Ontrak(OTRK) - 2019 Q1 - Quarterly Report

Cover Page Details the filing of Form 10-Q by CATASYS, INC. for Q1 2019, including registrant information and filer status - CATASYS, INC. filed its Form 10-Q for the quarterly period ended March 31, 2019, confirming its status as a smaller reporting company and not a shell company[1][2] Registrant Information | Field | Value | | :--- | :--- | | Registrant Name | CATASYS, INC. | | Commission File Number | 001-31932 | | State of Incorporation | Delaware | | IRS Employer Identification No. | 88-0464853 | | Principal Executive Offices | 11601 Wilshire Boulevard, Suite 1100, Los Angeles, California 90025 | | Telephone Number | (310) 444-4300 | | Trading Symbol | CATS | | Exchange | The NASDAQ Capital Market | | Filer Status | Smaller reporting company | | Shares Outstanding (May 7, 2019) | 16,214,625 | PART I - FINANCIAL INFORMATION Presents the company's unaudited consolidated financial statements and management's analysis for the reporting period ITEM 1. Financial Statements This section presents the unaudited consolidated financial statements for Catasys, Inc., including the Balance Sheets, Statements of Operations, Stockholders' Deficit, and Cash Flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial accounts Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and stockholders' deficit as of March 31, 2019, and December 31, 2018 Consolidated Balance Sheet Highlights (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $5,845 | $5,486 | | Total Assets | $7,217 | $6,323 | | Total Current Liabilities | $8,480 | $7,730 | | Total Liabilities | $17,893 | $15,288 | | Total Stockholders' Deficit | $(10,676) | $(8,965) | - The company's total assets increased by approximately $0.9 million, while total liabilities increased by approximately $2.6 million from December 31, 2018, to March 31, 2019, leading to an increase in the stockholders' deficit[7] Consolidated Statements of Operations Details the company's revenues, expenses, and net loss for the three months ended March 31, 2019, and 2018 Consolidated Statements of Operations Highlights (in thousands, except per share data) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $6,811 | $1,911 | $4,900 | 256% | | Cost of Revenue | $3,027 | $2,287 | $740 | 32% | | Gross Profit (Loss) | $3,784 | $(376) | $4,160 | -1106% | | Operating Loss | $(2,515) | $(4,247) | $1,732 | -41% | | Net Loss | $(2,921) | $(4,218) | $1,297 | -31% | | Net Loss Per Share (Basic & Diluted) | $(0.18) | $(0.27) | $(0.09) | -33% | - Revenue significantly increased by 256% year-over-year, leading to a positive gross profit in Q1 2019 compared to a gross loss in Q1 2018, and despite increased operating expenses, the net loss decreased by 31% due to higher revenue and gross profit[9] Consolidated Statements of Stockholders' Deficit Outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Stockholders' Deficit Changes (in thousands) | Item | Balance at Dec 31, 2018 | Q1 2019 Activity | Balance at Mar 31, 2019 | | :--- | :--- | :--- | :--- | | Common Stock (Shares) | 16,185,146 | 20,000 | 16,205,146 | | Common Stock (Amount) | $2 | $0 | $2 | | Additional Paid-In Capital | $296,688 | $1,210 | $297,898 | | Accumulated Deficit | $(305,655) | $(2,921) | $(308,576) | | Total Stockholders' Deficit | $(8,965) | $(1,711) | $(10,676) | - The total stockholders' deficit increased from $(8,965) thousand at December 31, 2018, to $(10,676) thousand at March 31, 2019, primarily due to the net loss incurred during the quarter, partially offset by increases in additional paid-in capital from warrant reclassification, cash exercise, and stock compensation expense[12] Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities for the reporting periods Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change ($) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(4,359) | $(3,416) | $(943) | | Net cash provided by (used in) financing activities | $2,493 | $(9) | $2,502 | | Net decrease in cash and restricted cash | $(1,866) | $(3,425) | $1,559 | | Cash and restricted cash at end of period | $1,704 | $1,354 | $350 | - Net cash used in operating activities increased by $943 thousand year-over-year, reflecting increased operational scale, while net cash provided by financing activities significantly improved, turning from a $9 thousand outflow in 2018 to a $2.493 million inflow in 2019, primarily due to proceeds from a Horizon revolving loan and warrant exercise[15] Notes to Consolidated Financial Statements Provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies and specific accounts Note 1. Basis of Consolidation and Presentation Explains the company's business model, operational scope, and management's plans for achieving financial stability - Catasys, Inc. leverages big data predictive analytics, AI, and telehealth with human interaction to improve member health and reduce costs for health plans by addressing unaddressed behavioral health conditions that worsen medical comorbidities[17][18][80][81] - The company operates its OnTrak solutions in twenty-four states, serving commercial, managed Medicare Advantage, and managed Medicaid populations, with plans to increase enrollment and fees throughout 2019[21][95] - Despite historical net losses and negative cash flows, management plans to achieve positive cash flow by the end of 2019 by increasing eligible members, signing new contracts, expanding existing programs, and controlling expenses, with current cash resources and available borrowings expected to cover expenses for at least the next twelve months[20][22][23][92][96][97] Note 2. Accounting Standards and Significant Accounting Policies Details the company's revenue recognition, cost of revenue, concentration of credit risk, and recent accounting standard adoptions - Revenue is recognized over time as OnTrak services are continuously provided, with variable consideration estimated using an expected value method for minimum performance guarantees and price concessions[25][26] Revenue Disaggregation by Business Line (in thousands) | Business Line | March 31, 2019 Revenue | March 31, 2019 Percentage | March 31, 2018 Revenue | March 31, 2018 Percentage | | :--- | :--- | :--- | :--- | :--- | | Commercial | $4,152 | 61% | $1,100 | 58% | | Government | $2,659 | 39% | $811 | 42% | | Total | $6,811 | 100% | $1,911 | 100% | - Cost of revenue primarily includes salaries for care staff, healthcare provider claims payments, and third-party administrator fees, expensed as incurred or when services are received[27] Concentration of Credit Risk by Customer (Percentage of Revenue) | Customer | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Largest customer | 26.5% | 22.8% | | 2nd largest customer | 25.8% | 22.1% | | 3rd largest customer | 16.2% | 19.8% | | 4th largest customer | 11.5% | 18.3% | | Remaining customers | 20.0% | 17.0% | - The company adopted ASC 842 (Leases) on January 1, 2019, recognizing right-of-use assets and lease liabilities for operating leases with initial terms of 12 months or greater, and also adopted ASU 2017-11, reclassifying a warrant liability of $86,000 to additional paid-in capital[33][40][42] Note 3. Accounts Receivable Describes the company's policy for accounts receivable and provision for doubtful accounts - The company uses the specific identification method for recording the provision for doubtful accounts and had no allowance for doubtful accounts as of March 31, 2019, and December 31, 2018[43] Note 4. Property and Equipment Provides details on the company's property and equipment, net, and associated depreciation expense Property and Equipment, Net (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total property and equipment, net | $225 | $263 | - Depreciation expense for the three months ended March 31, 2019, was $38,000, a decrease from $85,000 in the same period of 2018[46] Note 5. Common Stock Reports on common stock activity, including warrant exercises and share issuances - In January 2019, 20,000 warrants were exercised at $5.00 per share, generating $100,000 in proceeds and issuing 20,000 shares of common stock[47] Note 6. Stock Compensation Details stock compensation expense, unrecognized compensation cost, and stock option and warrant activity Stock Compensation Expense (in thousands) | Period | Stock Compensation Expense | | :--- | :--- | | Three Months Ended March 31, 2019 | $1,024 | | Three Months Ended March 31, 2018 | $328 | - Stock compensation expense increased significantly from $328,000 in Q1 2018 to $1,024,000 in Q1 2019, and as of March 31, 2019, there was $9.9 million of unrecognized compensation cost for employees and directors, expected to be recognized over approximately 3.05 years[50][51] Stock Option Activity for Employees and Directors | Item | Number of Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | Balance as of December 31, 2018 | 3,761,278 | $9.44 | | Granted (Q1 2019) | 555,378 | $10.45 | | Balance as of March 31, 2019 | 4,291,116 | $9.58 | Warrant Activity for Non-Employees | Item | Number of Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | Balance as of December 31, 2018 | 1,608,996 | $4.71 | | Issued (Q1 2019) | 40,279 | $9.93 | | Exercised (Q1 2019) | (20,000) | $5.00 | | Balance as of March 31, 2019 | 1,625,108 | $4.80 | Note 7. Leases Outlines the company's lease agreements, related expenses, and balance sheet impact under ASC 842 - The company entered into a new 48-month lease for corporate offices in Santa Monica, CA, beginning April 2019, with a base rent of approximately $48,000 per month, and a $408,000 letter of credit is recorded as long-term restricted cash[55] Operating Lease Expenses (in thousands) | Item | Three Months Ended March 31, 2019 | | :--- | :--- | | Operating lease cost | $74 | | Short-term lease rent expense | $3 | | Total rent expense | $77 | - As of March 31, 2019, the company had no operating lease liabilities or right-of-use assets on its balance sheet, and the weighted-average discount rate for operating leases was 9.25%[56] Note 8. Debt Describes the company's venture loan agreement, revolving loan, and associated interest expense and warrants - In March 2019, Catasys amended its venture loan agreement with Horizon Technology Finance Corporation, increasing the total loan facility to $15.0 million, including an initial $7.5 million and an additional $7.5 million in three revolving tranches, with an initial advance of $2.5 million funded[59] - The revolving loan bears interest at one-month LIBOR plus 9.75% and requires a payment equal to the greater of $150,000 or 6% of the outstanding principal balance on August 31, 2020[61] - In connection with the amended loan, Catasys issued Horizon 40,921 warrants to purchase common stock with an aggregate value of up to $600,000 at an exercise price of $9.93 per share[63] Debt Summary (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Horizon term loan | $7,950 | $7,950 | | Horizon debt discount | $(422) | $(478) | | Horizon revolving loan | $2,500 | $- | | Total debt | $10,028 | $7,472 | | Current maturities of debt | $1,167 | $- | | Long term debt | $8,861 | $7,472 | - Interest expense increased significantly to $321,000 for Q1 2019, compared to $1,000 in Q1 2018, primarily due to the new venture loan and security agreement with Horizon Technology Finance Corporation and associated debt discount amortization[66] Note 9. Fair Value Measurements Presents fair value measurements for financial instruments, including warrant liabilities and their valuation methodology Fair Value Measurements (in thousands) - March 31, 2019 | Item | Level I | Level II | Level III | Total | | :--- | :--- | :--- | :--- | :--- | | Certificates of deposits | $408 | $- | $- | $408 | | Warrant liabilities | $- | $- | $552 | $552 | Rollforward of Warrant Liabilities (in thousands) | Item | Level III Warrant Liabilities | | :--- | :--- | | Balance as of December 31, 2018 | $86 | | Issuance of new warrant liability | $461 | | Change in fair value of warrant liability | $91 | | Reclassification of warrant liability to equity upon adoption of ASU 2017-11 | $(86) | | Balance as of March 31, 2019 | $552 | - The company recognized a loss of $91,000 related to the revaluation of warrant liabilities for the three months ended March 31, 2019, compared to $10,000 in the prior year[72] - Horizon Warrants, issued in connection with the Amended Loan Agreement, are classified as a liability due to variable features and valued using a Monte Carlo model, with key assumptions including 101% expected price volatility and a 7-year expected term[73][74] Note 10. Variable Interest Entities Reports on the assets and liabilities of the company's variable interest entities Variable Interest Entities Assets and Liabilities (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total assets | $758 | $168 | | Total liabilities | $58 | $21 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, including an overview of its business model, recent developments, detailed analysis of operational results, and a discussion of liquidity and capital resources OVERVIEW Provides a high-level summary of the company's business model, operational expansion, and recent financing activities - Catasys utilizes big data predictive analytics, AI, and telehealth to identify, engage, and treat health plan members with unaddressed behavioral health conditions, aiming to improve health outcomes and reduce total health plan costs through its OnTrak program[80][81] - The company has expanded its OnTrak program to eligible members in 24 states, partnering with national and regional health plans[82][95] - In March 2019, Catasys amended its venture loan agreement with Horizon, increasing the total facility to $15.0 million and receiving an initial $2.5 million advance, with warrants valued up to $600,000 issued to Horizon[82][84] RESULTS OF OPERATIONS Analyzes the company's financial performance, focusing on revenue growth, cost of revenue, operating expenses, and net loss Key Financial Results (in thousands, except percentages) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $6,811 | $1,911 | $4,900 | 256% | | Cost of Revenue | $3,027 | $2,287 | $740 | 32% | | Gross Profit | $3,784 | $(376) | $4,160 | -1106% | | Operating Expenses | $6,299 | $3,871 | $2,428 | 63% | | Operating Loss | $(2,515) | $(4,247) | $1,732 | -41% | | Net Loss | $(2,921) | $(4,218) | $1,297 | -31% | - Revenue increased by 256% year-over-year, driven by new health plan contracts, expansion into new service lines, and growth from 19 to 22 states, resulting in a 97% increase in net enrollment[86] - Cost of revenue increased by 32% due to the rise in treated members and the addition of care coaches, outreach specialists, and other staff to support anticipated growth[87] - Operating expenses increased by 63% primarily due to investments in data science, IT, software development, stock compensation expense, and increased headcount[89] - Interest expense surged by 32,000% to $321,000, mainly due to the venture loan and security agreement with Horizon Technology Finance Corporation and associated debt discount amortization[90] LIQUIDITY AND CAPITAL RESOURCES Discusses the company's cash position, working capital, cash flow trends, and strategies for funding future operations Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,359) | $(3,416) | | Net cash provided by (used in) financing activities | $2,493 | $(9) | | Net decrease in cash and restricted cash | $(1,866) | $(3,425) | - Cash and restricted cash stood at $1.7 million as of March 31, 2019, with a working capital deficit of approximately $2.6 million, and the company expects to continue incurring negative cash flows and net losses for the next twelve months, with an average cash burn rate of $1.5 million per month[92] - The company's ability to fund operations relies on increasing eligible members, signing new contracts, and managing expenses, with management believing current cash and available borrowings will cover expenses for at least the next twelve months, and positive cash flow expected by the end of 2019[95][96][97][102] - Financing activities provided $2.5 million in cash for Q1 2019, primarily from the Horizon revolving loan and warrant exercises, a significant improvement from a net cash outflow in Q1 2018[100] OFF BALANCE SHEET ARRANGEMENTS Confirms the absence of off-balance sheet arrangements during the reporting period - The company did not have any relationships with unconsolidated entities or financial partnerships that would facilitate off-balance sheet arrangements during the periods presented[104] CRITICAL ACCOUNTING ESTIMATES Refers to the detailed discussion of critical accounting estimates within the notes to the financial statements - Critical accounting estimates are discussed in Note 2 to the Consolidated Financial Statements[106] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - The company has no applicable quantitative and qualitative disclosures about market risk[107] ITEM 4. Controls and Procedures This section details the effectiveness of the company's disclosure controls and procedures and confirms no material changes in internal control over financial reporting - As of March 31, 2019, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[108] - There were no changes in internal control over financial reporting during the three months ended March 31, 2019, that materially affected or are reasonably likely to materially affect internal control over financial reporting[110] PART II - OTHER INFORMATION Contains disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, and other relevant information ITEM 1. Legal Proceedings This section states that there are no legal proceedings to report - There are no legal proceedings to report[112] ITEM 1A. Risk Factors This section indicates that there are no new risk factors to report for the current period - There are no new risk factors to report for the current period[113] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms that there were no unregistered sales of equity securities or use of proceeds not previously reported - There were no unregistered securities sold or issued by the company during the period covered by this report that have not been previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K[114] ITEM 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - There are no defaults upon senior securities to report[115] ITEM 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[116] ITEM 5. Other Information This section states that there is no other information to report - There is no other information to report[117] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the form of Horizon Warrant, the Amended and Restated Venture Loan and Security Agreement, and certifications by the Chief Executive Officer and Chief Financial Officer - Key exhibits include the Form of Horizon Warrant, the Amended and Restated Venture Loan and Security Agreement, and certifications by the CEO and CFO[118] SIGNATURES Confirms the official signing of the report by the company's principal executive and financial officers - The report was signed on May 9, 2019, by Terren S. Peizer, Chief Executive Officer, and Christopher Shirley, Chief Financial Officer[124]