Ontrak(OTRK) - 2022 Q4 - Annual Report

Part I Business Ontrak, Inc. is an AI-powered, telehealth-enabled healthcare company focused on treating behavioral health conditions that exacerbate chronic medical diseases, despite facing significant customer losses and restructuring efforts - Ontrak is an AI-powered and telehealth-enabled healthcare company focused on improving health for individuals with behavioral conditions that worsen chronic medical diseases like diabetes and hypertension[17][18] - The company's business model combines predictive analytics for member identification with human engagement through care coaches to deliver improved health outcomes and cost savings to healthcare payors[17][23] - The company experienced significant setbacks, including the termination of contracts by two large customers in 2021, which led to multiple rounds of workforce reductions in 2021, 2022, and March 2023 to reduce operating costs[41] - As of December 31, 2022, the company had 119 employees, a 53% year-over-year decrease, reflecting the significant restructuring and downsizing efforts[45] Treatment Effect Study Outcomes | Metric | Result | | :--- | :--- | | Per Member Per Month Savings | $485 (durable for 24 months post-enrollment) | | Avoidable Inpatient Utilization | 66% reduction | | Preventive Care Services | 50% increase | Risk Factors The company faces substantial risks including significant losses, funding needs, reliance on the Keep Well Agreement, customer concentration, potential Nasdaq delisting, ongoing litigation, and governance risks due to its largest stockholder's legal issues - The company has a history of significant operating losses and negative cash flow, with an average monthly cash burn of approximately $2.0 million in 2022, requiring additional funding to sustain operations[55][57] - The business is highly dependent on a few large customers, and the loss of two such customers in 2021 has had and will continue to have a material adverse effect on financial results[74][75][76] - The company is reliant on the Keep Well Agreement with Acuitas Capital for funding, with $19.0 million in secured debt outstanding, where a default would have severe consequences, and future funding is conditional on common stock remaining listed on Nasdaq[58][61] - The company's common stock (OTRK) and Series A Preferred Stock (OTRKP) are at risk of being delisted from Nasdaq for failing to meet the minimum bid price requirement[135][152][154] - Acuitas Group Holdings, LLC, controlled by former CEO Terren S. Peizer, beneficially owns approximately 85.5% of the company's common stock, giving it substantial influence over all stockholder matters, while Mr. Peizer is facing DOJ charges and an SEC civil complaint for alleged insider trading in the company's stock[151][86] - The company is subject to ongoing securities class action and stockholder derivative litigation, which could result in substantial liabilities and divert management resources[86][89] Unresolved Staff Comments The company reports no unresolved staff comments - Not Applicable[172] Properties The company's principal executive office is in leased space in Henderson, Nevada, having terminated its former Santa Monica office lease - The company's principal executive office is in a leased space in Henderson, Nevada[173] - The lease for the former principal office in Santa Monica, California was terminated effective February 28, 2023[174] Legal Proceedings The company is subject to various legal proceedings, with details provided in Note 13 of the Consolidated Financial Statements - The company refers to Note 13, "Commitments and Contingencies," for details on legal proceedings[175] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[176] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'OTRK', with 36 stockholders of record as of April 2023, and no unregistered securities sold or equity repurchases - The company's common stock is traded on the NASDAQ Capital Market under the symbol "OTRK"[179] - As of April 12, 2023, there were 36 stockholders of record for the common stock[179] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's financial performance significantly deteriorated in 2022 due to major customer losses, resulting in an 83% revenue decline and widened net loss, despite cost-cutting, with continued negative cash flow and reliance on the Keep Well Agreement for liquidity Key Financial Metrics (2022 vs 2021) | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $14.5M | $84.1M | ($69.6M) | (83)% | | Cash flow from operations | ($24.0M) | ($26.2M) | $2.2M | 8% | | Effective outreach pool (at YE) | 3,861 | 5,415 | (1,554) | (29)% | - The significant decrease in 2022 revenue was primarily due to the loss of two of the company's largest customers in 2021[213][224] - The company has undergone significant management changes, with Terren S. Peizer resigning as CEO and Chairman in March 2023, and Brandon H. LaVerne being appointed Interim CEO[187][188] - The company fully paid off its 2024 Notes in July 2022 using cash on hand and $5 million from the Keep Well Agreement[198][199] - The company has a history of net losses and negative operating cash flows, and expects this to continue, but management believes cash on hand and borrowings under the Keep Well Agreement are sufficient to meet obligations for at least the next 12 months[236][238] Results of Operations In fiscal year 2022, revenue decreased by 83% to $14.5 million due to customer losses, leading to an 87% drop in gross profit and a widened operating loss of $44.1 million, despite a 37% reduction in operating expenses Consolidated Statements of Operations Summary (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Revenue | $14,514 | $84,133 | | Cost of revenue | 7,461 | 31,214 | | Gross profit | 7,053 | 52,919 | | Total operating expenses | 51,170 | 80,900 | | Operating loss | (44,117) | (27,981) | | Net loss | (51,573) | (37,144) | - Total revenue decreased by $69.6 million (83%) in 2022, driven by the loss of two major customers, with government revenue seeing a larger decline (85%) than commercial revenue (80%)[224] - Gross profit margin decreased from 63% in 2021 to 49% in 2022, primarily due to the significant drop in revenue[227][228] - Operating expenses decreased by $29.7 million (37%), driven by reductions in R&D ($7.3 million), Sales & Marketing ($4.9 million), G&A ($9.5 million), and Restructuring costs ($8.0 million)[230][232] Liquidity and Capital Resources The company has a history of net losses and negative operating cash flows, with $24.0 million used in 2022, and relies on the Keep Well Agreement for liquidity, asserting sufficiency for the next 12 months - As of December 31, 2022, the company had $9.7 million in cash and restricted cash and a working capital of $4.8 million[236] - The average monthly cash burn from operations was $2.0 million for the year ended December 31, 2022[236] - The primary source of working capital is the Keep Well Agreement, which had $14.0 million of principal borrowing capacity remaining as of December 31, 2022[237] Summary of Cash Flows (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(23,966) | $(26,155) | | Net cash used in investing activities | $(1,156) | $(4,480) | | Net cash used in financing activities | $(31,111) | $(6,629) | | Net decrease in cash and restricted cash | $(56,233) | $(37,264) | Financial Statements and Supplementary Data The audited consolidated financial statements for 2022 and 2021 are presented, with a Critical Audit Matter on variable consideration, detailing significant declines in assets and equity, and highlighting liquidity, customer concentration, debt, and legal contingencies - The independent auditor's report identified the "Calculation of variable consideration related to price concessions" as a Critical Audit Matter due to the significant judgment and estimation required by management[392][393] Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $25,757 | $93,682 | | Total Liabilities | $20,080 | $48,127 | | Total Stockholders' Equity | $5,677 | $45,555 | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenue | $14,514 | $84,133 | | Operating Loss | $(44,117) | $(27,981) | | Net Loss | $(51,573) | $(37,144) | | Net Loss per Share | $(2.60) | $(2.47) | - The company is party to several legal proceedings, including a securities class action and stockholder derivative lawsuits, related to alleged false and misleading statements regarding its customer relationships and business practices[533][535][536] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2022, with no material changes in the fourth quarter, and no auditor attestation report is included due to filer status - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[268] - Management assessed internal control over financial reporting as effective as of December 31, 2022, based on the COSO framework (2013)[272] - The annual report does not include an attestation report from the independent registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules for the company's filer status[274] Part III Directors, Executive Officers and Corporate Governance This section details the Board of Directors and executive management as of April 2023, including biographies, committee compositions, a board diversity matrix showing three male directors, and notes a late Section 16(a) filing - As of April 12, 2023, the Board of Directors consists of three members: Richard A. Berman, Michael E. Sherman (Chairman), and James M. Messina[279] - Key executive officers include Brandon H. LaVerne (Interim CEO & COO), Mary Louise Osborne (President & CCO), and James J. Park (CFO)[300] - The Board Diversity Matrix indicates that of the three directors, two identified as male and white, and one did not disclose demographic information, with no female directors[298] - A late Form 4 filing was reported for Dr. Judith Feld for fiscal year 2022[310] Executive Compensation This section outlines compensation for Named Executive Officers in 2021 and 2022, including former CEO Terren S. Peizer's $0.66 million compensation in 2022, employment agreements, equity awards, and non-employee director compensation 2022 Summary Compensation for Named Executive Officers | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Award ($) | All Other Comp ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Terren S. Peizer (Former CEO) | 2022 | 650,000 | — | — | 11,306 | 661,306 | | Jonathan E. Mayhew (Former CEO) | 2022 | 446,250 | 35,000 | 299,907 | 20,176 | 801,333 | | Brandon H. LaVerne (Interim CEO) | 2022 | 400,000 | — | 146,710 | 40,436 | 587,146 | | Mary Louise Osborne (President) | 2022 | 400,000 | — | 153,215 | 21,903 | 575,118 | - In March 2023, Terren S. Peizer resigned as Chairman and CEO, with his 2022 compensation consisting mainly of his $0.65 million base salary[315] - Employment agreements for current executives Brandon H. LaVerne and Mary Louise Osborne provide for a $0.45 million base salary and an annual bonus target of 100% of base salary[318][319] - Stock options for executive officers provide for full vesting of unvested awards in the event of a change of control[324] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section highlights significant ownership concentration, with former Chairman and CEO Terren S. Peizer beneficially owning approximately 85.5% of the common stock through Acuitas Group Holdings, LLC, while all current directors and executive officers as a group own about 2.5% - As of April 12, 2023, former Chairman and CEO Terren S. Peizer beneficially owned 102.65 million shares, representing approximately 85.5% of the class, primarily through Acuitas Group Holdings, LLC and including common stock, convertible debt, warrants, and options[353][356] - All current directors and executive officers as a group (8 persons) beneficially own 0.75 million shares, or approximately 2.5% of the outstanding common stock[356] Equity Compensation Plan Information as of Dec 31, 2022 | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 6,345,048 | $3.54 | 1,610,731 | Certain Relationships and Related Transactions, and Director Independence The Board of Directors has determined that all three of its members are independent under NASDAQ listing standards, and each committee member also qualifies as independent - The Board has determined that all three of its current directors (Messrs. Berman, Sherman, and Messina) are independent as defined by NASDAQ listing standards[357] Principal Accountant Fees and Services This section details fees paid to EisnerAmper LLP, totaling $0.37 million in 2022, an increase from $0.26 million in 2021, consisting entirely of audit fees, with all services pre-approved by the Audit Committee Accountant Fees (EisnerAmper LLP) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | $367,988 | $262,000 | | Audit-related fees | — | — | | Tax fees | — | — | | All other fees | — | — | | Total | $367,988 | $262,000 | - The Audit Committee has a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm[361] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including corporate governance documents and material contracts - This section provides an index of all financial statements and exhibits filed with the report[370][371] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[375]