Ontrak(OTRK) - 2019 Q4 - Annual Report

PART I ITEM 1. BUSINESS Catasys, Inc. is an AI and technology-enabled healthcare company focused on identifying, engaging, and treating health plan members with unaddressed behavioral health conditions that exacerbate medical comorbidities, utilizing its OnTrak solution across 28 states - Catasys, Inc. was incorporated in Delaware on September 29, 2003, and operates as a leading AI and technology-enabled healthcare company[15][16] - The company's core offering, the OnTrak solution, leverages proprietary big data predictive analytics, artificial intelligence, and telehealth, alongside human interaction, to identify, engage, and treat health plan members with unaddressed behavioral health conditions that worsen medical comorbidities[16][17][23][24][25] - The OnTrak program is available to eligible members in twenty-eight states through contracts with leading national and regional health plans[18] - As of December 31, 2019, Catasys employed 395 full-time employees[27] ITEM 1A. RISK FACTORS The company faces significant risks including a limited operating history with substantial losses and negative cash flow, challenges in securing financing, managing growth, and regulatory compliance, alongside high customer concentration and stock volatility - Catasys has been unprofitable since its inception in 2003, with an accumulated deficit of $331 million and negative cash flow from operations of ($16.9 million) for the year ended December 31, 2019[33] - The company's ability to use its net operating losses (NOLs) to offset future taxable income may be limited by Section 382 of the Internal Revenue Code, and a Protective Amendment was filed to restrict common stock transfers to protect these NOLs[62][63][64] - Four customers accounted for an aggregate of 85% of revenue for the year ended December 31, 2019, and 89% of accounts receivable, indicating significant customer concentration risk[49] - The company's Note Agreement, entered into in September 2019 for up to $45.0 million, contains restrictive covenants and financial ratios that could limit operational flexibility and lead to accelerated repayment obligations if violated[101][102][104][105] - The healthcare industry is highly regulated, and non-compliance with federal and state laws (e.g., anti-kickback, self-referral, false claims, HIPAA, HITECH, CCPA, GDPR) could result in significant penalties, operational restructuring, and reputational damage[72][75][76][88][89][93][94] - The company's common stock has limited trading volume and is susceptible to high price volatility, with over 50% beneficially owned by the Chairman and CEO, which could influence corporate decisions and deter takeovers[109][111][112] Risks related to our business Risks related to our intellectual property Risks related to our healthcare industry Risks related to our Note Agreement Risks related to our common stock ITEM 1B. UNRESOLVED STAFF COMMENTS The company reported no unresolved staff comments from the SEC - No unresolved staff comments were applicable as of the report date[123] ITEM 2. PROPERTIES The company's principal executive and administrative offices are located in leased office space in Santa Monica, California, which is considered adequate for current needs - The company's principal executive offices are in leased space in Santa Monica, California[124] - The current office space is deemed adequate to meet the company's needs[125] ITEM 3. LEGAL PROCEEDINGS As of the report date, Catasys, Inc. is not a party to any legal proceedings that are expected to have a material adverse effect on its operations or financial position - The company is not currently involved in any litigation expected to have a material adverse effect on its results of operations or financial position[126] ITEM 4. MINE SAFETY DISCLOSURES Mine Safety Disclosures are not applicable to Catasys, Inc.'s operations - Mine Safety Disclosures are not applicable[127] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock is listed on the NASDAQ Capital Market under the symbol "CATS", with no issuer purchases of equity securities during 2019 and all unregistered sales previously disclosed - All sales of unregistered securities during 2019 were previously disclosed in Form 10-Q or 8-K[128] - There were no issuer purchases of equity securities[129] ITEM 6. SELECTED FINANCIAL DATA This section is not applicable, indicating that selected financial data is not presented separately here but is available elsewhere in the report - Selected Financial Data is not applicable[130] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Catasys experienced significant revenue growth in 2019, increasing by 131% to $35.1 million, driven by the expansion of its OnTrak program and a 137% increase in enrolled members, despite continued operating losses and negative cash flow due to expansion costs Key Metrics (2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | % Change | | :---------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Revenue | $35,095 | $15,177 | $19,918 | 131 % | | Effective outreach pool | 108,000 | 41,000 | 67,000 | 163 % | | Cash flow from operations | $(16,901) | $(8,574) | $(8,327) | (97)% | Revenue by Source (2019 vs. 2018) | Revenue Source | 2019 (in thousands) | % of Total (2019) | 2018 (in thousands) | % of Total (2018) | | :--------------- | :------------------ | :---------------- | :------------------ | :---------------- | | Commercial | $21,753 | 62 % | $9,495 | 63 % | | Government | $13,342 | 38 % | $5,682 | 37 % | | Total Revenue | $35,095 | 100 % | $15,177 | 100 % | Cost of Revenue, Gross Profit, and Gross Margin (2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | % Change | | :---------------- | :------------------ | :------------------ | :-------------------- | :------- | | Cost of revenue | $20,408 | $11,119 | $9,289 | 84 % | | Gross profit | $14,687 | $4,058 | $10,629 | 262 % | | Gross profit margin | 41.8 % | 26.7 % | - | - | Operating Expenses and Loss (2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | % Change | | :------------------ | :------------------ | :------------------ | :-------------------- | :------- | | Operating expense | $34,701 | $17,684 | $17,017 | 96 % | | Operating loss | $(20,014) | $(13,626) | $(6,388) | 47 % | | Operating loss margin | (57.0)% | (89.8)% | - | - | - Cash and cash equivalents were $13.6 million as of December 31, 2019, with working capital of $6.3 million, and the company expects current cash resources to cover expenses for at least the next twelve months[150][159] - In September 2019, Catasys entered into a Note Agreement for $35.0 million in senior secured notes, with an option for an additional $10.0 million, due in September 2024[151] Cash Flows Summary (2019 vs. 2018) | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Net cash used in operating activities | $(16,901) | $(8,574) | | Net cash provided by investing activities | $— | $62 | | Net cash provided by financing activities | $27,349 | $7,303 | Contractual Obligations as of December 31, 2019 (in thousands) | Obligation | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 Years | | :---------------------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt | $36,502 | $— | $— | $36,502 | $— | | Lease obligations | $3,184 | $737 | $1,475 | $972 | $— | | Other contractual obligations | $377 | $309 | $68 | $— | $— | Overview Key Components of Our Results of Operations Results of Operations Liquidity and Capital Resources Contractual Obligations Off-Balance Sheet Arrangements Critical Accounting Policy and Estimates Recently Issued or Newly Adopted Accounting Pronouncements ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section is not applicable, indicating no specific quantitative or qualitative disclosures about market risk are presented here - Quantitative and Qualitative Disclosures About Market Risk are not applicable[179] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and related financial information are incorporated by reference from Item 15 of this report - Consolidated financial statements and related financial information are incorporated by reference from Item 15[180] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[181] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, with no material changes in internal control over financial reporting during the fourth quarter, and an unqualified opinion from EisnerAmper LLP on the effectiveness of internal control - Disclosure controls and procedures were deemed effective as of December 31, 2019[182] - No material changes in internal controls over financial reporting occurred during the fourth quarter of 2019[183] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[186] - EisnerAmper LLP, the independent registered certified public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[188] ITEM 9B. OTHER INFORMATION There is no other information required to be disclosed in this section - No other information is reported in this section[189] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, executive officers, and corporate governance will be provided in the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the 2020 definitive Proxy Statement[191] ITEM 11. EXECUTIVE COMPENSATION Details on executive compensation will be included in the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the 2020 definitive Proxy Statement[192] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information concerning security ownership of beneficial owners, management, and related stockholder matters will be provided in the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the 2020 definitive Proxy Statement[193] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE Information regarding certain relationships, related transactions, and director independence will be disclosed in the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the 2020 definitive Proxy Statement[194] ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information on principal accounting fees and services will be included in the company's 2020 definitive Proxy Statement - Information for this item is incorporated by reference from the 2020 definitive Proxy Statement[195] PART IV ITEM 15. EXHIBITS. FINANCIAL STATEMENT SCHEDULES This section lists the financial statements and schedules filed as part of the report, along with a comprehensive list of exhibits, including corporate documents, debt agreements, and certifications - Financial Statements and Financial Statement Schedules are listed on page F-1 and filed as part of this report[197] - A list of exhibits, including the Amended and Restated Certificate of Incorporation, By-Laws, various stock certificates and warrants, the Note Agreement, employment agreements, and certifications, is provided[198] ITEM 16. FORM 10-K SUMMARY This section indicates that a Form 10-K Summary is not applicable for this report - Form 10-K Summary is not applicable[201] Financial Statements Report of Independent Registered Public Accounting Firm EisnerAmper LLP provided an unqualified opinion on Catasys, Inc.'s consolidated financial statements for 2019 and 2018, confirming fair presentation in accordance with U.S. GAAP, and also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019 - EisnerAmper LLP issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2019 and 2018[212] - An unqualified opinion was also provided on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[213][219] - The company adopted Accounting Standards Codification Topic 842, Leases, effective January 1, 2019[214] Consolidated Balance Sheets As of December 31, 2019, Catasys reported total assets of $23.855 million, a significant increase from $6.323 million in 2018, primarily driven by an increase in cash, receivables, and right-of-use assets, while total liabilities also increased substantially to $47.764 million, widening the total stockholders' deficit to $(23.909) million Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2019 | December 31, 2018 | | :---------------------------------- | :------------------ | :------------------ | | Cash, cash equivalents and restricted cash | $13,610 | $3,162 | | Total current assets | $20,392 | $5,652 | | Total assets | $23,855 | $6,323 | | Total current liabilities | $14,098 | $7,816 | | Long-term debt, net | $31,597 | $7,472 | | Total liabilities | $47,764 | $15,288 | | Total stockholders' deficit | $(23,909) | $(8,965) | Consolidated Statements of Operations For the year ended December 31, 2019, Catasys reported revenue of $35.095 million, a substantial increase from $15.177 million in 2018, yet the net loss widened to $(25.659) million due to increased operating expenses, interest expense, and other debt-related costs Consolidated Statements of Operations Highlights (in thousands, except per share data) | Item | Year Ended December 31, 2019 | Year Ended December 31, 2018 | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Revenue | $35,095 | $15,177 | | Cost of revenue | $20,408 | $11,119 | | Gross profit | $14,687 | $4,058 | | Operating expenses | $34,701 | $17,684 | | Operating loss | $(20,014) | $(13,626) | | Other income (expense) | $(2,538) | $40 | | Interest expense | $(3,047) | $(570) | | Net loss | $(25,659) | $(14,212) | | Net loss per share, basic and diluted | $(1.56) | $(0.89) | Consolidated Statements of Stockholders' Deficit The consolidated statements of stockholders' deficit show an increase in accumulated deficit from $(305.655) million at December 31, 2018, to $(331.314) million at December 31, 2019, primarily due to the net loss incurred during the year, while additional paid-in capital increased from stock compensation and warrant/option exercises Stockholders' Deficit Highlights (in thousands) | Item | December 31, 2019 | December 31, 2018 | | :---------------------- | :------------------ | :------------------ | | Common Stock (Shares) | 16,616,165 | 16,185,146 | | Common Stock (Amount) | $2 | $2 | | Additional Paid-In Capital | $307,403 | $296,688 | | Accumulated Deficit | $(331,314) | $(305,655) | | Total Stockholders' Deficit | $(23,909) | $(8,965) | - The accumulated deficit increased by $25.659 million in 2019, reflecting the net loss for the year[232] Consolidated Statements of Cash Flows For the year ended December 31, 2019, net cash used in operating activities increased to $(16.901) million, while net cash provided by financing activities significantly increased to $27.349 million, primarily from new debt issuance, resulting in a net increase in cash and restricted cash of $10.448 million Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Year Ended December 31, 2019 | Year Ended December 31, 2018 | | :---------------------------------- | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(16,901) | $(8,574) | | Net cash provided by investing activities | $— | $62 | | Net cash provided by financing activities | $27,349 | $7,303 | | Net increase (decrease) in cash and restricted cash | $10,448 | $(1,209) | | Cash and restricted cash at end of period | $14,018 | $3,570 | - The increase in cash used in operating activities was primarily due to higher headcount and investments in data science, IT, and software development to support growth[156] - Financing activities in 2019 included $36.527 million from new loan proceeds, $1.9 million from option exercises, and $1.1 million from warrant exercises, offset by $16.9 million in loan repayments and $2.8 million in debt issuance costs[158] Notes to Consolidated Financial Statements The notes provide detailed information on the company's organization, significant accounting policies, and financial instruments, including revenue recognition, cost of revenue, consolidation of VIEs, debt obligations, and significant net operating loss carryforwards with a full valuation allowance - Catasys's mission is to improve health and save lives through its technology-enabled OnTrak solution, which identifies and treats members with behavioral conditions exacerbating chronic medical conditions[237][238] - The company continues to experience net losses and negative operating cash flows, with management plans focused on increasing member enrollment, improving operational efficiencies, and potentially seeking additional financing[240][241][243][244][245] - Revenue is recognized over time as OnTrak services are continuously provided, typically over a 12-month period, with variable consideration estimated using an expected value method[247][248] - Cost of revenue primarily includes salaries for care coaches and staff, healthcare provider claims payments, and third-party administrator fees[249] - The company consolidates Variable Interest Entities (VIEs) due to significant involvement and absorption of expected losses or benefits from its management services agreements with Texas and California non-profit health organizations[267][268][269] - As of December 31, 2019, the company had net federal operating loss carryforwards of approximately $277 million and state operating loss carryforwards of $39 million, fully reserved by a valuation allowance of $70.1 million[322][323] Debt Obligations (in thousands) | Item | December 31, 2019 | December 31, 2018 | | :------------------ | :------------------ | :------------------ | | Principal | $36,502 | $7,950 | | Less: debt discount | $(4,905) | $(478) | | Net carrying amount | $31,597 | $7,472 | Stock-Based Compensation Expense (in thousands) | Year Ended December 31, | 2019 | 2018 | | :---------------------- | :--- | :--- | | Share-based compensation expense | $5,210 | $2,056 | Note 1. Organization Note 2. Summary of Significant Accounting Policies Note 3. Common Stock Note 4. Debt Note 5. Stock Based Compensation Note 6. Leases Note 7. Income Taxes Note 8. Commitments and Contingencies Note 9. Related Party Transactions Note 10. Restricted Cash