SEC Form 10-Q filed by Ontrak Inc.

11/13/24 4:06:08 PM ET

$OTRK

Misc Health and Biotechnology Services

Health Care

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otrk-20240930

Table of Contents

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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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	$	2,057
Less: debt discount	(242)		(590)
Net carrying amount	$	2,169	$	1,467

Total debt, net	$	7,920	$	1,467

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Contractual interest expense	$	410	$	1,174	$	787	$	3,110
Accretion of debt discount	61		1,210		146		2,850
Total interest expense	$	471	$	2,384	$	933	$	5,960

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 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

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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.

Other

During August and November 2023, the Company financed a total of $2.1 million of its insurance premiums at annual weighted average effective rate of 8.7%, payable in 9 to 11 equal monthly installments and down payments totaling $0.4 million. During August 2024, the Company financed a total of $0.2 million of its insurance premiums at annual weighted average effective rate of 9.6%, payable in 11 equal monthly installments and down payments totaling $0.02 million. At September 30, 2024 and December 31, 2023, there was $0.2 million and $1.4 million, respectively, relating to such financed insurance premium outstanding, which were included as part of "Other accrued liabilities" on our condensed consolidated balance sheet as of each respective period.

Note 11. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I) and the lowest priority to unobservable inputs (Level III). The three levels of the fair value hierarchy are described below:


Level Input						Input Definition
Level I						Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II						Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III						Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following tables summarize fair value measurements by level for assets and liabilities measured at fair value on a recurring basis as of the periods presented (in thousands):


	Balance as of September 30, 2024
	Level I		Level II		Level III		Total




Warrant liabilities (1)	$	—	$	—	$	3	$	3
Total liabilities	$	—	$	—	$	3	$	3


	Balance as of December 31, 2023
	Level I		Level II		Level III		Total
Contingent consideration (2)	$	—	$	—	$	64	$	64
Warrant liabilities (1)	—		—		8		8
Total liabilities	$	—	$	—	$	72	$	72

___________________

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Relates to warrants issued in connection with the Eight Amendment to the Note Purchase Agreement with Goldman Sachs Specialty Lending Group, L.P., executed on March 8, 2022, and included in "Other accrued liabilities" on our condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023.

(2) Included in "Other accrued liabilities" on our condensed consolidated balance sheets as of December 31, 2023.

Financial instruments classified as Level III in the fair value hierarchy as of September 30, 2024 and December 31, 2023 represent liabilities measured at market value on a recurring basis and include warrant liabilities relating to warrants issued in connection with an amendment to our Note Purchase Agreement dated September 24, 2019, and contingent consideration relating to a stock price guarantee provided in an acquisition (see further discussion below regarding this contingent consideration). In accordance with current accounting rules, the warrant liabilities and contingent consideration liability are marked-to-market each quarter-end until they are completely settled or expire. The fair value of the warrant liabilities was valued using the Black-Scholes pricing model, using both observable and unobservable inputs and assumptions consistent with those used in the estimate of fair value of employee stock options. The fair value of the contingent consideration liability was valued using the Monte Carlo simulation model, using both observable and unobservable inputs and assumptions.

The carrying value of the Keep Well Notes is estimated to approximate their respective fair values as the variable interest rate of the notes approximates the market rate for debt with similar terms and risk characteristics.

The fair value measurements using significant Level III inputs, and changes therein, was as follows (in thousands):


	Level III Contingent Consideration
Balance as of December 31, 2023	$	64
Settlement of contingent consideration	(64)
Balance as of September 30, 2024	$	—

The $0.1 million of contingent consideration liability, relating to a stock price guarantee in our acquisition of LifeDojo Inc. completed in October 2020, was included in "Other accrued liabilities" on our condensed consolidated balance sheets as of December 31, 2023. In January 2024, the Company issued 83 shares of common stock (1,238 shares of common stock before giving effect to the 2024 Reverse Stock Split), representing full settlement of the contingent consideration liability.

Warrant Liabilities


	Level III Warrant Liabilities
Balance as of December 31, 2023	$	8
Gain on change in fair value of warrant liabilities	(5)

Balance as of September 30, 2024	$	3

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


	September 30, 2024
Volatility	100.0	%
Risk-free interest rate	3.58	%
Weighted average expected life (in years)	1.98
Dividend yield	0	%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 12. Variable Interest Entities

Generally, an entity is defined as a Variable Interest Entity (“VIE”) under current accounting rules if it either lacks sufficient equity to finance its activities without additional subordinated financial support, or it is structured such that the holders of the voting rights do not substantively participate in the gains and losses of the entity. When determining whether an entity that meets the definition of a business, qualifies for a scope exception from applying VIE guidance, the Company considers whether: (i) it has participated significantly in the design of the entity, (ii) it has provided more than half of the total financial support to the entity, and (iii) substantially all of the activities of the VIE are conducted on its behalf. A VIE is consolidated by its primary beneficiary, the party that has the power to direct the activities that most significantly affect the economics of the VIE and has the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE. The primary beneficiary assessment must be re-evaluated on an ongoing basis.

As discussed under the heading Management Services Agreements (“MSA”) below, the Company has an MSA with a Texas nonprofit health organization (“TIH”) and a California Professional Corporation (“CIH”). Under the MSAs, the equity owners of TIH and CIH have only a nominal equity investment at risk, and the Company absorbs or receives a majority of the entity’s expected losses or benefits. The Company participates significantly in the design of these MSAs. The Company also agrees to provide working capital loans to allow for TIH and CIH to fund their day to day obligations. Substantially all of the activities of TIH and CIH, including its decision making and approvals are conducted for its benefit, as evidenced by the fact that (i) the operations of TIH and CIH are conducted primarily using the Company's licensed network of providers and (ii) under the MSA, the Company agrees to provide and perform all non-medical management and administrative services for the entities. Payment of the Company's management fee by TIH and CIH is subordinate to payments of the other obligations of TIH and CIH, and repayment of the working capital loans is not guaranteed by the equity owner of the affiliated medical group or other third party. Creditors of TIH and CIH do not have recourse to the Company's general credit.

Based on the design of the entity and the lack of sufficient equity to finance its activities without additional working capital loans, the Company has determined that TIH and CIH are VIEs. The Company, as the primary beneficiary, is required to consolidate the VIE entities as it has power and potentially significant interests in the entities. Accordingly, the Company is required to consolidate the assets, liabilities, revenues and expenses of the managed treatment centers.

Management Services Agreements

In April 2018, the Company executed an MSA with TIH and in July 2018, the Company executed an MSA with CIH. Under the MSAs, the Company licenses to TIH and CIH the right to use its proprietary treatment programs and related trademarks, and provides all required day-to-day business management services, including, but not limited to:

•general administrative support services;

•information systems;

•recordkeeping;

•billing and collection; and

•obtaining and maintaining all federal, state and local licenses, certifications and regulatory permits.

All clinical matters relating to the operation of TIH and CIH and the performance of clinical services through the network of providers shall be the sole and exclusive responsibility of the TIH and CIH Board free of any control or direction from the Company.

TIH pays the Company a monthly fee equal to the aggregate amount of (a) its costs of providing management services (including reasonable overhead allocated to the delivery of its services and including salaries, rent, equipment, and tenant improvements incurred for the benefit of the medical group, provided that any capitalized costs will be amortized over a five-year period), (b) 10%-15% of the foregoing costs, and (c) any performance bonus amount, as determined by TIH at its sole discretion.

CIH pays the Company a monthly fee equal to the aggregate amount of (a) its costs of providing management services (including reasonable overhead allocated to the delivery of its services and including salaries, rent, equipment, and tenant improvements incurred for the benefit of the entity, provided that any capitalized costs will be amortized over a five-year period), and (b) any performance bonus amount, as determined by CIH at its sole discretion.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company's condensed consolidated balance sheets include the following assets and liabilities from its TIH and CIH VIEs (in thousands):


	September 30, 2024		December 31, 2023
Cash	$	1,244	$	1,433
Accounts receivable	3		—
Unbilled receivables	121		85
Prepaid and other current assets	2		45
Total assets	$	1,370	$	1,563


Accrued liabilities	$	—	$	52
Deferred revenue	52		64
Payables to Ontrak	1,952		2,281
Total liabilities	$	2,004	$	2,397

Note 13. Commitments and Contingencies

From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities. As of the date of this report, we are not party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position, except the following:

Loss Contingencies

On March 3, 2021, a purported securities class action was filed in the United States District Court for the Central District of California, entitled Farhar v. Ontrak, Inc., Case No. 2:21-cv-01987. On March 19, 2021, another similar lawsuit was filed in the same court, entitled Yildrim v. Ontrak, Inc., Case No. 2:21-cv-02460. On July 14, 2021, the Court consolidated the two actions under the Farhar case (“Consolidated Class Action”), appointed Ibinabo Dick as lead plaintiff, and the Rosen Law Firm as lead counsel. On August 13, 2021, lead plaintiff filed a consolidated amended complaint. In the Consolidated Amended Complaint, lead plaintiff, purportedly on behalf of a putative class of purchasers of Ontrak securities from August 5, 2020 through February 26, 2021, alleges that the Company and Terren S. Peizer, Brandon H. LaVerne and Curtis Medeiros, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by intentionally or recklessly making false and misleading statements and omissions in various press releases, SEC filings and conference calls with investors on August 5, 2020 and November 5, 2020. Specifically, the Consolidated Amended Complaint alleges that the Company was inappropriately billing its largest customer, Aetna, causing Aetna to, in May 2020, shut off its data feed to Ontrak, and, in July 2020, require Ontrak to complete a Corrective Action Plan (“CAP”). Lead plaintiff alleges that defendants: (1) misrepresented to investors that the data feed was shut off in July 2020, and that it was part of Aetna’s standard compliance review of all of its vendors; (2) failed to disclose to investors that Aetna had issued the CAP; and (3) failed to disclose to investors that Ontrak was engaging in inappropriate billing practices. Lead plaintiff seeks certification of a class and monetary damages in an indeterminate amount. On September 13, 2021, defendants filed a motion to dismiss the Consolidated Amended Complaint for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 78u-4, et seq. The motion was taken under submission, with no oral argument. Prior to any ruling being issued on the motion to dismiss, on March 29, 2023, lead plaintiff filed a Second Amended Complaint. The Second Amended Complaint (1) adds Jonathan Mayhew as a defendant; (2) expands the purported class period to August 5, 2020 through August 19, 2021; and (3) now includes allegations that the defendants additionally intentionally or recklessly made false and misleading statements and omissions regarding the Company’s relationship with its then-second largest customer, Cigna, in various press releases, SEC filings and conference calls with investors on May 6, 2021 and August 5, 2021. On May 15, 2023, the Company filed its motion to dismiss the Second Amended Complaint. On February 2, 2024, the Court issued an order granting the Company’s motion to dismiss in its entirety and providing lead plaintiff leave to amend. On March 5, 2024, lead plaintiff filed its Third Amended Complaint, which asserts the same claims, against the same defendants for the same purported class period. On March 19, 2024, the Company filed its motion to dismiss the Third Amended Complaint. On

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

September 3, 2024, the Court granted the Company's motion to dismiss the Third Amended Complaint and dismissed the Third Amended Complaint with prejudice. On September 30, 2024, lead plaintiff filed his Notice of Appeal. On October 8, 2024, the Ninth Circuit set the following schedule for any appeal: (1) November 20, 2024, Opening Brief; and (2) Friday, December 21, 2024, Answering Brief. The Company believes that the allegations lack merit and intends to defend against any appeal vigorously.

On August 6, 2021, a purported stockholder derivative complaint was filed in the United States District Court for the Central District of California, entitled Aptor v. Peizer, Case No. 2:21-cv-06371, alleging breach of fiduciary duty on behalf of the Company against Terren S. Peizer, Brandon H. LaVerne, Richard A. Berman, Michael Sherman, Diane Seloff, Robert Rebak, Gustavo Giraldo and Katherine Quinn, and contribution against Terren S. Peizer and Brandon H. LaVerne. On October 6, 2021, a similar shareholder derivative action was filed in the same Court, entitled Anderson v. Peizer, Case No. 2:21-cv-07998, for breach of fiduciary duty, abuse of control, unjust enrichment, gross mismanagement and waste of corporate assets against Terren S. Peizer, Brandon H. LaVerne, Curtis Medeiros, Richard A. Berman, Michael Sherman, Edward Zecchini, Diane Seloff, Robert Rebak, Gustavo Giraldo, and Katherine Quinn, and contribution against Terren S. Peizer, Brandon H. LaVerne and Curtis Medeiros. On December 1, 2021, a similar shareholder derivative action was filed in the United States District Court for the District of Delaware, entitled Vega v. Peizer, Case No. 1:21-cv-01701, for violation of Section 20(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment and waste of corporate assets against Terren S. Peizer, Brandon H. LaVerne, Curtis Medeiros, Richard A. Berman, Michael Sherman, Edward Zecchini, Diane Seloff, Robert Rebak, Gustavo Giraldo, and Katherine Quinn. In these actions, plaintiffs allege that the defendants breached their fiduciary duties by allowing or causing the Company to violate the federal securities laws as alleged in the Consolidated Class Action discussed above. The plaintiffs seek damages (and contribution from the officers) in an indeterminate amount. On December 7, 2021, the Court in the Central District of California consolidated the two Central District of California actions under the Aptor case caption and number (the "Consolidated Derivative Action"), stayed the action pending a ruling on the Motion to Dismiss in the Consolidated Class Action and ordered plaintiffs to file a consolidated amended complaint within fourteen (14) days of a ruling on the Motion to Dismiss in the Consolidated Class Action. On February 7, 2022, the Court in the District of Delaware extended the deadline for defendants to respond to the complaint in the Vega action to April 8, 2022. On March 21, 2022, the Court in the District of Delaware granted plaintiff’s unopposed motion to transfer the case to the United States District Court for Central District of California in the interest of judicial efficiency due to the Consolidated Class Action and Consolidated Derivative Action already pending in that district, and that same day the case was transferred into the United States District Court for Central District of California and given the new Case No. 2:22-cv-01873-CAS-AS. On April 11, 2022, the Court stayed the action pending a ruling on the Motion to Dismiss in the Consolidated Class Action and ordered plaintiffs to inform defendants regarding their intention to amend their initial complaint within thirty (30) days of said ruling. On February 14, 2024, the parties in Consolidated Derivative Action stipulated to an extension of the stay pending a ruling on Ontrak’s anticipated motion to dismiss the forthcoming amended complaint filed by lead plaintiff in the Consolidated Class Action. On April 8, 2024, the parties in the Vega action did the same. On January 25, 2024, another purported stockholder derivative complaint was filed in the Court of Chancery of the State of Delaware, entitled Dutkiewicz v. Acuitas Group Holdings LLC (“Acuitas”), Case No. 2024-0068, alleging breach of fiduciary duty under Brophy and unjust enrichment against Acuitas and Terren S. Peizer and breach of fiduciary duties generally against Acuitas, Terren S. Peizer, Brandon H. LaVerne, Jonathan Mayhew, Curtis Medeiros, Richard A. Berman, Michael Sherman, Edward Zecchini, Diane Seloff, Robert Rebak, Gustavo Giraldo, Katherine Quinn and Robert Newton. On July 11, 2024, the parties also stipulated to stay the matter pending a ruling on Ontrak’s motion to dismiss in the Consolidated Class Action. On September 10, 2024, the Court in the Consolidated Derivative Action lifted the stay as a result of the September 3, 2024 dismissal with prejudice of the Third Amended Complaint in the Consolidated Class Action. The Court set November 8, 2024 as the date for Defendants’ response to the Complaint in the Consolidated Derivative Action. The parties in the Consolidated Derivative Action have stipulated to stay the case pending resolution of the appeal in the Consolidated Class Action. The parties are continuing to confer regarding a stay pending any appeal in the Consolidated Class Action and/or an appropriate briefing schedule for responses to the complaints in the remaining two derivative actions. Although all of the claims asserted in these actions purport to seek recovery on behalf of the Company, the Company will incur certain expenses due to indemnification and advancement obligations with respect to the defendants. The Company understands that defendants believe these actions are without merit and intend to defend themselves vigorously.

On February 28, 2022, a purported securities class action was filed in the Superior Court of California for Los Angeles County, entitled Braun v. Ontrak, Inc., et al., Case No. 22STCV07174. The plaintiff filed this action purportedly on behalf of a putative class of all purchasers of the Series A Preferred Stock pursuant to Registration Statements and Prospectuses issued in connection with Ontrak’s August 21, 2020 initial public stock offering, its September 2020 through December 2020 “at market” offering, and its December 16, 2020 follow-on stock offering (collectively, the “Preferred Stock Offerings”). The plaintiff brings this action against the Company; its officers: Terren S. Peizer, Brandon H. LaVerne, and Christopher Shirley; its board members: Richard A.

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(unaudited)

Berman, Sharon Gabrielson, Gustavo Giraldo, Katherine B. Quinn, Robert Rebak, Diane Seloff, Michael Sherman, and Edward Zecchini; and the investment banking firms that acted as underwriters for the Preferred Stock Offerings: B. Riley Securities, Inc., Ladenburg Thalmann & Co., Inc., William Blair & Company, LLC, Aegis Capital Corp., Insperex LLC (f/k/a Incapital LLC), The Benchmark Company, LLC, Boenning & Scatteredgood, Inc., Colliers Securities, LLC, Kingswood Capital Markets, and ThinkEquity (the "Underwriters"). The plaintiff asserts three causes of action alleging that Ontrak violated § 11, § 12(a)(2), and § 15 of the Securities Act of 1933, respectively, (1) by failing to disclose facts required to be disclosed under SEC Regulation S-K items 105 and 303 – that Aetna had turned off the data feed of customer records to Ontrak citing dissatisfaction with the Company’s value proposition and billing practices and thereafter submitted a CAP to which Ontrak’s senior executives were unable to effectively respond; and (2) by issuing allegedly false or misleading statements in its Registration Statements and Prospectuses: (a) regarding Ontrak’s growing customer base; (b) regarding its ability to scale its operations; (c) that revenue from a limited number of its customers would continue; (d) that its services are provided to customers continuously; (e) that revenue increases were attributable to continued expansion of the Ontrak program; and (f) regarding the healthcare experience of its executives. The plaintiff seeks damages in an indeterminate amount. On July 7, 2022, the defendants filed demurrers to the complaint. On October 4, 2022, the Court issued its ruling, allowing the case to proceed but with a narrowed scope. Specifically, of the six alleged misleading statements, only two remain (that Ontrak had a growing “growing customer base” and that Ontrak’s revenue growth was attributed to “[t]he continued expansion of [its] Ontrak program with [its] existing health plan customers”). The Court sustained the Company’s demurrer to the second cause of action, for violation of Section 12 of the Securities Act of 1933; while the Court granted leave to amend the plaintiff determined not to amend to pursue that claim. The Company believes that the remaining allegations lack merit and intends to defend against the action vigorously.

On November 18, 2022, plaintiff filed his Motion for Class Certification. On February 17, 2023, the Company filed its opposition and joined in the opposition of the Underwriters. On October 12, 2023, the Court issued its ruling granting plaintiff's Motion and certifying the class as to the Section 11 and Section 15 claims only.

The parties were engaged in discovery until November 3, 2023, when the United States Attorneys' Office filed an application for leave to intervene and stay discovery pending resolution of a federal criminal case. On November 8, 2023, the Court set the Government's motion for hearing on December 14, 2023 and issued an order temporarily staying all discovery in the action pending resolution of the motion. On December 14, 2023, the Court granted the application for leave to intervene and stay discovery, staying discovery until June 25, 2024, or until criminal case reaches its conclusion at the trial level. The Court also vacated the previously set trial and related dates. On June 25, 2024, the Court lifted the stay on discovery and ordered (a) a further status conference to be held August 29, 2024, at 9:00 a.m., (b) the parties to meet and confer in advance of that status conference regarding a new case schedule and (c) the parties to submit a joint status report in advance thereof. On August 26, 2024, the parties submitted a joint status report and proposed case schedule tying remaining dates to the resolution of certain document production issues, which the Court entered on August 27, 2024. At the August 29, 2024 status conference, the Court set a further status conference for October 23, 2024 at 1:45 p.m. At the October 23, 2024 status conference, the Court set a hearing on certain document production issues as between plaintiff and Mr. Peizer for February 20, 2025 at 1:45 p.m.

Securities Investigation

On November 15, 2022, the Company received a notification from the SEC, Division of Enforcement, that it is conducting an investigation captioned “In the Matter of Trading in the Securities of Ontrak, Inc. (HO-14340)” and issued a preservation letter as well as a subpoena for documents relating to the investigation. The notification indicates the investigation is a fact-finding inquiry for compliance with federal securities laws and should not be construed as an indication by the SEC that any violation of law has occurred, nor as a reflection upon any person, entity or security. The Company cooperated with the terms of the subpoena.

On March 1, 2023, the DOJ announced charges and the SEC filed a civil complaint against Terren S. Peizer, Ontrak's former Chief Executive Officer and Chairman of our board of directors, alleging unlawful insider trading in our stock. Neither the Company nor any other current or former director or employee of the Company were charged by the DOJ or sued by the SEC. On June 21, 2024, a federal jury convicted Mr. Peizer of one count of securities fraud and two counts of insider trading. He is now scheduled to be sentenced on February 10, 2025. The Company cannot predict whether any other governmental authorities will initiate separate investigations or litigation. Investigations and any related legal and administrative proceedings could include a wide variety of outcomes, including the institution of administrative, civil injunctive or criminal proceedings involving the Company and/or its current or former executives and/or directors, the imposition of fines and other penalties, remedies and/or sanctions.

Table of Contents

ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 14. Subsequent Events

Warrant Adjustments and Exercises

As discussed in more detail in Note 10 above under the heading “Warrant Adjustment Provisions,” the exercise price of, and the number of shares of common stock issuable upon exercise of, the November 2023 Warrants, the Demand Warrants and New Keep Well Warrants are subject to adjustment in the event of a Stock Combination Event. On October 8, 2024, the Company and certain holders of the Public Offering Warrants entered into warrant amendments, pursuant to which, solely with respect to the 2024 Reverse Stock Split, the parties agreed to shorten the measuring period for determining the Event Market Price for the 2024 Reverse Stock Split so that it ended on the 11th trading day immediately following the 2024 Reverse Stock Split. As a result of the foregoing, the exercise price of the Public Offering Warrants of the holders that entered into the warrant amendments was reduced to $2.25 per share, which was the Event Market Price for the shortened period, and the aggregate number of shares of common stock issuable upon the unexercised portions of those warrants as of October 8, 2024 increased to 1,483,098.

With respect to the Public Offering Warrants held by parties that did not enter into the warrant amendments described above, the Event Market Price for the 2024 Reverse Stock Split was $2.08. As a result, the exercise price of those Public Offering Warrants outstanding on October 12, 2024 (which was the day immediately following the end of the measuring period for determining the Event Market Price for the 2024 Reverse Stock Split other than for the Public Offering Warrants held by parties that entered into the warrant amendments described above) was reduced to $2.08 per share and the aggregate number of shares of common stock issuable upon the unexercised portions of those warrants as of October 12, 2024 increased to 4,966,383. Similarly, the exercise price of each of the Private Placement Warrant, the Demand Warrants and the New Keep Well Warrants was reduced to $2.08 per share and the number of shares of common stock issuable upon exercise thereof increased to 33,610,460.

On October 8, 2024 and October 9, 2024, the Company received in the aggregate a total of $1.5 million of cash proceeds from the exercise of Public Offering Warrants by certain holders thereof and the Company issued a total of 817,602 shares of the common stock upon exercise thereof.

Customer Notification

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. For the three and nine months ended September 30, 2024, the Company billed this customer approximately $1.7 million and $4.9 million, respectively, representing 68% and 64% of the Company's revenue for the three and nine months ended September 30, 2024, respectively.

Demand Note and Demand Warrant

On October 3, 2024, the Company issued and sold a Demand Note to Acuitas in the original principal amount of $1.0 million. In connection with each such Demand Note purchased by Acuitas from the Company, the Company issued to Acuitas a Demand Warrant, with an exercise price of $2.27, to purchase approximately 0.9 million shares of the Company’s common stock.

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

The following discussion and analysis of our financial condition and results of operations should be read together with the condensed consolidated financial statements, including the related notes, and other financial information included elsewhere 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.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for our stock and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements, including, without limitation, those relating to our future business prospects, our revenue and income, wherever they occur, are necessarily estimates reflecting the best judgment of our senior management as of the date on which they were made, or if no date is stated, as of the date of the filing of this report. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 10-K”) and other reports that we file with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Our actual results may differ materially from those discussed due to such risks, uncertainties and assumptions. New risks emerge from time to time, and it is not possible for us to predict which new risks will arise. In addition, we cannot assess the impact of each risk on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statement. We caution you not to place undue reliance on the forward-looking statements contained in this report. Forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

OVERVIEW

General

Ontrak was founded with a passion for engaging with and helping improve the health and save the lives of anyone impacted by behavioral health conditions through our Wholehealth+ solution. We are 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. Our technology-enabled platform utilizes claim-based analytics and predictive modeling to provide analytic insights throughout the delivery of our personalized care program. Our 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.

Our 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. Our programs seek to improve member health and deliver validated cost savings to healthcare payors.

We operate as one segment in the United States and we contract with leading national and regional health plans and other at-risk payors to make our solutions available to eligible members.

Recent Events

Reverse Stock Split

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.

Customer Notification

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. For the three and nine months ended September 30, 2024, the Company billed this customer approximately $1.7 million and $4.9 million, respectively, representing 68% and 64% of our revenue for the three and nine months ended September 30, 2024, respectively. As of September 30, 2024, we had 1,196 enrolled members from this health plan customer.

August 2024 Amendment to Keep Well Agreement

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 $5.0 million of Committed Demand Notes (as such term is defined in Note 10 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report) under the Master Note Purchase Agreement dated April 15, 2022 (as amended to date, the “Keep Well Agreement”) 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. 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”). Also, pursuant to the agreement, Acuitas agreed not to exercise its right to require that any amounts due under any Demand Note (as such term is defined in Note 10 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report) 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. For more information, see Notes 10 and 14 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Waivers by Holders of Outstanding Warrants

On March 28, 2024, the Company and each holder of warrants the Company issued in a public offering and in a private placement completed in November 2023 entered into a waiver and consent agreement, pursuant to which such holder agreed to the adjustments to the exercise price of their warrants then in effect. For more information, see Note 10 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Metrics

The following table sets forth our key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions:

•Revenue. Our revenues are mostly generated from fees charged to health plan customers related to health plan members enrolled in our Ontrak program. Our contracts are generally designed to provide cash fees to us on a monthly basis, an upfront case rate, or fee for service based on enrolled members and achievement of certain member specified metrics that drive clinical engagement. Our performance obligation is generally satisfied over the length of the Ontrak program as our services our delivered and in certain contractual arrangement that provides for a minimum guarantee at the end of a contractual term upon non-achievement of stipulated revenue targets, revenue for the minimum guarantee is recognized when our performance obligation is satisfied at a point in time.

•Cash flow from operations. Our business activities generally have resulted in an outflow of cash flow from operations as we invest strategically into our business to help the growth of our operations.

•Callable outreach pool. Our callable outreach pool represents individuals insured by our health plan customers who have been identified through our advanced data analytics and predictive modeling with untreated behavioral health conditions that may be impacted through enrollment in the Ontrak program.


	Three Months Ended September 30,
(In thousands, except for outreach pool and percentages)	2024		2023		Change $		Change %
Revenue	$	2,569	$	3,715	$	(1,146)	(31)	%
Cash flow from operations	(1,412)		(1,814)		402		(22)

	Nine Months Ended September 30,
(In thousands, except for outreach pool and percentages)	2024		2023		Change $		Change %
Revenue	$	7,700	$	9,204	$	(1,504)	(16)	%
Cash flow from operations	(9,141)		(11,882)		2,741		(23)


	At September 30,
	2024	2023	Change	Change %
Callable outreach pool - WholeHealth+	6,689	9,377	(2,688)	(29)	%
Callable outreach pool - Ontrak Engage (1)	498	—	498	N/A
	7,187	9,377	(2,190)

_________

(1) Represents the number of health plan members eligible for our Ontrak Engage program, one of the segmented solutions of WholeHealth+. We began offering the Ontrak Engage program on an à la carte basis in the first half of 2024. A detailed description of our solutions is available in Part I, Item 1 of our 2023 10-K.

Our revenue for the three months ended September 30, 2024 was $2.6 million compared to $3.7 million for the same period in 2023, and $7.7 million for the nine months ended September 30, 2024 compared to $9.2 million for the same period in 2023. The decrease in our revenue in the three and nine months ended September 30, 2024 compared to the same periods in 2023 was primarily attributable to a decrease in revenue related to the health plan customer informing us in October 2023 of its intent not to continue using our services after February 2024, partially offset by an increase in commercial revenue related to the expansion with an existing health plan customer.

Our cash flow from operations for the three months ended September 30, 2024 was $(1.4) million compared to $(1.8) million for the same period in 2023, and $(9.1) million for the nine months ended September 30, 2024 compared to $(11.9) million for the same period in 2023. The improvement in our cash flow from operations during the three and nine months ended September 30, 2024 as compared to the same period in 2023 was primarily due to an improvement in operating expenses resulting from strategic headcount reductions in March 2023 and February 2024 as well as cost optimization initiatives we implemented.

Our callable outreach pool for the WholeHealth+ program was 6,689 at September 30, 2024 compared to 9,377 at September 30, 2023. The decrease was primarily related to a health plan customer informing us in October 2023 of its intent not to continue using our services after February 2024, partially offset by an increase in our callable outreach pool related to the expansion of our program to a larger commercial population with a health plan customer, one of the largest health systems in the U.S. Mid-Atlantic and Southeast and a continuing expansion of our strategic partnership with the same health plan customer to offer our program to eligible self-insured groups. Also, in May 2024, we announced the launch of a new customer agreement with a prominent regional Medicaid health plan for our Wholehealth+ and Ontrak Engage and Ontrak Access solutions upon obtainment of state approval. In August 2024, we announced the signing of a new customer agreement with a large, regional health plan in the Northeast, for whom we began proving our WholeHealth+ solution in October 2024 to its members in New York as well as our Engage solution to its members who are not eligible for WholeHealth+ but would benefit from ongoing care coaching to help them address physical and behavioral health challenges and social needs without the need for provider intervention. As we work with our remaining customers in maximizing return on their investment, optimizing our enrollment process and enhancing our offering, the callable outreach pool could continue to fluctuate in the near term.

In the first half of 2024, we began offering the Ontrak Engage program, one of the segmented solutions of WholeHealth+, on an à la carte basis. Our callable outreach pool for the Ontrak Engage program was 498 at September 30, 2024.

Key Components of Our Results of Operations

Revenue

We generate revenues from the services we provide to populations insured by private health insurance programs, including employer funded programs (which we refer 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. We aim 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 we have existing contracts.

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue related to health plan customers whose health plan members are enrolled in our program is recognized over the enrollment period of the program.

One of our customer’s contract includes a minimum guarantee of aggregate invoices, at agreed upon rates, of $5.8 million over a two year contractual period ending on December 31, 2024, of which we have invoiced $2.0 million as of September 30, 2024, leaving $3.8 million of minimum guarantee over the remaining contractual period. In the event the minimum guarantee is not achieved, the shortfall will be invoiced to the customer on December 31, 2024, at which time revenue will be evaluated for recognition.

Cost of Revenue

Cost of revenue consists primarily of salaries related to our care coaches, member engagement specialists and other staff directly involved in member care, healthcare provider claims payments and related processing fees, and other direct costs incurred to serve our health plan customers. All costs are recognized in the period in which an eligible member receives services.

Operating Expenses

Our operating expenses consist of our sales and marketing, research and development, and general and administrative expenses, as well as restructuring, severance and related costs as applicable. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation and commissions, and costs of marketing and promotional events, corporate communications, online marketing, product marketing and other brand-building activities. All advertising related costs are expensed as incurred. Research and development expenses consist primarily of personnel and related expenses for our engineers and software development staff, including salaries, benefits, bonuses and stock-based compensation, and the cost of certain third-party service providers. Research and development costs are expensed as incurred. General and administrative expenses consist primarily of personnel and related expenses for administrative, legal, finance, compliance and human resource staff, including salaries, benefits, bonuses and stock-based

compensation, professional fees, insurance premiums, and other corporate expenses. Restructuring, severance and related costs include workforce reduction costs and asset impairment charges, if any.

Interest Expense, net

Interest expense consists primarily of interest expense from our outstanding debt, accretion of debt discount, amortization of debt issuance costs and finance leases.

Other Income (Expense), net

Other income (expense), net consists of gains and losses associated with changes in fair value of warrant liabilities and contingent consideration, write-off of debt issuance related costs and other assets, net gain related to the write-off of an operating lease asset and liability upon early termination of the lease, and other miscellaneous income and expense items.

RESULTS OF OPERATIONS

The table below and the discussion that follows summarize our results of operations for each of the periods presented (in thousands):


	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	—		—		(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)

Revenue

The mix of our revenue between commercial revenue and government revenue can fluctuate quarter over quarter. The following table sets forth our sources of revenue for each of the periods indicated:


	Three Months Ended September 30,											Nine Months Ended September 30,
(In thousands, except percentages)	2024			2023			Change			Change %		2024			2023			Change			Change %
Commercial revenue	$	777		$	1,216		$	(439)		(36)	%	$	2,567		$	3,133		$	(566)		(18)	%
Percentage of commercial revenue to total revenue	30		%	33		%	(3)		%			33		%	34		%	(1)		%
Government revenue	$	1,792		$	2,499		$	(707)		(28)	%	$	5,133		$	6,071		$	(938)		(15)	%
Percentage of government revenue to total revenue	70		%	67		%	3		%			67		%	66		%	1		%
Total revenue	$	2,569		$	3,715		$	(1,146)		(31)	%	$	7,700		$	9,204		$	(1,504)		(16)	%

Total revenue decreased $1.1 million, or 31%, in the three months ended September 30, 2024 compared to the same period of 2023, and decreased $1.5 million, or 16%, in the nine months ended September 30, 2024 compared to the same period of 2023.

The percentage of our commercial revenue to total revenue decreased to 30% for the three months ended September 30, 2024 compared to 33% for the three months ended September 30, 2023, and the percentage of our government revenue increased to 70% for the three months ended September 30, 2024 compared to 67% for the three months ended September 30, 2023. The percentage of our commercial revenue decreased to 33% for the nine months ended September 30, 2024 compared to 34% for the nine months ended September 30, 2023, and the percentage of our government revenue increased to 67% for the nine months ended September 30, 2024 compared to 66% for the nine months ended September 30, 2023. The decrease in commercial revenue for the three and nine months ended September 30, 2024 compared to the same periods last year was primarily related to a health plan customer who gave notice in October 2023 of its intent not to continue using our services after February 2024, partially offset by an increase in commercial revenue related to an expansion with an existing customer. The decrease in government revenue for the three and nine months ended September 30, 2024 compared to the same period last year was primarily related to a health plan customer who gave notice in October 2023 of its intent not to continue using our services after February 2024 and a decrease in enrolled members.

Cost of Revenue, Gross Profit and Gross Profit Margin


	Three Months Ended September 30,											Nine Months Ended September 30,
(In thousands, except percentages)	2024			2023			Change			Change %		2024			2023			Change			Change %
Cost of revenue	$	975		$	1,040		$	(65)		(6)	%	$	2,794		$	2,691		$	103		4	%
Gross profit	1,594			2,675			(1,081)			(40)		4,906			6,513			(1,607)			(25)
Gross profit margin	62		%	72		%	(10)		%			64		%	71		%	(7)		%

Cost of revenue decreased $(0.07) million, or (6)%, in the three months ended September 30, 2024 compared to the same period of 2023, and increased $0.1 million, or 4%, in the nine months ended September 30, 2024 compared to the same period of 2023. The decrease in cost of revenue during the three months ended September 30, 2024 was primarily due to a decrease in provider costs. The increase in cost of revenue during the nine months ended September 30, 2024 was primarily due to higher employee compensation and benefit costs, partially offset by a decrease in provider costs.

Gross profit decreased by $1.1 million and gross profit margin decreased by 10% in the three months ended September 30, 2024 compared to the same period of 2023, and gross profit decreased by $1.6 million and gross profit margin decreased by 7% in the nine months ended September 30, 2024 compared to the same period of 2023. The decrease in gross profit margin in the three and nine months ended September 30, 2024 was primarily due to the decrease in revenue, as discussed above.

Operating Expenses


	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except percentages)	2024		2023		Change		Change %		2024		2023		Change		Change %
Operating expenses:
Research and development	$	1,224	$	1,552	$	(328)	(21)	%	$	3,328	$	4,733	$	(1,405)	(30)	%
Sales and marketing	780		822		(42)		(5)		2,003		2,649		(646)		(24)
General and administrative	4,697		4,365		332		8		12,712		14,593		(1,881)		(13)
Restructuring, severance and related costs	—		—		—		—		290		457		(167)		(37)
Total operating expenses	$	6,701	$	6,739	$	(38)	(1)		$	18,333	$	22,432	$	(4,099)	(18)

Operating loss	$	(5,107)	$	(4,064)	$	(1,043)	26	%	$	(13,427)	$	(15,919)	$	2,492	(16)	%

Total operating expenses decreased by $0.04 million, or 1%, in the three months ended September 30, 2024 compared to the same period in 2023. The decrease in operating expenses was primarily due to:

•a $0.3 million decrease in our research and development costs, which was primarily related to a $0.3 million decrease in amortization expense and a $0.2 million decrease in depreciation expense, partially offset by a $0.2 million increase in employee-related costs;

•a $0.04 million decrease in our sales and marketing costs, which was primarily related to a $0.08 million decrease in employee related cost in our sales and marketing department, partially offset by a $0.1 million increase in software related expenses; and

•a $0.3 million increase in our general and administrative costs, which was primarily related to a $0.5 million increase in employee-related costs, partially offset by a $0.2 million decrease in legal costs.

Total operating expenses decreased by $4.1 million, or 18%, in the nine months ended September 30, 2024 compared to the same period in 2023. The decrease in operating expenses was primarily due to:

•a $1.4 million decrease in our research and development costs, which was primarily related to a $0.9 million decrease in amortization expense, a $0.3 million decrease in depreciation expense, a $0.2 million decrease in employee-related costs and a $0.2 million decrease in software related costs, partially offset by a $0.1 million increase in professional consulting fees;

•a $0.6 million decrease in our sales and marketing costs, which was primarily related to a $0.9 million decrease in employee related cost in our sales and marketing department, partially offset by a $0.1 million increase in promotional expenses;

•a $1.9 million decrease in our general and administrative costs, which was primarily related to a $1.8 million decrease in legal costs, a $0.3 million decrease in insurance related costs and a $0.1 million decrease in depreciation expense, partially offset by a $0.2 million increase in software costs and a $0.2 million increase in travel and entertainment expenses; and

•a $0.2 million decrease in our restructuring, severance and related costs related to the workforce reduction implemented in February 2024 compared to the workforce reduction implemented in March 2023. For more information, see Note 6 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Other Income, net


	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except percentages)	2024		2023		Change $		Change %		2024		2023		Change $		Change %
Other income, net	$	2	$	38	$	(36)	(95)	%	$	5	$	324	$	(319)	(98)	%

Other income, net for the three and nine months ended September 30, 2024 was related to the gain on change in fair value of warrant liabilities. Other expense, net for the three months ended September 30, 2023 was primarily related the gain on change in fair value of warrant liabilities. The $0.3 million of other income, net, for the nine months ended September 30, 2023 was primarily related to a $0.5 million gain resulting from the write-off of an operating lease asset and liability upon early termination of the lease for office space in Santa Monica, California, partially offset by approximately $0.2 million of net lease termination related fees.

Debt Issuance Costs


	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except percentages)	2024		2023		Change $		Change %		2024		2023		Change $		Change %
Debt issuance costs	$	—	$	—	$	—	—	%	$	(5,921)	$	—	$	(5,921)	N/A

Debt issuance costs for the nine months ended September 30, 2024 was primarily related to $3.3 million of debt issuance costs expensed related to Demand Notes issued through June 2024 and $2.6 million of demand warrants expensed related to Demand Notes issued through June 2024.

Interest Expense, net


	Three Months Ended September 30,							Nine Months Ended September 30,
(In thousands, except percentages)	2024	2023		Change $		Change %		2024		2023		Change $		Change %
Interest expense, net	$(475)	$	(2,392)	$	1,917	(80)	%	$	(984)	$	(6,009)	$	5,025	(84)	%

The decrease in interest expense, net for the three and nine months ended September 30, 2024 compared to the same periods in 2023 was primarily due to a lower average total outstanding loan balance during the three and six months ended September 30, 2024 and lower amount of accretion of debt discount to interest expense.

Income Tax Benefit, net


	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except percentages)	2024		2023		Change $		Change %		2024		2023		Change $		Change %
Income tax benefit, net	$	—	$	—	$	—	—	%	$	—	$	80	$	(80)	N/A

Income tax benefit, net of $0.08 million for the nine months ended September 30, 2023, respectively, was primarily related to a reversal of accrued estimated income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Going Concern

In August 2024, the Company entered into an agreement with Acuitas pursuant to which Acuitas agreed to purchase $5.0 million in principal amount of Committed Demand Notes. See “—Overview—Recent Events—August 2024 Amendment to Keep Well Agreement,” above. As of the filing date of this report, Acuitas has purchased $3.5 million in principal amount of Committed Demand Notes but 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. 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 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 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report), 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. 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.

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 its other sources of capital are sufficient to allow the Company to meet its obligations as they become 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.

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated (in thousands):


	Nine Months Ended September 30,
	2024		2023
Net cash used in operating activities	$	(9,141)	$	(11,882)
Net cash used in investing activities	(102)		(196)
Net cash provided by financing activities	7,508		11,592
Net change in cash and restricted cash	$	(1,735)	$	(486)

Net cash used in operating activities during the nine months ended September 30, 2024 was $9.1 million compared with $11.9 million during the same period in 2023. The year-over-year improvement in our cash flow from operations was primarily due to a decrease in net loss which resulted primarily from an improvement in operating expenses resulting from strategic headcount reductions in March 2023 and February 2024 and vendor cost optimization plans.

Net cash used in investing activities was approximately $0.1 million for each of the nine months ended September 30, 2024 and 2023, which was primarily related to capitalized software development costs.

Net cash provided by financing activities was $7.5 million for the nine months ended September 30, 2024 compared with $11.6 million for the nine months ended September 30, 2023. The $7.5 million of net cash provided by financing activities for the nine months ended September 30, 2024 was primarily related to $7.0 million of proceeds from borrowings under the Keep Well Agreement and $2.0 million of proceeds from exercises of warrants, partially offset by $1.5 million of financed insurance premium payments. The $11.6 million of net cash provided by financing activities for the nine months ended September 30, 2023 was primarily related to $8.0 million of proceeds from borrowings under the Keep Well Agreement and $6.0 million of cash received in escrow under the Keep Well Agreement and held in a separate account, partially offset by $1.8 million of financed insurance premium payments.

Our total cash was $8.0 million as of September 30, 2024.

Debt

See Note 10 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a detailed discussion about our debt.

OFF BALANCE SHEET ARRANGEMENTS

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of the 2023 10-K and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the 2023 10-K for a discussion of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting policies and estimates since the filing date of the 2023 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have evaluated, with the participation of our principal executive officer and our principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2024. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of September 30, 2024, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities. As of the date of the filing of this report, we are not a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position, except for the legal proceedings discussed in Note 13, “Commitments and Contingencies” in the Notes to Condensed Consolidated Financial Statements, in Part I, Item 1 of this report, which is incorporated by reference herein.

Item 1A. Risk Factors

In evaluating us and our securities, we urge you to carefully consider the risks, uncertainties and other information in this report, as well as the risk factors disclosed in Item 1A to Part I of the 2023 10-K. Any of the risks discussed in this report or any of the risk factors disclosed in Item 1A to Part I of the 2023 10-K, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition. If any of these risks occur, our business, results of operations and financial condition could be harmed, the price of our securities could decline, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this report. Except as discussed below, there have been no material changes from the risk factors disclosed in Item 1A to Part I of the 2023 10-K.

Risks Related to Our Common Stock

There can be no assurance that our common stock will continue to be listed on Nasdaq or, if listed, that we will be able to comply with the continued listing standards of Nasdaq, which could limit investors’ ability to transact in our securities and subject us to additional trading restrictions.

Our common stock is listed on The Nasdaq Capital Market under the symbol “OTRK.” We are required to satisfy continued listing requirements to maintain our listing, including requirements commonly referred to as the minimum bid price rule and either the stockholders’ equity rule or the market value of listed securities rule. The minimum bid price rule requires that the closing bid price of our common stock be at least $1.00 per share, and the stockholders’ equity rule requires that our stockholders' equity be at least $2.5 million, or, alternatively, that the market value of our listed securities be at least $35 million or that we

have net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years.

We were not in compliance with the minimum bid price rule from October 2023 until October 7, 2024, with the stockholders' equity rule from August 2023 until November 2023, and with the minimum bid price rule from September 2022 until August 2023. Although we regained compliance with the applicable rule in each instance, there can be no assurance that we will continue to satisfy those or any other continued listing requirement and maintain the listing of our common stock on Nasdaq.

When Nasdaq confirmed that we regained compliance with the minimum bid price rule on October 7, 2024, Nasdaq also informed us that, pursuant to Nasdaq Listing Rule 5815(d)(4)(A), we will be subject to a Discretionary Panel Monitor for a period of one year from October 7, 2024, and that if, within that one-year period, we fail to maintain compliance with any continued listing requirement, the Listing Qualifications Department will issue a Delist Determination Letter and promptly schedule a new hearing with Nasdaq’s Hearings Panel. Notwithstanding Nasdaq Listing Rule 5810(c)(2), we will not be permitted to provide a plan of compliance to the Listing Qualifications Department with respect to any deficiency that arises during the one-year monitoring period, and the Listing Qualifications Department will not be permitted to grant additional time for us to regain compliance with respect to any such deficiency.

In addition to the specified criteria for continued listing, Nasdaq also has broad discretionary public interest authority that it can exercise to apply additional or more stringent criteria for continued listing on Nasdaq. Nasdaq has exercised this discretionary authority in the past. As of the date of the filing of this report, Acuitas is our largest stockholder and the aggregate principal amount we borrowed under the Keep Well Agreement, plus all accrued and unpaid interest thereon, is approximately $11.1 million. Mr. Peizer, our former chief executive officer and chairman of our board of directors, owns and controls Acuitas. On March 1, 2023, the DOJ announced charges and the SEC filed a civil complaint against Mr. Peizer alleging unlawful insider trading in our stock. Neither the Company nor any other current or former director or employee of the Company were charged by the DOJ or sued by the SEC. On June 21, 2024, a federal jury convicted Mr. Peizer of one count of securities fraud and two counts of insider trading. He is scheduled to be sentenced in February 2025. No assurances can be given that Nasdaq will not exercise its discretionary public interest authority to delist our common stock due to public interest concerns related to Acuitas’ ownership of our common stock or its relationship to us under the Keep Well Agreement.

In connection with (a) our November 2023 public offering and concurrent private placement and the securities issuable in connection with the conversion of the senior secured convertible notes completed before the closing thereof and (b) the Sixth Amendment, we submitted listing of additional shares applications to Nasdaq in accordance with Nasdaq listing rules. Current Nasdaq practice is not to accept or reject listing of additional shares applications before the closing of a public or private offering. We believe that the issuances of securities in the November 2023 public offering and concurrent private placement, in connection with the conversion of the senior secured convertible notes completed before the closing thereof, and in connection with the Sixth Amendment are all compliant with Nasdaq listing rules. However, Nasdaq could assert that as a result of one or more of these securities issuances, we are not in compliance with Nasdaq listing rules. For example, Nasdaq could assert that the exercise price reset and share adjustment provisions in the Public Offering Warrants, in the Private Placement Warrant, in the New Keep Well Warrants mandate a delisting determination unless such provisions are modified. Should that occur, we would need to obtain (1) with respect to the Public Offering Warrants, the consent of the holders of Public Offering Warrants representing at least a majority of the shares of common stock underlying the Public Offering Warrants then outstanding and each investor in the November 2023 public offering who purchased at least $1.75 million of securities at the closing of the offering, and (2) with respect to the Private Placement Warrant and the New Keep Well Warrants, the consent of Acuitas, for any modifications. The failure to obtain such consent(s) could result in the delisting of our common stock.

If our common stock is delisted by Nasdaq, and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, then we could face significant material adverse consequences, including: (a) less liquid trading market for our securities; (b) more limited market quotations for our securities; (c) determination that our common stock is a “penny stock” that requires brokers to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; (d) more limited research coverage by stock analysts; (e) loss of reputation; and (f) more difficult and more expensive equity financings in the future.

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our common stock remains listed on Nasdaq, our common stock will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. If our securities

were no longer listed on Nasdaq and therefore not “covered securities,” we would be subject to regulation in each state in which we offer our securities.

Our enrollment rates and engagement of our members could be impacted by accuracy and frequency of the member data that we receive from our customers.

We depend on and utilize member data that is transmitted to us by our health plan customers to analyze, outreach, enroll and engage members throughout the duration of our WholeHealth+ program. Our ability to enroll our customers’ members in our WholeHealth+ program may not achieve anticipated enrollment rates for various reasons, one of which is because our ability to perform identification algorithms designed to increase customers’ members enrollment can be adversely impacted when our customers delay transmitting, or temporarily do not transmit, member data to us. From time to time, customers may delay, or there may be a temporary pause in, the transmission of member data to us due to various reasons outside of our control, such as transmission errors, system configuration issues, system implementation or transitions, etc. For example, during the quarter ended June 30, 2024, the transmission of member data from one customer to us was temporarily paused during the time that customer performed its internal data security review, which adversely impacted our enrollment efforts with respect to the members of that customer.

Risk Related to Our Business

We will need additional funding to continue our operations and execute our business strategy, and we cannot guarantee that we will raise adequate additional funding on a timely basis, on favorable terms, or at all.

In addition, 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 payable at any time after August 30, 2025 upon demand of the holder, and the balance of which matures on May 14, 2026, unless it becomes due and payable in full earlier, whether by acceleration or otherwise.

Based on our current analysis of the conditions described above and our forecast of our future operating results, we do not believe that our cash on hand and our other sources of capital are sufficient to allow us to meet our obligations as they become due and to continue our 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 our 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.

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. If we raise additional funds by issuing equity securities, it will result in further dilution to our stockholders and any such equity securities may provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds by issuing debt securities, such securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of such securities could impose significant restrictions on our operations. We do not know whether, and no assurances can be given that, additional funding will be available to us when needed, on terms favorable to us and our stockholders or at all. If additional adequate funding is not available or is not available on acceptable terms, we may need to downsize, curtail program development efforts or halt our operations altogether.

A substantial percentage of our revenues are attributable to a few large customers, any or all of which may terminate our services at any time.

Approximately 98.7% and approximately 93.2% of our total revenue for the three months ended September 30, 2024 and 2023 were attributable to two and three customers, respectively. Approximately 94.5% and approximately 91.9% of our total revenue for the nine months ended September 30, 2024 and 2023, respectively, were attributable to three customers. Also, two customers represented 100% of our total accounts receivable as of September 30, 2024. We had $0.03 million of accounts receivable outstanding as of September 30, 2024.

We expect that revenues from a limited number of customers will continue for the foreseeable future. Sales to these customers are made pursuant to agreements with flexible termination provisions, generally entitling the customer to terminate with or without cause on limited notice to us, and which have adversely affected our business and financial condition and results. For example, in February 2021 and August 2021 we received notices from each of our then largest customers of their intent not to continue our program, and in October 2023 and October 2024, we received a notice from a large customer of its intent not to continue using our services after February 2024 and December 2024, respectively. We may not be able to keep our key customers, or these customers may decrease their enrollment levels. Any substantial decrease or delay in revenues relating to one or more of our key customers would harm our business and financial condition and results. If revenues relating to current key customers cease or are reduced, we may not obtain sufficient enrollments from other customers necessary to offset any such losses or reductions.

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

All sales of unregistered securities during the three months ended September 30, 2024, if any, were previously reported by the Company in a Current Report on Form 8-K.

Item 3. Defaults Upon Senior Securities

(a) None.

(b) Preferred Dividend Arrearage

Holders of the Series A Preferred Stock are entitled to receive, when, as and if declared by our board of directors out of funds legally available therefor, 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). Our board of directors has not declared dividends on the Series A Preferred Stock since May 2022. As such, as of the date of the filing of this report, we had approximately $24.2 million of undeclared dividends in arrears. For more information about the Series A Preferred Stock, see Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a) None.

(b) None.

(c) During the period from July 1, 2024 to September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any Rule 10b5-1 trading arrangement (as defined in Item 408(a)(1)(i) of Regulation S-K) or any non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).

Item 6. Exhibits


Exhibit No.						Description
3.1						Certificate of Amendment of Certificate of Incorporation dated September 17, 2024 (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on September 19, 2024).


3.2						Amended and Restated Bylaws of Ontrak, Inc., as amended through August 9, 2024 (incorporated herein by reference to Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2024).
10.1#						Ontrak, Inc, 2017 Amended and Restated Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on September 13, 2024).
10.2#						Form of stock option agreement for grants to non-executive officer employees under the Ontrak, Inc, 2017 Amended and Restated Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed with the SEC on September 13, 2024).
10.3#						Form of stock option agreement for grants to executive officers under the Ontrak, Inc, 2017 Amended and Restated Stock Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed with the SEC on September 13, 2024).
10.4#						Form of stock option agreement for grants to non-employee directors under the Ontrak, Inc, 2017 Amended and Restated Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, filed with the SEC on September 13, 2024).
10.5						Form of Warrant Amendment dated October 8, 2024 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on October 15, 2024).
10.6#						Employment Agreement of Richard Newman, dated August 12, 2024 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2024).
10.7						Agreement by and between Ontrak, Inc. and Acuitas Capital, LLC, dated August 13, 2024 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2024).
31.1*						Certification by the Chief Executive Officer, pursuant to Rule 13-a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification by the Chief Financial Officer, pursuant to Rule 13-a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification by the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification by the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						XBRL Instance Document
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

_____________________

* Filed herewith.

** Furnished herewith.

# Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	ONTRAK, INC.

Date: November 13, 2024	By:	/s/ BRANDON H. LAVERNE
		Brandon H. LaVerne Chief Executive Officer (Principal Executive Officer)

Date: November 13, 2024	By:	/s/ JAMES J. PARK
		James J. Park Chief Financial Officer (Principal Financial Officer)

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Date	Price Target	Rating	Analyst
12/5/2023	$4.00	Buy	ROTH MKM
3/9/2022	$13.00 → $2.50	Hold	Canaccord Genuity
3/9/2022	$11.00 → $2.00	Sector Perform	RBC Capital
8/20/2021	$35.00 → $9.00	Market Perform → Underperform	Cowen & Co.
8/20/2021	$15.00	Buy → Neutral	B. Riley Securities

SEC Form 10-Q filed by Ontrak Inc.

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