Ontrak, Inc. (NASDAQ:OTRK) Q2 2022 Earnings Conference Call August 9, 2022 4:30 PM ET
Company Participants
Caroline Paul – IR
Terren Peizer – CEO
James Park – CFO
Mary Osborne – CCO
Brandon LaVerne – COO
Conference Call Participants
Operator
Good day, and thank you for standing by. Welcome to Ontrak 2Q ’22 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, Caroline Paul, Investor Relations. Please go ahead.
Caroline Paul
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 ended June 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 Factors section of the Form 10-K and Form 10-Q as filed with the SEC. Therefore, actual outcomes and results may differ materially from those expressed or implied by these forward-looking statements. Ontrak expressly disclaims any intent or obligation to update these forward-looking statements.
With that, I’d like to turn the call over to Terren.
Terren Peizer
Thanks, Caroline. Good afternoon everyone and thank you for joining us. As Chief Executive Officer of Ontrak Health, my belief in the mission of Ontrak Health and our people is unwavering and so why we’re remaining two tier business strategy and why have committed financing to help the company grow. We are continuing to refine end market, our AI-infused enhanced clinical model. Our evidence based approach to integrated care is exactly what prospects have told us to need and what we think differentiates us in the market place.
I have here Brandon LaVerne and Mary Lou Osborne as co-Presidents to build on the excellent work they’ve been doing and run the day-to-day operations and growth activities of the company. We’re also here to provide new Chief Financial Officer James Park who has seamlessly stepped into the role.
I have full confidence in them and our leadership team, our focus on capital formation and long-term strategy and are excited to see our progress materialize into new customers and growth.
Now, I’d like to turn the call over to Mary Lou Osborne, our co-President.
Mary Osborne
Thank you, Terren. I’m grateful for the opportunity to help lead Ontrak Health. My top priorities are supporting our current health plans and employ our customers in achieving their growth goals and new business development to drive Ontrak’s growth strategies. In my prospect meetings it’s clear, we have a compelling and innovative solution for health plans; value-based provider groups and self-insured employer groups. These prospects are searching for solutions that improve the health of their members with behavior health and physical health comorbidities, provide prompt behavior health network access and availability and decrease medical expenses by reducing avoidable emergency room and inpatient utilization.
In our current conversations with prospects, we are encouraged by their interest and engagement with Ontrak Health. I will provide an update on our pipeline progress, outlining the major categories of our prospects which include health plans, large self-insured employer groups, value-based provider groups and LifeDojo prospects.
First, we continue to have a very robust pipeline of 19 health plan prospects representing national, regional, and local health plans in all lines of business across the U.S. One large state plan has shared with us over 1.2 million lives in their data feed from which we were able to ascertain a significant opportunity greater than our existing customer base to improve the apparent unmet behavior health needs of their members which include a significant cohort of first responders. The data received includes all lines of business and we are currently awaiting a final data feed from which we will make our final pricing proposal. Our discussions with this prospect indicate a potential launch date of Q1 2023. A second large multistate plan with over a million Medicaid members remains in the data exchange face.
I’m optimistic about this opportunity moving to a clinical and financial proposal soon. The remaining health plan pipeline features a variety of prospects in early-to-mid stages of this development which combined with the prospects mentioned earlier cover approximately 6 million members. This translates to a potential outreach pool between a 125,000 to 200,000 members. In addition, we are working on three expansions with two of our current health plan customers which include a new state expansion, a customer’s own employee base, and a new line of business. We are encouraged by these conversations that highlight the unique value proposition Ontrak delivers to these customers. We believe these expansions will contribute to revenue beginning in Q1 2023.
In our second category, we have several active self-insured employer group prospects with whom we are in discussions. One of these is a large union with 500,000 members that includes frontline healthcare workers who are dealing with depression, anxiety, and the effects of COVID-19. The next step is for this is for member data sharing and providing a clinical and financial proposal. Our third prospect category is a large value-based provider group where we have three active prospects including a partnership that would allow us to improve access and availability to more behavior health providers for their patients through our behavior health network covering multiple cities across two states. Our fourth prospect category is our LifeDojo wellbeing digital solution where we have four active prospects across a variety of employer organizations. One of these prospects is currently evaluating our financial proposal for at least 600,000 lives and their dependents after completing a successful pilot.
To summarize, our pipeline is progressing and robust across each of our prospect category as we expand our outreach and engagement with a variety of health plans, employers, and provider groups located across the U.S. Our Ontrak health plan opportunities continue to represent most of our revenue growth potential beginning in Q1 2023 and remain the focus of our sales efforts.
Now, I’d like to turn the call over to Brandon LaVerne.
Brandon LaVerne
Thanks, Mary Lou. I also want to thank Terren for the opportunity to co-lead Ontrak Health alongside you. My focus is on an operational, technological, and clinical delivery. To that end, we’ve made some important appointments beginning with James Park as CFO and Dr. Judy Feld as Chief Medical Officer. I’m really excited about the new team structure and a full-faith that James and Judy’s decades of experience will bring significant value to Ontrak Health. We’ve also immediately centralized our cross functional operational leadership under one roof to ensure seamless development, delivery, and integration of our AI-infused evidence-based clinical model while maintaining deep collaboration with the clinical teams.
Our model places an emphasis on a series of innovative elements that we believe differentiate us versus app based solutions, manage behavior health organization offerings, and care management within health plans themselves. Such as 1) The use of augmented intelligence throughout the entire program not just upfront, in identification and eligibility. This is a proprietary orchestration of different technologies into our advanced engagement system a platform that all of our activity rests on. These cases include enhanced engagement capabilities such as optimal time to call, natural language processing prompts and sentiment analysis to help our coaches maximize their conversations with members and Ai-generated notes for coach and provider visits.
2) Evidence-based technique and strategies like motivational interviewing, smart goal setting, research-based tailored content, standardized behavior health assessments and measurements of progress. 3) Measurable and consistent engagements like continuous coaching sessions, therapists, psychiatric and medication assistor provider visits and other meaningful care team interaction. 4) Enhanced provider relationships to promote quality, access and availability, bidirectional communication and effective treatment plans.
Taking together this blending of technology and human interactions focused on a whole person approach represents a competitive advantage for Ontrak Health that we’re proud of and excited to bring to the market. It is a high tech and high touch approach to integrated care that we believe make the huge impact not only to our health plan customers and prospects but also for the lives of the members we serve.
Now I would like to turn it over to our new Chief Financial Officer, James Park.
James Park
Great. Thanks, Brandon. I want to thank you, Mary Lou and Terren for the opportunity to step in some big shoes and I’m very excited for the opportunity. On to the second quarter. We recorded revenue of $3.9 million and 85% year-over-year decrease in primarily to the loss of two large customers we previously discussed. At the beginning of the quarter, we have 2,867 enrolled members and ended with 2,094 at the end of the quarter or a simple average of 2,481. The decrease in enrolled members was driven by the greater number of members that either graduated or disenrolled during the quarter compared to the number of newly enrolled members during the quarter. That equates to revenue of about $524 per enrolled member per month for the quarter compared to $685 per enrolled member per month in Q2 of 2021 and $526 per enrolled member per month in Q1 of 2022.
We expect the revenue per enrolled member per month to continue at the current rate in the near future. To go a bit deeper into Q2 enrollment, we enrolled a total of 364 members during the quarter compared to 3,152 in Q2 of last year. Dividing Q2’s gross enrollment by the average core which averages approximately 3,750 for the quarter it annualizes to a 29% enrollment rate compared to a 28% annualized rate which is on 2021 and 38% in Q1 of 2022.
While we expect these rates to continue for our existing and mature customers, as we bring on new customers, we expect the enrollment rates to be higher in the first few months following launch as we are able to effectively work through the initial average pool that would be targeted for the first time. Our average monthly disenrollment rate was 8% which is consistent with the improving trend over the past few quarters.
Further, we graduate a 549 enrolled members during the quarter which equated above 19% 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 773 members in the second quarter. Our gross margin for the second quarter was 43.5% was decreased sequentially from 45.9% and decreased from 67.8% in the second quarter of last year. The decrease in our gross margin is due to the decrease in our revenue related to the loss of two of our customers as well as the new pricing model previously discussed.
We expect our gross margin to normalize in the low-50s by end of the year. We ended the quarter with 70 team members included in our cost of revenues down 20% sequentially from 88 at the end of Q1 which is in line with the decrease in our enrolled members.
Turning to the balance sheet and cash flow. Our cash flow from operations in second quarter was negative $4.2 million compared to negative $3.3 million in the second quarter of last year. We ended the quarter with cash and cash equivalents of $10.1 million down from $27.2 million at the end of the first quarter 2022.
Including restricted cash, total cash was $14.5 million down from $31.7 million at the end of the first quarter of this year. Of the decrease in cash, $11.7 million was related to principle note payment for our former lender during the quarter. With our Keep Well agreement that we closed on during the current quarter, we have access to $25 million of which we drew down $5 million subsequent to quarter end and have paid off our remaining balance of $7.5 million of existing debt with our former lender.
We also have recently raised a net $3.5 million last week and continue to work on improving our capital structure to allow us to execute upon our sales pipeline. Regarding our outlook. Our pipeline is a large and diverse as it has ever been and as Mary Lou outlined, we expect to have new client signed during this year that we believe will go live in Q1 of 2023. To provide some context into the potential impact of the health plan prospect that Mary Lou mentioned, based on historical experience each 1 million health plan members would equate to approximately 25,000 members in our outreach pool. Which at our current enrollment rate would equate to 7,000 enrolled members. And at our current revenue per enrolled member per month, this would equate to a revenue opportunity of approximately $11 million per quarter. However, given how the timing and the budget cycle of these large options has evolved, we do not currently expect our pipeline to contribute to revenues materially in Q3 and Q4 as we have previously anticipated.
As such, we will be updating our revenue guidance for the year to be in the range of $14 million to $16 million and continue to believe that 2023 will show a triple-digit growth.
I’d now like to open our call for any questions. Operator?
Question-and-Answer Session
Operator
Terren Peizer
Thank you everyone for your time today and your interest in Ontrak. Have a great rest of the day.
Operator
Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
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