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    OTRK   US6833731044

ONTRAK, INC.

(OTRK)
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ONTRAK : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2021 | 04:12pm EDT
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, 2020 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 risks, uncertainties and
assumptions, including those described in the "Risk Factors" in 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, 2020 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
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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

We harness proprietary big data predictive analytics, artificial intelligence
and telehealth, combined with human interaction, to deliver improved member
health and cost savings to health plans. We identify, engage and treat health
plan members with unaddressed behavioral health conditions that worsen medical
comorbidities. Our mission is to help improve the health and save the lives of
as many people as possible.
We apply advanced data analytics and predictive modeling to identify members
with untreated behavioral health conditions, whether diagnosed or not, and
coexisting medical conditions that may be impacted through treatment in the
Ontrak™ program. We then uniquely engage health plan members who do not
typically seek behavioral healthcare by leveraging proprietary enrollment
capabilities built on deep insights into the drivers of care avoidance. Our
technology enabled Ontrak™ program is an integrated suite of services that
includes 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. We believe that the Company's programs seek to
improve member health and deliver validated cost savings to healthcare payors.
Recent Development

Reduction in Workforce
On February 26, 2021, we received a termination notice from its largest customer
that the participation status with this customer will be terminated effective
June 26, 2021. As a result of this termination notice, our management assessed
various options and deemed it prudent to initiate a workforce reduction plan to
effectively align its resources and manage its operating costs, resulting in
reduction of 35% full time positions. We a total of one-time costs of
approximately $1.3 million of termination benefits to the impacted employees.
During the three months ended March 31, 2021, we incurred $1.0 million of
termination related costs recorded as part of "General and administrative"
expenses on our condensed consolidated statement of operations. As of March 31,
2021, we paid $0.2 million of the total $1.3 million of termination benefits and
we had $1.1 million of accrued termination related costs on our condensed
consolidated balance sheet. We expect to complete the reduction in workforce
plan by the end of June 2021.
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. Our
performance obligation is satisfied over the of length the Ontrak program as our
services are 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 continue 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 March 31,
(In thousands, except outreach pool and
percentages)                                       2021                2020            Change $              Change %
Revenue                                       $   28,722            $ 12,338          $ 16,384                      133  %
Cash flow from operations                          6,432              (3,146)            9,578                      304



                                                  At March 31,
                               2021            2020           Change         Change %
Effective Outreach Pool           24,709     144,657        (119,948)           (83) %



Our revenue for the three months ended March 31, 2021 was $28.7 million compared
to $12.3 million for the same period in 2020. The increase in our revenue was
primarily due to the increase in our enrolled members, increasing from 8,600 as
of March 31, 2020 to 14,868 as of March 31, 2021. The termination notice from
our largest customer did not have a significant impact on our revenue for the
three months ended March 31, 2021 as the effective date will be in Q2 2021.

Our cash flow from operations for the three months ended March 31, 2021 was $6.4
million compared to $(3.1) million for the same period in 2020. The increase was
primarily due to continued increase in billing and collection from the increase
in the number of enrolled members. Our second largest customer has case rate
billing terms, where we bill and collect the fees from the enrolled members up
front upon enrollment. Cash flow from operations may fluctuate throughout the
year as we continue to invest in the development of our technology and growth of
our operations.

Our effective outreach pool for the three months ended March 31, 2021 was 24,709
compared to 144,657 for the same period in 2020. The decrease was primarily due
to the outreach pool associated with our largest customer that provided
termination notice received on February 26, 2021. The outreach pool for our
largest customer had an enrollment rate lower than our remaining customers, thus
the decrease in the outreach pool was greater than the expected decrease in
revenue associated with the loss of this customer. Also, we began disenrollment
of this customer's members in April 2021 and expect to complete the
disenrollment throughout the second quarter of 2021.

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. Sales and marketing
expenses consist primarily of personnel 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.

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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 Income (Expense), net
Other income (expense) consists of gains (losses) associated with changes in
fair value of contingent consideration and warrant liabilities 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
                                     March 31,
                                 2021           2020
Revenue                      $   28,722      $ 12,338
Cost of revenue                  12,750         7,233
Gross profit                     15,972         5,105

Operating expenses:
Research and development          4,569         1,944
Sales and marketing               1,942           877
General and administrative       12,341         8,288
Total operating expenses         18,852        11,109
Operating loss                   (2,880)       (6,004)

Other expense, net                 (606)           64
Interest expense, net            (2,007)       (1,655)

Net loss                     $   (5,493)     $ (7,595)



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:

                                                                       Three Months Ended March 31,
(In thousands, except percentages)                    2021              2020             Change             Change %
Commercial revenue                                 $ 11,351          $  7,241          $  4,110                    57  %
Percentage of commercial revenue to total revenue        40  %             59  %            (19) %
Government revenue                                 $ 17,371          $  5,097          $ 12,274                   241  %
Percentage of government revenue to total revenue        60  %             41  %             19  %
  Total revenue                                    $ 28,722          $ 12,338          $ 16,384                   133  %


Total revenue increased $16.4 million, or 133% in the three months ended
March 31, 2021 compared to the same period of 2020. Enrolled members increased
by 6,268, or 73%, to 14,868 as of March 31, 2021 compared to 8,600 as of March
31, 2020. These
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increases were attributable to the continued expansion of our Ontrak program
with our existing health plan customers and increase in our enrolled members
from existing and new health plans. Revenues relating to our expansion health
plan members during the three months ended March 31, 2021 were generally billed
up front for the Ontrak program's annual fee based on enrolled members and
contributed to an increase in our deferred revenue at March 31, 2021, which we
expect to recognize as revenue over the related service performance period. Our
deferred revenue increased to $24.9 million as of March 31, 2021 compared to
$21.0 million as of December 31, 2020.
The mix of our revenues from government customers increased to 60% in the three
months ended March 31, 2021 compared to 41% in the same period of 2020. This
increase was mainly due to our expansion of health plan customers with Medicare
and Medicaid members.
Cost of Revenue, Gross Profit and Gross Profit Margin

                                                    Three Months Ended March 31,
(In thousands, except percentages)         2021            2020         Change       Change %
Cost of revenue                        $   12,750       $ 7,233       $ 5,517            76  %
Gross profit                               15,972         5,105        10,867           213  %
Gross profit margin                            56  %         41  %         15  %


Cost of revenue increased $5.5 million, or 76% in the three months ended
March 31, 2021 compared to the same period of 2020. The increase in cost of
revenue was primarily due to a $5.1 million increase in member facing headcount
and a $1.2 million increase in provider related costs, partially offset by a
$0.7 million decrease in member outreach costs. Our member facing headcount,
which includes our care coaches and member engagement specialists, increased by
34, or 13%, to 303 as of March 31, 2021 compared to the same period last year,
and reflects the effect of the reduction in workforce.
Gross profit and gross profit margin increased by $10.9 million and 15%, and
respectively, in the three months ended March 31, 2021 compared to the same
period of 2020. The increase in gross profit was primarily due to the increase
in our revenue discussed above. The increase in gross profit margin was
primarily related to an improvement in costs for member visit claims from
healthcare providers, hourly compensation and member related material printing
as a percentage of revenue.
We expect our cost of revenue to increase as our revenue increases, but expect
our gross profit margin to increase over time as we optimize the efficiency of
our operations and continue to scale our business.
Operating Expenses

                                                    Three Months Ended March 31,
(In thousands, except percentages)         2021           2020          Change       % Change
Operating expenses:
  Research and development             $   4,569       $  1,944       $ 2,625           135  %
  Sales and marketing                      1,942            877         1,065           121
  General and administrative              12,341          8,288         4,053            49
Total operating expenses               $  18,852       $ 11,109       $ 7,743            70

Operating loss                         $  (2,880)      $ (6,004)      $ 3,124           (52) %
Operating loss margin                      (10.0) %       (48.7) %       38.7  %


Total operating expense increased $7.7 million, or 70%, in the three months ended March 31, 2021 compared to the same period in 2020. The increase in operating expenses was primarily due to the following:


•$2.6 million increase in our research and development costs, which was
primarily related to an increase of $1.8 million in employee-related costs and a
$0.7 million increase in professional consulting and software costs, as we
invest in continued enhancement of our technology and related tools to support
the growth of our business.
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•$1.1 million increase in our sales and marketing costs, which was primarily
related to an increase of $0.6 million of professional service and promotional
costs related to marketing initiatives and a $0.4 million increase in
employee-related costs.
•$4.1 million increase in our general and administrative costs, which was
primarily related to a $1.7 million increase in various third party vendor
costs, a $1.5 million increase in employee-related costs related to higher
headcount throughout the three months ended March 31, 2021 compared to the same
period of 2020, and $1.0 million of severance costs related to the workforce
reduction.
We expect our operating expenses to increase for the foreseeable future as we
continue to make investments in the growth of our business, but we expect our
operating expenses to decrease as a percentage of revenue over time. 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) Income, net

                                                        Three Months Ended March 31,
(In thousands, except percentages)               2021               2020      Change $       Change %
Other (expense) income, net            $      (606)                $ 64      $    (670)      (1,047) %


The increase in other expense, net for the three months ended March 31, 2021 was
primarily due to a $0.6 million loss related to a change in the fair value of
the contingent liability resulting from an acquisition.
Interest Expense, net

                                                      Three Months Ended March 31,
(In thousands, except percentages)           2021             2020        Change $       Change %
Interest expense, net                             $2,007    $ 1,655      $     352           21  %


The increase in interest expense for the three months ended March 31, 2021 was
primarily due to the higher average total outstanding loan balance during the
three months ended March 31, 2021 compared to the same period of 2020.
LIQUIDITY AND CAPITAL RESOURCES
Cash and restricted cash was $106.6 million as of March 31, 2021. We had working
capital of approximately $85.0 million as of March 31, 2021. We have incurred
significant net losses and negative operating cash flows since our inception. We
expect our current cash resources to cover expenses through at least the next
twelve months. However, delays in cash collections, revenue, or unforeseen
expenditures could impact this estimate.
Our ability to fund our ongoing operations is dependent on increasing the number
of members that enroll in the Ontrak program. We provide services to commercial
(employer funded), managed Medicare Advantage, and managed Medicaid and duel
eligible (Medicare and Medicaid) populations.
Historically, we have seen and continue to see net losses, net loss from
operations and negative cash flow from operating activities, as we continue
through a period of rapid growth. The accompanying consolidated financial
statements do not reflect any adjustments that might result if we were unable to
continue as a going concern. We have alleviated substantial doubt by both
entering into contracts for additional revenue-generating health plan customers
and expanding our Ontrak program within existing health plan customers as well
as completing equity and debt financings totaling approximately $87 million and
$10 million, respectively, in 2020. To support this increased demand for
services, we invested and will continue to invest in additional headcount and
enhancements to technology needed to support the anticipated growth. Additional
management plans include increasing the effective outreach pool as well as
improving our current enrollment rate. We will continue to explore ways to
increase operational efficiencies resulting in increase in margins on both
existing and new members.
We have a growing customer base and believe we are able to fully scale our
operations to service the contracts and future enrollment providing leverage in
these investments that will generate positive cash flow by in the near future.
We believe we will have enough capital to cover expenses through the foreseeable
future and we will continue to monitor liquidity. If we add more
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health plans than budgeted, increase the size of the outreach pool by more than
we anticipate, decide to invest in new products or seek out additional growth
opportunities, we would consider financing these options with either a debt or
equity financing.
Cash Flows
The following table sets forth a summary of our cash flows for the periods
indicated (in thousands):
                                                                       Three Months Ended March 31,
                                                                         2021                  2020
Net cash provided by (used in) operating activities                $        6,432          $  (3,146)
Net cash used in investing activities                                        (827)               (14)
Net cash (used in) provided by financing activities                        (2,234)             1,551
Net increase (decrease) in cash and restricted cash                $        

3,371 $ (1,609)




Net cash provided by operating activities during the three months ended March
31, 2021 was $6.4 million compared with net cash used in operating activities of
$3.1 million during the same period in 2020. The $9.6 million improvement in net
cash provided by operating activities during the three months ended March 31,
2021 was primarily related to a decrease in net loss related to higher revenue
in the three months ended March 31, 2021 resulting from the increase in enrolled
members. Additionally, we had an increase of members with case rate billing
terms, where we bill and collect the fees from the enrolled members up front
upon enrollment. The increase was partially offset by interest payments during
the three months ended March 31, 2021 compared to the three months ended March
31, 2020.
Net cash used in investing activities was $0.8 million for the three months
ended March 31, 2021 and $0.01 million in the same period of 2020. The $0.8
million of net cash used in investing activities for the three months ended
March 31, 2021 was primarily related to capitalized software development costs.
We anticipate that software development costs and capital expenditures will
increase in the future as we continue our investment in our IT infrastructure as
well as replace our computer systems that are reaching the end of their useful
lives, increase equipment to support our increased number of enrolled members,
and enhance the reliability and security of our systems. These future capital
expenditure requirements will also depend upon many factors, including
obsolescence or failure of our systems, progress with expanding the adoption of
our solutions, number of member facing employees needed based on the growth of
our enrolled members our marketing efforts, the necessity of, and time and costs
involved in obtaining, regulatory approvals, competing technological and market
developments, and our ability to establish collaborative arrangements, effective
commercialization, marketing activities and other arrangements.

Our net cash used in financing activities was $2.2 million for the three months
ended March 31, 2021 compared with net cash provided by financing activities of
$1.6 million for the three months ended March 31, 2020. Net cash used in
financing activities for the three months ended March 31, 2021 was primarily
related to a $2.2 million dividend payment made on our Series A Preferred Stock
and $0.7 million of payments made on our financed insurance premiums, partially
offset by $0.7 million of proceeds received from stock option exercises. Net
cash provided by financing activities for the three months ended March 31, 2020
was primarily related to $1.6 million of proceeds received from stock option
exercises.
As a result of the above, our cash and cash equivalents, including restricted
cash of $14.1 million, was $106.6 million as of March 31, 2021.

Debt


See Note 8 of the Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this Form 10-Q for a detailed discussion about our debt.
Preferred Stock Dividend
Holders of 9.50% Series A Cumulative Perpetual Preferred Stock (the "Series A
Preferred Stock") of record at the close of business of each respective record
date (February 15, May 15, August 15 and November 15) are entitled to receive,
when, as and if declared by our Board of Directors, out of funds legally
available for the payment of dividends, cumulative cash dividends at the rate of
9.50% per annum of the $25.00 per share liquidation preference (equivalent to
$2.375 per annum per share). Dividends,
                                       30
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if and when declared by our Board of Directors, are payable quarterly in arrears, every February 28, May 30, August 31, and November 30, as applicable, beginning on or about November 30, 2020.


On February 5, 2021, our Board of Directors declared the second quarterly
dividend on the Company's Series A Preferred Stock for shareholders of record as
of the close of business on February 15, 2021. The second quarterly cash
dividend equaled $0.593750 per share, at 9.50% per annum of liquidation
preference of $25.00 per share. As such, we paid cash dividends of $2.2 million
on February 28, 2021. At March 31, 2021, we had undeclared dividends of
$0.7 million.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

There were no material changes in our contractual obligations and commitments
outside of the ordinary course of business during the three months ended March
31, 2021 from the contractual obligations and commitments reported in our Annual
Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on
March 9, 2021.
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 1 of the Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this Form 10-Q, Note 2 of the Notes to the Consolidated Financial
Statements in Part II, Item 8 of the 2020 Form 10-K, and "Critical Accounting
Policy and Estimates" in Part II, Item 7 of the 2020 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 2020 Form 10-K.

© Edgar Online, source Glimpses

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