Ontrak, Inc. [OTRKP] Filings

10-Q 1 otrk-20230331.htm 10-Q otrk-20230331

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

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.)

2200 Paseo Verde Parkway, Suite 280, Henderson, NV 89052

(Address of principal executive offices, including zip code)

(310) 444-4300

(Registrant's telephone number, including area code)

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
9.50% Series A Cumulative Perpetual Preferred Stock, $0.0001 par value	OTRKP	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 May 9, 2023, there were 29,321,106 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 March 31, 202 3 (unaudited) and December 31, 20 22	3

		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 202 2 (unaudited)	4

		Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 202 2 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 202 3 and 202 2 (unaudited)	6

		Notes to Condensed Consolidated Financial Statements	7

	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		29

	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		37

	ITEM 4. Controls and Procedures		37

PART II - OTHER INFORMATION			38

	ITEM 1. Legal Proceedings		38

	ITEM 1A. Risk Factors		38

	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		59

	ITEM 3. Defaults Upon Senior Securities		59

	ITEM 4. Mine Safety Disclosures		59

	ITEM 5. Other Information		59

	ITEM 6. Exhibits		59

	Signatures		61

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)


	March 31, 2023		December 31, 2022
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	7,393	$	5,032
Restricted cash - current	4,681		4,477
Receivables, net	695		973
Unbilled receivables	236		453
Deferred costs - current	160		156
Prepaid expenses and other current assets	2,288		3,168
Total current assets	15,453		14,259
Long-term assets:
Property and equipment, net	2,241		2,498
Restricted cash - long-term	—		204
Goodwill	5,713		5,713
Intangible assets, net	820		1,125
Other assets	381		1,326
Operating lease right-of-use assets	238		632
Total assets	$	24,846	$	25,757
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,706	$	1,927
Accrued compensation and benefits	2,106		1,987
Deferred revenue	309		326
Current portion of operating lease liabilities	60		653
Other accrued liabilities	4,032		4,576

Total current liabilities	8,213		9,469
Long-term liabilities:
Long-term debt, net	9,804		10,065
Long-term operating lease liabilities	209		546


Total liabilities	18,226		20,080
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 March 31, 2023 and December 31, 2022	—		—
Common stock, $0.0001 par value; 500,000,000 shares authorized; 29,320,248 and 27,167,479 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	3		3
Additional paid-in capital	457,708		448,415
Accumulated deficit	(451,091)		(442,741)
Total stockholders' equity	6,620		5,677
Total liabilities and stockholders' equity	$	24,846	$	25,757

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 March 31,
		2023		2022
Revenue		$	2,529	$	5,258
Cost of revenue		847		2,846
Gross profit		1,682		2,412

Operating expenses:
Research and development		1,644		3,428
Sales and marketing		990		1,436
General and administrative		5,818		10,693
Restructuring, severance and related charges		457		—
Total operating expenses		8,909		15,557
Operating loss		(7,227)		(13,145)

Other income, net		291		—
Interest expense, net		(1,394)		(1,400)
Loss before income taxes		(8,330)		(14,545)
Income tax expense		(20)		(100)
Net loss		(8,350)		(14,645)
Dividends on preferred stock - declared and undeclared		(2,239)		(2,239)
Net loss attributable to common stockholders		$	(10,589)	$	(16,884)

Net loss per common share, basic and diluted		$	(0.38)	$	(0.81)

Weighted-average common shares outstanding, basic and diluted		28,115		20,723

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share and per share data)


	Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2022	3,770,265	$	—	27,167,479	$	3	$	448,415	$	(442,741)	$	5,677


Common stock issued for financing	—	—		2,038,133	—		—		—		—
Warrants issued in connection with Keep Well Notes	—	—		—	—		10,797		—		10,797
Loss on extinguishment of debt with related party	—	—		—	—		(2,153)		—		(2,153)
Restricted stock units vested, net	—	—		1,253	—		(2)		—		(2)
401(k) employer match	—	—		113,383	—		—		—		—
Stock-based compensation expense	—	—		—	—		651		—		651

Net loss	—	—		—	—		—		(8,350)		(8,350)
Balance at March 31, 2023	3,770,265	$	—	29,320,248	$	3	$	457,708	$	(451,091)	$	6,620

Balance at December 31, 2021	3,770,265	$	—	20,680,186	$	2	$	436,721	$	(391,168)	$	45,555
Preferred dividends declared	—	—		—	—		(2,239)		—		(2,239)
Common stock issued relating to settlement of contingent consideration	—	—		24,333	—		213		—		213
Common stock issued for consulting services	—	—		55,555	—		102		—		102
Restricted stock units vested, net	—	—		1,259	—		(2)		—		(2)
401(k) employer match	—	—		69,987	—		188		—		188
Stock-based compensation expense	—	—		—	—		2,911		—		2,911
Net loss	—	—		—	—		—		(14,645)		(14,645)
Balance at March 31, 2022	3,770,265	$	—	20,831,320	$	2	$	437,894	$	(405,813)	$	32,083

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	For the Three Months Ended March 31,
	2023		2022
Cash flows from operating activities
Net loss	$	(8,350)	$	(14,645)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	651		2,911
Paid-in-kind interest expense	848		—
Gain on termination of operating lease	(471)		—
Depreciation expense	295		651
Amortization expense	912		637


Change in fair value of warrant liability	19		—
401(k) employer match in common shares	—		202

Common stock issued for consulting services	—		102


Changes in operating assets and liabilities:
Receivables	278		163
Unbilled receivables	217		(933)
Prepaid expenses and other current assets	836		351
Accounts payable	(258)		789
Deferred revenue	(18)		47
Leases liabilities	(118)		124
Other accrued liabilities	206		(890)
Net cash used in operating activities	(4,953)		(10,491)

Cash flows from investing activities
Purchase of property and equipment	(25)		(255)
Net cash used in investing activities	(25)		(255)

Cash flows from financing activities
Proceeds from Keep Well Notes	8,000		—

Dividends paid	—		(2,239)
Repayments of 2024 Notes	—		(19,994)




Finance lease obligations	(50)		(84)
Financed insurance premium payments	(611)		(750)
Payment of taxes related to net-settled stock awards	—		(2)
Net cash provided by (used in) financing activities	7,339		(23,069)

Net change in cash and restricted cash	2,361		(33,815)

Cash and restricted cash at beginning of period	9,713		65,946
Cash and restricted cash at end of period	$	12,074	$	32,131

Supplemental disclosure of cash flow information:
Interest paid	$	27	$	1,181
Income taxes refunded, net	(72)		—
Non-cash financing and investing activities:
Warrants issued in connection with Keep Well Notes	$	10,797	$	—
Finance lease and accrued purchases of property and equipment	44		187
Common stock issued to settle contingent consideration	—		213

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 artificial intelligence (“AI”)-powered and telehealth-enabled, virtualized 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 provides claim-based analytics and predictive modeling to provide analytic insights throughout the delivery of our personalized treatment 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 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 OntrakTM programs 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 coaching and in-market community care coordinators who address the social and environmental determinants of health, including loneliness. The Ontrak programs seek to improve member health and deliver validated cost savings to healthcare payors.

Basis of Presentation

The accompanying condensed consolidated financial statements include Ontrak, Inc. and its wholly-owned subsidiaries and variable interest entities (VIEs). 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 condensed financial statements included 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 most recent Annual Report on Form 10-K for the year-ended December 31, 2022, filed with the Securities and Exchange Commission ("SEC"), from which the consolidated balance sheet as of December 31, 2022 has been derived. The Company operates as one segment.

The Company provides services to commercial (employer funded), managed Medicare Advantage, managed Medicaid and dual eligible (Medicare and Medicaid) populations to generate revenues. The Company also provides mental health and wellbeing support to members of employer customers under our LifeDojo wellbeing solution. The Company aims to increase the number of members that are eligible for its solutions by signing new contracts and identifying more eligible members in existing contracts.

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 March 31, 2023, our cash and restricted cash was $12.1 million and we had working capital of approximately $7.2 million. For the three months ended March 31, 2023, our average monthly cash flow from operations burn rate was $1.7 million. Throughout the year ended December 31, 2022 and in March 2023, as part of the Company's continued cost saving measures to reduce its operating costs and to better align with its previously stated strategic initiatives, the Company implemented a number of reduction in workforce and vendor cost optimization plans. The Company expects the full effect of these plans to be realized during the remainder of 2023 and beyond, including a decrease in the Company's operating costs and an improvement in the Company's average monthly cash flow from operations. The cost optimization plans were necessary to right size the Company's business commensurate with its current customer base.

In addition to revenue from business operations, our primary source of working capital is borrowing under the Keep Well Agreement (as defined in Note 10 below). As of March 31, 2023, $6.0 million remained to be borrowed under the Keep Well Agreement. We may also be able to raise capital through equity financings, however, when we can affect such financing and the

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

amount of capital raised 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.

Regardless of our success in raising additional capital, we expect our cash on hand and the remaining $6.0 million to be borrowed under the Keep Well Agreement will be sufficient to meet our obligations for at least the next 12 months from the date these financial statements are released.

Management plans to continue to execute on its strategy by (i) exploring other sources of capital with either debt or equity financing for future liquidity needs; (ii) continuing to manage operating costs by strategically pursuing cost optimization initiatives; and (iii) continuing to pursue executing our growth strategy by improving our marketing techniques and implementing new features to increase customer engagement, adding new members and securing new customer contracts.

There can be no assurance that we will be able to satisfy the conditions precedent to future borrowings under the Keep Well Agreement or 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, our Keep Well Agreement contains various financial and other covenants, and any non-compliance with those covenants could prevent us from borrowing additional amounts under the Keep Well Agreement and/or 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.

Recently Adopted Accounting Standards

In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-08, "Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" ("ASU 2021-08"), which improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, and payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-08 require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in ASU 2021-08, however, do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606, such as refund liabilities, or in a business combination, such as customer-related intangible assets and contract-based intangible assets. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in ASU 2021-08 should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The adoption of ASU 2021-08 on January 1, 2023 did not have a material effect on our condensed consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-10, "Codification Improvements" ("ASU 2020-10"), which includes amendments to improve consistency of disclosures by ensuring that all guidance that require disclosures or provides an option for an entity to provide information in the notes to the financial statement is codified in the disclosure section of the codification. ASU 2020-10 is effective for public companies, other than smaller reporting companies, for fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-10 is effective for fiscal years beginning after December 15, 2021, and interim periods beginning after December 15, 2022. The adoption of ASU 2020-10 on January 1, 2023 did not have a material effect on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires recognition of an estimate of lifetime expected credit losses as an allowance. For companies eligible to be smaller reporting company as defined by the SEC, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022, including interim periods within those annual periods. The adoption of ASU 2016-13 on January 1, 2023 did not have a material effect on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In the time since the Company filed its most recent Annual Report on Form 10-K for the year ended December 31, 2022, there were no new accounting standards issued, but not yet adopted by the Company, which are expected to materially affect the Company's condensed consolidated financial statements.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2. Restricted Cash

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


	March 31, 2023		December 31, 2022
Cash and cash equivalents	$	7,393	$	5,032
Restricted cash - current:
Dividend payments on preferred stock (1)	4,477		4,477
Letter of credit (2)	204		—
Subtotal - Restricted cash - current	4,681		4,477
Restricted cash - long term:

Letter of credit (2)	—		204
Subtotal - Restricted cash - long term	—		204
Cash, cash equivalents and restricted cash	$	12,074	$	9,713

____________

(1) Represents the amount remaining in an account funded with a portion of the proceeds from the sale of the Series A Preferred Stock for the payment of dividends thereon until August 2022. The use of such funds for the payment of such dividends is subject to compliance with applicable laws. Also, the Company’s board of directors may determine that the use of such funds for other corporate purposes is required pursuant to the exercise of their fiduciary duties to the Company’s common stockholders.

(2) The letter of credit ("LOC") was required under the terms of the lease for our Santa Monica, CA office. In accordance with the lease termination agreement entered into on February 16, 2023 (as discussed in Note 9 below), the LOC is to be returned to the Company within 120 days of the lease termination date, which was February 28, 2023.

Note 3. Accounts Receivable 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 March 31,
Percentage of Revenue		2023		2022
Customer A		52.0	%	24.0	%
Customer B		35.8		48.3
Customer C		8.7		3.7
Customer D		1.7		18.5

Remaining customers		1.8		5.5
Total		100.0	%	100.0	%

The following table is a summary of concentration of credit risk by customer accounts receivables as a percentage of our total accounts receivable:

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


Percentage of Accounts Receivable	March 31, 2023		December 31, 2022
Customer C	31.5	%	3.8	%
Customer B	29.4		35.7
Customer E	28.2		20.3
Customer A	—		39.1
Remaining customers	10.9		1.1
Total	100.0	%	100.0	%

The Company applies the specific identification method for assessing provision for doubtful accounts. There was no bad debt expense in each of the three months ended March 31, 2023 and 2022.

Note 4. Property and Equipment

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


	March 31,		December 31,
	2023		2022
Software	$	4,401	$	6,882
Computers and equipment	466		466
ROU assets - finance lease	375		375
Leasehold improvements	—		17

Subtotal	5,242		7,740
Less: Accumulated depreciation and amortization	(3,001)		(5,242)
Property and equipment, net	$	2,241	$	2,498

Total depreciation and amortization expense relating to property and equipment presented above was $0.3 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively.

Capitalized Internal Use Software Costs

During the three months ended March 31, 2023 and 2022, we capitalized $0.1 million and $0.4 million, respectively, of costs relating to development of internal use software, and recorded $0.3 million and $0.6 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 March 31, 2023 and December 31, 2022.

Intangible Assets

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

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


		At March 31, 2023						At December 31, 2022
	Weighted Average Estimated Useful Life (years)	Gross Value		Accumulated Amortization		Net Carrying Value		Gross Value		Accumulated Amortization		Net Carrying Value
Acquired software technology	3	$	3,500	$	(2,819)	$	681	$	3,500	$	(2,528)	$	972
Customer relationships	5	270		(131)		139		270		(117)		153
Total		$	3,770	$	(2,950)	$	820	$	3,770	$	(2,645)	$	1,125

Amortization expense for intangible assets presented above was $0.3 million for each of the three months ended March 31, 2023 and 2022.

At March 31, 2023, estimated amortization expense for intangible assets for each year thereafter was as follows (in thousands):


Remainder of 2023	$	721
2024	54
2025	45
Total	$	820

Note 6. Restructuring, Severance and Related Costs

On March 9, 2023, as part of the Company's continued cost saving measures and to reduce its operating costs and to help align with its previously stated strategic initiatives, the Company implemented additional headcount reductions wherein approximately 19% of the Company's employee positions were eliminated. During the three months ended March 31, 2023, the Company incurred a total of approximately $0.5 million of termination related costs, including severance payments and benefits payable to the impacted employees, recorded as part of "Restructuring, severance and related costs" on its condensed consolidated statement of operations for the three months ended March 31, 2023. As of March 31, 2023, the Company paid $0.1 million of such amount and $0.4 million was included as part of "Accrued compensation and benefits" on the Company's condensed consolidated balance sheet.

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 shareholders 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 potential shares of common stock, preferred stock and outstanding stock options and warrants, 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 potential shares of common stock would have been anti-dilutive.

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

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


	Three Months Ended March 31,
		2023		2022
Net loss		$	(8,350)	$	(14,645)
Dividends on preferred stock - declared and undeclared		(2,239)		(2,239)
Net loss attributable to common stockholders		$	(10,589)	$	(16,884)

Weighted-average shares of common stock outstanding		28,115		20,723
Net loss per common share - basic and diluted		$	(0.38)	$	(0.81)

The following common equivalent shares as of March 31, 2023 and 2022, issuable upon exercise of stock options and warrants, have been excluded from the diluted earnings per share calculation as their effect was anti-dilutive:


	March 31,
	2023	2022
Warrants to purchase common stock	42,496,703	167,496
Options to purchase common stock	5,585,828	3,505,469
Total	48,082,531	3,672,965

Equity Offerings

Common Stock

In February 2023, pursuant to the terms of the Keep Well Agreement, as a result of approvals obtained at the 2023 Special Meeting of Stockholders, the Company issued to Acuitas (as defined in Note 10 below) 2,038,133 additional shares of the Company's common stock. For additional information, see Note 10 below.

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"), which is listed on the Nasdaq Global Market under the symbol "OTRKP." 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 will have limited voting rights if the Company fails to pay dividends for six or more quarters, whether or not declared or consecutive and in certain other events.

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. In 2022, our Board of Directors declared the first quarterly dividend on the Series A Preferred Stock for shareholders of record on February 15, 2022 and paid cash dividends on February 28, 2022. Thereafter, no dividends have been declared by our Board of Directors. As such, at March 31, 2023, we had total undeclared dividends of $9.7 million.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 8. Stock-Based Compensation

The Company's 2017 Stock Incentive Plan (the “2017 Plan”) and 2010 Stock Incentive Plan (the “2010 Plan”) (the 2017 Plan and the 2020 Plan together, the "Plan") provide for the issuance of 10,174,421 shares of the Company's common stock. The Company has granted stock options to executive officers, 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, option rights expire no later than ten years from the date of grant and employee and Board of Director awards 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 March 31, 2023, the Company had 7,029,479 stock options and RSUs outstanding and 1,739,449 shares reserved for future awards.

Stock-based compensation expense was $0.7 million and $2.9 million for the three months ended March 31, 2023 and 2022, respectively.

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


	Three Months Ended March 31, 2023
Volatility	109.0%
Risk-free interest rate	3.57% - 4.18%
Expected life (in years)	3.76 - 3.81
Dividend yield	0	%

The expected volatility assumptions have been based on the historical and expected volatility of our stock and comparable companies, measured over a period generally commensurate with the expected term or acceptable period to determine reasonable volatility. The weighted average expected option term for the three months ended March 31, 2023 reflects the application of the simplified method prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107 (as amended by SAB 110), which defines the life 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 for employees, directors and consultants is as follows:


	Number of Shares	Weighted Average Exercise Price
Outstanding as of December 31, 2022	4,895,522	$	3.54
Granted	827,719	0.36

Forfeited	(137,413)	1.29

Outstanding as of March 31, 2023	5,585,828	3.12


Options vested and exercisable as of March 31, 2023	2,206,720	$	6.57

As of March 31, 2023, there was $3.3 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees and directors under the Plan. These costs are expected to be recognized over a weighted-average period of approximately 2.44 years.

Restricted Stock Units - Employees

The Company estimates the fair value of RSUs based on the closing price of our common stock on the date of grant. The following table summarizes our RSU award activity issued under the 2017 Plan:

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


	Restricted Stock Units	Weighted- Average Grant Date Fair Value
Non-vested at December 31, 2022	1,449,526	$	2.15

Forfeited	(4,000)	33.41
Vested and distributed	(1,875)	51.98
Non-vested at March 31, 2023	1,443,651	2.00

As of March 31, 2023, there was $2.6 million of unrecognized compensation costs related to unvested outstanding RSUs. These costs are expected to be recognized over a weighted-average period of approximately 2.42 years.

Warrants - Non-employees

The Company has granted warrants to purchase common stock that have been approved by our Board of Directors. A summary of warrants activity was as follows:


	Number of Warrants	Weighted Average Exercise Price
Outstanding as of December 31, 2022	1,576,256	$	1.78


Granted	40,920,447	0.45


Outstanding as of March 31, 2023	42,496,703	0.46
Warrants exercisable as of March 31, 2023	42,496,703	0.46

On each of January 5, 2023 and March 6, 2023, the Company borrowed $4 million under the Keep Well Agreement. In connection with the January 5, 2023 borrowing, the Company issued to Acuitas a warrant to purchase 473,373 shares of the Company's common stock with an exercise price equal to $1.69 per share and in connection with the March 6, 2023 borrowing, the Company issued to Acuitas a warrant to purchase 8,888,889 shares of the Company's common stock with an exercise price equal to $0.45 per share. In February 2023, as discussed in Note 10 below, warrants to purchase 1,775,148 shares of the Company’s common stock previously issued by the Company to Acuitas through February 20, 2023 were exchanged for warrants to purchase 33,333,333 shares of the Company’s common stock with an exercise price equal to $0.45 per share. All warrants issued to Acuitas have a five year term.

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


	Three Months Ended March 31, 2023
Volatility	100.0	%
Risk-free interest rate	3.90% - 4.61%
Expected life (in years)	5.00
Dividend yield	0	%

Performance-Based and Market-Based Awards

The Company’s Compensation Committee designed a compensation structure to align the compensation level of the former Executive Chairman to the performance of the Company through the issuance of market-based stock options. The market-based options vest upon the Company’s stock price reaching a certain price at a specific performance period and the total amount of compensation expense recognized is based on a Monte Carlo simulation that factors in the probability of the award vesting. The following table summarizes the Company’s outstanding awards under this structure:

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Grant Date

Performance Measures

Vesting Term

Performance Period

# of Shares

Exercise Price

December 2017

Weighted Average Price of our common stock is $15.00 for at least twenty trading days within a period of thirty consecutive trading days ending on the trading day prior to January 1, 2023.

Fully vest on January 1, 2023

January 1, 2023

642,307

7.50

August 2018

Weighted Average Price of our common stock is $15.00 for at least twenty trading days within a period of thirty consecutive trading days ending on the trading day prior to January 1, 2023.

Fully vest on January 1, 2023

January 1, 2023

397,693

7.50

As of January 1, 2023, both of the market-based options described above became fully vested.

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 our balance sheet and classifies the leases as either operating or financing leases. The Company leases office space in Henderson, Nevada, which serves as the Company's headquarters, and in Rosemont, Illinois, which are accounted for as operating leases. The Company leases various computer equipment used in the operation of our business, which are accounted for as finance leases. The operating lease agreements include a total of 5,297 square feet of office space for lease terms ranging from 26 months to 58 months. The finance leases are generally for 36 month terms.

On April 12, 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 on June 3, 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 $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 condensed consolidated statement of operations for the three months ended March 31, 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):

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


Condensed Consolidated Balance Sheets	Balance Sheet Classification	March 31, 2023		December 31, 2022
Assets
Operating lease assets	"Operating lease right-of-use-assets"	$	238	$	632
Finance lease assets	"Property and equipment, net"	41		66
Total lease assets		$	279	$	698
Liabilities
Current
Operating lease liabilities	"Current portion of operating lease liabilities"	$	60	$	653
Finance lease liabilities	"Other accrued liabilities"	86		136
Non-current
Operating lease liabilities	"Long-term operating lease liabilities"	209		546

Total lease liabilities		$	355	$	1,335


	Three Months Ended March 31,
Condensed Consolidated Statements of Operations		2023		2022
Operating lease expense		$	87	$	98
Short-term lease rent expense		1		4
Variable lease expense		15		15
Operating sublease income		(65)		—
Total rent expense		$	38	$	117
Finance lease expense
Amortization of leased assets		$	25	$	31
Interest on lease liabilities		2		7
Total		$	27	$	38


	Three Months Ended March 31,
Condensed Consolidated Statements of Cash Flows	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	145	$	179
Financing cash flows from finance leases	50		84
Other
Cash received for operating sublease	97		—


Other Information	March 31, 2023		December 31, 2022
Weighted-average remaining lease term (years)
Operating leases	3.7		2.5
Financing leases	0.5		0.7
Weighted-average discount rate (%)
Operating leases	16.15	%	12.56	%
Finance leases	13.13	%	12.92	%

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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


	At March 31, 2023
	Operating Leases		Financing Leases		Total
Remainder of 2023	$	76	$	87	$	163
2024	88		—		88
2025	90		—		90
2026	93		—		93
2027	16		—		16


Total lease payments	363		87		450
Less: imputed interest	(94)		(1)		(95)
Present value of lease liabilities	269		86		355
Less: current portion	(60)		(86)		(146)
Lease liabilities, non-current	$	209	$	—	$	209

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 Capital LLC (“Acuitas Capital”), an entity indirectly wholly owned and controlled by Terren S. Peizer, the Company’s former Chief Executive Officer and Chairman, a related party. On August 12, 2022, the Company and Acuitas Capital entered into an amendment to the Original Keep Well Agreement in connection with the appointment of a collateral agent under the Original Keep Well Agreement (the “First Amendment”). On November 19, 2022, the Company and Acuitas Capital entered into a further amendment to the Original Keep Well Agreement, as amended by the First Amendment (the “Second Amendment”), and on December 30, 2022, the Company and Acuitas Capital entered into a further amendment to the Original Keep Well Agreement, as amended by the First Amendment and the Second Amendment (the “Third Amendment”). The Company refers to the Original Keep Well Agreement, as amended by the First Amendment, the Second Amendment and the Third Amendment, as the “Keep Well Agreement” and to Acuitas Capital, together with any of its transferees or affiliates under the Keep Well Agreement, as “Acuitas.”

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 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 conditions precedent to the Company’s ability to borrow, and Acuitas’ obligation to lend, under the Original Keep Well Agreement included that (x) the Company have used best efforts to obtain sufficient financing from a third party for the Company to pay and discharge, when due and payable, its obligations, (y) the Company be unable despite its best efforts to obtain such financing from a third party on reasonably acceptable terms, and (z) (1) absent obtaining the funds requested by the Company to borrow under the Original Keep Well Agreement, the Company would not have sufficient unrestricted cash to pay and discharge

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

all of its obligations then due or scheduled to become due within the 30 days following the date of the borrowing request, and (2) there be no conditions or events that, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern through August 15, 2023 (the “Funding Condition”).

In connection with entering into the Original Keep Well Agreement, subject to obtaining approval of the Company’s stockholders as required by applicable Nasdaq listing rules, which approval was obtained at the 2022 Annual Meeting of Stockholders, the Company agreed to issue 739,645 shares of its common stock to Acuitas (or an entity affiliated with Acuitas, as designated by Acuitas) (the “Original Commitment Shares”). The Original Commitment Shares were issued to Acuitas in September 2022.

The Second Amendment and the Third Amendment

Below is a summary of certain amendments effected by the Second Amendment and the Third Amendment (as indicated):

•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, 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 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;

•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;

•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 below), the entire remaining amount of $14.0 million, to be funded 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;

•many of the conditions precedent to the Company’s ability to borrow, and Acuitas’ obligation to lend, were eliminated, including the Funding Condition;

•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 Original Keep Well Note (and of any other 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, however, the satisfaction of such covenant as a condition to funding was eliminated, and certain other affirmative and negative covenants of the Company, the satisfaction of which were conditions to funding, were also eliminated as conditions to funding; and

•as provided in the Third Amendment, (a) the minimum conversion price of the Keep Well Notes (as discussed 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 (as discussed below), will be $0.15 (subject to adjustment for stock splits or other recapitalizations that affect all common stockholders proportionately).

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 of Stockholders”), 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.

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.”

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

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Following approval of the Company’s stockholders obtained at the 2023 Special Meeting of Stockholders, 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 and to warrant coverage on all previous and future borrowings under the Keep Well Agreement was increased as follows:

•the exercise price of the warrants outstanding at the time of the 2023 Special Meeting of Stockholders was reduced to $0.45 per share, 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;

•the number of shares of the Company’s common stock subject to the warrants outstanding at the time of the 2023 Special Meeting of Stockholders (i.e., 1,775,148 shares) 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);

•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) $0.45 (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, subject to future adjustment as described below;

•if the reverse stock split that was also approved at the 2023 Special Meeting of Stockholders is effected in the future, then:

▪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 will 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 in the bullet immediately below; and

▪the Warrant Coverage Denominator will be reduced to the greater of $0.15 (adjusted for the reverse stock split) and the Post-Stock Split Price, subject to further reduction as described in the bullet immediately below; and

•upon the occurrence of the final funding under the Keep Well Agreement (the date on when such final funding occurs, the “Final Funding Date”):

▪the exercise price of each warrant issued pursuant to the Keep Well Agreement that is outstanding as of the Final Funding Date will be reduced to (i) if the Final Funding Date occurs at any time prior to the time the Reverse Stock Split Price is determined, the closing price of the Company’s common stock on the trading day immediately preceding the Final Funding Date (the “Final Funding Date Price”), or (ii) if the Final Funding Date occurs at any time from and after the time the Reverse Stock Split Price is determined, the lesser of (x) the Post-Stock Split Price and (y) the Final Funding Date Price; and

▪the Warrant Coverage Denominator will be reduced to the lesser of (i) if the Final Funding Date occurs at any time prior to the time the Reverse Stock Split Price is determined, the greater of (a) $0.15 (subject to adjustment for stock splits and the like, including the reverse stock split) and (b) the Final Funding Date Price, or (ii) if the Final Funding Date occurs at any time from and after the time the Reverse Stock Split Price is determined, the greater of (a) $0.15 (subject to adjustment for stock splits and the like, including the reverse stock split) and (b) the lesser of (x) the Post-Stock Split Price and (y) the Final Funding Date Price.

As a result of approvals obtained at the 2023 Special Meeting of Stockholders, 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

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

to purchase shares of the Company’s common stock that reflect the amendments to the warrants described above, 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 described above) as the “Keep Well Warrants.”

Additional Commitment Shares

As a result of approvals obtained at the 2023 Special Meeting of Stockholders, the Company issued to Acuitas 2,038,133 additional shares of the Company’s common stock.

Issuance Cap

The Company and Acuitas agreed that (i) under no circumstances will the Company issue any shares upon exercise of any warrant issued under the Keep Well Agreement or upon conversion of any Keep Well Note to the extent that, after giving effect to the issuance of any such shares, Acuitas (together with its affiliates) would beneficially own shares of the Company’s common stock representing more than 90% of the total number of shares of the Company’s common stock outstanding as of the time of such issuance (the “Issuance Cap”); and (ii) in the event of a Fundamental Transaction (as defined in the Second Amendment), regardless of the actual number of securities of the Company beneficially owned by Acuitas and its affiliates at the effective time thereof, Acuitas shall not be entitled to receive any consideration pursuant to such Fundamental Transaction in respect of any shares underlying any of the warrants issued under the Keep Well Agreement or any shares issuable upon conversion of any Keep Well Note that would represent shares in excess of the Issuance Cap if beneficially owned by Acuitas and/or its affiliates immediately prior to such effective time, and all warrants and Keep Well Notes owned or beneficially owned by Acuitas and/or its affiliates at the effective time of such Fundamental Transaction, solely to the extent that, if exercised or converted, such warrants and Keep Well Notes would result in the issuance of such excess shares, will be cancelled and forfeited without consideration therefor, effective as of such effective time; provided, however, that the foregoing shall not affect the Company’s obligation to pay all amounts owed under such Keep Well Notes in connection with such Fundamental Transaction.

Covenants

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. Subject to certain customary exceptions, the Company also agreed not to incur any indebtedness or issue any shares of its capital stock or capital stock equivalents without Acuitas’ consent until 180 days following the Final Funding Date.

As mentioned above, 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 all of its covenants under the Keep Well Agreement as of March 31, 2023.

Borrowings Under the Keep Well Agreement

In February 2023, as a result of approvals obtained at the 2023 Special Meeting of Stockholders 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 is 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

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 are recorded as part of debt discount and accreted using the effective interest method over the contractual term of the debt.

As of March 31, 2023, the Company borrowed a total of $19.0 million under the Keep Well Agreement. Each borrowing was evidenced with the issuance of a Keep Well Note, which will accrue interest based on the adjusted term SOFR for each interest period. At March 31, 2023, the Company had a total of $1.4 million of accrued paid-in-kind interest, of which $0.8 million related to the three months ended March 31, 2023, related to the Keep Well Notes, and the effective weighted average interest rate for the Keep Well Notes was 20.34%. At March 31, 2023, $6.0 million remained to be funded under the Keep Well Agreement: $4.0 million in June 2023 and $2.0 million in September 2023.

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


	March 31, 2023		December 31, 2022
Principal	$	20,402	$	11,553
Less: debt discount	(10,598)		(1,488)
Net carrying amount	$	9,804	$	10,065

The following table presents the interest expense recognized related to the Company's borrowings under the Keep Well Agreement and the 2024 Notes (in thousands):


	Three Months Ended March 31,
		2023		2022
Contractual interest expense		$	848	$	1,160
Accretion of debt discount		521		242
Total interest expense		$	1,369	$	1,402

Securities Issued Under the Keep Well Agreement During 2022

Following approval of the Company’s stockholders obtained at the annual stockholder meeting held on August 29, 2022, (a) on September 2, 2022, the Company issued 739,645 shares of its common stock (the “Commitment Shares”) to Acuitas and (b) in August and September 2022, the Company issued to Acuitas warrants to purchase a total of 1,301,775 shares of the Company’s common stock. The Commitment Shares and such warrants, which qualified for equity classification, were accounted for as debt discount based on their respective fair values determined at each issuance dates. The warrants have a term of five years and had an exercise price equal to $1.69, which was the closing price of the Company’s common stock as reported on Nasdaq immediately preceding the time the parties entered into the Keep Well Agreement. As discussed above, as result of approvals obtained at the 2023 Special Meeting of Stockholders, each warrant issued under the Keep Well Agreement outstanding as of the date of such approval was exchanged for a new warrant to purchase shares of the Company’s common stock that reflect the amendments to the warrants described above, including the increase in the warrant coverage and the decrease in the exercise price.

Stockholders Agreement

Under the terms of the Keep Well Agreement, if Acuitas' beneficial ownership of the Company’s capital stock equals at least a majority of the voting power of the Company’s outstanding capital stock, Acuitas Capital and the Company agreed to enter into a stockholders agreement (the “Stockholders Agreement”) pursuant to which, during any period that Acuitas’ beneficial ownership of the Company’s capital stock equals at least 50% of the Company’s outstanding capital stock, Acuitas agreed to vote the shares of the Company’s common stock it beneficially owns (a) in favor of an amendment to the certificate of incorporation or bylaws of the Company that would require the Company’s board of directors to include not fewer than three independent directors at all

Table of Contents

ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

times, (b) in favor of the election or re-election of independent directors nominated for election by the Company’s board of directors or by the nominating committee thereof unless the failure of a nominee to be elected or re-elected to the Company’s board of directors would not result in the Company having fewer than three independent directors following such election, and (c) against any proposal or action that would result in the Company’s board of directors having fewer than three independent directors at all times. In addition, under the Stockholders Agreement, the parties agreed that, during any period that such beneficial ownership of Acuitas affiliates equals at least 50% of the Company’s outstanding capital stock, the Company will not enter into any transaction between the Company or any of its affiliates, on the one hand, and Acuitas or any of its affiliates (excluding the Company and its affiliates), on the other hand, unless it is approved by a majority of the independent directors then serving on the Company’s board of directors. The Stockholders Agreement was entered into on February 21, 2023.

2024 Notes

The Company was party to a Note Purchase Agreement dated September 24, 2019 (the “Note Agreement”) with Goldman Sachs Specialty Lending Group, L.P. and any other purchasers party thereto from time to time (collectively, the “Holders”), as amended, pursuant to which the Company initially issued $

Ontrak, Inc. [OTRKP] Filings
Ontrak, Inc. [OTRK] Filings
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. [OTRKP] Filings

Ontrak, Inc. [OTRK] Filings