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    OTRK   US6833731044

ONTRAK, INC.

(OTRK)
  Report
Delayed Nasdaq  -  04:00:00 2023-02-01 pm EST
1.120 USD   -2.61%
01/19Ontrak Health to Present at the Maxim Group's Healthcare IT Virtual Conference
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01/19New data shows significant reduction in depression and anxiety symptoms for ontrak health's innovative wholehealth+ program members
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01/18Ontrak Reports Improvement in Mental Health Data for Wholehealth+ Program; Shares Jump
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ONTRAK, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/21/2022 | 04:06pm EST
The following discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements, including the related notes, and the other financial information
included elsewhere in this report. In addition to historical information, this
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those discussed below. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled "Risk Factors" included elsewhere in this report
and in our Annual Report on Form 10-K for the year ended December 31, 2021 filed
with the Securities and Exchange Commission.

FORWARD-LOOKING STATEMENTS


This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive positions, growth opportunities for existing products,
plans and objectives of management, markets for our stock and other matters.
Statements in this report that are not historical facts are hereby identified as
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act of 1934, as amended (the "Exchange Act") and
Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements, including, without limitation, those relating to the future business
prospects, our revenue and income, wherever they occur, are necessarily
estimates reflecting the best judgment of our senior management as of the date
on which they were made, or if no date is stated, as of the date of this report.
These forward-looking statements are subject to a variety of risks,
uncertainties and assumptions, including those described in the "Risk Factors"
in Item 1A of Part II of this Quarterly Report on Form 10-Q, Item 1A of Part I
of our most recent Annual Report on Form 10-K ("Form 10-K") for the fiscal year
ended December 31, 2021 and other reports we filed with the Securities and
Exchange Commission ("SEC"), that may affect the operations, performance,
development and results of our business. Because the factors discussed in this
report could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements made by us or on our behalf, you
should not place undue reliance on any such forward-looking statements. New
factors emerge from time to time, and it is not possible for us to predict which
factors will arise. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. We assume no obligation and do not intend to update
these forward-looking statements, except as required by law.

All references to "Ontrak," "Ontrak, Inc.," "we," "us," "our" or the "Company"
mean Ontrak, Inc., its wholly-owned subsidiaries and variable interest entities,
except where it is made clear that the term means only the parent company.


OVERVIEW

General

Ontrak, Inc. ("Ontrak," "Company," "we," "us" or "our") is an AI-powered and
telehealth-enabled, virtualized healthcare company, whose mission is to help
improve the health and save the lives of as many people as possible. Our
technology-enabled platform provides claim based analytics and predictive
modeling to provide analytic insights throughout the delivery of our
personalized treatment program. Our program predicts people whose chronic
disease will improve with behavior change, recommends effective care pathways
that people are willing to follow, and engages and guides them to and through
the care they need. By combining predictive analytics with human engagement, we
deliver improved member health and validated outcomes and savings to healthcare
payors.

Our integrated, technology-enabled OntrakTM programs are designed to provide
healthcare solutions to members with behavioral conditions that cause or
exacerbate chronic medical conditions such as diabetes, hypertension, coronary
artery disease, chronic obstructive pulmonary disease, and congestive heart
failure, which result in high medical costs. Ontrak has a unique ability to
engage these members, who do not otherwise seek behavioral healthcare,
leveraging proprietary enrollment capabilities built on deep insights into the
drivers of care avoidance. Ontrak integrates evidence-based psychosocial and
medical interventions delivered either in-person or via telehealth, along with
care coaching and in-market community care coordinators who address the social
and environmental determinants of health, including loneliness. Our programs
seek to improve member health and deliver validated cost savings to healthcare
payors.

We operate as one segment in the United States and we have contracted with leading national and regional health plans to make the Ontrak program available to eligible members.

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Recent Developments

Reduction in Workforce


In August 2022, our management approved a restructuring plan as part of
management's cost saving measures in order to reduce its operating costs,
optimize its business model and help align with its previously stated strategic
initiatives. Under the restructuring plan, we reduced approximately 34% of
positions and $7.7 million of annual compensation costs, as well as
approximately $3.0 million of annual third party costs. During the three months
ended September 30, 2022, we incurred a total of approximately $0.9 million of
termination benefits to the impacted employees, including severance payments and
benefits, recorded as part of "Restructuring, severance and related costs" on
our condensed consolidated statement of operations for the three and nine months
ended September 30, 2022. For information See Note 6 of the Notes to Condensed
Consolidated Financial Statements included in Item I, Part I of this Quarterly
Report on Form 10-Q.

Keep Well Agreement

On April 15, 2022, we entered into a Master Note Purchase Agreement with Acuitas
Capital, LLC ("Acuitas"), an entity indirectly wholly owned and controlled by
Terren S. Peizer, the Company's Executive Chairman and largest stockholder, and
on November 19, 2022, we and Acuitas entered into an amendment to that agreement
(the "Second Amendment," and the Master Note Purchase Agreement as amended to
date, the "Keep Well Agreement"). In connection with each borrowing under the
Keep Well Agreement, we are required to issue a senior secured note for the
amount borrowed (each such note a "Keep Well Note") to Acuitas or an entity
affiliated with it, which accrues interest based on a variable rate based on the
30 day tenor Secured Overnight Financing Rate plus a corresponding applicable
margin (the "adjusted term SOFR") and are due on June 30, 2024, subject to
acceleration for customary events of default, including for failure to make
payments when due, breaches by us of certain covenants and representations in
the Keep Well Agreement, defaults by us under other agreements related to
indebtedness, our bankruptcy or dissolution, and a change of control.

During the three months ended September 30, 2022, we borrowed a total of
$11.0 million under the Keep Well Agreement, and applied a portion of the
proceeds therefrom to pay off in full all outstanding amounts we owed under the
2024 Notes, discussed below, and to fund our working capital requirements. Each
borrowing was completed with the issuance of a Keep Well Note, which accrues
interest based on the adjusted term SOFR for each interest period. At September
30, 2022, the effective weighted average interest rate for the Keep Well Notes
was 18.25%. At September 30, 2022, the amount available to be borrowed under the
Keep Well Agreement was approximately $10.7 million, which reflects the
reduction in the total amount available to be borrowed resulting from the
$3.3 million of net proceeds we raised in the equity offering discussed below.
Pursuant to the Second Amendment, the $3.3 million reduction was reversed, such
that amount available to be borrowed was increased to $14.0 million, and which
will be borrowed as follows: $4.0 million in each of January, March and June
2023 and $2.0 million in September 2023.

In accordance with the terms of the Keep Well Agreement, following the approval
of the stockholders at the annual stockholder meeting held on August 29, 2022,
(a) on September 2, 2022, we issued 739,645 shares of its common stock (the
"Commitment Shares") to Acuitas and (b) as of September 30, 2022, we have issued
to Acuitas Keep Well Warrants to purchase 1,301,775 shares of our common stock
(the "Keep Well Warrants"). The Keep Well Warrants have a term of five years and
an exercise price equal to $1.69, which was the closing price of our common
stock as reported on Nasdaq immediately preceding the time the parties entered
into the Keep Well Agreement. The exercise price of the Keep Well Warrants is
subject to reduction in accordance with the terms of the Second Amendment.

For additional information regarding the Keep Well Agreement and the Second Amendment, please see the discussion under "Keep Well Agreement" in Note 10 and Note 14, respectively, of the Notes to Condensed Consolidated Financial Statements in Item 1, Part I of this Quarterly Report on Form 10-Q.

2024 Note Agreement


On March 8, 2022, we entered into an Eight Amendment to Note Purchase Agreement
with the Holders (the "Eighth Amendment"), which among other things, amended
certain financial covenants intended to increase the Company's financial
flexibility, a required prepayment of $11.0 million of the outstanding loan
balance without the incurrence of a yield maintenance premium or prepayment fee,
which prepayment was made by the Company on March 8, 2022, restrictions on the
declaration and payment of dividends on our Series A Preferred Stock until after
December 31, 2022, and elimination of LIBOR as a reference rate such that the
2024 Notes only bear interest at the Base Rate, as defined in the Note
Agreement, going forward. During the
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first half of 2022, the Company prepaid a total of $31.7 million (including the
above mentioned $11.0 million) of the 2024 Notes, and wrote off $2.0 million of
debt issuance costs related to the 2024 Notes.

On July 15, 2022, we entered into a payoff letter agreement with the Holders of
our 2024 Notes, pursuant to which we paid in full the outstanding loan balance
under the 2024 Notes of approximately $7.6 million, which included $0.1 million
of accrued interest as of July 15, 2022. We funded the payoff with $2.6 million
of its cash on hand and $5 million of borrowing under the Keep Well Agreement,
as discussed above. All obligations owing by us and the other Note Parties (as
defined in the Note Purchase Agreement), including restrictions described above,
under the Note Purchase Agreement were released, discharged and satisfied in
full, the Note Purchase Agreement and all other Note Documents (as defined in
the Note Agreement) were terminated (other than those provisions therein that
expressly survive termination), and all liens securing our obligations under the
Note Agreement were released. During the three months ended September 30, 2022,
we wrote off the remaining $1.3 million of debt issuance costs related to the
2024 Notes.

In connection with entering into the Eighth Amendment, we issued to Special
Situations Investing Group II, LLC (the "Holder"), a Purchase Warrant for Common
Shares (the "Amendment Warrant") pursuant to which the Holder may purchase
shares of our common stock in an aggregate amount of up 111,680 shares. Also, we
agreed to issue to the Holder, beginning March 31, 2022 and until the earlier of
(i) date the 2024 Notes have been paid in full and (ii) October 31, 2022,
additional warrants (each a "Ticking Warrant" and together with the Amendment
Warrant, the "Warrants"), having the same terms as the Amendment Warrant, to
purchase a number of shares of our common stock equal to $47,500, to be
calculated based on the volume weighted average trading price of our common
stock during the five (5) trading day period immediately preceding the date such
Ticking Warrant is issued, not to exceed 7% of the outstanding shares of our
common stock on the date of the Eighth Amendment. The Warrants were offered and
sold to the Holder in a private placement exempt from registration under the
Securities Act. The Warrants may be exercised by the Holder at an exercise price
equal to $0.01 per share and will expire on September 24, 2026. As of September
30, 2022, Ticking Warrants to purchase 118,931 shares of our common stock were
issued to the Holder. We assessed and separated the Warrants into liability and
equity components, wherein the Amendment Warrant qualified for equity
classification and the Ticking Warrants qualified for liability classification.

Equity Offering


On August 2, 2022, we entered into a securities purchase agreement with certain
institutional investors for the purchase and sale of 5,000,000 shares of our
common stock at an at-the-market purchase price of $0.80 per share in a
registered direct offering. The offering closed on August 4, 2022 and we
received total net proceeds of approximately $3.3 million (excluding
approximately $0.7 million of fees and expenses). We used the net proceeds from
the offering for working capital purposes.

Metrics

The following table sets forth our key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions:


•Revenue. Our revenues are mostly generated from fees charged to health plan
customers related to health plan members enrolled in our Ontrak program. Our
contracts are generally designed to provide cash fees to us on a monthly basis,
an upfront case rate, or fee for service based on enrolled members and
achievement of certain member specified metrics that drive clinical engagement.
Our performance obligation is satisfied over the length of the Ontrak program as
our services our delivered.

•Cash flow from operations. Our business activities generally have resulted in an outflow of cash flow from operations as we invest strategically into our business to help the growth of our operations.


•Effective Outreach Pool. Our Effective Outreach Pool represents individuals
insured by our health plan customers who have been identified through our
advanced data analytics and predictive modeling with untreated behavioral health
conditions that may be impacted through enrollment in the Ontrak program.

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Three Months Ended

                                                                           September 30,
(In thousands, except outreach pool and
percentages)                                   2022               2021              Change $              Change %
Revenue                                     $  2,843           $ 18,594           $ (15,751)                     (85) %
Cash flow from operations                     (8,305)           (14,265)              5,960                      (42)

                                                                         Nine Months Ended
                                                                           September 30,
                                               2022               2021              Change $              Change %
Revenue                                     $ 12,004           $ 73,801           $ (61,797)                     (84) %
Cash flow from operations                    (22,520)           (11,111)            (11,409)                     103



                                                 At September 30,
                                 2022              2021          Change        Change %
Effective Outreach Pool                4,163      14,165       (10,002)           (71) %



Our revenue for the three months ended September 30, 2022 was $2.8 million
compared to $18.6 million for the same period in 2021, and $12.0 million for the
nine months ended September 30, 2022 compared to $73.8 million for the same
period in 2021. The decrease in our revenue in the three and nine months ended
September 30, 2022 compared to the same period in 2021 was primarily due to the
loss of two of our largest customers as previously announced in 2021 and a
decrease in total average enrolled members during the three and nine months
ended September 30, 2022 compared to the same periods in 2021.

Our cash flow from operations for the three months ended September 30, 2022 was
$(8.3) million compared to $(14.3) million for the same period in 2021, and
$(22.5) million for nine months ended September 30, 2022 compared to $(11.1)
million for the same period in 2021. The year over year decrease in our cash
flow from operations during the three and nine months ended September 30, 2022
as compared to the same periods in 2021 was primarily due to a decrease in our
revenue related to the customer terminations previously announced.

Our effective outreach pool at September 30, 2022 was 4,163 compared to 14,165
for the same period in 2021. The decrease was primarily due to reduced outreach
pool associated with the loss of one of our customers, as well as smaller
decreases associated with the loss of a second customer and budgetary
constraints limiting our enrollment at certain other customers. As we work with
our remaining customers in maximizing return on their investment, optimizing our
enrollment process, and enhancing our offering, the effective outreach pool
could continue to fluctuate in the near term.

Key Components of Our Results of Operations

Revenue


Revenue from contracts with customers is recognized when, or as, we satisfy our
performance obligations by transferring the promised goods or services to the
customers. Revenue from a performance obligation satisfied over time is
recognized by measuring our progress in satisfying the performance obligation in
a manner that depicts the transfer of the goods or services to the customer.
Revenue related to health plan customers whose health plan members are enrolled
in our program is recognized over the enrollment period of the program.

Cost of Revenue


Cost of healthcare services consists primarily of salaries related to our care
coaches, member engagement specialists and other staff directly involved in
member care, healthcare provider claims payments and related processing fees,
and other direct costs incurred to serve our health plan customers. All costs
are recognized in the period in which an eligible member receives services.

Operating Expenses


Our operating expenses consist of our sales and marketing, research and
development, and general and administrative expenses, as well as restructuring,
severance and related costs as applicable. Sales and marketing expenses consist
primarily of personnel
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and related expenses for our sales and marketing staff, including salaries,
benefits, bonuses, stock-based compensation and commissions, and costs of
marketing and promotional events, corporate communications, online marketing,
product marketing and other brand-building activities. All advertising related
costs are expensed as incurred. Research and development expenses consist
primarily of personnel and related expenses for our engineers and software
development staff, including salaries, benefits, bonuses and stock-based
compensation, and the cost of certain third-party service providers. Research
and development costs are expensed as incurred. General and administrative
expenses consist primarily of personnel and related expenses for administrative,
legal, finance, compliance and human resource staff, including salaries,
benefits, bonuses and stock-based compensation, professional fees, insurance
premiums, and other corporate expenses. Restructuring, severance and related
costs include workforce reduction costs and asset impairment charges, if any.

Interest Expense, net


Interest expense consists primarily of interest expense from our note
agreements, accretion of debt discount, amortization of debt issuance costs and
finance leases.
Other Expense, net

Other income (expense) consists of gains (losses) associated with changes in
fair value of contingent consideration and warrant liabilities, write-off of
debt issuance related costs and other miscellaneous income (expense) items.


RESULTS OF OPERATIONS

The table below and the discussion that follows summarize our results of operations for each of the periods presented (in thousands):

                                                  Three Months Ended                      Nine Months Ended
                                                    September 30,                           September 30,
                                               2022                2021                2022               2021
Revenue                                   $     2,843          $   18,594          $  12,004          $  73,801
Cost of revenue                                 1,436               5,856              6,488             27,125
Gross profit                                    1,407              12,738              5,516             46,676

Operating expenses:
Research and development                        2,833               4,563              9,113             13,531
Sales and marketing                             1,151               2,269              3,893              7,839
General and administrative                      7,552              11,325             27,694             33,966
Restructuring, severance and related
costs                                             934                  49                934              1,339
Total operating expenses                       12,470              18,206             41,634             56,675
Operating loss                                (11,063)             (5,468)           (36,118)            (9,999)

Other expense, net                             (1,241)               (361)            (3,213)            (1,004)
Interest expense, net                            (440)             (2,054)            (2,996)            (6,090)
Loss before income taxes                      (12,744)             (7,883)           (42,327)           (17,093)
Income tax expense                                (20)                  -               (140)                 -
Net loss                                  $   (12,764)         $   (7,883)         $ (42,467)         $ (17,093)



Revenue

The mix of our revenue between commercial and government insured members can
fluctuate quarter over quarter. The following table sets forth our sources of
revenue for each of the periods indicated:

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                                                    Three Months Ended                                                          Nine Months Ended
                                                       September 30,                                                              September 30,
(In thousands, except
percentages)                   2022             2021              Change            Change %             2022              2021              Change             Change %
Commercial revenue          $ 1,267          $  7,093          $  (5,826)                (82) %       $  5,624          $ 28,902          $ (23,278)                 (81) %
Percentage of commercial
revenue to total revenue         45  %             38  %               7  %                                 47  %             39  %               8  %
Government revenue          $ 1,576          $ 11,501          $  (9,925)                (86) %       $  6,380          $ 44,899          $ (38,519)                 (86) %
Percentage of government
revenue to total revenue         55  %             62  %              (7) %                                 53  %             61  %              (8) %
  Total revenue             $ 2,843          $ 18,594          $ (15,751)                (85) %       $ 12,004          $ 73,801          $ (61,797)                 (84) %



Total revenue decreased $15.8 million, or 85%, in the three months ended
September 30, 2022 compared to the same period of 2021, and decreased by $61.8
million, or 84%, in the nine months ended September 30, 2022 compared to the
same period of 2021. The decrease in revenue during the three and nine months
ended September 30, 2022 compared to the respective periods in 2021 was
primarily attributable to the loss of our two largest customers as previously
announced and a decrease in total average enrolled members.

The mix of our revenues from commercial customers increased to 45% and 47% in
the three and nine months ended September 30, 2022, respectively, compared to
38% and 39% in the three and nine months ended September 30, 2021, respectively.
The mix of our revenues from government customers decreased to 55% and 53% in
the three and nine months ended September 30, 2022, respectively, compared to
62% and 61% in the three and nine months ended September 30, 2021, respectively.
This shift in mix of revenues from commercial and government customers was
mainly due to the loss of our two largest customers as previously announced.

We currently expect our revenues in the remainder of 2022 to decline year over
year primarily as a result of the lost customers as previously announced and
pricing and volume updates with certain other customers.

Cost of Revenue, Gross Profit and Gross Profit Margin


                                               Three Months Ended                                                         Nine Months Ended
                                                 September 30,                                                              September 30,
(In thousands, except
percentages)              2022             2021            Change             Change %             2022             2021              Change             Change %
Cost of revenue        $ 1,436          $ 5,856          $ (4,420)                 (75) %       $ 6,488          $ 27,125          $ (20,637)                  (76) %
Gross profit             1,407           12,738           (11,331)                 (89)           5,516            46,676            (41,160)                  (88)
Gross profit margin         49  %            69  %            (20) %                                 46  %             63  %             (17) %



Cost of revenue decreased $4.4 million, or 75%, in the three months ended
September 30, 2022 compared to the same period of 2021. The decrease in cost of
revenue during the three months ended September 30, 2022 was primarily due to a
decrease in personnel costs resulting from headcount efficiencies gained and
cost optimization initiatives as we improve the operations for our member facing
organization and a decrease in provider costs.

Gross profit and gross profit margin decreased by $11.3 million and 20%,
respectively, in the three months ended September 30, 2022 compared to the same
period of 2021. The decrease in both gross profit and gross profit margin in the
three months ended September 30, 2022 was primarily due to the decrease in our
revenue discussed above.

Cost of revenue decreased $20.6 million, or 76%, in the nine months ended
September 30, 2022 compared to the same period of 2021. The decrease in cost of
revenue during the nine months ended September 30, 2022 was primarily due to a
decrease in personnel costs resulting from headcount efficiencies gained and
cost optimization initiatives as we improve the operations for our member facing
organization and a decrease in provider costs.

Gross profit and gross profit margin decreased by $41.2 million and 17%,
respectively, in the nine months ended September 30, 2022 compared to the same
period of 2021. The decrease in both gross profit and gross profit margin in the
nine months ended September 30, 2022 was primarily due to the decrease in our
revenue discussed above.

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We expect our cost of revenue to decline year over year in line with the decrease in revenue as discussed above and as well as pricing updates to our customers.

Operating Expenses

                                                          Three Months Ended                                                          Nine Months Ended
                                                            September 30,                                                               September 30,
(In thousands, except
percentages)                         2022              2021             Change            Change %              2022              2021              Change            Change %

Operating expenses:

  Research and development       $   2,833          $  4,563          $ (1,730)                (38) %       $   9,113          $ 13,531          $  (4,418)                (33) %
  Sales and marketing                1,151             2,269            (1,118)                (49)             3,893             7,839             (3,946)                (50)
  General and administrative         7,552            11,325            (3,773)                (33)            27,694            33,966             (6,272)                (18)
Restructuring, severance and
related costs                          934                49               885                1806                934             1,339               (405)                (30)
Total operating expenses         $  12,470          $ 18,206          $ (5,736)                (32)         $  41,634          $ 56,675          $ (15,041)                (27)

Operating loss                   $ (11,063)         $ (5,468)         $ (5,595)                102  %       $ (36,118)         $ (9,999)         $ (26,119)                261  %
Operating loss margin                 (389) %            (29) %           (360) %                                (301) %            (14) %            (287) %



Total operating expense decreased by $5.7 million, or 32%, in the three months
ended September 30, 2022 compared to the same period in 2021. The decrease in
operating expenses was primarily due to the following:

•$1.7 million decrease in our research and development costs, which was
primarily related to $2.0 million decrease in employee-related costs and $0.5
million decrease in professional consulting fees, partially offset by a $0.5
million increase in depreciation expense and a $0.3 million increase in software
costs.

•$1.1 million decrease in our sales and marketing costs, which was primarily
related to $0.6 million decrease in promotional costs related to marketing
initiatives, $0.4 million decrease in employee-related costs and $0.1 million
decrease in professional service costs.

•$3.8 million decrease in our general and administrative costs, which was primarily related to $3.1 million decrease in employee-related costs, a $0.4 million decrease in software related costs and a $0.2 million decreases in occupancy costs, partially offset by a $0.3 million increase in legal and related professional service costs.


•$0.9 million increase in restructuring, severance and related costs related to
the reduction in workforce announced in August 2022 contributed to a partial
offset to the total net decrease in operating expenses.

Total operating expense decreased by $15.0 million, or 27%, in the nine months
ended September 30, 2022 compared to the same period in 2021. The decrease in
operating expenses was primarily due to the following:

•$4.4 million decrease in our research and development costs, which was
primarily related to $5.4 million decrease in employee-related costs and $1.0
million decrease in professional consulting fees, partially offset by a $1.6
million increase in depreciation expense and a $0.5 million increase in software
costs.

•$3.9 million decrease in our sales and marketing costs, which was primarily related to $2.8 million decrease in promotional costs related to marketing initiatives, $0.6 million decrease in professional service costs and $0.6 million decrease in employee-related costs.


•$6.3 million decrease in our general and administrative costs, which was
primarily related to $5.2 million decrease in employee-related costs, a $1.0
million decrease in software related costs, a $0.5 million decreases in other
general professional service costs and a $0.4 million decrease in occupancy
costs, partially offset by a $1.0 million increase in legal costs.

•$0.4 million decrease in restructuring, severance and related costs related to
the reduction in workforce announced in August 2022 compared to the reduction in
workforce costs incurred in the nine months ended September 30, 2021 relating to
the reduction in workforce announced in March 2021.
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Our operating expenses may fluctuate as a percentage of our total revenue from
period to period due to the timing and extent of our operating and strategic
initiatives.

Other Expense, net

                                                 Three Months Ended                                                         Nine Months Ended
                                                    September 30,                                                             September 30,
(In thousands, except
percentages)                2022             2021            Change $            Change %             2022              2021            Change $            Change %
Other expense, net       $ (1,241)         $ (361)         $    (880)                (244) %       $ (3,213)         $ (1,004)         $ (2,209)                (220) %


Other expense, net of $1.2 million for the three months ended September 30, 2022
was primarily related to the write-off of debt issuance costs on our 2024 Notes.
Other expense, net of $0.4 million for the three months ended September 30, 2021
was related to $0.5 million loss related to a change in the fair value of
contingent consideration liability, partially offset by a $0.1 million of other
income.

Other expense, net for the nine months ended September 30, 2021 was $3.2
million, which was related to $3.3 million of write-off of debt issuance costs
on our 2024 Notes, partially offset by $0.1 million of gain related to a change
in the fair value of warrant liabilities. Other expense, net for the nine months
ended September 30, 2021 was $1.0 million, which was related to $1.3 million
loss related to a change in the fair value of contingent consideration
liability, partially offset by a $0.2 million gain related to a PPP loan that
was forgiven and $0.1 million of other income.

Interest Expense, net

                                                    Three Months Ended                                                           Nine Months Ended
                                                      September 30,                                                                September 30,
(In thousands, except
percentages)                  2022               2021            Change $            Change %              2022              2021            Change $            Change %
Interest expense, net            $(440)       $ (2,054)         $  1,614                    79  %       $ (2,996)         $ (6,090)         $  3,094                   51  %


The decrease in interest expense for the three and nine months ended
September 30, 2022 compared to the same periods in 2021 was primarily due to
lower average total outstanding loan balance during the three and nine months
ended September 30, 2022.

Income Tax Expense

                                                  Three Months Ended                                                         Nine Months Ended
                                                    September 30,                                                              September 30,
(In thousands, except
percentages)                2022             2021            Change $            Change %              2022             2021            Change $            Change %
Income tax expense             $(20)       $    -          $     (20)                  100  %       $  (140)         $     -          $    (140)                  100  %


Income tax expense for the three and nine months ended September 30, 2022 was
$0.02 million and $0.1 million, respectively, which were primarily related to
state income taxes. There was no income tax expense for the three and nine
months ended September 30, 2021.

LIQUIDITY AND CAPITAL RESOURCES


Our ability to fund ongoing operations is dependent on several factors. We aim
to increase the number of members that are eligible for our solutions by signing
new contracts and identifying more eligible members in existing contracts.
Additionally, our funding is dependent upon the success of management's plan to
increase revenue and control expenses. We provide services to commercial
(employer funded), managed Medicare Advantage, managed Medicaid and duel
eligible (Medicare and Medicaid) populations. We also provide mental health and
wellbeing support to members of employer customers under our LifeDojo wellbeing
solution.


                                       36
--------------------------------------------------------------------------------

We have incurred significant net losses and negative operating cash flows since
our inception, and we expect to continue to incur net losses and negative
operating cash flow, in part due to the negative impact on our operations by
customer terminations. As of September 30, 2022, our cash and restricted cash
was $11.9 million and we had working capital of approximately $11.5 million. For
the nine months ended September 30, 2022, average monthly cash flow from
operations burn rate was $2.5 million. Based on our cash and restricted cash
levels, expected revenue from business operations, and after taking into account
the amount available to borrow under the Keep Well Agreement, we expect to have
sufficient cash to cover our operating expenses through at least the next twelve
months following the date our financial statements in this report are issued. As
of the date of this Quarterly Report on Form 10-Q, we had $14 million of
available borrowing capacity under the Keep Well Agreement. See Note 10 and Note
14 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1
of this Quarterly Report on Form 10-Q for more information about the Keep Well
Agreement. However, delays in cash collections, lower revenue than anticipated,
unforeseen expenditures, or our inability to satisfy the conditions precedent to
borrowing funds under the Keep Well Agreement could impact our expectation.

In addition to revenue from business operations, our primary source of capital
is the amount available under the Keep Well Agreement. We may also be able to
raise capital through equity financing, however, when we can effect such sales
and the amount of shares we can sell depends on a variety of factors to be
determined by us from time to time, including, among others, market conditions,
the trading price of our common stock and our determination as to the
appropriate sources of funding for our operations.

Management plans to continue to execute on its strategy by (i) exploring other
sources of capital with either debt or equity financing for on-going liquidity
needs; (ii) continuing to manage operating costs by strategically pursuing cost
optimization initiatives; and (iii) continuing to pursue executing our growth
strategy by improving our marketing techniques and implementing new features to
increase customer engagement, adding new members and securing new customer
contracts. There can be no assurance that capital will be available when needed
or that, if available, it will be obtained on terms favorable to us and our
stockholders, that we will be successful in implementing cost optimization
initiatives, or that we will be successful in executing our growth strategy. In
addition, our Keep Well Agreement contains various financial covenants, and any
unanticipated non-compliance with those covenants could result in an
acceleration of the repayment of the outstanding loan balance, and our ability
to borrow funds under the Keep Well Agreement is subject to conditions precedent
being satisfied, and we may not satisfy such conditions precedent if and when we
need to borrow funds thereunder. Furthermore, equity or debt financings may have
a dilutive effect on the holdings of our existing stockholders, and debt
financings may subject us to restrictive covenants, operational restrictions and
security interests in our assets.


Cash Flows


The following table sets forth a summary of our cash flows for the periods
indicated (in thousands):

                                                          Nine Months Ended
                                                            September 30,
                                                         2022           2021

Net cash used in provided by operating activities $ (22,520) $ (11,111) Net cash used in investing activities

                    (1,004)        

(3,865)

Net cash used in financing activities                   (30,488)        

(3,467)

Net decrease in cash and restricted cash              $ (54,012)     $ 

(18,443)




Net cash used in operating activities during the nine months ended September 30,
2022 was $22.5 million compared with net cash used in operating activities of
$11.1 million during the same period in 2021. The $11.4 million increase in net
cash used in operating activities during the nine months ended September 30,
2022 compared to the same period in 2021 was primarily due to a decrease in our
revenue related to the customer terminations previously announced and related
decrease in customer billings and collections.

Net cash used in investing activities was $1.0 million for the nine months ended
September 30, 2022 compared with $3.9 million in the same period of 2021. The
$1.0 million and $3.9 million of net cash used in investing activities for the
nine months ended September 30, 2022 and 2021, respectively, was primarily
related to capitalized software development costs. We anticipate that software
development costs and capital expenditures will decrease in the near future.

                                       37
--------------------------------------------------------------------------------

Our net cash used in financing activities was $30.5 million for the nine months
ended September 30, 2022 compared with $3.5 million for the nine months ended
September 30, 2021. The $30.5 million of net cash used in financing activities
for the nine months ended September 30, 2022 was primarily related to $39.2
million of repayments made on our 2024 Notes, representing full payment and
termination of the 2024 Notes, $2.2 million of dividend payments made on our
Series A Preferred Stock and $2.3 million of payments made on our financed
insurance premiums, partially offset by $11.0 million borrowed on the Keep Well
Agreement and $3.3 million net raised in a registered direct offering of our
common stock. The $3.5 million of net cash used in financing activities for the
nine months ended September 30, 2021 was primarily related to $6.7 million of
dividend payments made on our Series A Preferred Stock and $2.2 million of
payments made on our financed insurance premiums, partially offset by $5.6
million of proceeds received from stock option exercises.

As a result of the above, our total cash and cash equivalents, including restricted cash of $4.7 million, was $11.9 million as of September 30, 2022.

Debt


See Note 10 of the Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion about
our debt.

Equity Offerings

See Note 7 of the Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion about
our equity offerings.

OFF BALANCE SHEET ARRANGEMENTS


During the periods presented, we did not have, nor do we currently have, any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. We are
therefore not exposed to the financing, liquidity, market or credit risk that
could arise if we had engaged in those types of relationships.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


See Note 2 of the Notes to the Consolidated Financial Statements in Part II,
Item 8 of our 2021 Form 10-K, and "Critical Accounting Policy and Estimates" in
Part II, Item 7 of our 2021 Form 10-K for a discussion of the significant
accounting policies and methods used in the preparation of the Company's
condensed consolidated financial statements. There have been no material changes
to the Company's critical accounting policies and estimates since the 2021 Form
10-K.

© Edgar Online, source Glimpses

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