Ontrak, Inc. (OTRKQ) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Ontrak Health Second Quarter '24 Earnings Call. [Operator Instructions] 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.

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, 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 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.

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 2-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 health care 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-difference 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-difference medical cost savings of $508 per member per month for members that did not graduate from our program. These results solidify the strength 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 enhance inpatient 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 health care 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.

Thanks, Brandon. As Brandon mentioned, and we announced this morning for the second quarter in a row, I'm excited to share that we 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 3 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 plans 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.

Thanks, Mary Lou. During the second quarter, we recorded 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 from $504 per health plan enrolled member per month in Q1 of 2024 and a decrease from $528 in Q2 of 2023. The decrease was primarily due to a large percentage of our new members being enrolled towards the end of the quarter as well as the addition of Engage members, which will have a lower revenue per enrolled member. Through the remainder of the year, we expect a 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 Engage 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 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 expiring customer contract that would have otherwise normalized at 11%. Further, we graduated 178 enrolled members during the quarter. This equates to 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 a decrease from 72.8% in the 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 $15 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 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 and $2.8 million, which doesn't include any revenue for the new customer we discussed as we expect new member enrollments for this customers to commence in early Q4. To provide a 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 to $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 to $2 million of annual recurring revenue for our WholeHealth+ product. Now we will open up for questions. Thank you.

The first question comes from the line of Jonathan Aschoff of ROTH Capital Partners.

Congrats on the deal you announced in the middle of the day. The questions I have, just kind of quickly, do you expect quarter-over-quarter revenue growth 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?

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

Okay. 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?

That's correct. Yes. The original amount was $15 million in total. So...

Okay. And so what is your pro forma debt like 6-something millions?

Yes.

$6.7 million straight from the balance sheet, nothing extra after the quarter? Or what is pro forma including since July 1 drawdown?

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

Okay. How about the total number of outstanding warrants?

Total outstanding -- that's $250 million roughly.

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?

Yes, we are at 26. Jonathan, it's Mary Lou Osborne. We have 26 active prospects and about 15 million lives associated with that. And so as our new customer is coming off the list, we're adding new customers all the time, prospects.

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

Yes, we have. And 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. And as you know, we talked about this in our previous earnings call, our customer was awarded 5 regions in the most recent Medicaid RFP. So they are projected to grow above where they are currently. So that's some of the background, and I'll turn it over to James to talk more.

Actually, right before you do that. So did -- is CCP still at one region? Or is it 2 or 3? Or anywhere you ever thought?

Yes, they are currently in one region, and they were awarded 5 regions, including the one they have, and that will start in January 2025.

Yes. Start growing towards 5, one at a time.

It will begin January 1. They will be live in 5 regions across the state of Florida.

And then James?

Yes. And we did successfully launch and started enrolling members. So I don't think we disclose exactly how many, but it was a successful launch.

Okay. And one...

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.

Okay. Lastly, can you help me out with pro forma cash, you have $7.3 million plus, what have you raised since the end of the quarter?

So you asking how much we have.

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

Well, we have the access, the $10 million of the Keep Well that we still have access to, the $15.9 million that we have access to, of the warrants. So we're in active discussions and to open up the capital for that -- for those amounts as well as other sources currently.

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

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

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.