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Edited Transcript of OTRK.OQ earnings conference call or presentation 5-Nov-20 9:30pm GMT

·44 min read

Q3 2020 Ontrak Inc Earnings Call LOS ANGELES Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Ontrak Inc earnings conference call or presentation Thursday, November 5, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brandon H. LaVerne Ontrak, Inc. - CFO * Curtis Medeiros Ontrak, Inc. - President & COO * Terren S. Peizer Ontrak, Inc. - Founder, Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Charles Rhyee Cowen and Company, LLC, Research Division - MD & Senior Research Analyst * Richard Collamer Close Canaccord Genuity Corp., Research Division - MD & Senior Analyst * Sean Wilfred Dodge RBC Capital Markets, Research Division - Analyst * William Sutherland The Benchmark Company, LLC, Research Division - Senior Equity Analyst * Caroline Paul ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Ontrak Third Quarter 2020 Earnings Call. My name is Jenny, and I'll be your operator for today's call. (Operator Instructions) I will turn the call over to Caroline Paul, Investor Relations. Ms. Paul, you may begin. -------------------------------------------------------------------------------- Caroline Paul, [2] -------------------------------------------------------------------------------- Thank you, and thank you all for participating in today's call. Joining me today are Terren Peizer, Chairman and Chief Executive Officer; Brandon LaVerne, Chief Financial Officer; and Curt Medeiros, President and Chief Operating Officer, who will join us for the question-and-answer portion of the call. Earlier today, Ontrak released financial results for the quarter ended September 30, 2020. 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 anticipate, 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 S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you. Good afternoon, everyone, and thank you for joining us today. With the growing behavioral health crisis in the United States and Ontrak's proven ability to demonstrate value for our payer customers, the growth opportunity for Ontrak in the coming years has never been larger. The demand for what is now known as telemental health has surged, confirming reports by the CDC and Milliman that the mental health crisis in the country is significantly worse than previously documented. Importantly, the Journal of American Medical Association, or JAMA, has just reported that an accumulation of evidence now indicates that a second wave of mental health disorders is on the horizon. The tremendous growth opportunity ahead for Ontrak is underscored by an August 2020 McKinsey report, which predicts that in the post-COVID period, traumatic stress, unemployment and social isolation will lead to exacerbation of existing behavioral health conditions and the onset of new conditions that could drive $100 billion to $140 billion of additional spending on behavioral and physical health in the coming year. Ontrak is well positioned to support this second wave to our telehealth-enabled behavioral health solutions for health plans, and for the first time, through our acquisition of LifeDojo, commercial employers. Executing on our strategy to add lower cost digital interventions and behavioral health as well as future programs for severe chronic conditions could increase our total addressable market by up to 100%. Turning to our results for the third quarter. Our business has continued to perform well in an unprecedented environment. We delivered revenue of $24 million, reflecting a 172% growth from last year. Our total active enrolled members grew rapidly as well, totaling 14,345 members at the end of the quarter. Our effective outreach pool ended the quarter at 144,000, a small increase sequentially from 141,000 and has increased further to 155,000 as of today. We anticipate that the outreach pool will be 164,700 in the next week or so. We are also pleased to report that we were adjusted EBITDA positive in the last 2 months of the quarter. We anticipate we will be significantly adjusted EBITDA positive in 2021. That said, our payer customers have faced tremendous disruption in 2020, and those disruptions created headwinds for our financial performance this year. We are pleased that improvements in our productivity, efficiency and performance metrics offset many of the customer-related headwinds, and we would like to provide more detail on these customer headwinds. As you may recall from our last earnings call, a new enterprise level procurement process at Cigna and subsequent data protocol changes had delayed the signing and launch of our contract by 9 months, while we're able to successfully launch the Ontrak program in October and give Cigna Medicare Advantage members access to critical behavioral health care in an additional 13 states. This pushed approximately $38 million in revenues to 2021. The growth of our outreach pool in Q3 was affected by headwinds related to lower consumption of health care services by members of our health plan customers. This lower utilization trend during the pandemic causes high-cost members to drop below the medical expense threshold concluded in our outreach pool. While we are beginning to see utilization trends stabilize, we have seen up to 40% more high-cost members falling below the medical expense threshold during the pandemic compared to Q1. In practical terms, this means we have lost 42,000 individuals from the outreach pool than we would have expected with pre-pandemic utilization levels. Fortunately, the decline in high-cost members in Q3 was offset by members added to our outreach pool through health plan expansions and further enhancements that we have made to our outreach pool identification algorithms. We believe normal utilization patterns will resume in 2021 once the economy opens up again or when people feel they can no longer put off necessary health care services. This will accelerate the growth of our outreach pool. Importantly, UnitedHealth just announced an uptick in utilization, which bodes very well for our 2021 outreach pool numbers. Finally, with respect to other customer headwinds and their impact on 2020 guidance, we would also like to point out that our largest customer is conducting compliance reviews of all of their vendors. These reviews have disrupted data refreshes for the Ontrak program since July, putting further pressure on our outreach pool numbers despite the customer having no compliance issues or concerns with Ontrak. Data is our lifeline to engaging members, and we are working closely together with our partner to ensure that we can meet the rapidly-expanding needs of their members during this pandemic. Importantly, this is one of the plans for which we anticipate continued significant expansion. Given the headwinds that I just outlined, we have revised our guidance for 2020. Auguring well for 2021, we anticipate that many of our 2020 headwinds will become 2021 tailwinds with full year revenue from new launches, nationwide contracts upon which to expand and significant progress towards contracting with our increasing pipeline of potential partners. We are expecting 2021 revenue growth in excess of 100%, and we are executing our growth strategy on multiple fronts. First, we will expand our addressable market through innovative suite of clinical interventions for behavioral health and in future, severe chronic conditions. Second, we will invest in building out the outreach -- the Ontrak platform, which integrates data, workflows and analytics across members, providers and payers. We will drive this strategy with transformative acquisitions that accelerate our growth trajectory while simultaneously investing in the capabilities and scalability of our AI and internal systems. We recently announced that we acquired LifeDojo, a comprehensive, science-backed behavioral change platform that combines digital modules with coaching support to a single mobile application. The acquisition enables us to enhance our value proposition in the marketplace with the addition of market-leading behavior change interventions, new multimodal engagement and remote patient monitoring data that will feed our AI capability and further enhance Ontrak's evidence-based coaching. We plan to offer the LifeDojo tools, both as part of our Ontrak program for high-cost members as well as a stand-alone program for the larger-, medium- and low-cost populations within our health plan partners. While LifeDojo previously positioned itself in the wellness category, we are not changing our focus. Think of us as leveraging the valuable features of their platform in an Ontrak context. We see the greatest market opportunity for Ontrak as the leading engagement platform for those with unaddressed behavioral health conditions and severe chronic disease. To illustrate the power of today's Ontrak platform, I'd like to highlight 2 specific examples for you. The first is a new agreement with the Veterans Health Administration, and the second is a significant expansion with an existing health plan partner. Today, we announced a partnership with the Veterans Health Administration to leverage the artificial intelligence of both our organizations, and our evidence-based coaching model conducts a 3-year research study of the most effective interventions for veterans at risk for suicide-related behaviors. We are honored to be partnering with the VHA on understanding the ways in which we can reduce veteran suicide risk. In October, Dr. Chester Ho, the CMO of Health Alliance Medical plans, reported in an AHIP CMO roundtable that the Ontrak program had delivered a 41% reduction in medical costs, which averaged 28,000 pre-enrollment. As a result, his organization is beginning to explore how to expand the Ontrak program to its ASO base. In the near future, we expect to share news of significant expansions among our existing health plan partners. We look forward to shine the light on more advocates of Ontrak like Dr. Ho in 2021. Speaking of which, while we are the clear industry leader in our ability to significantly improve the health and lives of our targeted care and treatment-avoidant population, we are also the least well-known and the best-kept secret in the industry. This will change in 2021. We have just hired a new Senior Vice President of Marketing from one of the world's most respected communication firms to ensure that our compelling story and results are shared nationwide. We have also retained a highly-acclaimed communications firm that is poised to work with the mainstream national media in telling our story. Just like our name changed to Ontrak, we have purposely waited to take a national profile until we were ready for prime time. Our growth trajectory expanding national health plan partner footprint, clinical impact and value proposition and expanding technological delivery systems mean that next year, we will be ready for prime time. I want to take a moment to comment on the quickly deteriorating mental behavioral health of our country due in large part to the pandemic. We have highlighted the latest stats. As you can see, the pandemic has been a significant headwind this year. Yes, people are more at home and theoretically easier to reach. We have always found the Medicare population easier to reach. Let's remember that we are dealing with a care-avoidant population. And while we can reach them, we still have to engage them, and it takes a significant time to engage them to enroll. This also augurs very well for 2021. Let's understand that the worsening mental behavioral crisis has a lagged effect on our business as the exacerbated chronic disease conditions work their way through the increasing medical claims costs. We expect this to be a powerful macro backdrop and tailwind in 2021. I will now turn the call over to Brandon LaVerne, our Chief Financial Officer, and will return with closing comments. -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Terren. Similar to last quarter, rather than spending a lot of time reading results from our press release, I'm going to roll forward our data to help give you insights into how we think about our revenue model in the future. We received great feedback on this approach last quarter, and as a result, we'll provide similar data this time around. As Terren mentioned, we recorded revenue of $24 million during Q3, most of which is received on a per enrolled member per month or PEMPM basis. Our new Cigna expansion that launched in October and for which we expect to deliver in the neighborhood of $40 million next year is handled on what we call a case rate. This means to be built for the entire program upon initial enrollment with proportion of credits back for any disenrollments during the first 6 months. While that is great for cash flow, it will increase deferred revenue significantly as we attempt to record the revenue as evenly as possible over the life of a member's time in the Ontrak program. At the beginning of the quarter, we had 11,989 enrolled members with 14,345 at the end of the third quarter, an increase of 2,356 and a simple average of 13,167 enrolled members during the quarter. That equates to revenue of about $1,823 per enrolled member for the quarter or annualized just shy of $7,300 per enrolled member per year. This compares to our second quarter average of about $6,700 per enrolled member per year. Using the 14,512 enrolled members we have today as of this call multiplied by the $7,300 per year rate, that equates to a run rate of over $106 million as of now compared to a run rate of $88 million as we had as of our second quarter call. Note that this largely excludes the newly launched Cigna business since enrollments just barely began in October. Breaking down the Q3 enrollment a bit more, we enrolled a total of 7,192 members during Q3 compared to 6,723 in Q2 or a 7% increase sequentially and 118% more than the 3,295 gross enrollments in the third quarter last year despite the headwinds mentioned by Terren earlier. Although without those headwinds, we would have expected to enroll a significantly higher amount. Divided by Q3 gross enrollment by our outreach pool, which averaged 142,500 during the third quarter, it annualized to a 20% enrollment rate, a little higher than the 19% annualized rate we saw in Q2. Our disenrollment rate fluctuates but ran between 8% to 10% per month during the quarter, resulting in us disenrolling a total of 3,706 enrolled members during the quarter. Further, we graduated 1,130 enrolled members during the quarter, which works out to about 9.4% of the enrolled members in the program at the beginning of the quarter. The net impact of all that was a net enrollment increase of 2,356 in the third quarter versus just 1,456 in the third quarter of 2019, an increase of 62%. Our gross margin for the third quarter of 45.6% increased sequentially from 42.7% and compared to 30.8% in the third quarter of last year. We're currently forecasting gross margin to stay at least in this higher rate during the fourth quarter as well. We ended the quarter with 455 team members included in cost of sales, up 18% sequentially from 384 at the end of Q2 and up 70% from 267 at the same time last year, primarily made up of our care coaches and member engagement specialists. We, of course, are proud that we're able to say we had positive adjusted EBITDA in the last 2 months of the third quarter. While we are investing a significant portion of our growth into our operation to support the expected ramp in 2021, we see a trajectory that leads to significant adjusted EBITDA for 2021. Looking at the balance sheet and cash flow. Cash flow used operations in the third quarter was $2.5 million. And on the balance sheet, we ended the quarter with cash, cash equivalents of $57.6 million, but including restricted cash associated with our first 8 quarters of bank preferred stock dividend payments, total cash was $67.4 million. Our cash balance increased as a result of 2 primary sources. First, we raised net proceeds of $45.1 million via public offering of our nonconvertible Series A preferred stock. Our Series A preferred stock is perpetual, trades on NASDAQ Global Select market under the ticker OTRKP and paid quarterly cash dividends at the rate of $0.095 per annum. Second, we raised $10 million with the note issued under our Goldman Sachs debt financing agreement. Given our existing cash balances and increased efficiencies in our business, I'm confident that we have sufficient capital and access to future capital to manage our operations and execute on the strategic initiatives we've outlined. As Terren mentioned, we've revised our revenue guidance for the year to $82 million to $85 million from $90 million due to the timing of some of the launches and data refreshes this year and softer utilization environment due to the COVID-19 pandemic. However, we anticipate revenue growth in excess of 100% in 2021 as these headwinds turn into tailwinds for us. I'll now turn the call back over to Terren for his closing remarks. Terren? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- Thank you, Brandon. As we look ahead to 2021, we are very excited about the opportunity ahead of us to drive behavioral change among low and high acuity populations. We remain focused on innovation and transformative acquisition opportunities, which are critical to our continued success this year and beyond. We are deeply committed to improving the lives of millions of members facing barriers that can make their engagement difficult, and we are confident that we are taking the right steps to drive near- and long-term shareholder value. Before closing, I'd like to thank everyone on our Ontrak team from our senior leadership, to our various support organizations to our exceptional frontline community of care coaches, member engagement specialists, network provider specialists, community care coordinators and community operations specialists for their unwavering commitment to help our health plan partners and their members in these challenging times. We are a mission-driven company. Our mission at Ontrak is to help improve the health and save the lives of as many people as possible. With that, we will now open it up to questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Charles Rhyee from Cowen. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Terren, maybe ask just about sort of the data refresh issue with one of your -- with your largest customer here. When is that expected to be resolved? And is that part of your estimate in the -- what you say, thinking for mid-November outreach pool? Or is that all really from Cigna launching? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- I'll -- since Curt is intimately involved with it, I'll let Curt address that. -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [4] -------------------------------------------------------------------------------- Thanks, Charles. So as far as timing with the expected data refreshes to be turned back on, we have a mutual agreement with the client based on our current understanding that we expect the data to be turned back on by the end of the year. Of course, we're working with large health plans, and they move at their own pace and their own timing. But right now, the target date that we've agreed to is by the end of the year. In terms of how that translates into the outreach pool numbers that we talked about for November, that is not included in any uptick. The uptick is both driven by expected increases with our current customers, inclusive of Cigna. But also, as Terren mentioned earlier, we've been continuing on the work of updating our algorithms as well as bringing in third-party data on phone numbers to increase our effective outreach pool. I hope that helps. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [5] -------------------------------------------------------------------------------- Yes, I think it does. And so then maybe if you could help us understand a little bit then. When we're -- Terren, you're providing here a preliminary '21 outlook. Obviously, very significant in terms of growth and expectations also on EBITDA. With these issues currently, I know you kind of hinted at discussions expansion, can you tell us how you're building to this '21 outlook? And what sort of gives you the confidence here, this sort of early on given this data of the -- just the environment with COVID and everything? -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [6] -------------------------------------------------------------------------------- Charles, it's Brandon. The way we look at it is really, we look at the pool, we look at our enrollments that exist and how long each of the cohorts stay in the program. We continue to see enrollments at similar rates as we saw in Q3 even now. And so we are growing. We're growing our membership. Our pools, as you've heard us say, is growing as well. And so we look at that, we pair that with the launch of Cigna, which just started in October, which has pretty substantial increase, as well as some other anticipated things that we've talked about as far as expansions with some of our existing customers that are in the pipe. And so what we don't have in there are large expansions, the big transformational expansion, some of which we do -- I'd like to say, expect, but want to have next year. Those would provide even more upside. And so the way we see it today is what we're doing now, the utilization returning into the business and continue to invest in ourselves and our technology and capabilities to increase our pool organically as well. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [7] -------------------------------------------------------------------------------- Let me add something to that. First, we did indicate that we expect greater than 100% growth next year. Unfortunately, last year, we gave guidance at this time. And as you may recall, we gave guidance for $90 million off of $127 million internal forecast, and we thought we were being extremely conservative in the whole year would be about beating and raising. We expect next year to be about beating and raising. And having learned the lesson of not waiting until the first week or 2 of February, we're going to defer to that to give our official guidance. But in our numbers, we've had a history, and just like we attempted to do a year ago, we have a history of telling you what we know, not what we expect. We view our, what we, I think, we're implying towards our guidance, we believe that is a very low bar of what we know and has very little to do with what we expect or what we're going to endeavor to accomplish. Also not included in the guidance is how we can leverage the acquisitions, the LifeDojo acquisition and several others that we are contemplating, how we can leverage that into our business and how our business can leverage their business. So we -- while we know -- why we are hopeful and expect some significant expansions next year. When they take place, as we always caution, with these health plan customers, very largest companies in America or in the world, things always take a lot longer than they imply. That said, we think next year's growth should be quite significant. -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [8] -------------------------------------------------------------------------------- And Charles, this is Brandon again. Just to put -- just a little bit of quantification on there. I'd mentioned that our run rate, as we did now, is around $106 million, which largely excludes the $40 million of Cigna that we've talked about as well. And so you're already looking at $145 million, assuming we don't grow anything in the rest of the business outside of Cigna. And so we still have other customers there that are growing nicely. So you can see the baseline get disposed there already without any growth at all. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- And also know that in Cigna, for example, we are in their Medicare population, which is tiny compared to their commercial operation. Also with respect to Aetna, we're primarily in substance use disorder, which is a fraction of what the total opportunity would be in both depression and anxiety. And then you add in what could possibly be as we expand down the acuity curve. That is not in our numbers. So as you see, as time goes on this next year and the year after, we contemplate continuing this growth rate in excess of 100% for years to come. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [10] -------------------------------------------------------------------------------- Just to clarify though, right, when you're saying this preliminary cut outlook about 100% growth, you're basically saying Aetna still stays within substance use to sort of only, Cigna stays within MA only. Is that correct? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [11] -------------------------------------------------------------------------------- Correct. And that we don't go down the acuity curve even though we know we will, that we don't go down the acuity curve from the high-cost members to the moderate -- medium- and to low-cost members. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12] -------------------------------------------------------------------------------- But that was never really anticipated though in the near term, right? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [13] -------------------------------------------------------------------------------- Well, we're in discussions already. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14] -------------------------------------------------------------------------------- Okay. But in terms of what you're talking about right now for... -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [15] -------------------------------------------------------------------------------- Right in our numbers. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Sean Dodge from RBC Capital Markets. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [17] -------------------------------------------------------------------------------- I just wanted to better understand real quick the disruption in the data feed. Is that something that only affects your ability to enroll new members? Or is that kind of critical to feeding how you coordinate care for people in the program? So when we think about how that impacts you, does that show up more in the enrollment? Or is that more something that drives disenrollment? -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [18] -------------------------------------------------------------------------------- Thanks, Sean. This is Curt. I'll take that one. So we are still enrolling based on the data feed that we received back in July from our largest customer. So our ability to identify the individuals with the data that we have still persists. As we engage with those individuals, get them enrolled in the program and then go through the care journey, we have always used a mix of historical data as well as being able to collect information with the -- from the member as well as verify that with their behavioral health provider. Because, as you know, the claims data that we receive will have a lag to it a month up to 3 months in certain circumstances. So once someone is enrolled in the program, it really turns to sort of real-time data exchange with the member and the provider. That being said, even when we get new data feeds from existing customers, there will be people that will leave the overall outreach pool as well as new members that will come into the outreach pool. Given right now that we are static, working off of a July data set, what we're missing is the ability to get new members, and that's why our growth in terms of enrollment is not accelerating as fast as we had originally planned. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [19] -------------------------------------------------------------------------------- Got it. Okay. That's helpful. And then you mentioned part of the bridge to 100% revenue growth next year is being dependent upon some expansions with existing clients. You said it doesn't include the big one with Cigna or expanding into Aetna with depression, anxiety. So can you give us a sense of which kinds of customer expansions, client expansions are included in there? Do you already have these contracted? Or are they close to being contracted? And then kind of the characterization of them, are they geographic expansions into additional states? Are they more member populations, different diagnoses? Any help there? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [20] -------------------------------------------------------------------------------- I'll let Curt answer, and I'll chime in and cover anything he doesn't answer. -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [21] -------------------------------------------------------------------------------- Sure. So it's actually a mix, Sean, of all the above. So as Terren mentioned earlier, with Health Alliance, we're actually looking at the opportunity to serve their ASO customers, which is not currently part of our contract. And that is a significant uptick relative to their non-ASO customers that we're serving today. We have clients, a variety of clients that are finishing early-stage rollouts, where there's an opportunity to go even further. So an example there is Optima, where we have successfully completed the early phase of our pilot and now are expanding within their network, but they also bought a health plan called Virginia Premier, which provides us additional opportunity to expand within their books of business. And then with some of our larger clients, both Aetna and Cigna, as they continue to expand their market. So Cigna is investing aggressively to expand their Medicare Advantage footprint. We're discussing how do we grow with their footprint into new geographies. And then with Aetna, we have scheduled multiple geography expansions that we hope to sign in the fourth quarter and roll out early in the year. One example there is the state of New York. We have started the process to get licensed in the state of New York both for an expansion with an existing client but also to move forward with a new logo that we're looking to launch in 2021. So I hope that can give some flavor that we have a lot of irons in the fire to meet the growth numbers for 2021 and beyond. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [22] -------------------------------------------------------------------------------- I would also add -- sorry, I would also add, this past week, we announced an extension of our contract with Centene, a renewal extension, whatever you want to call it. Centene is a very fragmented plan, state by state, but we also hope that we can -- oops, sorry, just got an echo, sorry. We also hope that we can expand perhaps nationally with Centene over time. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [23] -------------------------------------------------------------------------------- Okay. Then the 2 big ones, the Cigna commercial and Aetna depression, anxiety, you said selling the health plans can be frustrating because sometimes it just takes a long time. What -- you think those are 2021 opportunity still? Or are those something more realistically maybe you can add in 2021? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [24] -------------------------------------------------------------------------------- I would be surprised, and we would all personally be surprised and disappointed, if the expansions that we are alluding to don't happen in 2021. But accordingly, we don't put them in our numbers. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Richard Close from Canaccord Genuity. -------------------------------------------------------------------------------- Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [26] -------------------------------------------------------------------------------- Great. Congratulations. I don't want to focus on the trees and not see the forest here, but just to go on the Aetna and vendor compliance, I guess comments there. So you reiterated the guidance back after the second quarter. That was despite Cigna being delayed. This lowering of guidance here, the $5 million to $8 million, should we assume that a majority of that is this Aetna data issue? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [27] -------------------------------------------------------------------------------- I'll start with that question, and then Curt could chime in. On our last call, to put this all in perspective, so we knew about the compliance data issue back in July, August. And at the time, we thought it was only a 1-, 2- or 3-month issue. As typical with the health or these health large plan customers, it dragged out. At the time we did our last call, we still expected to achieve $90 million in guidance. And it really was -- look, we had -- this whole year, we've had nothing but headwinds, which is we're able to grow so significantly. Display all these headwinds is quite a statement to the high productivity efficiency that we're operating on. That said, the data refresh was just a -- and again, it really has nothing to do with us. In fact, quite the contrary. Was just a gut punch because it really does impact our ability to optimize what our capability is. And Curt, if you want to add anything, please do. -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [28] -------------------------------------------------------------------------------- No, I think you covered it, Terren. -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [29] -------------------------------------------------------------------------------- I was going to add one point there, Richard. In that, we've -- over our course of time with our largest customer, we've had several periods where we've had 1-, 2-month delays in data and never really created a blip for us in the past. This is the first time we've had anything that was an extended period of time. And so as we sat here in August on the same call, thinking it was going to be over, we moved forward. That's where we were. And so now that we've seen the effects of what I would call an aging outreach pool of that particular plan's membership, you can start to see the impact on enrollment. And so I want to make sure you got that point. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- And in fact, prior to that, I will add, that we were on a monthly refresh, which really turbocharges our capability. So that's where we were in the first half of the year. And to go from what is, I don't know, 5 months from monthly is a big hit. -------------------------------------------------------------------------------- Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [31] -------------------------------------------------------------------------------- Okay. That's helpful. And then, Brandon, since we had you here, does the lower guidance impact the Goldman covenants? Do those come into play here? Just refresh us on that and whether there's any financial impact associated with that. -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [32] -------------------------------------------------------------------------------- No, not at all. Those covenants have been modified, and we've got plenty of clearance under them. But the next covenant comes in play next year with EBITDA, so an EBITDA by next year. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [33] -------------------------------------------------------------------------------- Yes. So let me add onto that, Richard. I believe the covenant is $20 million of EBITDA for next year, which we think we'll significantly beat. Let me say something about the Goldman debt. First of all, as you know, they have done extremely well on their investment. It was great for them. And at the time, it made sense for us. As you also know, we have significant access to capital, both equity, which were abhorrent to. I have a strong aversion to issuing common equity. The nonconvertible preferred, we have significant access to as well, as well as we get pitched or I get pitched weekly on people that would like to finance Goldman out. Goldman, in negotiating with them on allowing us to pay preferred dividends, they required us to take that $10 million additional. And they extended the redemption period a few months because they know that we want to take them up, and we will take them up. We're looking forward to refinancing them, and hopefully, we refinance them with Goldman. And that -- they've been an unbelievable partner and they're -- I'm sure we're the least of their concerns in their portfolio. I'm not saying they have other concerns in the portfolio, but it's a very difficult environment for a lot of cash flow, manufacturing and alike companies. We really are thankful for their support, and they're excited to work with, and we hope they'll want us to refinance them, but we will refinance at significantly lower rates. -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [34] -------------------------------------------------------------------------------- And Richard, just want to say this, too. So the covenant for next year is $20 million. That's obviously -- that's what our target is. That's our goal, is not to redo any covenants associated with that. But that's -- when people are looking at next year, it's a target you can look at. -------------------------------------------------------------------------------- Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [35] -------------------------------------------------------------------------------- Okay. So as we think about next year in the positive adjusted EBITDA, I assume you're thinking cost to EBITDA here for the fourth quarter. Should we think about 2021 as just a stair-step in adjusted EBITDA? There's not going to be like anything like additional investments in the first quarter where you dipped back negative? Or just any thoughts on that? -------------------------------------------------------------------------------- Brandon H. LaVerne, Ontrak, Inc. - CFO [36] -------------------------------------------------------------------------------- Sure. The way we think about it, the first quarter is always a strange quarter for us. And I shouldn't say always because we have a much, much better handle on our data now than we did a year ago in Q1 of 2019. But we've been saying for a few quarters that there's going to be an enrollment impact in the first quarter with folks disrupting their planned changes as well as we tend to collect less in the first quarter as folks are paying off their co-pays and coinsurance. And so that has a revenue impact on us and an enrollment impact on us that we tend to recover from in the second quarter and really partially through the first quarter. And so Q1 is -- as we're investing in the growth, we've talked about some of the anticipated launches of some of our expansions, not the giant ones we've talked about, but the ones that we've kind of said we're pretty comfortable will happen. We are ramping up for that. And so that does require hiring, that does require COGS. And so my gut would tell me now that, as I say, Q4 gross margin is probably going to stay at this elevated level, I would usually expect Q1's gross margin to go down for all those reasons, which puts pressure on EBITDA in the first quarter. -------------------------------------------------------------------------------- Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [37] -------------------------------------------------------------------------------- Okay. And final question, great news on the VA and the Harvard study here. I think that's a big plus for you guys. But it's a 3-year study. So are there opportunities with the VA before the study ends? What are your thoughts in and around that? -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [38] -------------------------------------------------------------------------------- Well, let me answer that. Well, first of all, for those that don't know, the VA -- veterans in the country number about 19 million. So that would make it one of the larger health plans in the country. Obviously, as we all know, veterans suffer from major issues with depression, anxiety, substance use disorder, post-traumatic stress disorder. Although post-traumatic stress disorder and suicidal ideation are somewhat related, somewhat the same, we didn't talk about it because the actual title of the study is on suicide prevention. But I think it's fair to say that we have a very nice, significant relationship with the VHA. I would think that we are going to endeavor to engage them with our other programs. We -- it's important to know that we treat suicidal ideation today. We are -- a lot of our members through whether it be -- and as we've talked about, it's exacerbated significantly this year because of COVID. And we are dealing a lot often with successfully with suicidal ideation, and we would hope to engage them certainly well before 3 years. In fact, we're hopeful that if they see success in the first year, because I think we will make a significant impact, that we will enter into a commercial relationship sooner rather than later and sooner rather than 3 years. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- And our next question comes from Bill Sutherland from the Benchmark Company. -------------------------------------------------------------------------------- William Sutherland, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [40] -------------------------------------------------------------------------------- I just -- at this point, I think I have one question left. I guess it's for Curt, and I'm thinking about your Acquisition of Dojo. I know It's going to move the needle based on the commentary for '21 that much. But I would like to understand kind of the integration process for it into your -- into the core line that you do and then also how you may be helping them build out at the coaching level they have right now. -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [41] -------------------------------------------------------------------------------- Thanks, Bill. Great question. So when we started looking at LifeDojo, we were really impressed with -- as Terren said, they have 32 digital behavior change modules, and this overlaps significantly with the needs of our Ontrak members. They also have all the components in their solution with some expertise from our side to be able to put together a leading depression and anxiety treatment app. And so this was the basis of looking at how can we leverage these tools where they are existing members, and then how can we add some of our expertise into their strong platform to be able to go into a new direction, as Terren said, going after sort of the medium to lower cost populations in anxiety and depression, which are actually much, much larger. And so as we think about the integration process, we have brought the team over. It's a small dedicated team. We are looking at already building into our offering, both for existing Ontrak members as well as the larger population as we're going out and renewing contracts. So as Terren said, the Centene contract was in the works before the LifeDojo acquisition as we're moving forward with renewals and extensions with other health plan partners through the end of the year and the beginning of next. We're adding this into the offering to be able to expand our reach and the amount of data that we can have and the ways that we can engage the members. And then the second priority is, in parallel, we are starting to build out this anxiety and depression capability by taking pieces of the modules that they already have and adding the expertise both from our clinical team as well as from the coaching side, as you mentioned. So those are the 2 priorities. -------------------------------------------------------------------------------- William Sutherland, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [42] -------------------------------------------------------------------------------- Interesting. So do you expect this will be a standard part of the care protocol that you're doing currently, where you are treating something beyond substance use? I'm not sure if it applies to substance use, maybe it does. -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [43] -------------------------------------------------------------------------------- It does not overlap with substance use today, but it does have a whole series of tools that help with things like healthy living, help managing stress as well as anxiety, but in slightly different ways than we approach it. So part of what we're doing is bringing our expertise to be able to offer these tools, as you ask, broadly across the current membership to give them additional resources and additional ways for our coaches to engage, but then also, again, to the lower-cost, larger populations who might not need as much help on the coaching side so we can offer at a lower price point a way to engage them and get them into the treatment that they need. -------------------------------------------------------------------------------- William Sutherland, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [44] -------------------------------------------------------------------------------- And any color that you guys want to talk about as far as the M&A pipeline that kind of moves you more towards the broader population or whatever you're kind of contemplating to expand the capabilities there. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [45] -------------------------------------------------------------------------------- I'll comment on our macro level, and I'll let Curt comment at a more macro level if he'd like to. At a more macro level, in our legacy Ontrak program, we've always said that it was a combination of human interaction and technology. Obviously, the technology is 2 parts, and the delivery of the program would be the identification algorithms and the technology we also use to enhance productivity and efficiency within the member engagement specialists, care coaches, et cetera. As we always said, as we progress down the acuity curve, it would entail because lower acuity, lower cost, that would entail a cheaper -- well, less expensive, I don't like we're using the word cheaper, less expensive delivery like mobile apps, et cetera. And also, gathering remote patient monitoring capability is also a high priority for us. As we said, it feeds our AI lake and enhances engagement capability. LifeDojo is just the beginning of what we want to accomplish strategically and just a part of a platform that we're putting together that I think in terms of it will offer all things to all people in a sense. People always wonder, well, can you scale your business because you have such a human interaction component? The short answer is, yes, of course. I think if you go from 7.7 million to 5.12 to 35.1 to whatever this year's number ends up being and until next years, yes, we're scaling the business in the high-acuity, high-cost members that, again, the minimum threshold, we'll say, is 7,000 and average somewhere between 30,000, 35,000. Or if you look at the Milliman report pre-COVID, 44,000. But the bottom line is, is it's kind of interesting because a lot of people like comparing us to Livongo. Different business, we're not in the -- well, we treat patient members that have both chronic diabetes and also mental behavioral health issues. So in that sense, we're in the diabetes business. But what we are operating in, we have a much bigger moat around our business, and our long-term objective is where we have very little to no competition at the high-acuity segment. We're going to, through the use of increasing technology, companion it with the high utilizers, moving down the acuity curve to include the medium to low utilizers. We believe that we'll be able to offer a value proposition to every employer and every health plan that we've already demonstrated. We're dealing with care-avoidant members. We're doing something -- the industry is focusing on treatment seeking, we're focusing on care avoiding. We're -- it's -- we've developed a 15-, 16-, I'm going to pursue, 17-year playbook on engagement. No one was as stupid as we were to practice this at home, but here we are. So we have a huge moat around our business. We'll combine it with lower-acuity populations, and no one will be able to offer the full spectrum of care both the treatment-avoidant with the treatment-neutral and then the treatment-seeking, offer the whole continuum of care to all health plans and our payers that aren't touching the high-acuity members. But with our acquisition strategy, we'll be able to effectively be the lowest cost, highest value provider for all populations. Curt, if you want to add something, please do. -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [46] -------------------------------------------------------------------------------- I'll make it quick. So thanks, Bill, again. The -- just going back to what Terren said earlier, I see the strategy as 2 main pieces, and this is both organic as well as M&A. We're looking to grow the portfolio of interventions, both across populations, as Terren talked about, but also across conditions. And so obviously, the announcement today with the VA is a step in that direction. We expect to sign and start the pilot in heart failure that we've talked about in the fourth quarter that is tied to a renewal, a contract renewal, with an existing client. And then as we look out in the marketplace in the M&A opportunities, we're looking to also add novel interventions that have that combination of digital and human touch, again, to spread the population that we can address. And then the second part that Terren talked about is being able to extend the platform that we have built with pre as well as the engagement tool embedded in our coaching system to the member, which LifeDojo is a part of, but also to better integrate data analytics with the provider network as well as payers. And so that's another focus area, is how do we actually look at assets that will help us move to integrate with those other stakeholders, the provider network and the payers as well. -------------------------------------------------------------------------------- William Sutherland, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [47] -------------------------------------------------------------------------------- And finally, I know you've mentioned that before, Curt. I think that's pretty -- that's the long ball, right? -------------------------------------------------------------------------------- Curtis Medeiros, Ontrak, Inc. - President & COO [48] -------------------------------------------------------------------------------- Well, there's -- I mean, it's a highly underserved opportunity in the behavioral health space, in particular. And so we are looking at opportunities that would move us in that direction, not only to help solve those challenges for the Ontrak program and LifeDojo, but also solve those for our health plan partners, specific to behavioral health as a biased starting place. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [49] -------------------------------------------------------------------------------- And by the way, I didn't really think I closed the loop when I start to say what I was referencing Livongo. So everyone was trying to compare us and say that we're the next Livongo. Yes, we're -- they're much -- they're a full SaaS model, technology platform. We have the high acuity, higher human interaction. But I think what we will evolve as is a better Livongo in terms of -- as I said in the past, Livongos, Teladocs of the world, they were first movers, and they used off-the-shelf technology. As time goes on, there's better technology available. I think we'll be a better Livongo, but focused on this behavioral health space because you can't really be in the behavioral health business without understanding engagement. And you can't really solve for, as Milliman said, the 5.7% of the population, that costs 44% of the total medical spend, unless you can treat and enroll, engage and modify the behavior of a care-avoidant population. So that's where I think we're going. We're going to look very much less like a human interaction company and a lot more like a technology company, maybe even evolving into a SaaS model. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- We have no further questions at this time. -------------------------------------------------------------------------------- Terren S. Peizer, Ontrak, Inc. - Founder, Chairman & CEO [51] -------------------------------------------------------------------------------- Okay. Well, thank you, operator. And more importantly, thank you for all of our shareholders, interested investors. And again, thank you for our Ontrak team for their commitment and devotion, and we'll see you soon. Have a great night, everyone. Stay safe and social distance. Wear masks, please. Thank you. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.