Ontrak, Inc. [OTRK] Filings

10-Q 1 otrk-20240930.htm 10-Q otrk-20240930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-31932

____________________________

Ontrak, Inc.

(Exact name of registrant as specified in its charter)

____________________________


Delaware			88-0464853
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

333 S. E. 2nd Avenue, Suite 2000, Miami, FL 33131

(Address of principal executive offices, including zip code)

(310) 444-4300

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	OTRK	The NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,’’ “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of November 7, 2024, there were 4,217,846 shares of the registrant's common stock, $0.0001 par value per share, outstanding.

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TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION			3

	ITEM 1. Financial Statements		3

		Condensed Consolidated Balance Sheets as of September 30, 2024 (unaudited) and December 31, 20 23	3

		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)	4

		Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (unaudited)	7

		Notes to Condensed Consolidated Financial Statements	9

	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		37

	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		47

	ITEM 4. Controls and Procedures		47

PART II - OTHER INFORMATION			47

	ITEM 1. Legal Proceedings		47

	ITEM 1A. Risk Factors		47

	ITEM 2. Unregistered Sales of Equity Securities , Use of Proceeds, and Issuer Purchases of Equity Securities		50

	ITEM 3. Defaults Upon Senior Securities		50

	ITEM 4. Mine Safety Disclosures		50

	ITEM 5. Other Information		50

	ITEM 6. Exhibits		50

	Signatures		52

In this Quarterly Report on Form 10-Q, all references to “Ontrak,” “Ontrak, Inc.,” “we,” “us,” “our” or the “Company” mean Ontrak, Inc., its wholly-owned subsidiaries and variable interest entities, except where it is made clear that the term means only the parent company. The Company’s common stock, par value $0.0001 per share, is referred to as “common stock" and the Company’s 9.50% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, is referred to as “Series A Preferred Stock.”

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ONTRAK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	September 30, 2024		December 31, 2023
Assets	(unaudited)
Current assets:
Cash	$	7,966	$	9,701

Accounts receivable, net	29		—
Unbilled receivables	446		207

Deferred costs	165		128
Prepaid expenses and other current assets	1,562		2,743
Total current assets	10,168		12,779
Long-term assets:
Property and equipment, net	509		913

Goodwill	5,713		5,713
Intangible assets, net	—		99
Other assets	5,850		147
Operating lease right-of-use assets	158		195
Total assets	$	22,398	$	19,846
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	490	$	563
Accrued compensation and benefits	653		442
Deferred revenue	60		97
Demand notes payable, net	5,751		—
Current portion of operating lease liabilities	65		56
Other accrued liabilities	1,638		2,784

Total current liabilities	8,657		3,942
Long-term liabilities:
Long-term debt, net	2,169		1,467
Long-term operating lease liabilities	117		166


Total liabilities	10,943		5,575
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 3,770,265 shares issued and outstanding at each of September 30, 2024 and December 31, 2023	—		—
Common stock, $0.0001 par value; 500,000,000 shares authorized; 3,400,240 and 2,564,465 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively	7		6
Additional paid-in capital	502,436		484,926
Accumulated deficit	(490,988)		(470,661)
Total stockholders' equity	11,455		14,271
Total liabilities and stockholders' equity	$	22,398	$	19,846

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)


	Three Months Ended September 30,			Nine Months Ended September 30,
		2024		2023		2024		2023
Revenue		$	2,569	$	3,715	$	7,700	$	9,204
Cost of revenue		975		1,040		2,794		2,691
Gross profit		1,594		2,675		4,906		6,513

Operating expenses:
Research and development		1,224		1,552		3,328		4,733
Sales and marketing		780		822		2,003		2,649
General and administrative		4,697		4,365		12,712		14,593
Restructuring, severance and related costs		—		—		290		457
Total operating expenses		6,701		6,739		18,333		22,432
Operating loss		(5,107)		(4,064)		(13,427)		(15,919)

Other income, net		2		38		5		324
Debt issuance costs (Note 10)		—		—		(5,921)		—
Interest expense, net		(475)		(2,392)		(984)		(6,009)
Loss before income taxes		(5,580)		(6,418)		(20,327)		(21,604)
Income tax benefit, net		—		—		—		80
Net loss		(5,580)		(6,418)		(20,327)		(21,524)
Dividends on preferred stock - undeclared		(2,239)		(2,239)		(6,716)		(6,716)
Net loss attributable to common stockholders		$	(7,819)	$	(8,657)	$	(27,043)	$	(28,240)

Net loss per common share, basic and diluted		$	(1.77)	$	(26.47)	$	(6.29)	$	(87.70)

Weighted-average common shares outstanding, basic and diluted		4,420		327		4,297		322

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share data)


	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Equity (Deficit)
	Shares	Amount		Shares	Amount





























Balance at June 30, 2024	3,770,265	$	—	3,197,849	$	7	$	500,814	$	(485,408)	$	15,413


Demand Warrants issued	—	—		—	—		1,137		—		1,137


Debt issuance costs, net	—	—		—	—		(1,227)		—		(1,227)
Restricted stock units vested, net	—	—		3	—		—		—		—
Stock-based compensation expense	—	—		—	—		1,712		—		1,712
Fractional shares issued in connection with reverse stock split	—	—		202,388	—		—		—		—
Net loss	—	—		—	—		—		(5,580)		(5,580)
Balance at September 30, 2024	3,770,265	$	—	3,400,240	$	7	$	502,436	$	(490,988)	$	11,455









Balance at June 30, 2023	3,770,265	$	—	325,858	$	3	$	458,600	$	(457,847)	$	756
Restricted stock units vested, net	—	—		79	—		(1)		—		(1)
Warrants issued in connection with Keep Well Notes	—	—		—	—		237		—		237
Stock-based compensation expense	—	—		—	—		797		—		797
Fractional shares issued in connection with reverse stock split	—	—		1,861	—		—		—		—
Net loss	—	—		—	—		—		(6,418)		(6,418)
Balance at September 30, 2023	3,770,265	$	—	327,798	$	3	$	459,633	$	(464,265)	$	(4,629)

Balance at December 31, 2023	3,770,265	$	—	2,564,465	$	6	$	484,926	$	(470,661)	$	14,271
Debt issuance costs, net	—	—		—	—		9,424		—		9,424
Common stock issued relating to settlement of contingent consideration	—	—		83	—		64		—		64
Pre-Funded Warrants exercised	—	—		268,827	1		—		—		1
Public Offering Warrants exercised	—	—		364,445	—		1,963		—		1,963
Demand Warrants issued	—	—		—	—		3,796		—		3,796
Loss on extinguishment of debt with related party	—	—		—	—		(521)		—		(521)
Warrants issued in debt financing, adjusted for repricing	—	—		—	—		278		—		278
Restricted stock units vested, net	—	—		32	—		—		—		—
Stock-based compensation expense	—	—		—	—		2,506		—		2,506
Fractional shares issued in connection with reverse stock split	—	—		202,388	—		—		—		—
Net loss	—	—		—	—		—		(20,327)		(20,327)
Balance at September 30, 2024	3,770,265	$	—	3,400,240	$	7	$	502,436	$	(490,988)	$	11,455

Balance at December 31, 2022	3,770,265	$	—	301,861	$	3	$	448,415	$	(442,741)	$	5,677
Common stock issued for financing	—	—		22,646	—		—		—		—
Warrants issued in connection with Keep Well Notes	—	—		—	—		11,034		—		11,034
Loss on extinguishment of debt with related party	—	—		—	—		(2,153)		—		(2,153)
Restricted stock units vested, net	—	—		170	—		(3)		—		(3)
401(k) employer match	—	—		1,260	—		—		—		—
Stock-based compensation expense	—	—		—	—		2,340		—		2,340

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Fractional shares issued in connection with reverse stock split	—	—		1,861	—		—		—		—
Net loss	—	—		—	—		—		(21,524)		(21,524)
Balance at September 30, 2023	3,770,265	$	—	327,798	$	3	$	459,633	$	(464,265)	$	(4,629)

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	For the Nine Months Ended September 30,
	2024		2023
Cash flows from operating activities
Net loss	$	(20,327)	$	(21,524)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	2,506		2,340

Write-off of other asset	—		100
Paid-in-kind interest expense	787		3,110
Gain on termination of operating lease	—		(471)
Depreciation expense	507		876
Amortization expense	281		3,924


Change in fair value of warrant liability	(5)		(26)
Debt issuance costs expensed related to Demand Notes	3,262		—
Demand Warrants expensed related to Demand Notes	2,659		—




Changes in operating assets and liabilities:
Accounts receivable	(29)		761
Unbilled receivables	(239)		102
Prepaid expenses and other assets	1,017		917
Accounts payable	(72)		(736)
Deferred revenue	(37)		(27)
Leases liabilities	(41)		(154)
Other accrued liabilities	590		(1,074)
Net cash used in operating activities	(9,141)		(11,882)
Cash flows from investing activities
Purchase of property and equipment	(102)		(196)
Net cash used in investing activities	(102)		(196)
Cash flows from financing activities
Proceeds from Demand Notes	7,000		—
Proceeds from Keep Well Notes	—		8,000
Proceeds from warrants exercised	1,963		—

Proceeds from Keep Well Agreement held in escrow	—		6,000




Debt issuance costs	—		(449)



Finance lease obligations	—		(126)
Financed insurance premium payments	(1,455)		(1,830)
Payment of taxes related to net-settled stock awards	—		(3)
Net cash provided by financing activities	7,508		11,592

Net change in cash and restricted cash	(1,735)		(486)

Cash and restricted cash at beginning of period	9,701		9,713
Cash and restricted cash at end of period	$	7,966	$	9,227


Supplemental disclosure of cash flow information:
Interest paid	$	52	$	55
Income taxes paid	5		3
Non-cash financing and investing activities:
Debt issuance costs	$	9,424	$	266
Warrants issued in connection with Demand Notes	3,796		—

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Warrants issued in connection with Keep Well Notes	—	11,034
Loss on extinguishment of debt with related party	521	2,153

Financed insurance premium	228	284
Finance lease and accrued purchases of property and equipment	—	23
Common stock issued to settle contingent consideration	64	—

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization

Company Overview

Ontrak, Inc. (“Ontrak,” “Company,” “we,” “us” or “our”) is an AI-powered and technology-enabled behavioral healthcare company, whose mission is to help improve the health and save the lives of as many people as possible. The Company's technology-enabled platform utilizes claim-based analytics and predictive modeling to provide analytic insights throughout the delivery of its personalized care program. The Company's program predicts people whose chronic disease will improve with behavior change, recommends effective care pathways that people are willing to follow, and engages and guides them to and through the care and treatment they need. By combining predictive analytics with human engagement, we deliver improved member health and validated outcomes and savings to healthcare payors.

The Company's integrated, technology-enabled solutions are designed to provide healthcare solutions to members with behavioral conditions that cause or exacerbate chronic medical conditions such as diabetes, hypertension, coronary artery disease, chronic obstructive pulmonary disease, and congestive heart failure, which result in high medical costs. Ontrak has a unique ability to engage these members, who may not otherwise seek behavioral healthcare, leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Ontrak integrates evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, along with care coaches who address the social and environmental determinants of health. The Ontrak programs seek to improve member health and deliver validated cost savings to healthcare payors.

The Company generates revenues from the services it provides to populations insured by private health insurance programs, including employer funded programs (which the Company refers to as commercial revenue) and by government-funded health insurance programs, such as managed Medicare Advantage, managed Medicaid and dual eligible (Medicare and Medicaid) populations. The Company aims to increase the number of members that are eligible for our solutions by signing new contracts and identifying more eligible members within customers with whom the Company has existing contracts.

Basis of Presentation

The accompanying condensed consolidated financial statements include Ontrak, Inc., its wholly-owned subsidiaries and its variable interest entities. The accompanying condensed consolidated financial statements for Ontrak, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and instructions to Form 10-Q and Article 8 of Regulation S-X. All intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed financial statements includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any other interim period or for the entire fiscal year. The accompanying unaudited financial information should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year-ended December 31, 2023 (the “2023 10-K”), filed with the Securities and Exchange Commission (“SEC”), from which the consolidated balance sheet as of December 31, 2023 has been derived. The Company operates as one segment.

Going Concern

We have incurred significant net losses and negative operating cash flows since our inception, and we expect to continue to incur net losses and negative operating cash flow, in part due to the negative impact on our operations by customer terminations. As of September 30, 2024, our total cash was $8.0 million and we had working capital of approximately $1.5 million. For the nine months ended September 30, 2024, our average monthly cash burn rate from operations was $1.0 million.

On August 13, 2024, the Company entered into an agreement with Acuitas Capital LLC (“Acuitas Capital” and together with its affiliates, “Acuitas”) pursuant to which Acuitas agreed to purchase Committed Demand Notes (as defined in Note 10 below) in the original principal amount of $5.0 million in accordance with a schedule specified therein, subject to a limited offset right, and not to exercise its right to require that any amounts due under any Demand Note (as defined in Note 10 below) be paid until after August 30, 2025, subject to a limited exception. As of September 30, 2024, Committed Demand Notes with an aggregate principal amount of $2.5 million have been issued by the Company and purchased by Acuitas. In October 2024, Acuitas

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

purchased a Committed Demand Note with a principal amount of $1.0 million. See Note 14 below. As of the filing date of this report, Acuitas has not purchased the remaining $1.5 million in principal amount that was to be purchased no later than November 1, 2024. In addition, Acuitas may, in its sole discretion, elect to purchase up to an additional $5.5 million in principal amount of Demand Notes under the Keep Well Agreement (as defined in Note 10 below). Management is in active discussion with Acuitas with respect to the purchase of the remaining $1.5 million in principal amount of Committed Demand Notes and some or all of the additional $5.5 million in principal amount of Demand Notes. The Company cannot predict if or when Acuitas will purchase the remaining $1.5 million in principal amount of Committed Demand Notes or will elect to purchase some or all of the additional $5.5 million in principal amount of Demand Notes.

As of September 30, 2024, $9.8 million of secured debt, including accrued paid-in-kind interest, issued under the Keep Well Agreement was outstanding. As of the filing date of this report, approximately $11.1 million of secured debt, including accrued paid-in-kind interest, issued under the Keep Well Agreement was outstanding, $8.6 million of which is represented by Demand Notes (including Committed Demand Notes) payable at any time after August 30, 2025 upon demand of the holder (see Note 10 below for more information) and the balance of which matures on May 14, 2026, unless it becomes due and payable in full earlier, whether by acceleration or otherwise.

In October 2024, the Company received a total of $1.5 million of cash proceeds from the exercise of warrants the Company issued in its public offering consummated in November 2023. See Note 14 below. Assuming the exercise in full of the warrants the Company issued in such public offering at their current exercise price and that the exercise price is paid in cash, the Company would receive gross proceeds of approximately $13.7 million. There can be no assurance that all or any portion of such warrants will be exercised.

Management is actively pursuing execution of the Company’s growth strategy and has been engaged in discussions with prospects in its sales pipeline, two of which are in or near the final proposal and approval phase, as well as in discussions with existing customers to expand their business relationship with the Company. There can be no assurance that the Company will be successful in any of these endeavors.

Management plans to continue executing its strategy to increase liquidity by continuing to (i) explore other sources of capital for future liquidity needs; (ii) manage operating costs by strategically pursuing cost optimization initiatives; and (iii) pursue executing our growth strategy by: (a) expanding sales and marketing resources to acquire new and diverse customers across major health plans, value based provider groups and self-insurance employers; (b) executing on our better market penetration strategy by providing full scale customized behavioral health solutions, addressing customer needs across all member acuity levels while mitigating vendor fatigue by becoming a principal customer partner; (c) leveraging our AI technology and new predictive algorithms to improve identification and outreach, create more efficiencies, enhance coaching solutions and create more proof points; and (d) opportunistically pursuing partnerships that we believe will accelerate growth.

We will need additional capital to successfully execute our growth strategy. In addition to revenue from business operations, since April 2022, the Company's primary source of working capital has been borrowings under the Keep Well Agreement and raising capital in equity offerings. We may seek to raise additional capital through equity or debt financings, however, when we can affect such financings and how much capital we can raise depends on a variety of factors, including, among others, market conditions, the trading price of our common stock and our determination as to the appropriate sources of funding for our operations. There can be no assurance that other capital will be available when needed or that, if available, it will be obtained on terms favorable to us and our stockholders, that we will be successful in implementing cost optimization initiatives, or that we will be successful in executing our growth strategy. In addition, the Keep Well Agreement contains various financial and other covenants, and any non-compliance with those covenants could result in an acceleration of the repayment of the amounts outstanding thereunder. Furthermore, equity or debt financings may have a dilutive effect on the holdings of our existing stockholders, and debt financings may subject us to restrictive covenants, operational restrictions and security interests in our assets.

Based on the Company's current analysis of the conditions described above and the Company's forecast of its future operating results, the Company does not believe that its cash on hand and other sources of capital will be sufficient to allow the Company to meet its obligations as they come due and to continue its operating activities for at least the next 12 months from the date the financial statements in this report are released. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Reverse Stock Split

At the annual meeting of the Company's stockholders held on September 10, 2024 (the “2024 Meeting”), the Company’s stockholders approved a proposal to give the Company’s board of directors the authority, at its discretion, to file a certificate of amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of the Company's issued common stock at a ratio that is not less than 1-for-2 and not greater than 1-for-15, without reducing the authorized number of shares of the Company’s common stock, with the final ratio to be selected by the Company’s board of directors in its discretion, and to be effected, if at all, in the sole discretion of the Company’s board of directors at any time within one year of the date of the 2024 Meeting without further approval or authorization of the Company’s stockholders. Subsequently, the Company's board of directors determined to effect a reverse split at a ratio of 1-for-15, which was effective at 12:01 a.m. Eastern Time on September 23, 2024 (the “2024 Reverse Stock Split”). Fractional shares of the Company’s common stock resulting from the reverse split were automatically rounded up to the nearest whole share. The Company’s common stock began trading on The Nasdaq Capital Market on a post-split basis at the open of trading on September 23, 2024. The Company’s common stock continues to trade under the symbol “OTRK,” but was assigned a new CUSIP number (683373401).

All restricted stock units, stock options and warrants to purchase shares of the Company’s common stock and securities convertible or exchangeable for shares of the Company’s common stock (including the Series A Preferred Stock) outstanding immediately prior to the 2024 Reverse Stock Split, and the shares of the Company’s common stock reserved for issuance under the Company’s equity incentive plans immediately prior to the 2024 Reverse Stock Split, were proportionally adjusted.

All common share and common stock per share amounts presented herein for all periods have been retroactively adjusted to reflect the impact of the 2024 Reverse Stock Split.

Recently Adopted Accounting Standards and Recently Issued Accounting Pronouncements

Since the date on which the Company filed the 2023 10-K, there were no recently adopted account standards or new accounting standards issued, but not yet adopted by the Company, which are expected to materially affect the Company's condensed consolidated financial statements.

Note 2. Restricted Cash

The following table provides a reconciliation of total cash and restricted cash as presented in the Company's condensed consolidated statement of cash flows for the periods presented (in thousands):


	September 30,
	2024		2023
Cash	$	7,966	$	3,227
Restricted cash - current:
Cash in escrow (1)	—		6,000


Subtotal - Restricted cash - current	—		6,000




Cash and restricted cash	$	7,966	$	9,227

____________

(1) Represents cash received under the Keep Well Agreement in June 2023 and held in a separate account pursuant to the terms of the Keep Well Agreement. See Note 10 below for more information. The amount was included in "Other accrued liabilities" on the Company's condensed consolidated balance sheet as of September 30, 2023.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3. Receivables and Revenue Concentration

The following table is a summary of concentration of credit risk by customer revenues as a percentage of our total revenue:


	Three Months Ended September 30,				Nine Months Ended September 30,
Percentage of Revenue	2024		2023		2024		2023
Customer A	68.2	%	57.8	%	63.9	%	55.4	%
Customer B	30.5		2.9		23.5		2.7
Customer C	—		32.6		7.1		33.8


Remaining customers	1.3		6.7		5.5		8.1
Total	100.0	%	100.0	%	100.0	%	100.0	%

The Company had $0.03 million of accounts receivable and $0.4 million of unbilled receivable as of September 30, 2024, respectively. The Company had no accounts receivable and $0.2 million of unbilled receivable as of December 31, 2024, respectively.

The Company applies the specific identification method for assessing provision for credit losses. There was no bad debt expense during either of the three or nine months ended September 30, 2024 or 2023.

Customer Notifications

On October 2, 2024, the Company was notified by a health plan customer of its intent not to continue using the Company’s services after December 2024. See Note 14 below for more information.

On October 10, 2023, the Company was notified by a health plan customer of its intent not to continue using the Company’s services after February 2024. The customer advised us to cease enrollment of any new members from that customer immediately. The customer also informed us that its decision was related to the customer’s change in strategy and not reflective of the performance or value of the Company’s services. The Company billed this customer $0.5 million for services rendered from January 2024 through February 2024, and received full payment of such invoiced amount in March 2024.

Other Receivable - Insurance Recoveries

The Company is involved in various securities class actions and purported stockholder derivative complaints, and the Company has incurred legal costs related to the SEC/Department of Justice (the "DOJ") investigation of the Company's former Chief Executive Officer and Chairman of the Board of Directors, as described in Note 13 below. The Company maintains a corporate liability insurance policy which provides coverage for legal defense costs. The terms of this insurance policy provide that the insurer will pay the third party directly on behalf of the Company for such legal defense costs. Based on the Company's analysis, the Company's obligation as the primary obligor of the invoices for legal defense costs has not been transferred to the insurer and as such, the Company records these costs as an other receivable with a corresponding liability on its consolidated balance sheet. As of September 30, 2024, the Company submitted cumulative claims for legal defense costs totaling approximately $4.9 million, of which $4.3 million has been paid by the insurer to the third parties. The Company has $0.6 million of claims for legal defense costs recorded as other receivable included in "Prepaid expenses and other current assets" and $0.6 million as part of "Other accrued liabilities" on its condensed consolidated balance sheet as of September 30, 2024.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Property and Equipment

Property and equipment consisted of the following (in thousands):


	September 30,		December 31,
	2024		2023
Software	$	4,736	$	4,575
Computers and equipment	401		416
ROU assets - finance lease	268		300

Software development in progress	—		59
Subtotal	5,405		5,350
Less: Accumulated depreciation and amortization	(4,896)		(4,437)
Property and equipment, net	$	509	$	913

Total depreciation and amortization expense relating to property and equipment presented above was $0.1 million and $0.3 million for the three months ended September 30, 2024 and 2023, respectively, and $0.5 million and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Capitalized Internal Use Software Costs

During the three months ended September 30, 2024 and 2023, the Company capitalized $0.02 million and $0.07 million, respectively, of costs relating to development of internal use software, and recorded $0.2 million and $0.3 million, respectively, of amortization expense relating to capitalized internal use software, which was included in total depreciation and amortization expense as described above.

During the nine months ended September 30, 2024 and 2023, the Company capitalized $0.1 million and $0.2 million, respectively, of costs relating to development of internal use software, and recorded $0.5 million and $0.8 million, respectively, of amortization expense relating to capitalized internal use software, which was included in total depreciation and amortization expense as described above.

Note 5. Goodwill and Intangible Assets

Goodwill

The carrying amount of indefinite-lived goodwill was $5.7 million as of September 30, 2024 and December 31, 2023.

Intangible Assets

The following table sets forth amounts recorded for intangible assets subject to amortization (in thousands):


		At December 31, 2023
	Weighted Average Estimated Useful Life (years)		Gross Value		Accumulated Amortization		Net Carrying Value
Acquired software technology	3		$	3,500	$	(3,500)	$	—
Customer relationships	5		270		(171)		99
Total			$	3,770	$	(3,671)	$	99

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As of September 30, 2024, the Company's acquired software technology and customer relationships presented in the table above were fully amortized. Amortization expense for intangible assets presented above was $0.3 million for the three months ended September 30, 2023, and $0.1 million and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Note 6. Restructuring, Severance and Related Costs

In each of 2023 and 2024, the Company implemented restructuring plans as part of management's continued cost saving measures in order to reduce its operating costs, optimize its business model and help align with its previously stated strategic initiatives.

In February 2024, approximately 21% of the Company's employee positions were eliminated and the Company incurred a total of approximately $0.3 million of one-time termination related costs, including severance payments and benefits payable to the impacted employees, which have been recorded as part of "Restructuring, severance and related costs" on the Company's condensed consolidated statement of operations for the nine months ended September 30, 2024. The headcount reductions were completed by May 2024.

In March 2023, approximately 19% of the Company's employee positions were eliminated and the Company incurred a total of approximately $0.5 million of one-time termination related costs, including severance payments and benefits payable to the impacted employees, which have been recorded as part of "Restructuring, severance and related costs" on the Company's condensed consolidated statement of operations for the nine months ended September 30, 2023. The headcount reductions were completed by May 2023.

Note 7. Common Stock and Preferred Stock

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by giving effect to all shares of common stock potentially issuable upon exchange or exercise of outstanding shares of preferred stock and outstanding stock options and warrants, in each case, to the extent dilutive. Basic and diluted net loss per common share were the same for each period presented below as the inclusion of any such shares of common stock potentially issuable would have been anti-dilutive.

Basic and diluted net loss per common share were as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net loss	$	(5,580)	$	(6,418)	$	(20,327)	$	(21,524)
Dividends on preferred stock - undeclared	(2,239)		(2,239)		(6,716)		(6,716)
Net loss attributable to common stockholders	$	(7,819)	$	(8,657)	$	(27,043)	$	(28,240)

Weighted-average shares of common stock outstanding	4,420		327		4,297		322
Net loss per common share - basic and diluted	$	(1.77)	$	(26.47)	$	(6.29)	$	(87.70)

Included in the weighted-average shares of common stock outstanding for the three and nine months ended September 30, 2024 are a total of 1,299,575 common shares (18,333,333 common shares before giving effect to the 2024 Reverse Stock Split) issuable upon the exercise of Private Placement Pre-funded Warrants (as defined and described in Note 10 below), which are exercisable at any time for nominal consideration, and as such, the shares are considered outstanding for the purpose of calculating basic and diluted net loss per share attributable to common stockholders.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following number of shares issuable upon exercise of stock options and warrants outstanding as of September 30, 2024 and 2023 have been excluded from the diluted earnings per share calculation as their effect would be anti-dilutive:


	September 30,
	2024	2023
Warrants to purchase common stock	18,314,885	1,344,342
Options to purchase common stock	4,039,659	78,618
Total	22,354,544	1,422,960

Equity Offerings

Common Stock

In February 2023, pursuant to the terms of the Keep Well Agreement, the Company issued to Acuitas 22,646 shares of the Company's common stock, after giving effect to the 1-for-6 reverse stock split, approved at the special meeting of the Company's stockholders held in February 2024, effected by the Company on July 27, 2023 (the “2023 Reverse Stock Split”) and the 2024 Reverse Stock Split.

Preferred Stock

In 2020, the Company completed the issuance of a total of 3,770,265 shares of 9.50% Series A Cumulative Perpetual Preferred Stock (the "Series A Preferred Stock"). The Company, generally, may not redeem the Series A Preferred Stock until August 25, 2025, except upon the occurrence of a Delisting Event or Change of Control (as defined in the Certificate of Designations establishing the Series A Preferred Stock), and on and after August 25, 2025, the Company may, at its option, redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock has no maturity date and will remain outstanding indefinitely unless redeemed by the Company or exchanged for shares of common stock in connection with a Delisting Event or Change of Control. Holders of Series A Preferred Stock generally have no voting rights, but have limited voting rights if the Company fails to pay dividends in respect of the Series A Preferred Stock for six or more quarters, whether or not declared or consecutive and in certain other events, including the right, voting separately as a single class, to elect two individuals to the Company's Board of Directors. Such director election right commenced on August 31, 2023 since the Company did not pay the dividend payable on that date or in respect of the five prior quarters.

Holders of Series A Preferred Stock of record at the close of business of each respective record date for quarterly dividends (February 15, May 15, August 15 and November 15 of each year) are entitled to receive, when, as and if declared by our board of directors, out of funds legally available for the payment of dividends, cumulative cash dividends at the rate of 9.50% per annum of the $25.00 per share liquidation preference (equivalent to $2.375 per annum per share or $0.593750 per quarter per share). Dividends, if and when declared by our board of directors, are payable quarterly in arrears, every February 28, May 30, August 31, and November 30, as applicable. At September 30, 2024, we had total undeclared dividends of $23.1 million.

On October 11, 2023, the Company received a letter from Nasdaq informing the Company that it is not eligible for a second 180-day compliance period within which to regain compliance with the minimum bid price rule for the Series A Preferred Stock and that Nasdaq determined that the Series A Preferred Stock would be delisted from The Nasdaq Capital Market and would be suspended at the opening of business on October 20, 2023. On November 20, 2023, The Nasdaq Stock Market filed a Form 25-NSE with the SEC to remove the Series A Preferred Stock from listing and registration on The Nasdaq Stock Market. The Series A Preferred Stock currently trades in the over-the-counter OTC Markets system.

Note 8. Stock-Based Compensation

The Company's Amended and Restated 2017 Stock Incentive Plan (the “A&R 2017 Plan”), 2017 Stock Incentive Plan (the “2017 Plan”) and 2010 Stock Incentive Plan (the “2010 Plan” and together with the A&R 2017 Plan and 2017 Plan, the "Plans") provide for the issuance of 4,856,650 shares of the Company's common stock. The A&R 2017 Plan has an “evergreen” feature pursuant to which on the first day of each fiscal year beginning with January 1, 2025 and through and including January 1, 2034,

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

3% of the number of shares outstanding on the first day of the applicable fiscal year will be automatically added to the share pool reserve; provided that the number of shares that may be added pursuant to the evergreen feature each fiscal year will not exceed 900,000 or such lesser number determined by our board of directors. The Company has granted stock options to employees, members of the Company's board of directors, and certain outside consultants, and restricted stock units ("RSUs") to employees and members of the Company's board of directors. The terms and conditions upon which options vest vary among grants; however, options expire no later than ten years from the date of grant and awards granted to employees and members of the Company's board of directors generally vest over one to four years on a straight-line basis. The terms and conditions upon which RSUs vest vary among grants; however, RSUs generally vest over three to five years on a straight-line basis. As of September 30, 2024, the Company had 4,043,574 shares of common stock in the aggregate subject to outstanding stock options and RSUs and 935,150 shares available for issuance under the A&R 2017 Plan (assuming that all awards outstanding as of such date are ultimately settled for their full number of shares and are not forfeited or modified).

Stock-based compensation expense was $1.7 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and $2.5 million and $2.3 million for the nine months ended September 30, 2024 and 2023, respectively.

The assumptions used in the Black-Scholes option-pricing model were as follows:


	Nine Months Ended September 30, 2024
Volatility	96.0% - 98.0%
Risk-free interest rate	3.52% - 4.52%
Expected life (in years)	3.52 - 4.66
Dividend yield	0	%

The expected volatility assumptions have been based on the historical and expected volatility of our stock and the stock of comparable companies, measured over a period generally commensurate with the expected term or acceptable period to determine reasonable volatility. The weighted average expected life of options for the nine months ended September 30, 2024 reflects the application of the simplified method prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107 (as amended by SAB 110), which defines the expected life of options as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

Stock Options - Employees and Directors

A summary of stock option activity is as follows:


	Number of Shares	Weighted Average Exercise Price
Outstanding as of December 31, 2023	77,566	$	99.58
Granted	4,076,172	3.38

Forfeited	(114,079)	33.93

Outstanding as of September 30, 2024	4,039,659	4.37


Options vested and exercisable as of September 30, 2024	75,236	$	52.98

The stock options granted, as presented in the table above, includes options to purchase 3.9 million shares of the Company's common stock granted in June 2024 to the Company's employees and members of the Company's board of directors, all of which were subject to stockholder approval of the A&R 2017 Plan, which was obtained on September 10, 2024, at the Company's 2024 annual meeting of stockholders.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As of September 30, 2024, there was $9.9 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted to the Company's employees and members of the Company's board of directors under the Plans. These costs are expected to be recognized over a weighted-average period of approximately 3.49 years.

Restricted Stock Units - Employees

The Company estimates the fair value of RSUs based on the closing price of its common stock on the date of grant. The following table summarizes our RSU award activity issued under the Plans:


	Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2023	8,043	$	196.00

Vested and settled	(3,894)	109.62
Forfeited	(234)	2,946.96

Non-vested at September 30, 2024	3,915	117.48

As of September 30, 2024, there was $0.4 million of unrecognized compensation costs related to unvested outstanding RSUs. These costs are expected to be recognized over a weighted-average period of approximately 0.92 years.

Warrants - Non-employees

The Company has issued warrants to purchase shares of the Company's common stock that have been approved by the Company's board of directors. A summary of warrants activity was as follows:


	Number of Warrants	Weighted Average Exercise Price
Outstanding as of December 31, 2023	8,097,896	$	8.94
Granted	27,981,651	4.75
Exercised	(673,352)	2.92
Cancelled	(15,791,735)	7.53

Outstanding as of September 30, 2024	19,614,460	4.30
Warrants exercisable as of September 30, 2024	19,614,460	4.30

The number of shares of the Company's common stock subject to warrants granted and warrants cancelled as presented in the table above each include and give effect to the adjustment to the exercise price of Public Offering Warrants and Private Placement Warrants (as such terms are defined in Note 10 below) pursuant to the waivers entered into by each holder of such warrants (discussed in Note 10 below). In accordance with the terms of such waivers, the exercise price per share of all outstanding Public Offering Warrants and Private Placement Warrants was reduced to $0.36 on March 28, 2024, further reduced to $0.3442 on April 5, 2024 and further adjusted to $4.8557 to reflect the 2024 Reverse Stock Split, and simultaneously with each exercise price adjustments, the number of shares of common stock issuable upon exercise was increased proportionally, such that the aggregate exercise price of the warrants, after taking into account the adjustment in the exercise price, was equal to the aggregate exercise price before the adjustment in the exercise price. The exercise price reduction described above has been reflected as a cancellation of the previously issued warrants and grant of new warrants.

Also included in the number of shares of the Company's common stock subject to warrants granted as presented in the table above are Demand Warrants (as such term is defined in Note 10 below) granted in June 2024 through September 2024 by the Company to Acuitas to purchase a total of 3.9 million shares of the Company's common stock with exercise prices ranging from $2.63 to $4.8557. See Note 10 below for more information.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The assumptions used in the Black-Scholes warrant-pricing model were determined as follows:


	Nine Months Ended September 30, 2024
Volatility	93% - 98%
Risk-free interest rate	3.58% - 3.63%
Expected life (in years)	3.33 - 5.00
Dividend yield	0	%

Note 9. Leases

The Company determines whether an arrangement is a lease, or contains a lease, at inception and recognizes right-of-use assets and lease liabilities, initially measured at present value of the lease payments, on the Company's balance sheet and classifies the leases as either operating or finance leases. The Company leases office space in Henderson, Nevada, which previously served as the Company's headquarters and currently serves as the administrative office for certain of the Company's back-office functions, and in Rosemont, Illinois, which are accounted for as operating leases. The Rosemont, Illinois lease expired in June 2023. In September 2023, the Company entered into a month-to-month lease for a virtual office space in Miami, Florida, which serves as the Company's headquarters. The Company leases various computer equipment used in the operation of its business, which are accounted for as finance leases. The operating lease agreement for the Henderson, Nevada office is for a total of 2,721 square feet of office space for lease term of 58 months. The Company's finance leases are generally for 36 month terms. The Company had no finance leases during either of the three or nine months ended September 30, 2024, or as of September 30, 2024 and December 31, 2023.

In April 2022, the Company entered into a sublease agreement with a subtenant for 100% of the office space the Company leased in Santa Monica, California. The sublease agreement commenced in June 2022 and provided for an expiration date of July 17, 2024, unless sooner terminated. On February 16, 2023, the Company, the landlord and the subtenant entered into a lease and sublease termination agreement for the office space, with a termination date of February 28, 2023. The Company agreed to pay to the landlord a $0.1 million early termination fee and monthly fixed rent for March and April 2023, and the subtenant agreed to pay to the Company monthly fixed sublease payments for March and April 2023. As a result of the lease termination, the Company wrote-off $0.3 million of operating lease right-of-use assets, and $0.6 million and $0.2 million of current and long-term operating lease liabilities, respectively, resulting in a non-cash gain of $0.5 million included in "Other income, net" on the Company's condensed consolidated statement of operations for the nine months ended September 30, 2023.

The Company’s operating leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. The leases include renewal options and escalation clauses. The renewal options have not been included in the calculation of the operating lease liabilities and right-of-use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses.

Quantitative information for our leases is as follows (in thousands):


Condensed Consolidated Balance Sheets	Balance Sheet Classification	September 30, 2024		December 31, 2023
Assets
Operating lease assets	"Operating lease right-of-use-assets"	$	158	$	195

Total lease assets		$	158	$	195
Liabilities
Current
Operating lease liabilities	"Current portion of operating lease liabilities"	$	65	$	56

Non-current
Operating lease liabilities	"Long-term operating lease liabilities"	117		166

Total lease liabilities		$	182	$	222

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
Condensed Consolidated Statements of Operations	2024		2023		2024		2023
Operating lease expense	$	20	$	20	$	61	$	139
Short-term lease rent expense	1		1		3		2
Variable lease expense	—		—		—		23
Operating sublease income	—		—		—		(65)
Total rent expense	$	21	$	21	$	64	$	99
Finance lease expense
Amortization of leased assets	$	—	$	16	$	—	$	66
Interest on lease liabilities	—		1		—		4
Total	$	—	$	17	$	—	$	70


	Nine Months Ended September 30,
Condensed Consolidated Statements of Cash Flows	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	65	$	200
Financing cash flows from finance leases	—		126
Other
Cash received for operating sublease	—		97


Other Information	September 30, 2024		December 31, 2023
Weighted-average remaining lease term (years):
Operating leases	2.4		3.2

Weighted-average discount rate (%):
Operating leases	16.25	%	16.25	%
Finance leases	—		15.15	%

The following table sets forth maturities of our lease liabilities (in thousands):


Operating Leases	September 30, 2024

Remainder of 2024	$	22
2025	90
2026	93
2027	16





Total lease payments	221
Less: imputed interest	(39)
Present value of lease liabilities	182
Less: current portion	(65)
Lease liabilities, non-current	$	117

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 10. Debt

Keep Well Agreement

On April 15, 2022, the Company entered into a Master Note Purchase Agreement (the “Original Keep Well Agreement”) with Acuitas, an entity indirectly wholly owned and controlled by Terren S. Peizer, the Company’s former Chief Executive Officer and Chairman. The Original Keep Well Agreement was amended on each of August 12, 2022 (the “First Amendment”), November 19, 2022 (the “Second Amendment”), December 30, 2022 (the “Third Amendment”), June 23, 2023 (the “Fourth Amendment”), October 31, 2023 (the “Fifth Amendment”), March 28, 2024 (the “Sixth Amendment”) and August 13, 2024 (the “August 2024 Amendment”). The Company refers to the Original Keep Well Agreement as amended to date as the “Keep Well Agreement.”

The Keep Well Agreement contains customary covenants that must be complied with by the Company, including, among other covenants, restrictions on the Company’s ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into certain asset sale transactions, and covenants that require the Company to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain its property in good repair, maintain insurance and comply with applicable laws.

The Keep Well Agreement also includes the following financial covenants: a requirement that annualized consolidated recurring revenue for the preceding twelve months be at least $11.0 million tested monthly, and a requirement that consolidated liquidity must be greater than $5.0 million at all times. The Company was in compliance with such financial covenants as of September 30, 2024.

The Original Keep Well Agreement

Under the terms of the Original Keep Well Agreement, subject to the satisfaction of certain conditions precedent (some of which are described below), the Company could borrow from Acuitas up to $25.0 million, and in connection with each such borrowing, the Company agreed to issue to Acuitas a senior secured note (each, an “Original Keep Well Note”) with a principal amount equal to the amount borrowed. Subject to obtaining approval of the Company’s stockholders as required by applicable Nasdaq listing rules, which approval was obtained at the Company’s annual meeting of stockholders held on August 29, 2022 (the “2022 Annual Meeting of Stockholders”), in connection with each Original Keep Well Note issued by the Company, the Company agreed to issue to Acuitas a warrant to purchase shares of the Company’s common stock (each, an “Original Keep Well Warrant”). The number of shares of the Company’s common stock underlying each Original Keep Well Warrant was to be equal to (y) the product of the principal amount of the applicable Keep Well Note and 20% divided by (z) the exercise price of the applicable Original Keep Well Warrant, which was $1.69 per share, the Nasdaq Official Closing Price (as reflected on Nasdaq.com) of the Company’s common stock immediately preceding the time the parties entered into the Original Keep Well Agreement. The maturity date of the Original Keep Well Notes was September 1, 2023.

The Second Amendment, the Third Amendment and Fourth Amendment to the Keep Well Agreement

Under the Second Amendment and the Third Amendment, many of the conditions precedent to the Company’s ability to borrow, and Acuitas’ obligation to lend, were eliminated, the Company’s obligation to pay accrued interest on a monthly basis was eliminated, and instead accrued interest will be added to the principal amount of the applicable secured note issued under the Keep Well Agreement, the financial covenant that the Company’s consolidated recurring revenue be at least $15.0 million was reduced to $11.0 million, and (a) the minimum conversion price of the Keep Well Notes (as defined below) and (b) the minimum dollar amount to which the denominator will be reduced for purposes of calculating the warrant coverage on future borrowings under the Keep Well Agreement, was revised to be $0.15 (subject to adjustment for stock splits or other recapitalizations that affect all common stockholders proportionately). The $0.15 referenced in the preceding sentence was adjusted to $0.90 after giving effect to the 2023 Reverse Stock Split. See discussions below for further adjustments.

Below is a summary of certain other amendments effected by the Second Amendment, the Third Amendment and the Fourth Amendment:

•the maturity date of the Original Keep Well Notes (and of any other secured notes issued under the Keep Well Agreement) was extended from September 1, 2023 to June 30, 2024 in the Second Amendment, and further extended from June 30, 2024 to September 30, 2024 in the Fourth Amendment, subject to acceleration for certain customary events of default, including for failure to make payments when due, breaches by the Company of certain covenants and

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

representations in the Keep Well Agreement, defaults by the Company under other agreements related to indebtedness, the Company’s bankruptcy or dissolution, and a change of control of the Company;

•per the Second Amendment, the remaining amount available to be borrowed under the Keep Well Agreement was increased from $10.7 million to $14.0 million and the provision that previously reduced the amount available to be borrowed by the net proceeds the Company received from equity financings was eliminated;

•per the Second Amendment, the funding structure was changed from borrowings as needed from time to time at the election of the Company, to the Company agreeing to borrow, and Acuitas agreeing to lend, subject to the conditions in the Keep Well Agreement (which conditions were also amended as described above), the entire then-remaining amount of $14.0 million as follows: $4.0 million in each of January (which was borrowed on January 5, 2023), March (which was borrowed on March 6, 2023) and June 2023, and $2.0 million in September 2023; the funding structure was further amended in the Fourth Amendment with respect to the $4.0 million and $2.0 million that was supposed to be funded in June 2023 and September 2023, respectively, as described below;

•per the Fourth Amendment, in lieu of the $4.0 million and $2.0 million that was supposed to be funded in June 2023 and September 2023 as described above (and in full satisfaction of Acuitas’ obligation to purchase Keep Well Notes from the Company), Acuitas agreed to deliver to the Company for deposit and to be held by the Company in a segregated account established by the Company (the proceeds so deposited, the “Escrowed Funds” and the account into which the proceeds are so deposited, the “Escrow Account”): (i) $4.0 million on June 23, 2023 (which was received by the Company on June 26, 2023); and (ii) $2.0 million on September 1, 2023 (which was received by the Company on September 7, 2023);

•per the Fourth Amendment, any time, and from time to time, that the Company has less than $1.0 million of Qualified Cash (as defined in Fourth Amendment), the Company may withdraw $1.0 million of Escrowed Funds (or any lesser remaining amount of Escrowed Funds) from the Escrow Account; each such withdrawal will be treated as a sale by the Company to Acuitas of a Keep Well Note with a principal amount equal to the amount withdrawn by the Company and in connection with each such withdrawal, the Company will also issue a Keep Well Warrant to Acuitas; and

•per the Fourth Amendment, if the Company does not complete a Qualified Financing (as defined below) on or prior to October 31, 2023, then, on October 31, 2023, the Company must withdraw all of the Escrowed Funds (other than any accrued interest thereon, all of which will belong to the Company) then on deposit in the Escrow Account, and such withdrawal will be treated as a sale by the Company to Acuitas of a Keep Well Note, and in connection with such withdrawal, the Company will also issue a Keep Well Warrant to Acuitas.

In the event the Company completes a Qualified Financing, all of the Escrowed Funds (other than any accrued interest thereon, all of which will belong to the Company) then on deposit in the Escrow Account will be invested in the Qualified Financing on behalf of Acuitas on the same terms as all other investors in the Qualified Financing, and the Company’s obligation to sell to Acuitas, and Acuitas’ obligation to purchase from the Company, any further Keep Well Notes will thereupon be deemed discharged with respect to the amount so invested.

A “Qualified Financing” generally means any financing in which the Company issues or sells any of its equity securities for cash to one or more third party investors resulting in gross proceeds to the Company of at least $10.0 million exclusive of any amount invested by Acuitas in such financing. For a discussion regarding an amendment to the definition of Qualified Financing as well as investment of Escrowed Funds and conversion of Keep Well Notes, as described below, see “Fifth Amendment to Keep Well Agreement" below.

Conversion of Keep Well Notes

Following approval of the Company’s stockholders obtained at a special meeting of stockholders held in February 2023 (the “2023 Special Meeting”), Acuitas, at its option, has the right to convert the entire principal amount of the secured notes issued under the Keep Well Agreement, plus all accrued and unpaid interest thereon, in whole or in part, into shares of the Company’s common stock at a conversion price equal to the lesser of (i) $0.40 per share and (ii) the greater of (a) the closing price of the Company’s common stock on the trading day immediately prior to the applicable conversion date and (b) $0.15 (the “Conversion Right”). The $0.40 and $0.15 referenced in the preceding sentence are subject to adjustment for stock splits and similar corporate actions, and were adjusted to $2.39 and $0.90, respectively, after giving effect to the 2023 Reverse Stock Split. See further discussion under “Sixth Amendment and August 2024 Amendment - Surviving Note” below.

Each Original Keep Well Note outstanding as of the date of stockholder approval was deemed to be amended to contain the Conversion Right. The Company refers to such Original Keep Well Notes, as so amended, and to all other secured notes issued under the Keep Well Agreement, as the “Keep Well Notes” below.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In addition, in connection with the conversion of the principal amount of any Keep Well Note and/or accrued interest thereon into shares of the Company’s common stock (as described above), the Company will issue to Acuitas a five-year warrant to purchase shares of the Company’s common stock, and the number of shares of the Company’s common stock subject to each such warrant will be equal to (x) 100% of the amount converted divided by (y) the conversion price of the Keep Well Note then in effect, and the exercise price of each such warrant will be equal to the conversion price of the Keep Well Note then in effect, subject to adjustment as described below.

Increase in Warrant Coverage and Other Adjustments

Following approval of the Company’s stockholders obtained at the 2023 Special Meeting, (a) the exercise price of the warrants issued under the Keep Well Agreement (both the Original Keep Well Warrants outstanding as of the date of the Second Amendment and those issued thereafter) was reduced to $0.45 per share ($2.70 per share as adjusted for the 2023 Reverse Stock Split), which was the Nasdaq Official Closing Price (as reflected on Nasdaq.com) of the Company’s common stock immediately preceding the time the parties entered into the Second Amendment, and which is subject to future adjustment as described below; (b) the number of shares of the Company’s common stock subject to the warrants outstanding at the time of the 2023 Special Meeting (i.e., 1,775,148 shares, before the 2023 Reverse Stock Split) was increased to the number of shares that would have been subject to such warrants if the warrant coverage was equal to 100% of the amount borrowed under the Keep Well Agreement in respect of which the applicable Keep Well Warrant was issued (instead of 20%) divided by $0.45 (i.e., 33,333,333 shares, or an additional 31,558,185 shares; 5,555,557 shares , or an additional 5,259,696 shares, as adjusted for the 2023 Reverse Stock Split); and (c) the warrant coverage on borrowings under the Keep Well Agreement after the date of the Second Amendment was increased to a number of shares of the Company’s common stock equal to (x) 100% of the amount borrowed (instead of 20% of such amount) divided by (y) the greater of (i) the per share warrant exercise price (as adjusted as of the date of issuance of the applicable warrant) and (ii) $0.15 ($0.90 as adjusted for the 2023 Reverse Stock Split) (the “Warrant Coverage Denominator”), subject to future adjustment as described below, and each warrant issued after the date of the Second Amendment has an exercise price equal to $0.45 per share ($2.70 per share as adjusted for the 2023 Reverse Stock Split), subject to future adjustment as described below.

As a result of stockholder approvals obtained at the 2023 Special Meeting, the Company issued to the holder of each warrant issued under the Keep Well Agreement outstanding as of the date of such approval, in exchange for such warrant, a new warrant to purchase shares of the Company’s common stock that reflect the amendments to the warrants described above and below, including the increase in the warrant coverage and the decrease in the exercise price. The Company refers to the new warrants issued in exchange for outstanding warrants and to any warrants issued in connection with future borrowings under the Keep Well Agreement or in connection with the conversion of the principal amount of any Keep Well Note and/or accrued interest thereon into shares of the Company’s common stock as the “Keep Well Warrants.”

Under the terms of the Second Amendment, if the reverse stock split approved at the 2023 Special Meeting is effected, then:

(1) the exercise price of each warrant issued pursuant to the Keep Well Agreement that is outstanding as of the effective time of the reverse stock split would be reduced to the lesser of (i) the volume-weighted average price of the Company’s common stock over the five trading days beginning on the trading day that commences immediately after the effective time of the reverse stock split (the “Reverse Stock Split Price”) and (ii) the exercise price after giving effect to the adjustment thereto as a result of the reverse stock split (the lesser of (i) and (ii), the “Post-Stock Split Price”), subject to further reduction as described below; and

(2) the Warrant Coverage Denominator would be reduced to the greater of $0.15 ($0.90 as adjusted for the 2023 Reverse Stock Split) and the Post-Stock Split Price, subject to further reduction as described below.

As discussed in Note 7 above, the reverse stock split approved at the 2023 Special Meeting was effected on July 27, 2023. After giving effect to such reverse stock split, and in accordance with the above, the Post-Stock Split Price was determined to be $2.44 on August 3, 2023. In addition, after giving effect to such reverse stock split, the number of shares of the Company’s common stock underlying the Keep Well Warrants outstanding at the effective time of the reverse stock split were proportionally adjusted such that the aggregate exercise price payable upon exercise of the Keep Well Warrants remains unchanged.

Also under the terms of the Second Amendment: (i) the exercise price of each Keep Well Warrant outstanding as of September 1, 2023 was to be reduced to the closing price of the Company’s common stock on August 31, 2023, if such closing price is less

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

than the Post-Stock Split Price; and (ii) the Warrant Coverage Denominator was to be reduced to the greater of (a) $0.15 (or $0.90 as adjusted after giving effect to the 2023 Reverse Stock Split) and (b) the lesser of (x) the Post-Stock Split Price and (y) the closing price of the Company’s common stock on August 31, 2023. As such, on September 1, 2023, the exercise price of each Keep Well Warrant and the Warrant Coverage Denominator (applicable to warrant issuances, if any, thereafter) was determined to be $0.92.

In February 2023, as a result of approvals obtained at the 2023 Special Meeting relating to the terms provided for in the Second Amendment, as described above, the Company determined that terms of the Keep Well Agreement as amended by the Second Amendment is substantially different from the terms in the Original Keep Well Agreement and that extinguishment of the senior secured notes issued under the Original Keep Well Agreement and recognition of a new debt instrument for the senior secured notes under the Original Keep Well Agreement as amended by the Second Amendment was appropriate. As such, in February 2023, the Company recorded the extinguishment of the senior secured notes under the Original Keep Well Agreement, resulting in a loss on extinguishment of debt of $2.2 million, which was recorded as part of additional paid in capital since the debt transaction is with Acuitas, a significant shareholder. The new debt instrument includes an embedded conversion feature, as described above, which was accounted for in accordance with ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity's Own Equity,” which the Company adopted on January 1, 2022, and accordingly the Company did not separately present such embedded conversion feature in equity but rather accounted for the convertible debt wholly as debt. The Company also assessed and determined that the Keep Well Warrants qualified for equity classification and applied the relative fair value method to allocate proceeds from the debt issuance to the Keep Well Warrants. The Company incurred $0.3 million of debt issuance costs related to the Second Amendment. The fair value of the Keep Well Warrants and new debt issuance costs relating to the Second Amendment were recorded as part of debt discount and accreted using the effective interest method over the contractual term of the debt.

Additional Commitment Shares

As a result of stockholder approvals obtained at the 2023 Special Meeting, the Company issued to Acuitas 22,646 shares of the Company's common stock (after giving effect to the 2023 Reverse Stock Split and 2024 Reverse Stock Split).

Fifth Amendment to Keep Well Agreement

Changes to Qualified Financing. Under the Fifth Amendment, the minimum amount to be raised in an equity financing for such financing to constitute a “Qualified Financing” was reduced from $10.0 million to $8.0 million, and the deadline by when a Qualified Financing must be completed before the Company is required to withdraw the Escrowed Funds was extended from October 31, 2023 to January 31, 2024. Under a letter agreement entered into on November 9, 2023, the minimum amount to be raised in an equity financing for such financing to constitute a “Qualified Financing” was further reduced to $6.0 million.

Conversion of Keep Well Notes. Under the Fifth Amendment, if the Company completed a Qualified Financing, Acuitas agreed to convert into shares of the Company’s common stock the aggregate principal amount of the Keep Well Notes plus all accrued and unpaid interest thereon, minus (a) $7.0 million, minus (b) the principal amount of any Keep Well Notes purchased with funds from the Escrow Account prior to the closing of the Qualified Financing, if any, in accordance with the terms (including the conversion price) of the Keep Well Agreement and the Keep Well Notes (the “Notes Conversion”); provided that if the offering price per share at which the shares of common stock and accompanying warrants are sold to the public in the Qualified Financing (the “Offering Price”) is less than the conversion price at which Keep Well Notes are converted, upon the effectiveness of the Fifth Amendment Stockholder Approval Matters (as defined below): (1) the Company would issue to Acuitas such additional shares of common stock such that the total number of shares of common stock issued in respect of the Notes Conversion plus such additional shares of common stock would equal the number of shares that would have been issued in respect of the Notes Conversion if the Keep Well Notes converted in the Notes Conversion were converted at a conversion price equal to the Offering Price; and (2) the exercise price of the warrants issued to Acuitas in connection with the Notes Conversion (the “Conversion Warrants”) would be reduced to the Offering Price and the number of shares of common stock subject to the Conversion Warrants would be increased to the number of shares of common stock that would have been subject to the Conversion Warrants if the Keep Well Notes were converted at a conversion price equal to the Offering Price.

Private Placement. In lieu of the provisions set forth in the Fourth Amendment concerning the investment of Escrowed Funds in the offering that constitutes a Qualified Financing, the Fifth Amendment provided that if an offering constituted a Qualified Financing, the Company and Acuitas will immediately prior to, or simultaneously with the closing of such offering, consummate a private placement (the “Private Placement”) of $11.0 million of an unregistered pre-funded warrant to purchase shares of the

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Company’s common stock (the “Private Placement Pre-Funded Warrant”) and an unregistered warrant to purchase shares of the Company’s common stock (the “Private Placement Warrant,” and together with the Private Placement Pre-Funded Warrant, the “Private Placement Securities”). The consideration for the Private Placement Securities purchased by Acuitas would consist of (a) the Escrowed Funds then held in the Escrow Account, and (b) a reduction of the aggregate amounts outstanding under the Keep Well Notes (after giving effect to the Notes Conversion) to $2.0 million (the senior secured convertible promissory note evidencing such $2.0 million, the “Surviving Note”). Each Private Placement Pre-Funded Warrant would be sold together with two Private Placement Warrants with each Private Placement Warrant exercisable for one share of our common stock.

Surviving Note. Under the Fifth Amendment, the maturity date of the Surviving Note was extended from September 30, 2024 to May 14, 2026, which date is two years and six months after the closing date of the offering that constituted a Qualified Financing, unless the Surviving Note becomes due and payable in full earlier, whether by acceleration or otherwise. In addition, if the Offering Price is lower than $0.90, then, subject to the effectiveness of the Fifth Amendment Stockholder Approval Matters, the $0.90 floor on the conversion price of the Surviving Note would be replaced with the Offering Price. On December 20, 2023, upon the effectiveness of the Fifth Amendment Stockholder Approval Matters (as defined below), the $0.90 conversion price of the Surviving Note was reduced to $0.60, the Public Offering Price, discussed below.

Stockholder Approval. Under the Fifth Amendment, among other things, the Company was required to seek stockholder approval in accordance with the Nasdaq listing rules of (A) the issuance of the shares of the Company’s common stock issuable upon exercise of (x) the warrants and the pre-funded warrants sold in the offering that constitutes a Qualified Financing and (y) the Private Placement Securities that, in the aggregate for clauses (x) and (y) above, are in excess of the maximum number of shares of the Company’s common stock permitted to be issued without such approval under Nasdaq’s listing rules (which amount is equal to 19.99% of the total number of shares of the Company’s common stock outstanding immediately following the Notes Conversion and immediately prior to the closing of the offering that constitutes a Qualified Financing and/or the Private Placement), (B) the amendment to the conversion price of the Surviving Note described above, and (C) any other terms of the offering that constitutes a Qualified Financing, the Private Placement and/or the Fifth Amendment that require approval of the Company’s stockholders under Nasdaq’s listing rules (collectively, the “Fifth Amendment Stockholder Approval Matters”).

Support Agreement. In connection with entering into the Fifth Amendment, on October 31, 2023, the Company and Acuitas entered into a support agreement pursuant to which Acuitas has agreed to vote the shares of the Company's common stock it beneficially owns in favor of the Fifth Amendment Stockholder Approval Matters.

Public Offering, Private Placement and Notes Conversion

On November 14, 2023, the Company completed a public offering (the “Public Offering”). In the Public Offering, the Company issued (a) 4,592,068 shares of its common stock and 9,184,136 warrants to purchase up to 9,184,136 shares of its common stock at a combined public offering price of $0.60 per share of common stock and accompanying warrants (the “Public Offering Price”), and (b) 5,907,932 pre-funded warrants to purchase up to 5,907,932 shares of its common stock (the “Public Offering Pre-Funded Warrants”) and 11,815,864 warrants to purchase up to 11,815,864 shares of its common stock at a combined public offering price of $0.5999 per Public Offering Pre-Funded Warrant and accompanying warrants, which represents the per share public offering price for the common stock and accompanying warrants less the $0.0001 per share exercise price for each Public Offering Pre-Funded Warrant. The Company refers to the warrants sold in the Public Offering accompanying the shares of common stock and the warrants accompanying the Public Offering Pre-Funded Warrants as the “Public Offering Warrants.” The Company received gross proceeds of $6.3 million from the Public Offering, and therefore the Public Offering constituted a Qualified Financing. Total net proceeds was approximately $5.3 million (net of approximately $1.0 million of offering related fees and expenses, not including the placement fee payable relating to the Private Placement discussed below). The Public Offering Warrants had an initial exercise price of $0.85 per share, subject to adjustment. The exercisability of the Public Offering Warrants was subject to the effectiveness of the Fifth Amendment Stockholder Approval Matters, and expire five years from the effectiveness thereof.

In accordance with the Fifth Amendment, concurrent with the closing of the Public Offering, the Company issued to Humanitario Capital LLC, an affiliate of Acuitas Capital, a Private Placement Pre-Funded Warrant to purchase up to 18,333,333 shares of the Company's common stock, at an exercise price of $0.0001 per share, and a Private Placement Warrant to purchase up to 36,666,666 shares of the Company's common stock, at an exercise price of $0.85 per share, subject to adjustment, for total consideration of $11.0 million. The consideration for the Private Placement Securities consisted of (a) the $6.0 million in the Escrow Account that Acuitas previously delivered to the Company in June 2023 and September 2023 in accordance with the Keep Well Agreement (which $6.0 million was reclassified from restricted cash to unrestricted cash) and (b) $5.0 million of debt owed

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

under the Keep Well Notes, which was cancelled. The Company wrote-off $1.5 million of debt discount in connection with $5.0 million Keep Well Notes cancelled. The Company paid placement fees of approximately $0.4 million in connection with the Private Placement.

The Company assessed and determined that the warrants issued in the Public Offering and Private Placement as described above qualified for equity classification and applied the relative fair value method to allocate proceeds from each Public Offering and Private Placement transactions to the respective warrants.

In accordance with the Fifth Amendment, on November 14, 2023 and before the closing of the Public Offering and Private Placement, the Notes Conversion was effected. In connection with the Notes Conversion, $16.2 million of Keep Well Notes were converted into 18,054,791 shares of the Company’s common stock and the Company issued to Acuitas a Conversion Warrant to purchase up to 18,054,791 shares of the Company’s common stock with an exercise price of $0.90 per share, which was the conversion price of the Keep Well Notes converted in the Notes Conversion. The Company wrote-off $3.7 million of debt discount in connection with the conversion of $16.2 million of Keep Well Notes.

On November 15, 2023, Acuitas, who owned a majority of the outstanding shares of the Company’s common stock as of that date, executed and delivered to the Company a written consent approving the Fifth Amendment Stockholder Approval Matters. The Company filed an information statement regarding the Fifth Amendment Stockholder Approval Matters with the SEC on November 30, 2023 and mailed such information statement to the holders of its common stock. The actions approved by such consent became effective on December 20, 2023.

Because the Public Offering Price was less than the conversion price at which Keep Well Notes were converted in the Notes Conversion, in December 2023 (1) the Company issued to Acuitas 9,027,395 additional shares of common stock, which when added with the shares of common stock issued in respect of the Notes Conversion, equaled the total number of shares of common stock that the Company would have issued in respect of the Notes Conversion if the Keep Well Notes converted in the Notes Conversion were converted at a conversion price equal to the Public Offering Price; and (2) the exercise price of the Conversion Warrant was reduced to the Public Offering Price and the number of shares of common stock subject to the Conversion Warrant was increased by an additional 9,027,395 shares to equal the number of shares of common stock that would have been subject to the Conversion Warrant if the Keep Well Notes converted in the Notes Conversion were converted at a conversion price equal to the Public Offering Price.

Sixth Amendment and August 2024 Amendment

Issuance of Demand Notes and Warrants. Under the Sixth Amendment, the Company agreed to issue and sell to Acuitas, in Acuitas’ sole discretion, up to $15 million of senior secured convertible promissory notes (each a “Sixth Amendment Note”).

Under the August 2024 Amendment, Acuitas agreed to purchase $5.0 million of the Sixth Amendment Notes (the “Committed Demand Notes”) as follows: (a) $1.5 million no later than August 15, 2024; (b) $1.0 million no later than August 30, 2024; (c) $1.0 million no later than September 1, 2024; (d) $1.0 million no later than October 1, 2024; and (e) $0.5 million no later than November 1, 2024. The Company refers to the Sixth Amendment Notes, including the Committed Demand Notes, as the “Demand Notes.” To the extent the Company receives proceeds from a capital contribution or the issuance of any capital stock on or after August 13, 2024 and on or before November 1, 2024, in its sole discretion, Acuitas has the right to elect to reduce the amount of Committed Demand Notes to be purchased on a dollar-for-dollar basis (the “Offset Right”). Under the August 2024 Amendment, Acuitas also agreed not to exercise its right to require that any amounts due under any Demand Note be paid until after August 30, 2025. Notwithstanding the foregoing, if Acuitas has purchased all $5.0 million of the Committed Demand Notes, less any amounts not purchased pursuant to its exercise of the Offset Right, and the Company receives any proceeds from a capital contribution or the issuance of any capital stock after November 1, 2024, Acuitas, in its sole discretion, may require that the net proceeds therefrom be applied to pay any amounts due under the Committed Demand Notes. The terms of the Demand Notes are substantially similar to the Surviving Note, except the amounts due under the Demand Notes are payable upon demand of the holder at any time after August 30, 2025.

The Company issued and sold Demand Notes to Acuitas in the original principal amount of $1.5 million on each of April 5, 2024, May 8, 2024, June 5, 2024 and August 28, 2024, and $1.0 million on September 30, 2024. As of September 30, 2024, in Acuitas’ sole discretion, Acuitas could purchase from the Company, and the Company would issue and sell to Acuitas, up to an additional $8.0 million in principal amount of Demand Notes.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In connection with each Demand Note purchased by Acuitas from the Company, the Company agreed to issue to Acuitas (or an entity affiliated with Acuitas, as designated by Acuitas) a warrant (“Demand Warrant”) to purchase such number of shares of the Company’s common stock that results in 200% warrant coverage.

The initial exercise price of each Demand Warrant issued with respect to: (a) the first $4.5 million of principal amount of Demand Notes purchased by Acuitas, was the lesser of (i) $4.8557 (after giving effect to the reduction of the exercise price of the Public Offering Warrants and the Private Placement Warrant (collectively, the “November 2023 Warrants”) that occurred on April 5, 2024 as described below, and the 2024 Reverse Stock Split) and (ii) the greater of (1) the consolidated closing bid price of the Company’s common stock as reported on The Nasdaq Stock Market or such other exchange on which the Company’s common stock is listed (the “Exchange”) immediately preceding the time the applicable Demand Note is deemed issued by the Company and (2) $1.69 (after giving effect to the 2024 Reverse Stock Split), subject to adjustment for stock splits and similar transactions; and (b) any subsequent Demand Notes, will be the consolidated closing bid price of the Company’s common stock as reported on the Exchange immediately preceding the time the applicable Demand Note is deemed issued by the Company.

Following the occurrence of the Sixth Amendment Stockholder Approval Effective Date (as defined below), the Company issued Demand Warrants to Acuitas in respect of the Demand Notes issued to Acuitas in the original principal amount of $1.5 million on each of April 5, 2024, May 8, 2024, June 5, 2024 and August 28, 2024, and $1.0 million on September 30, 2024. In the aggregate, such Demand Warrants allow the holder thereof to purchase a total of 3.9 million shares of the Company's common stock (after giving effect to the 2024 Reverse Stock Split) at per share exercise prices ranging from $2.63 to $4.8557 (after giving effect to the 2024 Reverse Stock Split). The Company determined the relative fair value of such Demand Warrants issued through June 2024 and recorded a total of $2.7 million of expense included in "Debt issuance costs" in its condensed consolidated statement of operation for the nine months ended September 30, 2024. Also, the Company analyzed and determined that the relative fair value of such Demand Warrants issued relating to the Committed Demand Notes under the August 2024 Amendment are to be amortized using effective interest method through August 30, 2025 and as such, $1.1 million of debt discount was recorded on the Company's condensed consolidated balance sheet as of September 30, 2024.

The exercise price of each Demand Warrant is subject to further adjustment in accordance with the terms of the Demand Warrant and the Sixth Amendment. Each Demand Warrant has a term of five years and the other terms of the Demand Warrants are substantially similar to the terms of the November 2023 Warrants. See “Warrant Adjustment Provisions,” below.

Sixth Amendment Stockholder Approval. The Company was required to seek stockholder approval in accordance with the Nasdaq listing rules of (a) the issuance of the (x) Demand Warrants, (y) the New Keep Well Warrants and (z) the Demand Notes, (b) the issuance of the shares of the Company’s common stock upon exercise or conversion, as applicable, of the Demand Warrants, the New Keep Well Warrants, and the Demand Notes, and (c) any other terms of the Sixth Amendment that require approval of the Company’s stockholders under the Nasdaq listing rules (the “Sixth Amendment Stockholder Approval Matters”).

On April 22, 2024, Acuitas, who owned a majority of the outstanding shares of the Company’s common stock as of that date, executed and delivered to the Company a written consent approving the Sixth Amendment Stockholder Approval Matters. The Company filed an information statement regarding the Sixth Amendment Stockholder Approval Matters with the SEC on May 13, 2024 and mailed such information statement to the holders of its common stock. The actions approved by such consent became effective on June 2, 2024 (the “Sixth Amendment Stockholder Approval Effective Date”).

Replacement of Keep Well Warrants. Following the occurrence of the Sixth Amendment Stockholder Approval Effective Date, the Company issued to each holder of each warrant to purchase shares of the Company’s common stock issued under the Keep Well Agreement outstanding as of the Sixth Amendment Stockholder Approval Effective Date (any such warrant, a “Replaced Keep Well Warrant”), in exchange therefor, a warrant to purchase shares of the Company’s common stock (a “New Keep Well Warrant”) substantially in the form of the Demand Warrant, and each Replaced Keep Well Warrant was deemed automatically cancelled. Each New Keep Well Warrant has (a) the same issuance date as the Replaced Keep Well Warrant in respect of which it was issued, (b) a term of five years from the original issuance date of the Replaced Keep Well Warrant in respect of which it was issued, and (c) an initial exercise price equal to $0.3442 (after giving effect to the reduction of the exercise price of the November 2023 Warrants that occurred on April 5, 2024 described below), subject to further adjustment in accordance with its terms and the terms of the Sixth Amendment. The $0.3442 referenced in the preceding sentence is subject to adjustment for stock splits and similar corporate actions, and was adjusted to $4.8557 after giving effect to the 2024 Reverse Stock Split.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Surviving Note. Effective as of the Sixth Amendment Stockholder Approval Effective Date, the conversion price of the Surviving Note was reduced from $0.60 to the lesser of (i) $0.36, and (ii) the greater of (a) the consolidated closing bid price of the Company’s common stock as reported on the Exchange on the trading day that is immediately prior to the applicable conversion date of such note and (b) $0.12, subject to further adjustment in accordance with its terms. The Company concluded that this modification of the conversion price of the Surviving Note was a substantially different term as provided in the Sixth Amendment, and therefore extinguishment of original debt and recognition of new debt is appropriate. As such, the Company recorded a $0.5 million loss on extinguishment of debt, which was recorded as part of additional paid in capital since the debt transaction is with Acuitas, a significant shareholder. The $0.60, $0.36 and $0.12 referenced in the preceding sentence are subject to adjustment for stock splits and similar corporate actions, and were adjusted to $9.00, $5.40 and $1.80, respectively, after giving effect to the 2024 Reverse Stock Split.

Waivers by Holders of Outstanding Warrants

On March 28, 2024, the Company and each holder of a Public Offering Warrant entered into a waiver and consent agreement (collectively, the “Public Offering Investor Waivers”), pursuant to which such holder agreed to waive, with respect to the transactions contemplated by the Sixth Amendment, certain limitations and prohibitions in the securities purchase agreement pursuant to which the Public Offering Warrants were issued that otherwise would have prohibited the Company from entering into Sixth Amendment and consummating the transactions contemplated thereby.

In addition, pursuant to the Public Offering Investor Waivers, the holders of the Public Offering Warrants agreed to the following adjustments to the exercise price of the Public Offering Warrants then in effect (in lieu of the adjustments that would otherwise be made in accordance with the terms of the Public Offering Warrants) in connection with the Sixth Amendment and the transactions contemplated thereby: (i) the exercise price was reduced to $0.36 per share at the time the Company entered into the Sixth Amendment; (ii) if $0.36 was greater than the lowest volume weighted average price (“VWAP”) of the Company’s common stock on any trading day during the five trading day period immediately following the public announcement of the Company entering into the Sixth Amendment (the “Restricted Transaction Measuring Period”), then the exercise price per share would be further reduced to the lowest VWAP on any trading day during the Restricted Transaction Measuring Period; and (iii) if any senior secured promissory note issued under the Keep Well Agreement is converted into shares of the Company’s common stock at a conversion price per share less than the exercise price per share of the Public Offering Warrants then in effect, after giving effect to the preceding clauses (i) and (ii) and any adjustments pursuant to the terms of the Public Offering Warrant (other than Section 3(b) thereof), then the exercise price will be further reduced to such conversion price at such time of such conversion.

Also on March 28, 2024, the Company and Humanitario entered into a waiver and agreement (together with the Public Offering Investors Waivers, the “Investor Waivers”) pursuant to which, among other things, Humanitario agreed to the adjustments to the exercise price of the Private Placement Warrant then in effect as described above for the Public Offering Warrants (in lieu of the adjustments that would otherwise be made in accordance with the terms of such warrant) in connection with the Sixth Amendment and the transactions contemplated thereby.

The lowest VWAP on any trading day during the Restricted Transaction Measuring Period (the five trading day ended on April 5, 2024) was $0.3442 and accordingly, the exercise price of the November 2023 Warrants was reduced to $0.3442 per share, subject to further adjustment in accordance with the terms of the Investor Waivers and the November 2023 Warrants. The $0.3442 referenced in the preceding sentence is subject to adjustment for stock splits and similar corporate actions, and was adjusted to $4.8557, after giving effect to the 2024 Reverse Stock Split.

In order to enter into the Sixth Amendment, as described above, the Company and the holders of the Public Offering Warrants and Private Placement Warrants agreed to adjust the exercise price and simultaneously increase the number of shares of the Company's common stock issuable upon exercise of the Public Offering Warrants and Private Placement Warrants, as described above. The Company deemed these modifications of warrants to be debt issuance costs, which was recorded at their relative fair value of $10.7 million. A cumulative total of $10.9 million of debt issuance costs (the foregoing $10.7 million plus $0.2 million of legal cost) was recorded as an other long-term asset included in "Other assets" on the Company's condensed consolidated balance sheet. As of September 30, 2024, $3.3 million of such debt issuance costs, representing a proportionate amount relative to the $4.5 million of Demand Notes that have been issued through August 12, 2024, has been expensed and included in "Debt issuance costs" in the Company's condensed consolidated statement of operation for the nine months ended September 30, 2024, and $1.8 million of such debt issuance costs, representing a proportionate amount relative to the $2.5 million of Demand Notes that

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

have been issued from August 13, 2024 through September 30, 2024, has been recorded as debt issuance costs, which are being amortized using the effective interest method through August 30, 2025.

Warrant Adjustment Provisions

In addition to customary adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock, the exercise price of the November 2023 Warrants, the Demand Warrants and New Keep Well Warrants, and the number of shares of common stock issuable upon exercise thereof are subject to adjustment upon the occurrence of the events described below (collectively, the “Warrant Adjustment Provisions”).

•Adjustment in May 2026. On May 14, 2026, the exercise price of the warrants will be reduced to the greater of (i) $2.376 per share (as adjusted for the 2024 Reverse Stock Split) and (ii) the lesser of (x) the then exercise price and (y) the lowest volume weighted average price of the Company's common stock on any trading day during the five trading day period immediately before May 14, 2026.

•Alternative Exercise Price Following Certain Issuances. If the Company issues or sells, or enters into any agreement to issue or sell, any common stock, common stock equivalents, or rights, warrants or options to purchase shares of its capital stock or common stock equivalents that are issuable or convertible into or exchangeable or exercisable for shares of the Company's common stock at a price which varies or may vary with the market price of our common stock (excluding customary adjustments in the event of stock dividends, stock splits, reorganizations or similar events), the holder will have the right, in its sole discretion, to substitute the variable price for the exercise price of its warrants.

•Adjustment for Stock Combination Events. In the event of stock dividends, stock splits, reorganizations or similar events affecting the Company's common stock (a “Stock Combination Event”), if the Event Market Price (as defined below) is less than the exercise price of the warrants then in effect (after giving effect to customary adjustments thereto as a result of the event), then on the 16th trading day immediately following the Stock Combination Event, the exercise price of the warrants will be reduced to the Event Market Price. “Event Market Price” means, with respect to any Stock Combination Event, the quotient determined by dividing (x) the sum of the VWAP of the Company's common stock for each of the five lowest trading days during the 20 consecutive trading day period ending and including the trading day immediately preceding the 16th trading day after the date of such Stock Combination Event, by (y) five.

•Adjustment Upon Restricted Investor Subsequent Placement. If at any time prior to June 20, 2027, the Company (1) grants, issues or sells (or enters into any agreement to grant, issue or sell) any shares of common stock, non-convertible indebtedness and/or common stock equivalents to Acuitas that results in a reduction of the exercise price in accordance with the terms of the warrants, or (2) consummates (or enters into any agreement with respect to) any other financing with Acuitas (any transaction described in clause (1) or (2), other than certain exempt issuances, a “Restricted Transaction”) and the exercise price of the warrants is greater than the lowest VWAP of the Company's common stock on any trading day during the five trading day period immediately following the public announcement of such Restricted Transaction, then the exercise price of the warrants will be reduced to the lowest VWAP on any trading day during such five trading day period.

•Adjustment for Dilutive Issuances. If the Company issues (or enters into any agreement to issue) any shares of its common stock or common stock equivalents, excluding certain exempt issuances, for a consideration per share less than the exercise price of the warrants in effect immediately prior to such issuance or deemed issuance, then the exercise price of the warrants will be reduced to an amount equal to the consideration per share at which the common stock or common stock equivalents were issued or deemed issued.

•Adjustment to Number of Shares Issuable Upon Exercise. Simultaneously with any adjustment to the exercise price on or prior to June 20, 2027, the number of shares of common stock issuable upon exercise will be increased or decreased proportionally, such that the aggregate exercise price of the warrants, after taking into account the adjustment in the exercise price, will be equal to the aggregate exercise price before the adjustment in the exercise price.

In the event of a fundamental transaction, as described in the November 2023 Warrants, the Demand Warrants and New Keep Well Warrants and which generally includes any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of the Company's properties or assets, the Company's consolidation or

Table of Contents

ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

merger with or into another person, the acquisition of more than 50% of the Company's outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by the Company's outstanding common stock, a holder of any of the November 2023 Warrants, the Demand Warrants or New Keep Well Warrants will be entitled to receive upon exercise thereof the kind and amount of securities, cash or other property that the holder would have received had it exercised the holder’s applicable warrant immediately prior to such fundamental transaction. Additionally, as more fully described in the November 2023 Warrants, the Demand Warrants and New Keep Well Warrants, in the event of certain fundamental transactions, the holder will be entitled to receive consideration in an amount equal to the Black Scholes Value (as defined in the warrants) of the warrants on the date of consummation of such transaction.

Borrowings Under the Keep Well Agreement

At September 30, 2024, a total of $9.8 million, which includes $0.8 million of accrued paid-in-kind interest, was outstanding under the Keep Well Agreement. The amount outstanding under the Keep Well Agreement, which are evidenced by Keep Well Notes, accrues interest based on the adjusted term SOFR for each interest period. At September 30, 2024, the effective weighted average interest rate for the Keep Well Notes was 21.31%.

The net carrying amounts of the liability components consists of the following (in thousands):


	September 30, 2024		December 31, 2023
Current debt:
Principal (Demand Notes)	$	7,433	$	—
Less: debt discount	(1,682)		—
Net carrying amount	$	5,751	$	—

Long-term debt:
Principal (Surviving Note)	$	2,411	$

Ontrak, Inc. [OTRK] Filings
Ontrak, Inc. [OTRKP] Filings
10-Q	[2024-11-13]
S-1	[2024-10-18]
10-Q	[2024-08-14]
10-Q	[2024-05-15]
S-1	[2024-04-22]
10-K	[2024-04-16]
10-Q	[2023-11-20]
10-Q	[2023-08-10]
S-1	[2023-06-29]
10-Q	[2023-05-12]
10-K	[2023-04-17]
10-Q	[2022-11-21]
10-Q	[2022-08-09]
10-Q	[2022-05-11]
10-K	[2022-04-15]
10-Q	[2021-11-05]
10-Q	[2021-08-05]
10-Q	[2021-05-06]
10-K	[2021-03-09]
10-Q	[2020-11-05]
10-Q	[2020-08-05]
10-Q	[2020-05-07]
10-K	[2020-03-16]
10-Q	[2019-11-14]
10-Q	[2019-08-14]
10-Q	[2019-05-09]
10-K	[2019-03-22]
10-Q	[2018-11-14]
10-Q	[2018-08-14]
10-Q	[2018-05-15]
10-K	[2018-03-07]
10-Q	[2017-11-14]
10-Q	[2017-08-15]
10-Q	[2017-05-15]
10-K	[2017-02-28]
S-1	[2017-02-10]
10-Q	[2016-11-14]
10-Q	[2016-08-15]
10-Q	[2016-05-13]
10-K	[2016-03-30]
10-Q	[2015-11-13]
10-Q	[2015-08-14]
S-1	[2015-05-29]
10-Q	[2015-05-15]
10-K	[2015-03-31]
10-Q	[2014-11-14]
10-Q	[2014-08-14]
10-Q	[2014-05-15]
10-K	[2014-03-31]
10-Q	[2013-11-13]
10-Q	[2013-08-14]
10-Q	[2013-05-15]
10-K	[2013-04-01]
10-Q	[2012-11-14]
10-Q	[2012-08-14]
10-Q	[2012-05-15]
10-K	[2012-03-30]

Ontrak, Inc. [OTRK] Filings

Ontrak, Inc. [OTRKP] Filings