Greetings, and welcome to the OnTrak 2020 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Before I turn the call over to management, 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, believe, estimate, expect, intend, guidance, confidence, target, project 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 and other factors that may cause 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 the 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 would like to turn the call over to Terren Peizer, Chairman and CEO of OnTrak Incorporated.

Please go ahead, Terren..

Thank you, operator. With me on today’s call are Brandon LaVerne, our Chief Financial Officer, who will review how we’re thinking about our model going forward versus repeating what is reported in today’s release; and Curt Medeiros, our President and Chief Operating Officer, who will join us for the question-and-answer portion of the call.

These are exciting times indeed. Since our last earnings call, we took the important step of changing the company’s name from Catasys to OnTrak to harness strong customer, member and provider awareness of our OnTrak product solutions.

This evolution marks the transition from the pilot phase of our corporate development into a clinically and economically proven strategic partner.

We believe it is more powerful to market under a unified master brand that we will be able to scale the business faster and more efficiently as OnTrak, especially since this is how we are known to our national network of over 12,000 behavioral health providers.

In these times of unprecedented social hardship and economic disruption, we have continued to refine our OnTrak product solutions to proactively and holistically address member health.

We now know that COVID-19 has disproportionately impacted communities of color and vulnerable populations, and we are actively working to address cultural trauma through effective and empathetic engagement of those who may have lost confidence in the broader healthcare system.

Taking a step back and looking at our strong second quarter performance, we delivered record revenue of $17.2 million, an increase of 124% from last year. Our total active enrolled members grew at a record rate as well, totaling nearly 12,000 members at the end of the quarter.

That momentum continued through July and we now have over 13,200 members enrolled as of today. Our effective outreach pool ended the quarter at 141,000, a small decline sequentially from 145,000, but has increased back up to 149,000 as of today.

As we cautioned last call, we saw high-cost members dropping below their medical express – expense threshold due to lower utilization during the pandemic, as well as certain members losing health plan coverage. As our health plan partners announced this past week, including CVS-Aetna today, there has been a sharp decline in hospital utilization.

However, they expect a commensurate rebound in the second-half or Q1 2021. During Q2, due to lower utilization and loss of health plan coverage, we saw a decrease in our outreach pool of 49,000 members.

Impressively, these decreases were nearly offset by members added to our outreach pool through qualifying higher-cost planned health plan expansions and enhancements we’ve made to our outreach pool identification algorithms.

We feel the enhancements we’ve made will last for the long-term and the low utilization during the pandemic should reverse course once the economy opens again or people feel they can no longer put up necessary healthcare services. Brandon will talk more about our metrics and how to think about them going forward in a bit.

From a new logo perspective, our pipeline is more robust now than at any time in the past, which we believe will contribute to further increases in the outreach pool. As we stand today, we are very confident in our ability to continue expansion of new customers, as well as substantial expansions within existing customers.

Turning to the announcement we made at the end of June, we have signed a three-year $90 million minimum contract with Cigna for the accelerated expansion of our OnTrak solution.

The $90 million is a starting point, and very importantly, although no assurance here, we have seen the actual amounts exceed contractual amounts in the initial Cigna states by 57%.

This nationwide expansion from our initial pilot will ensure that eligible Medicare Advantage members of Cigna will have access to critical behavioral healthcare in an additional 13 states.

Our initial plan with Cigna was to begin enrolling members in the third quarter, but we were advised last week that Cigna is still working through some changes to their company-wide data-sharing protocols, so we now expect enrollment to begin in October of this year.

We have been prepared for launch for some time, and we look forward to Cigna’s data feed and the opportunity for expansions with Cigna post launch.

Recall that in mid-November in 2019, our initial guidance for 2020 included a Cigna launch in January of 2020, which was expected to contribute nearly $40 million in the first 12 months, including a ramp-up period. Our guidance was very conservative relative to $127 million internal forecast at that time.

Assuming October launch, which is expected to contribute $3 million this year, approximately $36 million was lost revenue for the first nine months.

While this further delay in the implementation of our Cigna expansion puts pressure on our 2020 guidance, the great work the team has done this year in enhancing our identification algorithms, improving the speed of processing, health plan data, as well as late-stage expansion conversations, we are now having with existing partners, we still feel confident in our $90 million target for this year.

But let’s take a moment to emphasize that we overcame a $36 million loss of revenue this year. But this loss is not lost, but it is pushed out and augurs very well for next year’s revenue growth. As you can see, and Brandon will elucidate, next year is shaping up to become a very big year.

Importantly, from a profitability standpoint, we are poised to reach positive adjusted EBITDA in the next two to three quarters. I’ll now turn it over to Brandon to get into the numbers.

Brandon?.

Thank you, Terren. And as you mentioned, rather than spending a lot of time reading for you the numbers in the press release this quarter, I thought it would be more useful to provide some insight into how we think about our revenue model and the future.

I receive a lot of questions from investors asking for help understanding this and why we are so confident in such high growth going forward, so I’m going to take this time to walk through some thoughts to help you get the same comfort level that we have. So during the second quarter, we recorded revenues of $17.2 million.

Most of our revenue today is received on a per-enrolled member, per-month basis. At the beginning of the quarter, we had 8,600 total active enrolled members, with 11,989 at the end of the quarter, or that’s a simple average of 10,294.

That equates to about $1,673 per active enrolled member for the quarter, or if you annualize that just shy of $6,700 per year.

If we look at our 13,200 active enrolled members we have as of today multiplied by the $6,700 per year, that results in a run rate of over $88 million, assuming we do nothing else other than maintain existing membership levels. Further, if you look at our outreach pool at the beginning and end of the quarter, the simple average is 143,000.

We enrolled 6,723 new members during the quarter, which divided by the outreach pool, annualizes to about a 19% enrollment rate blended across our customer base.

Our disenrollment rate fluctuates, but has normalized in the 8% range plus or minus per month, and we graduated about 9% of the enrolled member base that existed at the beginning of the quarter. All that resulted in a net new enrollment of 3,389 new members during the quarter.

At the status quo, if we enrolled conservatively just 3,000 net new members in Q3 and Q4, which technically would be a slower pace than we saw in Q2 growing off of higher baselines, that would bring our enrolled members by the end of the year to 18,000.

If I take that 18,000, multiplied by the $6,700 per-enrolled member, per month average that we saw in Q2, that equates to a run rate of over $120 million. Of course, we would continue to expect those numbers to grow throughout 2021 as well.

However, none of those numbers yet include the signed Cigna contract that we announced in June, which we now expect to begin enrolling in October, as Terren mentioned.

This contract is expected to be worth minimally $90 million over its three-year period, but our modeling, based upon our experience with the pilot states for this customer suggests, we could far surpass that. As a reference, we were able to build 57% more under our pilot program than our original contract maximum given the success of our program.

You can see how quickly the numbers can grow when you add this to our baseline. And still further, as Terren indicated, we’re nearly ready to launch certain new enhancements to our tools with the expectation of adding tens of thousands more to the outreach pool over the next several months related to our existing customers.

We are also having late-stage conversations for additional expansions we’re currently negotiating with existing customers. And as Terren stated, our pipeline of new logos has never been stronger.

I hope this helps give you some insight into why we’re so excited about OnTrak’s prospects looking ahead, and I can’t wait to share our progress along the way.

For a few other highlights of the quarter, I’d like to point out that our gross margin improved to 42.7% in the second quarter of 2020 from 41.4% in the first quarter of 2020 consistent with the slight increase as we discussed on the last call.

As we ramp up hiring in Q3, I would expect a slight reduction in gross margin in Q3, but in the same ballpark as where we’ve been this year. We ended the quarter with 384 team members included in cost of sales, an increase of 81% from 212 at the same time last year, primarily made up of care coaches and member engagement specialists.

We are targeting to have approximately 700 team members in cost of sales by year-end, though that is a tall logistical task for recruiting and onboarding, but they’re up for it. Further, we’re investing in our operations, sales and support functions, including R&D, to handle the expected rapid growth of OnTrak in the coming quarters.

We had 185 team members in operating expense at the end of the quarter, a 65% increase from 112 at Q2 2019. I continue to believe that we will achieve positive EBITDA in the fourth or first quarter.

I’m also very pleased that our cash balance at the end of the quarter increased by about $650,000 from Q1 2020 as we continued to improve the management of our receivables from our customer base. I’ll now turn the call back over to Terren for his closing remarks.

Terren?.

Thanks, Brandon. As you can see, our outlook for the future is as strong as it has ever been, and hopefully, Brandon’s walk through the model helps you understand why we can feel comfortable thinking about triple-digit growth rates in 2021.

Whether it is further expansions with Aetna and other existing customers, the impending launch of our signed Cigna expansions, enhancements to our algorithms feeding the outreach pool or potential new logos and pilots, I’m really excited to see the hard work, dedication, passion and grit of every OnTrak teammate as we proceed onto new heights.

As we look to the future, we’ll be incorporating and leveraging more technology in our product offering, which will have the effect of significantly expanding our footprint within our health plan partners and advancing our mission to help improve the health and save the lives of as many people as possible.

I look forward to updating you on our progress along the way. We also look forward to participating in next week’s Canaccord Healthcare Conference. Curt, Brandon and I will now open the call to your questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Close. Your line is now open..

Great. Thank you for the questions. Congratulations on the success.

Just really quickly, with respect to the Cigna and the $90 million over three years and then how you characterize the pilots, can you go into the 57% outperformance on the pilots in a little bit more detail and then what the $90 million is over three years is actually for in terms of – just any details along that, that would be great?.

Brandon?.

Hey, I’ll start. So without going into the quantification of what the historical numbers were, I would just say that the original contract, similar to the new contract, had a max, and the max is in there by state. And when we look at – our pilot was in two states. We look at what we were originally contracted to bill under those states.

And as we started to get to the point of reaching that max, we exceeded that max and the customer allowed us to continue billing under that contract in excess of what it was. And that’s where that 57% comes in. And Curt, I would ask if there’s any – anything further you would say on that note..

Yes. The only thing I would add is that the Cigna Medicare Advantage group has consistently been above the 19% enrollment rate even prior to March when we saw upticks related to COVID.

And so as Brandon is saying, this overage that occurred actually started during the fourth quarter of last year and had continued to accelerate as overall enrollment rates increased. So this is – the client was very excited about the opportunity for us to serve more individuals and so continued to press the success of enrollment forward..

Okay, great. Next question would be with respect to the technology that you’re talking about rolling out.

Can you go into a little bit more detail exactly what that is? What you guys are intending to do? Does that expand? You mentioned expanding the footprint, but maybe a little bit more meat on the bone with respect to what that is?.

I’ll start and then I’m going to let Curt chime in. Needless to say, so today, we’ve talked about – in the past, we’ve talked about that we’re part human interaction and part technology.

And it’s because of the human interaction that – and because of our member obsession and our front line obsession translates into an NPS score of 83, which equates to our engagement capability. Human interaction is very necessary.

That said, as we see around us in terms of virtual care, remote patient monitoring, digital interventions, we will look to combine all of that into our product offering in the not-too-distant future, actually.

And with that, we will expand our footprint, because we’ll be addressing other – well, more immediately, we can go down to lower-acuity patients that will be more apt to take advantage of that technology. And you’ve heard me describe, the way I look at the world – the way we look at the world is the world’s divided into two.

There’s the treatment seeking and there’s the care avoidant and – treatment and care seeking and treatment and care avoidant. The world is focused on the easier lift of treatment seekers. We are focused and we don’t have any competition that we can see in the care avoidant market.

And we believe roughly 90% of those are care avoidant at the intersection of multiple behavioral health diseases and multiple chronic diseases. And it’s established knowledge that 50% of those with chronic disease alone are care avoidant.

So to the extent that we could take our 15-or-so-year playbook on engagement, incorporate technology and be able to deliver digital interventions to our care-avoidant members.

And then as you see around us, where the – those that are addressing the care seeking, we will use digital products and platforms similarly for remote patient monitoring, et cetera.

Curt, do you want to add anything to that?.

No, I think you covered it. Okay, I….

I would say one thing – last thing, Richard. We hope this will start becoming very clear. And we’re not talking about next year. We’re talking about in the next 30 to 60 days. So I think we’re going to look a lot like the other companies you cover, except the difference being that we can address the care avoidant market..

Okay, great. And with respect to the expansions discussions, late-stage discussions with expansions, maybe if you can dive into that a little bit more in terms of is that new populations or just new states.

Anything like national roll out sort of like Cigna? And then the new logos, any thoughts there? Are those large or small plans? And is that national in scope as well?.

I’ll let Curt start, and I’ll chime in if there’s anything left to discuss..

Sure. So….

We’re remote, so I apologize for the back and forth..

Yes, sorry. So we are working collaboratively with behavioral health executives at some of our top clients. Part of the ask is to continue to customize some parts of what we do with the OnTrak program, really, Richard, to address broader populations as the primary objective.

But the plan to continue to expand to the remaining geographies, the remaining states, we are still executing against. So the big lift is really being able to expand the target population beyond where we’re focused with those customers today..

Okay. And then the new logos….

And also, I would add – I would also add beyond that, our – with existing customers – pilots that we hope to share with you soon..

Okay, great. Thanks..

Curt, new logos. Do you want to….

Thank you. I’m sorry. Go ahead..

Curt – I’m sorry.

Curt, do you want to talk about the new logos?.

Sure. So from the beginning of the year through this date, we have really expanded, as Terren mentioned in the prepared remarks, the number of new opportunities. So this does not cover expansion with existing customers. So we’ve added over 35 new opportunities that, unrisk adjusted, we’re targeting over 450,000 new outreach pool lives.

And this expansion in our sales pipeline has happened just within the last six months. So we are aggressively going out, telling our story, talking to new customers and engaging to understand how we can earn the privilege of serving their population..

Okay. That’s very helpful. Thank you..

Thank you. Our next question comes from Sean Dodge. Your line is now open..

Thanks. Good afternoon and congratulations. Maybe starting with, Curt, your last comment there about the 450,000 incremental new lives you’re targeting via these pilots you’ve recently added. Historically, pilots have taken a long time to kind of get in place, run, get data from and then roll into some type of a national launch.

Are you at the point where you’ve done this enough times now that you can shorten time lines there? I guess, what should we be thinking about time line-wise the – kind of the opportunity around those 450,000 lives?.

Yes. So the 450,000 definitely is broadly, to your point, across a series of pilots and potential larger roll outs. One of the benefits of our customers’ management changing is that sometimes those folks end up in other places and they know us well. And so those are opportunities where they know the OnTrak program. They know the results we can deliver.

And we believe, based on the conversations, we can accelerate those roll outs. In terms of net new customers where there isn’t experience, it is reflected in the pipeline numbers that I gave you that those are intended to be smaller pilots.

So the roll outs in the full books of business would actually be significantly more, Sean, than the 450,000 that we’re tracking in the pipeline right now..

Got it.

And then the Cigna launch, how many individuals do you expect that to add to the outreach pool?.

Brandon, I know you have the latest numbers. I don’t know if you want to go through that..

Yes. In ours, it adds about 15,000 to the outreach pool. But one thing you have to consider about this population is it’s Medicare Advantage, and it comes at a much greater enrollment rate than our blended average of the 19% that we saw in Q2..

Okay..

Sean, I’m sorry, which plan did you ask about?.

Yes. The Cigna, the Medicare Advantage….

Okay..

…launch as you get to that in October? Okay. Then the comments around the timing for positive EBITDA, I think, previously, you guys have talked about fourth quarter. It sounds like you’re pushing that out just a little bit. What’s changed there? It sounds like maybe your hiring plans are a little bit more aggressive than you thought initially.

Is that it, or is it something else?.

No change whatsoever. The difference is Terren saying the fourth quarter and Brandon being a CFO and saying fourth quarter, first quarter. But nothing has changed..

Okay, good. And then last one for me. Brandon, the math you presented on enrollment revenue, if we think about – I don’t know, I’m kind of using that same exercise for this year. Your enrollments accelerated significantly over the course of the second quarter, the momentum carried into July.

What kind of monthly cadence do you need to maintain to hit the $90 million revenue goal for this year?.

Well, that’s ultimately, if you – without solving for it on my head right now, if you think about where we’re at now, I’ve given you some math on 3,000; and we’re already, 1 month in, 1,200. So we’re already beating that. I was trying to be conservative.

And so the cadence – we expect it’s going to continue to increase – our disenrollment rate has been consistently in that 8%. It’s dipped down below to 7%. It’s slightly around 8%. And so that’s been consistent. Our enrollment, our gross enrollment is already through the first month more than a third of what we enrolled in the second quarter.

And so we’re accelerating as we should be from a pure number perspective, because we have a higher base on what we’re starting from..

Got it. That’s great. Thank you, again..

Thank you..

Thanks, Sean..

Thank you. Our next question comes from Charles Rhyee. Your line is now open..

Yes. Thanks for taking the questions and congrats on the quarter. I guess, maybe a question for Brandon. If we’re – you’re pointing to this 19% sort of enrollment rate.

But at the same time, I think you – Terren, you talked about the fact that because of COVID, we’re having lower utilization, and so people are falling below the threshold, so they don’t qualify for the outreach pool.

If we think about a normalized outreach pool in the future as – if we do see this utilization kind of tick back, what kind of enrollment rates sort of on an ongoing basis should we think about sort of moving forward?.

Well, let me jump in. The enrollment rate is based on the outreach pool. You kind of said, well, how do we look at a normalized outreach pool. That won’t change our enrollment rate. It just means our outreach pool is going to grow significantly.

So the 49,000 that we lost this last quarter, you could pretty much – and of course, UnitedHealth said last week, they started to see a return of utilization. And Aetna said – CVS-Aetna said that they’re starting to see it now as well. So we do expect to bring those lives back at least a relative amount.

So you would add that 49,000 to where we are today. And, of course, we always are – that was the point. Despite the loss of 49,000, we’re still adding new members all the time. So we see the outreach pool – I’ll let Brandon speak to the enrollment rate. But we see the outreach pool to grow quite significantly from where it is right now.

The first growth would be Cigna, but we could see very substantial growth going into next year..

Sure. And Charles, the way we think about it, the enrollment rate, it goes into a lot of subcategories and how we’re reaching into the outreach pool, which we’ve seen acceleration there, the conversion rates associated with what our engagement specialists send over to the care coaches and how well they can convert.

And so all those metrics have been improving for a lot of reasons, some of which could be COVID and some of which are just operational improvements we’ve made in how we see and when we see the data.

And so the enhanced enrollment rate that we’re seeing, and we’ve talked about a 20% enrollment rate at scale in our history, and we’re starting to see that. Some of that comes with mix. We’re seeing a healthy mix and growth in our Medicare business we have today, which has a higher enrollment rate.

The new contract we have with Cigna will have a higher enrollment rate. And so we can see this percentage continue to climb..

And I could say, Charles, I could say qualitatively, because we don’t know the precise – we won’t – maybe we’ll never know. But what we can say is that we won’t see that big of a change with Medicare population, because they’ve always been relatively easy to reach them being at home.

So what’s different now is, yes, the commercial population is more at home. But let’s not forget, these are still care and treatment-avoidant patients. Just because you could reach them doesn’t mean you convert them.

So I think – and we’ll never know really what the true effect of COVID is other than we do know 49,000 dropped out of our outreach pool due to lower utilization..

Okay. That’s helpful.

And I don’t – maybe I missed it, but are we still targeting an outreach pool of 200,000 by year-end? Or has that kind of expectation changed at all?.

That has not changed and there’s room for significant increase..

Okay. And then last question, and Terren, you kind of touched on it. We won’t know what the real impact of COVID may or may not be down the road. Disenrollment, though, it seems like you’re saying it’s kind of stabilized here at this 8% monthly rate.

Do we feel comfortable that that’s going to be sort of consistent going forward, or as we kind of come out of this lockdown, could that change? Because it seems like that should be more a function of sort of the efforts that you guys are doing. Thanks..

Yes. I think the improvement to 8% is really improvement in our capability. I would say that the backdrop that people aren’t really fully appreciating is the worsening mental behavioral health in the country and the cultural trauma that’s also going on in the country were a lagging effect.

All that you see building up in the population now will over time translate into higher utilization because of the behavioral health hindering the chronic disease aspects. And so we’ll see that lagged in our business.

So I think the second-half this year, the first-half of next year, we will start seeing the effect of worsening behavioral health in the country in our numbers..

Great. Thanks a lot. Good luck..

Thank you, Charles..

Thank you. [Operator Instructions] Our next question comes from Gene Mannheimer. Your line is now open..

Thanks. Good afternoon, and congrats on all the good progress.

I had one housekeeping question, and that is, off hand, do you know the enrollment number in the year-ago period, Q2 of 2019?.

I do.

When you say the enrollment number, do you mean the gross or the actual enrolled members?.

I would say, yes, if you have the enrolled members and maybe the additions during that quarter?.

Sure. So we added 828 net and ended the quarter at 3,951..

Perfect. Thank you. And then just a question on – also on your path to profitability over the next two or three quarters. I mean, is some of that predicated on OnTrak 2.0 folding in here at a higher margin, given that it’s a lower-touch service and leverages more automation? Thanks..

Gene, no, it doesn’t include – it includes very little. Again, as you know, we say all the time, we tell you what we know, not what we expect. None of our numbers or none of our thoughts about this year and next year include 2.0.

However, there does represent a very large opportunity in 2.0, but that’s in the what is possible, what we expect, but not what we know..

That’s great. Thanks, again..

Thanks, Gene..

And speakers, I have no further questions in queue. So I’ll turn it back to you for closing comments..

Thank you, everyone, for joining us on the call today. I’d especially like to thank the entire OnTrak team for their incredible contributions towards our mission of helping improve the health and saving the lives of as many people as possible. Have a great afternoon and evening, everyone. Thank you for joining us. See you next quarter..

Thank you, ladies and gentlemen. Thank you. This concludes today’s conference call. Thank you for your participation. You may now disconnect..