Ontrak, Inc. (NASDAQ:OTRK) Q3 2022 Earnings Conference Call November 9, 2022 4:30 PM ET
Company Participants
Ryan Halsted – IR
Terren Peizer – CEO
James Park – CFO
Mary Osborne – CCO
Brandon LaVerne – COO
Conference Call Participants
Bill Sutherland – Benchmark Company
Operator
Good day, and thank you for standing by. Welcome to the Ontrak Third Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to you speaker today, Ryan Halsted, Investor Relations. Please go ahead.
Ryan Halsted
Thank you. And thank you all for participating in today’s call. Joining me today are Terren Peizer, Chief Executive Officer; Brandon LaVerne, Chief Operating Officer; Mary Lou Osborne, Chief Commercial Officer; and James Park, Chief Financial Officer.
Earlier today, Ontrak released financial results for the quarter ending September 30, 2022. A copy of the press release is available on the Company’s website.
Before we begin, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipates, believes, estimates, expects, intends, guidance, confidence, targets, projects, and some other expressions typically are used to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, but may involve and are subject to certain risks and uncertainties.
Other factors that may affect Ontrak’s business, financial condition and other operating results, which include, but are not limited to, the risk factors described in the Risk Sections of Form 10-K and Form 10-Q 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 Terren.
Terren Peizer
Thank you, Ryan and welcome everyone. As I [indiscernible] as CEO, I am reminded of the power of our mission to help you through the health and save the lives of as many people as possible. As he answered the final stage of signing a variety of new prospects I’m more convinced than ever, that our mission resonates with everyone in our industry is focused on improving member outcomes. And it’s why I’m not only CEO, but also principal investor in the company. Our AI enabled whole person solution provides durable outcomes for members and significant cost savings for health plans, providers, and employer groups. I’m confident the progress we are about to share with you is put the first step in a return to growth.
Now I’d like to turn the call over to our co-President and Chief Commercial Officer, Mary Lou Osborne.
Mary Osborne
Thank you, Terren. I’m excited to share encouraging progress in our pipeline. We now have 30 active prospects representing about 15 million eligible lives, which is more than double the total lives we described in our last quarter. 20 of the prospects are health plans. Seven are employer groups, three our value based provider groups. While a couple of smaller health plans dropped off the pipeline, we added a few larger health plans and move several other health plans closer to final signature, resulting in the most robust pipeline to-date. Let’s start with prospects in the final stage of our pipeline.
We are finalizing a master service agreement and scope of work with a prominent Western Regional Plan for their Medicare Advantage population and we are analyzing data for a South East base plan for their Medicaid population. We believe both could be new contracted customers before the end of this calendar year with revenue being realized beginning in Q1, 2023.
We are also conducting implementation meetings with a prominent multi-state value based provider care group as we finalize all paperwork and prepared to launch by the end of this year. We plan to launch in one Midwestern state with significant interest from the primary care group to expand two additional states in 2023 and initial meetings in various states are being scheduled at this time. And we have submitted a financial proposal to one of the largest plans in the Northeast for all their lines of business.
While we await their final response, we have discussed a Q1 launch which would start generating revenue in late Q1, 2023. Together, these final stage prospects represent over 1 million lives that could positively impact our revenue in 2023 and beyond. While not in our current pipeline yet, there are an additional 2 million lives in different lines of business associated with these prospects.
Several additional pipeline prospects representing almost 5 million lives have entered into nondisclosure agreement or NDAs with us. We have reached this stage in just a matter of several weeks, reduced from several months, which we believe is abbreviating the potential sales cycle. While the remaining 9 million lives in the early stage of our pipeline includes another large plant in the Midwest with approximately 4.5 million lives, and regional health plans across the nation in varying lines of business.
All told, we are encouraged by a robust pipeline with three health plans and one value based provider group and final stage, and others about to enter data exchange. These prospects represent over 6 million lives, or over 40% of our total pipeline. All of this is happening at a faster pace than the standard 18 month sales cycle as we anticipate several deals could be closing within one year of initial engagement. Our LifeDojo digital platform pipeline of five prospects includes two potential customers who are reviewing pricing proposals, including a large aviation manufacturing employer, and a large professional employer organization with access to over 500,000 lives.
Finally, we are in discussions to expand existing contracts with two long standing customers for additional populations with those eligible lines being added to our active outreach pool in Q1 of 2023. I’m excited by the accelerated nature of our pipeline, and eminent signatures we believe will materialize in the coming weeks. We believe we will see the revenue impact in Q1 and throughout 2023.
Most importantly, our health plan prospects are telling us we have an essential offering for people with chronic comorbidities, and unaddressed behavioral health conditions, as well as a robust behavioral health provider network with access and availability to timely treatment. We are hearing this is an attractive business model for payers, providers and employer groups that can build the foundation for our return to growth in 2023 and beyond.
Now, I’d like to turn the call over to our co-President and Chief Operating Officer, Brandon LaVerne.
Brandon LaVerne
Thanks, Mary Lou. I’m also energized by the positive momentum we are seeing in our pipeline. The feedback we are getting from prospects and current customers is informing our strategic and operational priorities for the coming year. These include, number one; a continued focus on evolving and improving our core offering, which is the on track Whole Health Plus program that focuses on that 2% to 5% of plan members who have undiagnosed or untreated behavioral health conditions, along with chronic physical comorbidities. These individuals represent an outsize cost burden for health plans while being the very people we effectively identify, engage and coach to and through treatment to deliver durable clinical outcomes and significant cost savings to our customers.
To that end, after only three months, our new clinical assessments for depression and anxiety already indicate clinically significant improvements in our members. This program will remain the bedrock of the Ontrak health offerings. Number two; using augmented intelligence, principally through our advanced engagement system to enhance our ability to care for our members through a variety of capabilities we have orchestrated. This includes benefits like best time to call members, natural language processing to inform our coaches are the most effective techniques to engage members and AI generated notes for both coaches and providers as part of our bi-directional communication to maximize our whole person approach. We plan to continue to bring on more AI-capabilities throughout 2023.
Number three; reviewing the potential increase of the population we serve to include people with mid acuity behavioral health conditions, and fewer chronic comorbidities. This could expand our outreach pool from the traditional 2% to 5% of a plant’s population to the next tranche of 6% to 15% of members who would benefit from our whole person coaching model and access to providers only as needed. This is a business and mission driven opportunity as we seek to serve and help as many members as possible. We are in the process of modeling out the market and revenue potential of this initiative and we believe it represents upside that leverages our core strengths, and extends the reach of our capabilities in a way that we will be financially and clinically attractive to customers and prospects.
Number four; further expanding our network of credentialed behavioral health providers so we’re well positioned to absorb new members and supplement new customers existing networks. And number five; continuing to roll out improvements to our LifeDojo digital platform. We are currently adding a new set of modules for users of the app, as well as expanding language capabilities for new international markets. This all reflects our continued focus on being clinically rigorous, measurement based and customer centric as we rebuild our customer base, top line revenue and overall growth trajectory.
Now I’d like to turn the call over to our Chief Financial Officer, James Park.
James Park
Thanks Brandon. During the third quarter, we recorded revenues of $2.8 million and 85% year-over-year decrease due primarily to the loss of two large customers we’ve previously discussed. At the beginning of the quarter, we have 2094 enrolled members and ended with 1365 at the end of the quarter, for a simple average of 1730. That equates to a revenue of about $548 per enrolled member per month for the quarter, compared to $611 per enrolled member per month in Q3 of 2021 and $528 per enrolled member per month in Q2 of 2022. To go a bit deeper into the Q3 enrollment, we enrolled a total of $533 members during the quarter compared to 2850 for Q3 of last year and $364 in Q2 of 2022. Divided Q3 gross enrollments by our outreach pool which average $3995 for the quarter, it analyzes to a 53% enrollment rate, the same rate we saw during Q3 of 2021 and increased from 39% in Q2 of 2022.
Our average monthly disenrollment rate was 8% same rate we saw in Q2 of 2022. Further, we graduated 828 members during the quarter, which equates to about 40% of the enrolled members in the program at the beginning of the quarter. The Net impact of all that was a net enrollment decrease of 725 or 29 members in the third quarter.
Our gross margin for the third quarter was 49.5%, which increased sequentially from 43.5% and decreased from 68.5% in the third quarter of last year. The increase in our gross margin sequentially for Q3 was primarily due to a restructuring plan we completed as part of management’s cost saving measure. Under this restructuring plan, we reduced approximately 34% of full time positions, and $7.7 million of annual compensation costs, as well as approximately $3 million of annual third party costs.
As this was implemented during the quarter, we expect our gross margin to normalize in the mid 50s by the end of the year. The year-over-year decrease in our gross margin is due to the decrease in our revenues related to the loss of two of our customers as well as a new pricing model previously discussed. We ended the quarter with 32 members, including a cost of revenue down from 70 at the end of Q2, which is in line with a decrease in our enrolled members.
Additionally, we continue to improve the efficiency of our member facing employees with investments we made during the year to enhance our technology and AI capabilities by automating or reducing the amount of administrative time spent and increasing the amount of direct time spent with our members. The improved processes will enable us to help our members more efficiently and deliver even a higher ROI to our customers.
Turning to the balance sheet and cash flow. Our cash flow from operations for the third quarter was negative $8.3 million compared to negative $14.3 million in the third quarter last year. We ended the quarter with cash and cash equivalents of $7.3 million down from $10.1 million at the end of the second quarter and 2022.
Including restricted cash, total cash was $11.9 million down from $14.9 million at the second quarter and this year. Of the net decrease in cash during the quarter $7.5 million was related to the final payoff of GS loan balance. During the quarter, we raised the net $3.3 million in our registered direct offering of our common stock, and continue to work on improving our capital structure. We’re also currently in discussions to extend the maturity date of our key fall agreement into 2024. Regarding our outlook, we’re confirming our previously issued revenue guidance of $14 million to $16 million for the year.
I’d now like to open up call for any questions. Operator?
Question-and-Answer Session
Operator
Thank you. At this time, we will conduct the question and answer session. [Operator Instructions] Our first question comes from the line of Bill Sutherland of the Benchmark Company. Your line is now open.
Bill Sutherland
Hi, everybody. Nice work in the quarter with the pipeline. So Mary Lou, maybe it would be, if it’s possible to talk about, I know this is difficult to get nailed down because of moving parts that are obviously in play as you close all the deals. But what would, is there a sense of cadence as you enter next year? And the ability to if there’s any gating factors, in terms of setting these up as they come in?
Mary Osborne
Yes, Bill, how are you? Hope you’re good. So we expect signatures in the next 30 to 90 days. We’re working on the late stage prospects that I reported on in the earnings release. And right now we have a very large plan evaluating our financial proposal. So we expect to hear back, I would say, within a couple of weeks. There may be a couple other decision makers that need to sign off. But we’re expecting that to continue to go forward.
For the other late stage prospects we are reviewing data for one. We had reviewed some data of the group and they asked us to review additional data. So that’s always a good sign. We actually have an increased amount of data from one plan that we’re reviewing right now. I would expect that one to go pretty fast as well. Once we go through that process, we will deliver a financial proposal. And we expect that also will close within the next 30 to 90 days.
In addition, there are a couple others that are further along. And we’re working on MSAs and SOW. So it’s just a matter of finalizing the paperwork, ensuring we have all the decision makers sign offs, getting those signatures and launching. We have expressed to all of our prospects. It takes about 90 days to launch. But we’re not waiting for 90 days to begin building provider networks. So we’ve already started the provider network build for all of these prospects and very, very pleased with the work that we’ve done thus far that we have brought new, net new providers into the Ontrak program for these prospects. So it could be a shorter period of a 90 day implementation for us as a result of that. Does that help?
Bill Sutherland
Yes, that’s good. Appreciate it. And follow up here. What’s kind of changed in your, from your view as far as the receptivity that you’re obviously getting? And the faster, feels like there’s a faster conversion process here from introduction to getting towards signatures?
Mary Osborne
Yes, well, thank you for the acknowledgment. We are working really hard here at Ontrak. We have a phenomenal sales team. We are reaching out to hundreds of prospects each week asking for time to introduce our Ontrak program. As you know, through Brandon’s comments, we have evolved our program. We’ve improved our program. We’re bringing an evidence based model forward and we are bringing forward a model that no one else it appears in our space has, the technology and the capabilities that we do.
So these prospects are very intrigued with our AI capabilities. The fact that we can impute behavioral health, that we identify and engage and activate members. We’re not waiting for members to call us. As everyone knows, that’s part of the problem. Those that need care are not seeking care. They’re not sure where to go, how to access providers. And what we’re hearing from health plans as well, is that it’s a very long time for members to be seen by providers.
Some of the plans we’ve made in the last couple of months are saying that it can be as much as four to six months for members to actually access a provider visit for a session. And so with our ability to bring net new providers forward to guarantee that members are seen in a timely manner within a couple of weeks, not four to six months, the message is resonating.
So it is an acknowledgement of our evidence based model plus all of our capabilities and techniques in addition to a provider network that’s available for their members in a very timely fashion.
And with that message plans are interested and we present the next steps in that introductory call. And the next steps are an NDA, BAA and let’s start exchanging data. And so that’s what we’ve been focused on. And it’s working.
Bill Sutherland
Sounds like it is. And then last one, maybe from Brandon or James both. What about the cash, the liquidity requirements as you ramp up? Remind me of the timing of the cash flows as that happens?
James Park
Sure, Bill, this is James. And the way we think about it is with these late stage prospects think about the 90 days to launch, we generate very quick. Now with the cash on hand and we also have 14 million available still on the [keep will], agreement that we that should give us plenty of runway to execute on our sales pipeline.
Bill Sutherland
So depending on a lot of factors, of course, would you expect to be generating cash as soon as midyear next year? Or is it hard? Is it just impossible to make a gauge?
James Park
Yes, it’s a little bit difficult to gauge at this point. I think once we get through these first wave of the late stage prospects, I think we’ll have a better view on a potential positive cash flow and EBITDA.
Bill Sutherland
Okay. Congrats on all the progress. So I’ll sign off. Thank you.
James Park
Great. Thank you.
Terren Peizer
Thanks Bill.
Operator
At this time, I’m showing up for their questions. So thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
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