Ontrak(OTRK) - 2023 Q2 - Quarterly Report

PART I Item 1. Financial Statements H1 2023 financials show revenue decline, improved profitability from cost cuts, and weakened equity with debt reliance Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $13,853 | $14,259 | | Total assets | $22,610 | $25,757 | | Total current liabilities | $9,745 | $9,469 | | Total liabilities | $21,854 | $20,080 | | Total stockholders' equity | $756 | $5,677 | | Total liabilities and stockholders' equity | $22,610 | $25,757 | - Total stockholders' equity decreased significantly from $5.7 million at the end of 2022 to $0.76 million as of June 30, 2023, primarily due to net losses[8] Condensed Consolidated Statements of Operations Statements of Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,960 | $3,903 | $5,489 | $9,161 | | Gross Profit | $2,156 | $1,697 | $3,838 | $4,109 | | Operating Loss | $(4,628) | $(11,910) | $(11,855) | $(25,055) | | Net Loss | $(6,756) | $(15,058) | $(15,106) | $(29,703) | | Net Loss per Share | $(1.84) | $(4.97) | $(4.09) | $(9.86) | - For Q2 2023, revenue decreased by 24% YoY, but gross profit increased by 27% due to a significant reduction in the cost of revenue. The operating loss narrowed substantially from $11.9 million in Q2 2022 to $4.6 million in Q2 2023[10] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,068) | $(14,215) | | Net cash used in investing activities | $(123) | $(754) | | Net cash provided by (used in) financing activities | $10,572 | $(36,043) | - For the first six months of 2023, cash from financing activities was positive $10.6 million, primarily from $8.0 million in proceeds from Keep Well Notes. This contrasts with a $36.0 million use of cash in the same period of 2022, which was driven by $31.7 million in debt repayments[14] Notes to Condensed Consolidated Financial Statements - The company has incurred significant net losses and negative operating cash flows since inception. Management states that cash on hand and the $6.0 million remaining under the Keep Well Agreement are sufficient to meet obligations for at least the next 12 months[20][23] - Revenue is highly concentrated, with two customers (Customer A and B) accounting for 88.9% of total revenue in Q2 2023[33] - In March 2023, the company implemented a headcount reduction, eliminating approximately 19% of employee positions and incurring $0.5 million in termination-related costs[45] - As of June 30, 2023, the company had total undeclared dividends of $11.9 million on its Series A Preferred Stock[53] - The company is heavily reliant on the Keep Well Agreement with Acuitas (an entity controlled by the former CEO) for liquidity, having borrowed a total of $19.0 million as of June 30, 2023. The debt matures on September 30, 2024[101][81] - The company is subject to multiple legal proceedings, including securities class actions, and an SEC investigation into trading of its securities. The DOJ and SEC have filed charges against the former CEO, Terren S. Peizer, for unlawful insider trading[128][136][137] - Subsequent to the quarter end, on July 27, 2023, the company effected a 1-for-6 reverse stock split of its common stock[139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses H1 2023 revenue decrease, improved profitability from cost cuts, and liquidity primarily supported by the Keep Well Agreement Results of Operations Revenue by Source (in thousands) | Revenue Source | Six Months 2023 | Six Months 2022 | Change % | | :--- | :--- | :--- | :--- | | Commercial revenue | $1,917 | $4,357 | (56)% | | Government revenue | $3,572 | $4,804 | (26)% | | Total revenue | $5,489 | $9,161 | (40)% | Profitability Metrics Comparison (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Cost of Revenue | $1,651 | $5,052 | | Gross Profit | $3,838 | $4,109 | | Gross Profit Margin | 70% | 45% | | Total Operating Expenses | $15,693 | $29,164 | | Operating Loss | $(11,855) | $(25,055) | - The decrease in revenue for the first six months of 2023 was primarily due to a decrease in total average enrolled members compared to the same period in 2022[170] - The significant improvement in gross profit margin (from 45% to 70% for the six-month period) was driven by lower headcount and cost optimization initiatives implemented throughout 2022 and March 2023[172][173] Liquidity and Capital Resources - As of June 30, 2023, the company had $10.1 million in total cash and restricted cash and working capital of approximately $4.1 million[180] - The primary source of working capital is borrowings under the Keep Well Agreement, with $6.0 million remaining available for funding as of June 30, 2023[181] - Management expects that cash on hand plus the remaining available funding under the Keep Well Agreement will be sufficient to meet obligations for at least the next 12 months[182] - The average monthly cash burn rate from operations for the first six months of 2023 was $1.7 million[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide this information - As a smaller reporting company, Ontrak is not required to provide quantitative and qualitative disclosures about market risk[192] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The principal executive officer and principal financial officer concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[193] - There were no changes in internal controls over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[194] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company faces various legal proceedings, including securities class actions and an SEC investigation, with charges against its former CEO - The company incorporates by reference the discussion of legal proceedings from Note 13 of the financial statements, which details ongoing securities class actions, shareholder derivative complaints, and an SEC investigation[196][128] Item 1A. Risk Factors The company faces significant risks including losses, customer concentration, funding needs, Keep Well Agreement reliance, and potential Nasdaq delisting - The company has incurred significant losses since inception and may be unable to obtain additional funds before achieving positive cash flows[200][202] - The business is highly dependent on a few large customers. In 2021, the company lost two such customers, and any further loss would have a material adverse effect[200][221][222] - The company has $19.0 million in secured debt outstanding under the Keep Well Agreement, and a default would have material adverse consequences. The company's ability to draw the remaining $2.0 million is subject to conditions, including remaining listed on Nasdaq[200][205][208] - The company's largest stockholder, Acuitas (controlled by former CEO Terren Peizer), beneficially owns approximately 85.4% of the outstanding common stock, giving it substantial influence over all stockholder matters[200][299] - Both the common stock and Series A Preferred Stock are at risk of being delisted from Nasdaq for failing to meet continued listing standards, such as the minimum bid price rule and stockholders' equity requirements[200][283][303] Item 3. Defaults Upon Senior Securities The company is in arrears on Series A Preferred Stock dividends, with $12.9 million undeclared since May 2022 - The Board of Directors has not declared dividends on the Series A Preferred Stock since May 2022. As of the filing date, the company had approximately $12.9 million of undeclared dividends in arrears[322]