Business Overview and History
Ontrak Health, a leading AI-powered and telehealth-enabled behavioral healthcare company, has navigated through a turbulent period marked by revenue declines and operational challenges. However, the company has remained resilient, leveraging its technological expertise and strategic partnerships to expand its reach and diversify its service offerings.
Ontrak was founded with a mission to improve the health and save the lives of individuals impacted by behavioral health conditions. The company's technology-enabled platform utilizes claim-based analytics and predictive modeling to provide personalized care programs. Ontrak's solutions identify high-cost, high-acuity members with chronic comorbidities and underlying, but unaddressed, behavioral health conditions, and then engages and guides them through the necessary care and treatment.
In 2018, Ontrak executed management services agreements with Texas Independent Health (TIH) and California Independent Health (CIH), establishing variable interest entities that the company was required to consolidate. These VIEs allowed Ontrak to license its proprietary treatment programs and provide day-to-day business management services.
The company has faced several legal challenges in recent years. In 2021, Ontrak was subject to multiple securities class action lawsuits and purported stockholder derivative complaints related to alleged false and misleading statements about its business. Additionally, in 2022, the company received a notification from the SEC that it was conducting an investigation into trading in Ontrak's securities.
Despite these challenges, Ontrak has achieved some key milestones. In 2020, the company completed the issuance of 3.77 million shares of 9.5% Series A Cumulative Perpetual Preferred Stock. In 2022, Ontrak entered into a Master Note Purchase Agreement, the "Keep Well Agreement", with Acuitas Capital LLC, an entity indirectly owned and controlled by the company's former CEO and Chairman, Terren S. Peizer. This agreement provided Ontrak with additional sources of working capital.
Financial Performance and Liquidity
Ontrak's financial performance has been characterized by a mix of revenue declines and operational challenges. In the latest reported quarter, Q3 2024, the company's revenue reached $2.6 million, a 31% decrease compared to the same period in the previous year. This decline was primarily attributed to the loss of a customer at the beginning of 2024.
The company's gross profit margin also experienced a decrease, from 72% in Q3 2023 to 62% in Q3 2024, due to the shift in customer mix and the inclusion of new members with lower revenue per member per month. Ontrak's operating loss for the quarter widened to $5.1 million, a 26% increase year-over-year. The net loss for the quarter was $5.6 million.
Ontrak's quarterly revenue per health plan enrolled member per month averaged approximately $449, which was a decrease from $462 in Q2 2024 and $552 in Q3 2023. This decline was primarily due to the mix shift resulting from newer customers with different pricing structures and the inclusion of new Engage members with a lower revenue per member per month.
On the liquidity front, Ontrak's cash reserves stood at $8 million as of the end of Q3 2024, a decrease from the $9.7 million it had on hand at the end of the previous year. The company's operating cash flow for the quarter was negative $1.4 million, compared to negative $1.8 million in the same period of 2023. The average monthly cash burn rate from operations for the nine months ended September 30, 2024, was $1 million.
Ontrak's financial position as of September 30, 2024, showed a working capital of approximately $1.5 million. The company's debt-to-equity ratio was 0.50, with a current ratio and quick ratio both at 1.17. Ontrak had $0.03 million of accounts receivable outstanding as of September 30, 2024, with two customers representing 100% of the total.
To bolster its liquidity, Ontrak has been actively seeking additional funding sources. In August 2024, the company entered into an agreement with Acuitas Capital, LLC, under which Acuitas agreed to purchase $5 million in principal amount of Committed Demand Notes. As of the filing date of the latest report, Acuitas has purchased $3.5 million in principal amount of these notes, with the remaining $1.5 million scheduled to be purchased by November 1, 2024. Additionally, Ontrak has $7 million available for future draws under the Keep Well Agreement, subject to approval.
Operational Highlights and Strategic Initiatives
Despite the challenges, Ontrak has continued to focus on expanding its product offerings and customer base. In Q3 2024, the company announced the signing of a new customer, a large regional health plan in the Northeast, for its WholeHealth+ solution. This partnership aims to deliver a proactive, predictive, and personalized behavioral health solution to the health plan's members in New York.
Additionally, Ontrak has made significant progress in the development and deployment of its Ontrak Quality solution, which is designed to help healthcare payers, providers, and stakeholders close gaps in care, thereby improving quality measures and boosting performance scores. The company has already announced an expansion of its partnership with Sentara Health Plans, where Ontrak Quality will be used to focus on behavioral health metrics according to the Healthcare Effectiveness Data and Information Set (HEDIS).
Ontrak has also continued to strengthen its technological capabilities, including the achievement of HITRUST CSF® certification for the customer data exchange elements of its Ontrak Advanced Engagement System. This certification underscores the company's commitment to maintaining the highest standards of data security and regulatory compliance.
Furthermore, Ontrak has forged a strategic partnership with MosaicVoice, a pioneer in AI-powered voice technology, to integrate advanced voice and AI technologies into its healthcare solutions. This collaboration aims to create a more connected, intelligent, and patient-centric healthcare ecosystem.
Risks and Challenges
Ontrak's business model and financial performance are heavily reliant on a small number of large customers. For the three months ended September 30, 2024, approximately 98.7% of Ontrak's total revenue was attributable to two customers, and for the nine months ended September 30, 2024, approximately 94.5% of its total revenue was attributable to three customers. This concentration of revenue highlights Ontrak's vulnerability to customer loss.
In October 2024, Ontrak was notified by a health plan customer, which accounted for 68% and 64% of the company's revenue for the three and nine months ended September 30, 2024 respectively, of its intent not to continue using Ontrak's services after December 2024. As of September 30, 2024, this customer had 1,200 enrolled members. The loss of such a significant customer could have a material adverse effect on Ontrak's business, financial condition, and results of operations.
The company's ability to maintain and grow its customer base is also subject to various external factors, such as regulatory changes, industry trends, and competition from other behavioral healthcare providers. Ontrak's success is tied to its ability to continue demonstrating the value of its solutions and securing new contracts with health plans and other healthcare organizations.
Additionally, Ontrak's liquidity position remains a concern, as the company has experienced negative operating cash flows in recent quarters. The company's reliance on external funding sources, such as the Committed Demand Notes from Acuitas, introduces additional risks and uncertainties. Failure to secure adequate funding or maintain compliance with the terms of the Keep Well Agreement could further jeopardize Ontrak's ability to continue as a going concern.
Future Outlook
Despite the challenges, Ontrak is showing signs of potential growth. For Q4 2024, the company anticipates revenues in the range of $2.9 million to $3.2 million, which represents a 12% to 23% sequential increase. This revenue increase is expected to come from continuing to launch new outreach to members of Ontrak's newest customer in the Northeast and launching the Engage Solution expansion announced recently.
Ontrak's current customers under contract now account for approximately $11 million to $13 million of annual revenue, which includes an approximate 20% increase due to the expansion announced recently. Furthermore, the opportunities at the bottom of Ontrak's sales funnel represent approximately $9 million to $12 million of additional annual revenue, which would be a 75% to 100% increase from the company's current customers under contract.
Conclusion
Ontrak Health has faced significant challenges in recent years, with declining revenue, profitability, and liquidity issues. However, the company has remained resilient, leveraging its technological expertise and strategic partnerships to expand its product offerings and customer base. The launch of the Ontrak Quality solution and the partnership with MosaicVoice demonstrate Ontrak's commitment to innovation and its ability to adapt to the evolving healthcare landscape.
As Ontrak navigates through these turbulent times, its success will depend on its ability to diversify its customer base, demonstrate the value of its solutions, and secure sufficient funding to support its operations and growth initiatives. The company's projected revenue increase for Q4 2024 and the potential for significant growth from its sales funnel provide some positive indicators for the future. However, the loss of a major customer and the ongoing liquidity challenges underscore the risks that Ontrak continues to face.
Investors should closely monitor the company's progress in executing its strategic plan, managing its liquidity position, and securing new customers to replace lost revenue. These factors will be crucial in determining Ontrak's long-term viability and potential for future success in the competitive and rapidly evolving behavioral healthcare market.