

And Brandon, I don't know if you want to add to that.

Brandon LaVerne -- Chief Financial Officer

And we've guided the near-term -- yeah, we guided the near-term revenues from existing contracts that the Q1 number, $5.2 million plus $4 million to $5 million going forward. And so, in order to get to the $25 million to $30 million, you can triangulate back into there is an expectation of some revenues being contributed by new customers.

Richard Close -- Canaccord Genuity -- Analyst

OK. And then, obviously, a good build in the pipeline. I think you said 19 with the additional seven, I think the number was. Can you -- is it all the --

Jonathan Mayhew -- Chief Executive Officer

And that's health plan-related. That's health plan-related.

Richard Close -- Canaccord Genuity -- Analyst

Is that the same thing as Aetna and Cigna previously? Have you made adjustments to the program just in and around that, whether we're just talking the same thing as what you were doing before?

Jonathan Mayhew -- Chief Executive Officer

They're health plan-related, Richard. It's the new and enhanced set of AI data platform and care management capabilities. So I would say it's pointed in the direction of the same user, of the same kind of member, but the capabilities to identify, engage, treat and be able to measure the fidelity and the effectiveness, both for clinical improvement, as well as financial ROI are all substantially increased and enhanced in the program. So pointed in the same direction, same kind of member trying to drive the same financial result, but very different set of capabilities have continued to be developed around the program.

Richard Close -- Canaccord Genuity -- Analyst

OK. And then, are you still talking about a 12-month program or has there been any changes associated with the length? And if someone completes it successfully and graduate, you get paid full from that standpoint? Just any thoughts around that?

Jonathan Mayhew -- Chief Executive Officer

Really good question. As we've continued to build out the quality and standardized set of measurable clinical improvements, I would imagine that we're going to be able to have a more variable set of graduation parameters, right, as people are achieving a number of dimensions on their well-being. If that can occur in less than 12 months and the individual and their treating professionals feel that the person self-management and skill improvement and all of their underlying primary care and clinical activities are sort of commensurate with graduation and that can occur before 12 months, that we would want to make sure we've got a variable graduation criteria. I don't know at the end of the day though, Richard, that what that will do is produce a lower average graduation rate for us, right? We've got a 12-month program on average, people are in the program eight to nine months or thereabouts today.

And I think even with the variable graduation criteria, we could likely see the same average duration of people in the program. But we'd like to be more sophisticated around variable graduation criteria.

Richard Close -- Canaccord Genuity -- Analyst

OK. And my final question would be with respect to the $25 million of available borrowings. Brandon, can you talk a little bit about that in terms of what's the cost of that, the borrowings and just thought process on timing of additional financing?

Brandon LaVerne -- Chief Financial Officer

Sure. The cost of it is very similar to our existing structure with our existing lender. And so, that particular financing would be in place of. And so, it's not in addition to, it would be in place of.

And so, if we get to a point where we are refinancing our existing debt or refinancing any other -- something in between, that's when it would kick in, but only we can't have both in place at the same time. But overall, the cost of capital associated with it is roughly similar to what we currently have in place.

Richard Close -- Canaccord Genuity -- Analyst

And remind me what that is?

Brandon LaVerne -- Chief Financial Officer

It's in the mid-teens.

Richard Close -- Canaccord Genuity -- Analyst

OK. All right. Thank you.

Operator

For our next question, we have Bill Sutherland from Benchmark Consulting. Bill, your line is open.

Bill Sutherland -- The Benchmark Company -- Analyst

Hey, guys. The multi-state health plan and the two health plans that I guess are in the data exchange phase, are these a particular type of health plan?

Jonathan Mayhew -- Chief Executive Officer

Good question. One I would describe as a multi-line of business carrier. And then, one is more profiled to the government program. So actually, I should probably say, two are multi-line and one is more profiled toward government programs.

Bill Sutherland -- The Benchmark Company -- Analyst

Yeah. I was curious because I know it will impact the size of the pool and the gross Margin rate. OK.

Jonathan Mayhew -- Chief Executive Officer

I don't know at this point I can sort of give you more detail on the size of those lines of business in particular. But generally speaking, the two have got sort of representation across Medicaid, Medicare, commercial, public exchanges. And then, one is far more profiled toward government than commercial.

Bill Sutherland -- The Benchmark Company -- Analyst

And you'll probably get more uptake in terms of the multi-line plans. You'll get more uptake in the managed plans, I would think?

Jonathan Mayhew -- Chief Executive Officer

I think as we've talked about, our reach rate and enrollment rate is higher in the government programs than it is in commercial. So right, just like the propensity of the disease burden is just higher in Medicaid and Medicare populations. So for many reasons, it's sort of good for our business and it's good for the financial return that we're able to create with the customer just given the higher cost associated with those kinds of individuals.

Bill Sutherland -- The Benchmark Company -- Analyst

Right. Right.

Brandon LaVerne -- Chief Financial Officer

And Bill, I'd add, it's also the -- the eligibility is higher too. So it's eligibility even upfront. So the outreach pool is a bit bigger for the government plans than it would be for commercial and then also the reach and the enrollment rate from there as well.

Bill Sutherland -- The Benchmark Company -- Analyst

Jonathan, you mentioned on the last call, I think you're seeing some activity, some sales activity with value-based providers. Any update with that?

Jonathan Mayhew -- Chief Executive Officer

We continue to be in very active conversations. The stage that I would describe some of those conversations in is the non-disclosure agreement, the BAA, right, the Business Associate Agreement, which puts us behind their firewall relative to privacy and HIPAA concerns and all that that enables the data exchange. So we're at that level of conversation in a couple of those value-based provider conversations. So moving along, and I can just tell you that the data security concerns generally and the sophistication on both sides of the equation with sort of the vast amounts of data that go back and forth, it just takes the right people on both of our teams to make sure that those conversations are occurring and that we're well positioned for all of that data exchange.

So like that is generally the stage that we're at with a couple of the more advanced larger value-based providers.

Bill Sutherland -- The Benchmark Company -- Analyst

OK. And, I guess, last for me, I was just thinking about the well-being product. It sounds like you're kind of going the consultant route as far as the sales process. I mean, you described it as having -- being in preferred vendor status at several brokers.

But I guess, clarify that for us, if you don't mind? And it sounds like you're also rather than going to a large Fortune 100 kind of company or you're taking more of the PEO route with small guys?

Jonathan Mayhew -- Chief Executive Officer

With the PEO, yes, I mean a couple of maybe questions there. The preferred vendor and provider status for some of the larger broker and consulting firms requires a lot of diligence. So whether it starts with requests for information and a vetting process that includes the viability and validity of a program, the technology that sits behind it, what the distribution strategies are, etc. And then, what happens is, once we're approved for preferred vendor status, they make the program available to their sales and customer client relationship people so that they can access the program, we're able to do distinguish training and whether it's recorded versus live training sessions and we're just able to get much closer to the sales of the customer service teams in those organizations once you achieve that preferred status.

And then, what starts to happen there is we'll look for quotes, right, for their pipeline to start to develop.

Bill Sutherland -- The Benchmark Company -- Analyst

In the case of that PEO, like 8,000 client companies, does it mean that now you're off that LifeDojo is now available at all of those companies as a elected benefit that they want?

Jonathan Mayhew -- Chief Executive Officer

That's the next step for us. We're in a pilot mode with them today. They've got a dedicated set of users in the tool. We are monitoring with them the enrollment activity and performance for the pilot group.

And it's our hope and expectation that the performance in the pilot will be of sufficient enough activity and value that they will extend it out to the 8,000 companies that they support. So we're excited about it. There's been a lot of diligence and a lot of proof of concept work just to get to the point where they've decided to go to a pilot phase on the program and it's relatively new. That is just a couple of weeks in on that.

Bill Sutherland -- The Benchmark Company -- Analyst

OK. All right. Those are the question. Appreciate it.

Jonathan Mayhew -- Chief Executive Officer

Thank you.

Brandon LaVerne -- Chief Financial Officer

Thank you.

Operator

As there are no further questions at this time, I'll hand it back over to Jonathan Mayhew for closing remarks.

Jonathan Mayhew -- Chief Executive Officer

Thank you everyone for joining us tonight and wish everyone a nice evening. Thank you very much.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Caroline Paul -- Investor Relations

Jonathan Mayhew -- Chief Executive Officer

Brandon LaVerne -- Chief Financial Officer

Richard Close -- Canaccord Genuity -- Analyst

Bill Sutherland -- The Benchmark Company -- Analyst

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