2019 Delaware (I.R.S. Employer Identification Number) 230 Act: Act: Indicate by check mark whether the registrant has submitted electronically Smaller reporting company ☑ PART I following behavioral health issues: abuse. Scientific research indicates that not only can drugs interfere with normal brain functioning, but they can also have long-lasting effects that persist even after the drug is no longer being used. Data indicates that at some point, changes may occur in the brain that can turn drug and alcohol abuse into substance dependence—a chronic, relapsing, and sometimes fatal disease. Those dependent on drugs may suffer from compulsive drug craving and usage and be unable to stop drug use or remain drug abstinent without effective treatment. Professional medical treatment may be necessary to end this physiologically-based compulsive behavior. •Anxiety Disorders. According to the National Institute of Mental Health, anxiety disorders are the most common mental illness in the U.S., affecting an estimated We Our business strategy is to Our OnTrak solution combines care coaching, innovative psychosocial and medical treatment delivered through a proprietary provider network and financing. altogether. or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be materially adversely affected. Our ability to Our policies and procedures may not fully comply with complex and increasing regulation by state and federal authorities, which could negatively impact our business operations. affect our business or reputation. Recognizing the breadth of the Anti-Kickback Law and the fact that it may technically prohibit many innocuous or beneficial arrangements within the health care industry, the Office of Inspector General (“OIG”) has issued a series of regulations, known as the “safe harbors.” Compliance with all requirements of a safe harbor immunizes the parties to the business arrangement from prosecution under the Anti-Kickback Law. The failure of a business arrangement to fit within a safe harbor does not necessarily mean that the arrangement is illegal or that the OIG will pursue prosecution. Still, in the absence of an applicable safe harbor, a violation of the Anti-Kickback Law may occur even if only one purpose of an arrangement is to induce referrals. The penalties for violating the Anti-Kickback Law can be severe. These sanctions include criminal and civil penalties, imprisonment, and possible exclusion from the federal health care programs. Many states have adopted laws similar to the Anti-Kickback Law, and some apply to items and services reimbursable by any payor, including private insurers. Federal or state authorities may claim that our fee arrangements, our agreements and relationships with contractors, hospitals and physicians, or other activities violate fraud and abuse laws and regulations. If our business practices are found to violate any of these laws or regulations, we may be unable to continue with our relationships or implement our business plans, which would have an adverse effect on our business and results of operations. Further, defending our business practices could be time consuming and expensive, and an adverse finding could result in substantial penalties or require us to restructure our operations, which we may not be able to do successfully. Certain of our professional healthcare employees, such as nurses, must comply with individual licensing requirements. Our stock price may be subject to substantial volatility, and the value of our stockholders' investment may decline. Future issuances of common stock and hedging activities may depress the trading price of our common stock. The exercise of our outstanding warrants may result in a dilution of our current stockholders' voting power and an increase in the number of shares eligible for future resale in the public market, 2. PROPERTIES Santa Monica, California. PART Bid Price 2016 High Low 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Bid Price 2015 High Low 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter 10-Q or Current Report on Form 8-K. note agreements, accretion of debt discount and amortization of debt issuance costs. Twelve Months Ended (In thousands, except per share amounts) December 31, 2016 2015 Revenues Healthcare services revenues Operating expenses Cost of healthcare services General and administrative Depreciation and amortization Total operating expenses Loss from operations Interest and other income Interest expense Loss on impairment of intangible assets Loss on exchange of warrants Loss on debt extinguishment Change in fair value of warrant liability Change in fair value of derivative liability Loss from operations before provision for income taxes Provision for income taxes Net loss Basic and diluted net loss per share: Basic weighted number of shares outstanding our operating and strategic initiates. existing notes. debt issuances, 50% of excess cash flow, asset sales and the amount by which total debt exceeds an applicable leverage multiple. cash flows for the periods indicated (in thousands): Capital expenditures for the year ended December 31, amount of $44 million, proceeds from option exercises of $1.9 million, warrant exercises of $1.1 million, partially offset by loan repayment of $16.9 million, debt issuance costs of $2.8 million and debt termination costs of $2.0 million. December 31, 2019 (in thousands): for all share-based payment awards made to employees and directors based on estimated fair values on the date of grant. We estimate the fair value of share-based payment awards using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the consolidated statements of operations. We recognize forfeitures when they occur. method. December 31, 2016 December 31, 2015 Expected volatility % Risk-free interest rate % Weighted average expected lives in years Expected dividend % December 31, 2016 December 31, 2015 Expected volatility % Risk-free interest rate % Weighted average expected lives in years Expected dividend % Our internal control over financial reporting is supported by written policies and procedures that: PART III Name Age Position Officer/ Director Since Terren S. Peizer 57 Director, Chairman of the Board and Chief Executive Officer 2003 Richard A. Anderson 47 Director, President and Chief Operating Officer 2003 Susan E. Etzel 43 Chief Financial Officer 2011 Richard A. Berman 72 Director, Chairman of the Audit Committee, and Member of the Compensation Committee 2014 David E. Smith 70 Director, and Member of the Nominations and Corporate Governance Committee 2014 Marvin Igelman 54 Director, Chairman of the Nominations and Corporate Governance Committee, Member of the Compensation Committee, and Member of the Audit Committee 2014 Steve Gorlin 79 Director, and Member of the Nominations and Corporate Governance Committee 2014 All Other Compen- Name and Stock/Option sation ($) Principal Position Year Salary ($) Award Total ($) Terren S. Peizer, 2016 Chairman and 2015 Chief Executive Officer Richard A. Anderson, 2016 President and 2015 Chief Operating Officer Susan Etzel, 2016 Chief Financial Officer 2015 Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Option Options (#) Options (#) Exercise Option Exercisable Unexer- Price Expiration Name cisable Date Terren S. Peizer 02/07/18 06/20/18 10/27/19 12/06/20 Richard A. Anderson 02/07/18 06/20/18 10/27/19 12/06/20 Susan Etzel 05/24/21 Option awards ($) Name (1) Total Richard Berman David Smith Marvin Igelman Steve Gorlin Aggregate grant date fair market value Options options outstanding outstanding Richard Berman David Smith Marvin Igelman Steve Gorlin (a) (b) (c) Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and right Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holders (1) Equity compensation plans not approved by security holders Total Total Shares common Common beneficially stock Percent stock owned beneficially of Name of beneficial owner (1) owned (2) owned class (3) Directors and Named Executive Officers: Terren S. Peizer (4) Richard A. Anderson (5) Susan E. Etzel (6) Richard A. Berman (7) David E. Smith (8) Marvin Igelman (9) Steve Gorlin (10) All directors and named executive officers as a group (7 persons) 2016 2015 Audit fees (1) Audit-related fees Tax fees: All other fees: Total PART 4.1 4.2 10.2# 21.1* 31.1* 31.2* 32.1** 32.2** 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document By: /s/ TERREN S. PEIZER Terren S. Peizer Chief Executive Officer Chairman of the Board of Directors Terren S. Peizer and Chief Executive Officer (Principal Executive Officer) /s/ President, Chief Operating Officer Director Richard Berman /s/ Director results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. (In thousands, except for number of shares) December 31, December 31, 2016 2015 ASSETS Current assets Cash and cash equivalents Receivables, net of allowance for doubtful accounts of $0 and $0, respectively Prepaids and other current assets Total current assets Long-term assets Property and equipment, net of accumulated depreciation of $1,620 and $1,491, respectively Deposits and other assets Total Assets LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable Accrued compensation and benefits Deferred revenue Other accrued liabilities Short term debt, related party, net of discount of $216 and $0, respectively Short term derivative liability Total current liabilities Long-term liabilities Deferred rent and other long-term liabilities Long term convertible debt, related party, net of discount $0 and $0, respectively Capital leases Long term derivative liability Warrant liabilities Total Liabilities Commitments and contingencies (note 8) Stockholders' deficit Preferred stock, $0.0001 par value; 50,000,000 shares authorized; no shares issued and outstanding Common stock, $0.0001 par value; 500,000,000 shares authorized; 55,288,458 and 55,007,761 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively Additional paid-in-capital Accumulated deficit Total Stockholders' deficit Total Liabilities and Stockholders' Deficit Twelve Months Ended (In thousands, except per share amounts) December 31, 2016 2015 Revenues Healthcare services revenues Operating expenses Cost of healthcare services General and administrative Depreciation and amortization Total operating expenses Loss from operations Interest and other income Interest expense Loss on impairment of intangible assets Loss on exchange of warrants Loss on debt extinguishment Change in fair value of warrant liability Change in fair value of derivative liability Loss from operations before provision for income taxes Provision for income taxes Net loss Basic and diluted net loss per share: Basic weighted number of shares outstanding (Amounts in thousands, except for number of shares) Common Stock Additional Paid-In Other Comprehensive Accumulated Shares Amount Capital Income Deficit Total Balance at December 31, 2014 Warrant Exchange Common stock issued for outside services Common stock issued in private placement, net of expenses Share-based Compensation Expense Net loss Balance at December 31, 2015 Warrants Exercised Common stock issued for outside services Extinguishment of Debt Share-based Compensation Expense Net loss Balance at December 31, 2016 Twelve Months Ended (In thousands) December 31, 2016 2015 Operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Loss on disposal of intangible assets Amortization of debt discount and issuance costs included in interest expense Loss on debt extinguishment Warrants issued for services Provision for doubtful accounts Deferred rent Share-based compensation expense Common stock issued for consulting services Fair value adjustment on warrant liability Loss on exchange of warrants Fair value adjustment on derivative liability Changes in current assets and liabilities: Receivables Prepaids and other current assets Deferred revenue Accounts payable and other accrued liabilities Net cash used in operating activities of continuing operations Investing activities: Purchases of property and equipment Deposits and other assets Net cash used in investing activities Financing activities: Proceeds from the issuance of common stock and warrants Proceeds from the issuance of convertible debt, related party Payments on convertible debenture Proceeds from the issuance of senior promissory note, related party Transactions costs Capital lease obligations Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash paid Interest Income taxes Supplemental disclosure of non-cash activity Common stock issued for exercise of warrants Property and equipment acquired through capital leases and other financing equity financing. Revenue Recognition year ended December 31, 2019. Revenue been determined to be six years and one year, respectively. they occur. Income Taxes allowance. Level Input: 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 at December 31, (Amounts in thousands) Level I Level II Level III Total Certificates of deposit Total assets Warrant liabilities Derivative Liability Total liabilities (Amounts in thousands) Level I Level II Level III Total Certificates of deposit Total assets Warrant liabilities Derivative Liability Total liabilities Level III Level III Warrant Derivative (Dollars in thousands) Liabilities (Dollars in thousands) Liabilities Balance as of December 31, 2014 Balance as of December 31, 2014 Issuance (exercise) of warrants, net Change in fair value Exchange of warrants Balance as of December 31, 2015 Balance as of December 31, 2015 Issuance (exercise) of warrants, net Change in fair value Warrant Exchanged Balance as of December 31, 2016 Balance as of December 31, 2016 December 31, 2016 December 31, 2015 Expected volatility Risk-free interest rate Weighted average expected lives in years Expected dividend For the years ended December 31, liabilities were $0.1 million, respectively. The Company maintains its cash in domestic financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, the company is entitled to aggregate coverage as defined by the Federal regulation per account type per separate legal entity per financial institution. The Company has incurred no losses as a result of any credit risk exposures. December31, 2016 December 31, 2015 Expected volatility % Risk-free interest rate % Weighted average expected lives in years Expected dividend % December 31, (in thousands) 2016 2015 Healthcare fees Other Total receivables Less allowance for doubtful accounts Total receivables, net (in thousands) 2016 2015 Furniture and equipment Leasehold improvements Total property and equipment Less accumulated depreciation and amortization Total property and equipment, net As of December 31, 2019, there was $18.0 million of unrecognized compensation costs related to non-vested share-based compensation arrangements granted to employees and directors under the Plan. These costs are expected to be recognized over a weighted-average period of 2.67 years. (in thousands) Amount Year ending December 31, 2017 2018 2019 Total minimum lease payments Less amounts representing interest Capital lease obligations, net of interest Less current maturities of capital lease obligations Long-term capital lease obligations 2016 2015 (in thousands) Federal, state and foreign net operating losses Stock based compensation Accrued liabilities Other temporary differences Valuation allowance 2016 2015 Federal statutory rate State taxes, net of federal benefit Non-deductible goodwill ISO / ESPP Other Change in valuation allowance Tax provision Weighted Avg. Shares Exercise Price Balance, December 31, 2014 2015 Granted Cancelled/Expired Balance, December 31, 2015 2016 Granted Cancelled/Expired Balance, December 31, 2016 Options Outstanding Options Exercisable Range of Exercise Prices Shares Weighted Average Remaining Life (yrs) Weighted Average Price Shares Weighted Average Price December 31, 2016 Description Shares Weighted Average Exercise Price Warrants issued in connection with equity offering Warrants issued in connection with debt agreement Warrants issued for services December 31, 2015 Description Shares Weighted Average Exercise Price Warrants issued in connection with equity offering Warrants issued in connection with debt agreement Warrants issued for services (In thousands) Year Amount 2017 2018 2019____________________________☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 2016☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ______________________________________________Delaware88-046485388-0464853 (State or other jurisdiction of incorporation) 11601 Wilshire Boulevard,1100Los Angeles, California 90025Act:NoneTitle of Each Class Trading Symbol Name of Each Exchange on Which Registered Common Stock, par value $0.0001 per share CATS The NASDAQ Stock Exchange Act:Common Stock, Par Value $0.0001 Per Share(Title of Class)Yes☐Yes☐No ☑Yes☑and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).Yes☑Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ☐or a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “large accelerated filer,’’“smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Accelerated filer☐[Do not check if a smallerreporting company]Emerging growth company ☐ Yes☐Yes ☐ 30, 2016,28, 2019, the last business day of the registrant’s second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) was $3,986,460$140,851,867 based on the $0.65$19.22 closing bidsales price of the common stock on the OTCQBThe NASDAQ Capital Market on that date.February 24, 2017,March 6, 2020, there were 55,288,45816,726,964 shares of the registrant’s common stock outstanding.None.CATASYS, INC.Form 10-K Annual ReportFor The Fiscal Year Ended December 31, 2016PART I1Item 1.BusinessRisk Factors71818181919202027272727282929333840424343Item 16. Form 10-K Summary 27 1A.“Risk Factors”1A. “Risk Factors” and Item 7.7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.”We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such 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.provideare a leading Artificial Intelligence (“AI”) and technology-enabled healthcare company and harness proprietary big data predictive analytics, artificial intelligence and telehealth, combined with human interaction, to deliver improved member health and cost savings to health plans. We identify, engage and treat health plan members with unaddressed behavioral health conditions that worsen medical comorbidities.based specializedand predictive modeling to identify members with untreated behavioral health managementconditions, whether diagnosed or not, and integratedcoexisting medical conditions that may be impacted through treatment services toin the OnTrak program. We then uniquely engage health plans through ourplan members who do not typically seek behavioral healthcare by leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Our technology enabled OnTrak solution. Our OnTrak solution is designed to improvean integrated suite of services that includes evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, nurse-led care coaching and local community support. We believe that the program is currently improving member health and, at the same time, lowerdemonstrating reduced medical utilization, driving a reduction in total health plan costs for enrolled members.the insurer for underserved populations wheremake OnTrak available to eligible members in twenty eight states.are causing or exacerbating co-existingthat worsen chronic medical conditions. The program utilizes proprietary analytics, member engagementcomorbidities cost health plans and patient centric treatment that integrates evidence-based medical and psychosocial interventions along withemployers a disproportionate amount of the total healthcare costs.coaching in a 52-week outpatient program. Our initial focus was members with substance use disorders, but we have expanded our solution to assist members with anxiety and depression. We currently operate our OnTrak solutions in Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We provide services to commercial (employer funded), managed Medicare Advantage,programs, including Preferred Provider Organizations, Health Maintenance Organizations, self-insured employers and managed Medicare/Medicaid programs. Each year, based on our analysis, approximately 1.9% of commercial plan members will have a substance dependence diagnosis, and duel eligible (Medicarethat figure may be lesser or greater for specific payors depending on the health plan demographics and Medicaid) populations. We have not been profitable since being incorporatedlocation. A smaller, high-cost subset of this population drives the majority of the claims costs for the overall substance dependent population. One in 2003 and may continue to incur operating losses for at leastfive adults in the next twelve months. AsUnited States of December 31, 2016, these conditions raised substantial doubt as to our ability to continue as a going concern.We believe that our business and operations as outlined aboveAmerica are in substantial compliance with applicable laws and regulations. However,impacted by one of the healthcare industry is highly regulated, and the criteria are often vague and subject to change and interpretation by various federal and state legislatures, courts, enforcement and regulatory authorities. Our future prospects are subject to the legal, regulatory, commercial and scientific risks outlined below and in Item 1.A “Risk Factors.”DependenceSubstance dependence is a worldwide problem with prevalence rates continuing to rise despite the efforts by national and local health authorities to curtail its growth. Substance dependence disorders affect many people and have wide-ranging social consequences. In 2015, an estimated 20.8 million adults in the United States (U.S.) met the criteria for substance dependence, according to the National Survey of Drug Use and Health. We believe the best results in treating substance dependence can be achieved in programs such as our OnTrak solution that integrate psychosocial and medical treatment modalities and provide longer term support on an out-patient basis.Disorders18%19.1% of adults or approximately 43 million people ageaged 18 years or older. People with anxiety disorders are:●Three to five times more likely to go to the doctor; and●Six times more likely to be hospitalized for psychiatric disorders.Mood Disorders2013,2016, an estimated 15.710.3 million U.S. adults aged 18 or older, or approximately 6.7%4.3% of all U.S. adults, had at least one major depressive episode in the past year, according to the National Institute of Mental Health. Patients with substance dependence and mood disorders were ranked four out of the top 10 reasons leading to readmission rates for Medicaid patients.Our MarketThe true impact of behavioral health is often under-identified by organizations that provide healthcare benefits. The reality is that individuals with behavioral health conditions:●are prevalent in any organization;●cost health plans and employers a disproportionate amount of money;●have higher rates of absenteeism and lower rates of productivity; and●have co-morbid medical conditions which incur increased costs for the treatment of these conditions compared to a non-substance dependent population.The reality is that individuals with behavioral health conditions generally have overall poorer health and lower compliance, which leads to more expensive treatment for related, and even seemingly unrelated, co-occurring medical conditions. In fact, forFor the members we seek to engage our solutions,solution, costs associated with behavioral health treatment arerepresent a small portion of their overall healthcare claims.According toclaims, while the U.S. Census Bureau in 2014, there were over 283 million lives inmedical costs are significant.U.S. covered by various private managed care programs, including Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), self-insured employersidentification, engagement and managed Medicare/Medicaid programs. Each year, based on our analysis, approximately 1.9%treatment of commercialhealth plan members will have awith unaddressed behavioral health conditions that worsen medical comorbidities. We specifically focus on members with anxiety, depression and/or substance dependence diagnosis,use disorder(s). We apply claims-based analytics and predictive modeling to first identify health plan members with medical costs that figure may be lesserimpacted through behavioral health treatment with the OnTrak program. These members may or greater for specific payors depending onmay not be diagnosed with a behavioral condition. We then conduct multichannel outreach to eligible members. Enrolled members receive nurse-led care coaching, the health plan demographicsopportunity to participate in telehealth or face-to-face evidence-based psychosocial and location. A smaller, high-cost subset of this population drives the majority of the claims costs for the overall substance dependent population. For commercial members with substance dependence and a total annual claims cost of at least $7,500, the average annual per member claims cost is $30,000, compared with an average of $3,250 for a commercial non-substance dependent member, according to our research. Our CustomersOur customers provide health insurance to individuals or groups (Contracted Membership). We contract with our customers to provide our OnTrak solution to the customers’ Contracted Membership generally in specific lines of business (e.g., commercial, Medicare, Medicaid, etc.) and/or specific states or other geographical areas and for specific indications, such as substance use disorders and, more recently, anxiety and depression. We refer to the Contracted Membership to whom we are providing the OnTrak solution as Covered Lives. Generally, we receive data relating to the Covered Lives on a regular basis from our customers. We use that data to identify members who meet our contractual eligibility requirements (Eligible Members) and we attempt to engage and enroll those members in our OnTrak solution. Our Eligible Members can fluctuate significantly from month to month due to fluctuations in our customers’ Contracted Membership and changes in eligibility due to changes in claims or eligibility data provided to us by our customers. Based on our analysis of the data provided to us by our customers, approximately 0.045% of the adult Contracted Membership in a commercial line of business is anticipated to be eligible for our OnTrak solution. Based on our analysis, Medicare and Medicaid lines of business average approximately 2.5 times the number of Eligible Members for our OnTrak solution as the same number of Covered Lives in a commercial line of business. Further, our preliminary data analysis shows that adding anxiety and depression indications to our Covered Lives is anticipated to increase our pool of Eligible Members substantially. Based on the latest data provided by one of our customers that has contracted for us to provide OnTrak for anxiety, adding the anxiety and depression indications are anticipated to increase the number of Eligible Members by approximately four times over substance use disorders alone. There are fluctuations in the number of Eligible Members across customers and geographies. Our analysis to date is based on limited data,pharmacological treatment and in some cases, like anxiety and depression, very limited data. There can be no assurance that the data we have analyzed to date will be predictive of the future or that the portion of Covered Lives that are eligible for our programs will not change in the future. In addition, the percentage of Eligible Members in any lines of Covered Lives may fluctuate substantially from period to period.Our Solution: OnTrakOnTrak™Our OnTrak solution combines evidence-based medical and psychosocial treatments with elements of population health management and ongoing member support to help health plans treat members with substance dependence, anxiety and depression and to improve member health and lower the overall health plan costs of these members.in-market Community Care Coordinator support. We believe the benefits of our On solution include improved clinical outcomes and decreased costs for the payor, andas well as improved quality of life and productivity for the member.Although the healthcare services industry is competitive, we believe OnTrak is the only solution of its kind. The OnTrak solution was developed by behavioral health experts with years of clinical experience. This experience has helped to form key areas of expertise that we believe sets our solution apart from other solutions, including member engagement, working directly with the member treatment team and a more fully integrated treatment offering.Our OnTrak solution includes the following components: identification of impactable members, member engagement, enrollment/referral, provider network, outpatient medical treatment, outpatient psychosocial treatment, care coaching, monitoring and reporting, and our proprietary web-based clinical information platform (eOnTrak). assist health plans to identify those members who incur significant costs and may be appropriate for enrollment into OnTrak. We then engage and enroll targeted members into our program through direct mailings and telephonic outreach, and referral through health plan sources. After enrollment, our contracted network of providers provide treatments utilizing integrated medical and psychosocial treatment modalities, including our proprietary OnTrak therapy modules for anxiety, depression and substance use disorders to help members develop improved coping skills and a recovery support network. Throughout the treatment process, our care coaches work directly with members to keep them engaged in treatment by proactively supporting members to enhance motivation, minimize lapses and enable lifestyle modifications consistent with the recovery goals. Periodically, we will provide outcomes reporting to payors on clinical and financial metrics to our customersa periodic basis to demonstrate the extentvalue of the program’s value.Clinical and financial outcomes from the OnTrak solution have been promising with OnTrak enrolled members achieving an average gross cost reduction of more than 50% for the year after enrollment compared to the 12 months prior to enrollment. In addition, to date, approximately 80% of members who have remained eligible have been retained in the program.OnTrakOur proprietary OnTrak solution is designed to improve treatment outcomes and lower the utilization of medical and behavioral health plan services by high utilization and high risk enrollees. Our OnTrak solution includes medical and psychosocial interventions; a proprietary web based clinical information platform and database, psychosocial programs and integrated care coaching services.Another important aspect of the Catasys solution is that the solution is flexible and can be altered in a modular way to enable us to partner with payors to meet their needs. As a service delivery model, the OnTrak solution can be modified to cover particular populations and provide for varying levels of service. In this way, OnTrak can work with payors to identify, engage and treat a broader spectrum of patients in a way that is consistent with payors’ business needs.Our value proposition to our customers includes that the OnTrak solution is designed for the following benefits:●A specific program aimed at addressing high-cost conditions by improving patient health and thereby reducing overall healthcare costs can benefit health plans;●Increased worker productivity by reducing workplace absenteeism, compensation claims and job related injuries;●Decreased emergency room and inpatient utilization;●Decreased readmission rates; and●Healthcare cost savings (including medical, behavioral and pharmaceutical).Our Strategyprovide a quality integrated medicaldeliver proven, repeatable clinical and behavioral programfinancial outcomes to help health plans and other organizations treat and manage health plan members whose behavioral health conditions are exacerbating co-existing medical conditions resulting in increased in-patient medical costs. Our initial focus wasfor their members with unaddressed behavioral conditions that worsen medical comorbidities. We do this by identifying, engaging and treating these members through our OnTrak solution. Our OnTrak solution to date has focused on substance use disorder, and we have expanded our solution into anxiety disorders and depression.Key elements of our business strategy include:●Demonstrating the potential for improved clinical outcomes and reduced cost associated with using our OnTrak solution with key managed care and other third-party payors;●Educating third-party payors on the disproportionately high cost of their substance dependent population;●Providing our OnTrak solution to third-party payors for reimbursement on a case rate, fee for service, or monthly fee basis; and●Generating outcomes data from our OnTrak solution to demonstrate cost reductions and utilization of this outcomes data to facilitate broader adoption.As an early entrant into offering integrated medical and behavioral programs for substance dependence, we believe we will be well positioned to address increasing market demand. We believe our OnTrak solution will help fill the gap that exists today: a lack of programs that focus on smaller populations with disproportionately higher costs driven by behavioral health conditions that improve patient care while controlling overall treatment costs.Our OperationsHealthcare Servicespsychosocial treatments with elements of traditional disease management, case management, and ongoing memberin-market support from Community Care Coordinators. The solution is designed to help organizationspayors treat and manage populations struggling with substance dependence,use disorder, depression, and anxiety to improve their health and thereby decrease their overall health care costs.As of February 24, 2017, we have contracts with six health plans, two of which have merged and are in the process of integrating operations. We are enrolling patients under five of these contracts.managed care health planspayors on a case rate, monthly fee, or fee for service basis, which involves educating third party payorsthem on the disproportionately high cost of their substance dependent population with unaddressed behavioral health conditions that exacerbate medical comorbidities, and demonstrating the potential for improved clinical outcomes and reduced cost associated with using our program.CompetitionHealthcare ServicesOur On solution to date has focused primarily on substance dependence, anxiety and depression, and is marketed to health plans and other insurance payers. While we believe our products and services are unique, we operate in highly competitive markets. We compete with other healthcare management service organizations, care management and disease management companies, including managed behavioral health organizations (MBHOs) that manage behavioral health benefits, perform utilization reviews, provide case management and patient coaching, and pay their network of providers for behavioral health services delivered. Most of our competitors are significantly larger and have greater financial, marketing and other resources than us. We compete with companies such as Hummingbird, One Health Solutions, and Health Integrated that offer coaching, social media, and in the case of Health Integrated, more comprehensive products to address the costs of members with substance dependence and other behavioral health conditions. One Health Solutions, a behavioral change technology and social networking site for people in recovery, has conducted a pilot with a national health plan that purported to show a reduction in in-patient readmissions for substance dependence treatment and has reported a pilot with a large managed behavioral health organization that has exceeded expectations on duration and frequency of participant engagement. There are several companies that seek to utilize digital approaches to treat behavioral health conditions or use data analytics and digital technologies to identify health plan members with behavior health conditions and try to match them to treatment providers. Some ofreduce these companies also utilize care coaches or on-line therapists to enhance their digital models. A small number of these have secured reimbursement for their products or services from health plans. We believe these providers are serving a different segment of the market and do not provide an end-to-end integrated solution with financial outcomes. We believe our product is the most comprehensive one to focus exclusively on engaging and treating high cost members whose anxiety, depression, or substance use disorders are exacerbating co-existing medical conditions through our network of providers using specially designed treatment regimens.In addition, managed care companies may seek to provide similar specialty healthcare services directly to their members, rather than by contracting with us for such services. Behavioral health conditions, including substance dependence, are typically managed for insurance companies by internal divisions or third-parties (MBHOs) frequently under capitated arrangements. Under such arrangements, MBHOs are paid a fixed monthly fee and must pay providers for provided services, which gives such entities an incentive to decrease cost and utilization of services by members. We compete to differentiate our integrated program for high utilizing substance dependence members, which seeks to increase treatment and impact the overall health care costs of the members, from the population utilization management programs that MBHOs offer to manage a health benefit.We believe that our ability to offer customers an outcomes based comprehensive and integrated solution, including the utilization of innovative medical and psychosocial treatments and engagement methodologies, and our network of treatment providers, will enable us to compete effectively. However, there can be no assurance that we will not encounter more effective competition in the future, which would limit our ability to maintain or increase our business.Once we contract with a third-party payor, we implement our program in conjunction with the third party payor and then commence outreach to eligible members to enroll them in our OnTrak solution. In this enrollment process, we compete against numerous other providers of behavioral health treatment programs, facilities and providers for those members that elect to receive treatment for their behavioral health conditions (see Treatment Programs below). We believe we provide members with a lower cost and more comprehensive solutions, but members may choose to receive care from other providers. To the extent a member selects a different provider that is part of a health plan network of providers, the cost of such treatment may be paid in whole or in part by our health plan customer.Treatment ProgramsThere are over 14,000 facilities reporting to the SAMHSA that provide substance dependence treatment. Well-known examples of residential treatment programs include the Betty Ford Center®, Caron Foundation®, Hazelden® and Sierra Tucson®. In addition, individual physicians may provide substance dependence treatment in the course of their practices. Many of these traditional treatment programs have established name recognition.TrademarksWe rely on a combination of trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. Our branded trade names on which we rely include the following:●OnTrak™; and●eOnTrak™.We require that, as a condition of their employment, employees assign to us their interests in inventions, original works of authorship, copyrights and similar intellectual property rights conceived or developed by them during their employment with us.Financial Information about SegmentsWe manage and report our operations through one business segment: Healthcare Services. This segment includes the OnTrak solution marketed to health plans and other third party payors.EmployeesFebruary 24, 2017,December 31, 2019, we employed 88395 full-time employees. We are not a party to any labor agreements and none of our employees are represented by a labor union.11601 Wilshire Blvd,2120 Colorado Ave., Suite 1100, Los Angeles, California 90025,230, Santa Monica, CA 90404, and our telephone number is (310) 444-4300.Commission.Commission ("SEC"). The Securities and Exchange Commission maintains an internet site that contains our public filings with the Securities and Exchange Commission and other information regarding our company, atwww.sec.gov. These reports and other information concerning our company may also be accessed at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The contents of these websites are not incorporated into this Annual Report. Further, our references to the URLs for these websites are intended to be inactive textual reference only.You shouldevaluate all of theother information in this report, includingAnnual Report on Form 10-K. Any of the risk factors listed below. Risksrisks discussed in this Annual Report on Form 10-K, as well as additional risks and uncertainties in addition to those we describe below, that may not be presentlycurrently known to us or that we currently believe aredeem immaterial, may also harm our business and operating resultscould materially and financial condition, as well as adversely affect the valueour results of an investment in our Company.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 common stock could decline, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this Annual Report on Form 10-K.financing, causing our independentregistered public accounting firm to express substantial doubt about our ability to continue as a going concern.As of December 31, 2016, these conditions raised substantial doubt as to our ability to continue as a going concern. At December 31, 2016,2019, cash and cash equivalents was approximately $851,000$13.6 million and accumulated deficit was approximately $280$331 million. During the twelve monthsyear ended December 31, 2016,2019, our cash and cash equivalents used by operating activities was $5.7($16.9) million. AlthoughAdditionally, we had working capital of $6.3 million. We expect our current cash resources to cover expenses through at least the next twelve months, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.taken actionsseen and continue to see net losses, net loss from operations, negative cash flow from operating activities, and historical working capital deficits as we continue through a period of rapid growth. The accompanying financial statements do not reflect any adjustments that might result if we were unable to continue as a going concern. We have alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding our OnTrak program within existing health plan customers. To support this increased demand for services, we invested and will continue to invest in additional headcount needed to support the anticipated growth. Additional management plans include increasing the outreach pool as well as improving our current enrollment rate. We will continue to explore ways to increase margins on both existing and new members. revenueoperations to service the contracts and future enrollment providing leverage in these investments that will generate positive cash flow in the near future. We believe we will have enough capital to cover expenses through the foreseeable future and we are seekingwill continue to obtainmonitor liquidity. If we add more health plans than budgeted, increase the size of the outreach pool by more than we anticipate, decide to invest in new products or seek out additional growth opportunities, we would consider financing there can be no assurancethese options with either a debt or equity financing.be successfulfind adequate sources of capital in the future.efforts.business. We may require additional funds before we achieve positive cash flows and we may never become cash flow positive.successful in raising necessary fundsavailable on commercially acceptable terms, or at all, andall. If adequate funds are not available or are not available on commercially acceptable terms, we may not be ableneed to offset our operating losses by sufficient reductions in expenses and increases in revenue. If this occurs, we may be unablecontinue to meet our cash obligations as they become due and we may be required to further delaydownsize, curtail program development efforts or reduce operating expenses and curtailhalt our operations which would have a material adverse effect on us.will need additional funding, may be unable to successfully execute on our growth initiatives, business strategies or operating plans.guaranteeassure you that we will find adequate sourcesrealize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of capital in the future.We have incurred negative cash flows from operations since inceptionthese growth initiatives, strategies and have expended, and expect to continue to expend, substantial funds to grow our business. As of February 24, 2017, we estimate that our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital requirements through March 31, 2017. Actual cash fees collected and expenses incurred may significantly impact this estimate. We will require additional funds before we achieve positive cash flows and we may never become cash flow positive.If we raise additional funds by issuing equity securities, such financing will result in further dilution to our stockholders. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations.We do not know whether additional financing will be available on commercially acceptable terms, or at all. If adequate funds are not available or are not available on commercially acceptable terms, we may need to continue to downsize, curtail program development efforts or haltplans adversely affect our operations altogether.programssolutions are effective they may discontinue them because they determine that the aggregate cost savings are not sufficient or that our solutionsprograms do not have a high enough return on investment. Our success is dependent on our ability to enroll third-party payor members in our OnTrak solutions. Large scale outreach and enrollment efforts have not been conducted and only for limited time periods and we may not be able to achieve the anticipated enrollment rates.may beis dependent on our ability to contract with a sufficient number of third party payors and to demonstrate financial and clinical outcomes from thoseour agreements. If we are unable to secure sufficient contracts to achieve recognition or acceptance of our OnTrak solution or if our program does not demonstrate the expected level of clinical improvement and cost savings, it is unlikely that we will be able to achieve widespread market acceptance.Solutionssolutionsor failure to attain our publicly disclosedmilestonescould adversely affect market acceptance and have a material adverse effect on our stock price.
A substantial percentage of ourrevenuesare attributable tofourlarge customers, any or all of which mayterminate our servicesat any time. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us. To date, we have not received a significant amount of revenue from our OnTrak solutions from health plans and other insurance payors, and acceptance of our OnTrak solutions is critical to the future prospects of our business. In addition, insurance payors are increasingly attempting to contain healthcare costs, and may not cover or provide adequate payment for our programs. Adequate insurance reimbursement might not be available to enable us to realize an appropriate return on investment in research and product development, and the lack of such reimbursement could have a material adverse effect on our operations and could adversely affect our revenues and earnings.We anticipate that manywill beare based upon anticipated or guaranteed levels of savings for our customers and achieving other operational metrics resulting in incentive fees based on savings. If we are unable to meet or exceed promised savings, achieve agreed upon operational metrics, or favorably resolve contract billing and interpretation issues with our customers, we may be required to refund from the amount of fees paid to us any difference between savings that were guaranteed and the savings, if any, which were actually achieved; or we may fail to earn incentive fees based on savings. Accordingly, during or at the end of the contract terms, we may be required to refund some or all of the fees paid for our services. This exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable. In addition, managed care operations are at risk for costs incurred to provide agreed upon services under our solution. Therefore, failure to anticipate or control costs could have a materially adverse effect on our business.utilizeuse our net operating losses to offset future taxable income may be subject to certain limitations.may be limited.As of December 31, 2016, we had net operating loss carryforwards (NOLs) of approximately $222 million for federal income tax purposes that("NOLs") will begin to expire in 2024.2023. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. We may be found to have experienced an ownership change under Section 382 as a result of events in the past or the issuance of shares of common stock, or a combination thereof. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.payers.Thepayers. Following the 2016 federal elections, which resulted in the election of the Republican presidential nominee and Republican majorities in both houses of Congress, is likely to promptthere were renewed legislative efforts to significantly modify or repeal the Health Care Reform Law is likelyand certain executive policy changes designed to modify its impact, howincluding the executive branch implementsenactment of the law,Tax Cuts and may impact howJobs Act in December 2017 which repealed the federal government responds to lawsuits challengingpenalties under the Health Care Reform Law.Law for uninsured persons. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on our business. There may also be other risks and uncertainties associated with the Health Care Reform Law. If we fail to comply or are unable to effectively manage such risks and uncertainties, our financial condition and results of operations could be adversely affected.or our healthcare professionals may bebecome subject to regulatory, enforcement and investigative proceedings,medical liability claims, which could adversely affectcause us to incur significant expenses and may require us to pay significant damages if not covered by insurance.financial condition or operations.We or one or moreproviders and us. Although we carry insurance covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our healthcare professionals could become the subject of regulatory, enforcement, or other investigations or proceedings, and our relationships, business, structure, and interpretations of applicable laws and regulations may be challenged. The defense of any such challengesuccessful medical liability claims could result in substantial costdamage awards that exceed the limits of our insurance coverage. We carry professional liability insurance for ourselves, and we separately carry a diversion of management’s time and attention.general insurance policy, which covers medical malpractice claims. In addition, any such challengeprofessional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services. As a result, adequate professional liability insurance may not be available to us in the future at acceptable costs or at all.require significant changesbe costly to how we conductdefend against, result in substantial damage awards against us and divert the attention of our businessmanagement and our providers from our operations, which could have a material adverse effect on our business, regardless of whether the challenge ultimately is successful. If determination is made that we or one or more of our healthcare professionals has failed to comply with any applicable laws or regulations, our business, financial condition and results of operations could beoperations. In addition, any claims may adversely affected.licensurelicensure requirements. Under HITECH, we are subject to prosecution or administrative enforcement and increased civil and criminal penalties for non-compliance, including a new, four-tiered system of monetary penalties. We are also subject to enforcement by state attorneys general who were given authority to enforce HIPAA under HITECH. such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information such(such as HIPAA and state data security laws), government enforcement actions and regulatory penalties. We may also be required to indemnify our customers for costs associated with having their data on our system breached. Unauthorized access, loss or dissemination could also interrupt our operations, including our ability to bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, or we may lose one or more of our customers, especially if they felt their data may be breached, any of which could adversely affect our business., and it is therefore susceptible tohighpricevolatility.volatility.quotedlisted on the OTCQBNASDAQ Capital Market under the symbol “CATS” and has at times experienced limited trading volume.volumes. As such, our common stock ismay be more susceptible to significant and sudden price changes than stocks that are widely followed by the investment community and actively traded on an exchange.traded. The liquidity of our common stock depends upon the presence in the marketplace of willing buyers and sellers. We cannot assure you that you will be able to find a buyer for your shares. In the future, if we successfully list the common stock on a securities exchange or obtain trading authorization, we will not be able to assure you that an organized public market for our securities will develop or that there will be any private demand for the common stock. We could also subsequently fail to satisfy the standards for continued national securities exchange trading,NASDAQ listing, such as standards having to do with a minimum share price, the minimum number of public shareholders or the aggregate market value of publicly held shares. Any holder of our securities should regard them as a long-term investment and should be prepared to bear the economic risk of an investment in our securities for an indefinite period.Our common stock is considered a “penny stock” and may be difficult to sell.Our common stock is subject to certain rules and regulations relating to “penny stock.” Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker−dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker−dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker−dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker−dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Since the Company’s securities are subject to the penny stock rules, investors in the Company may find it more difficult to sell their securities.Approximately 79%62,068,82679%50% of our outstanding shares of common stock. As a result, he has and is expected to continue to have the ability to significantly influence the election of our Board of Directors and the outcome of all other matters submitted to our stockholders. His interest may not always coincide with our interests or the interests of other stockholders, and he may act in a manner that advances his best interests and not necessarily those of other stockholders. One consequence to this substantial influence or control is that it may be difficult for investors to remove management of our Company. It could also deter unsolicited takeovers, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.will trade may fluctuatetrades fluctuates as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results and actual or anticipated announcements of our OnTrak solution, announcements regarding new or discontinued OnTrak solution contracts, new products or services by us or competitors, regulatory investigations or determinations, acquisitions or strategic alliances by us or our competitors, recruitment or departures of key personnel, the gain or loss of significant customers, changes in the estimates of our operating performance, actual or threatened litigation, market conditions in our industry and the economy as a whole.●announcements of new products or services by us or our competitors;●current events affecting the political, economic and social situation in the United States;●trends in our industry and the markets in which we operate;●changes in financial estimates and recommendations by securities analysts;●acquisitions and financings by us or our competitors;●the gain or loss of a significant customer;●quarterly variations in operating results;●the operating and stock price performance of other companies that investors may consider to be comparable;●purchases or sales of blocks of our securities; and●issuances of stock.We have completed a number of private placements of our common stock and other securities over the last several years, and we have effective resale registration statements pursuant to which the purchasers can freely resell their shares into the market. In addition, mostMost of our outstanding shares are eligible for public resale pursuant to Rule 144 under the Securities Act of 1933, as amended. As of February 24, 2017,December 31, 2019, approximately 48.99.2 million shares of our common stock are held by our affiliates and may be sold pursuant to an effective registration statement or in accordance with the volume and other limitations of Rule 144 or pursuant to other exempt transactions. Future sales of common stock by significant stockholders, including those who acquired their shares in private placements or who are affiliates, or the perception that such sales may occur, could depress the price of our common stock. the conversion of our 12% Original Issue Discount Convertible Debenture (the “Convertible Debenture”) or our 8% Senior Convertible Debenture (the “December 2016 Convertible Debenture”), upon satisfaction of our obligations, compensation of vendors, exercise of outstanding warrants, or effectuation of a reverse stock split, could dilute the interests of our existing stockholders, and could substantially decrease the trading price of our common stock. As of February 24, 2017,of March 6, 2020, we have outstanding options to purchase approximately 1,462,960approximately 3,964,118 shares of our common stock and warrants to purchase approximately 9,519,1821,539,926 shares of our common stock at prices ranging from $0.30$1.80 to $3,200.00$105.60 per share.share. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, in connection with acquisitions, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.For example,In addition, our amended and restated certificate of incorporation authorizes our Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.” These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests. number fewof our outstanding warrants contain anti-dilution provisions that, if triggered, could cause substantial dilution to our then-existing stockholders and adversely affect our stock price.numberfew of our outstanding warrants contain anti-dilution provisions. As a result, if we, in the future, issue or grant any rights to purchase any of our common stock or other securities convertible into our common stock for a per share price less than the exercise price of our warrants, the exercise price, or in the case of some of our warrants the exercise price and number of shares of common stock, will be reduced. If our available funds and cash generated from operations are insufficient to satisfy our liquidity requirements in the future, then we may need to raise substantial additional funds in the future to support our working capital requirements and for other purposes. If shares of our common stock or securities exercisable for our common stock are issued in consideration of such funds at an effective per share price lower than our existing warrants, then the anti-dilution provisions would be triggered, thus possibly causing substantial dilution to our then-existing shareholders if such warrants are exercised. Such anti-dilution provisions may also make it more difficult for us to obtain financing.,which may negatively impact the market price of our stock.February 24, 2017,March 6, 2020, we had outstanding warrants to purchase an aggregate of 9,519,1821,539,926 shares of common stock at exercise prices ranging from $0.30$1.80 to $3.00$18.71 per share. To the extent warrants are exercised, additional shares of common stock will be issued, and such issuance may dilute existing stockholders and increase the number of shares eligible for resale in the public market.1B. 1B. UNRESOLVED STAFF COMMENTS2. PROPERTIESInformation concerning our principal facilities, all of which were leased at December 31, 2016, is set forth below:LocationUseApproximateArea inSquare Feet11601 Wilshire Blvd., Suite 1100Los Angeles, California 90025Principal executive and administrative offices9,120Los Angeles, California, and consists of leasedofficeleased office space totaling approximately 9,120 square feet, which will expire in April 2019. Our base rent is approximately $31,000 per month, subject to annual adjustments, with aggregate minimum lease commitments at February 24, 2017, totaling approximately $800,000.None.IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket InformationOur common stock is quoted on the OTCQB under the symbol “CATS.” The last reported bid price for our common stock on the OTCQB on February 24, 2017 was $1.13 per share.The table below sets forth the high and low bid prices for our common stock as reported on the OTCQBperiods indicated. The quotations below as provided by OTC Markets Group, Inc., reflect inter-dealer prices and do not include retail markup, markdown or commissions. In addition, these quotations may not necessarily represent actual transactions. $ 1.28 $ 0.79 1.55 0.60 0.88 0.33 0.58 0.25 $ 0.79 $ 0.29 1.69 0.61 2.10 0.95 2.45 1.72 StockholdersAs of February 24, 2017, thereyear ended December 31, 2019 were approximately 69 stockholders of record of our 55,288,458 outstanding shares of common stock.DividendsWe have never declared or paid dividends on our common stock and we do not anticipate paying any cash dividends on our common stockpreviously disclosed in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on applicable law and then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.Information about our Equity Compensation PlansInformation regarding our equity compensation plans is incorporated by reference to Item 10, “Directors, Executive Officers and Corporate Governance” of Part III of this Annuala Quarterly Report on Form 10-K.UnregisteredSales ofSecuritiesNothing to Report.None.
None.ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1.A.1.A. -“Risk Factors.Factors.”provideharness proprietary big data predictive analytics, artificial intelligence and telehealth, combined with human interaction, to deliver improved member health and cost savings to health plans. We identify, engage and treat health plan members with unaddressed behavioral health conditions that worsen medical comorbidities. Our mission is to help improve the health and save the lives of as many people as possible.based specializedand predictive modeling to identify members with untreated behavioral health managementconditions, whether diagnosed or not, and integratedcoexisting medical conditions that may be impacted through treatment services toin the OnTrak program. We then uniquely engage health plans through ourplan members who do not typically seek behavioral healthcare by leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Our technology enabled OnTrak solution. Our OnTrak solution is designed to improvean integrated suite of services that includes evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, nurse-led care coaching and local community support. We believe that the program is currently improving member health and, at the same time, lowerdriving a reduction in total health plan costs after completion of the OnTrak program.insurer for underserved populations where12 month period of the OnTrak program.are causingthat may be impacted through treatment in the OnTrak program.Year Ended December 31, 2019 2018 Change % 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) % exacerbating co-existing medical conditions. Theas, 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 from customers enrolled in our program utilizes proprietary analytics,is recognized over the term of the program, which is typically twelve months.and patient centric treatment that integrates evidence-based medical and psychosocial interventions along with care coaching in a 52-week outpatient program. Our initial focus was members with substance use disorders, but we have expanded our solution to assist members with anxiety and depression. We currently operate our OnTrak solutions in Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and duel eligible (Medicare and Medicaid) populations. Our StrategyOur business strategy is to provide a quality integrated medical and behavioral solution to help health plansspecialists and other organizations treatstaff directly involved in member care, healthcare provider claims payments, and manage health plan members who’s behavioral health conditionsfees charged by our third party administrators for processing these claims. Salaries and fees charged by our third-party administrators for processing claims are exacerbating co-existing medical conditions resultingexpensed when incurred and healthcare provider claims payments are recognized in increased in-patient medical costs. We initially focused on members with substance use disordersthe period in which an eligible member receives services.we have expandedmarketing, research and development and general and administrative expenses. Sales and marketing expenses consist primarily of personnel and related expenses for our solution into anxiety disorderssales and depression. We intend to grow our business through increased adoption by health plansmarketing staff, including salaries, benefits, bonuses, stock-based compensation and commissions; costs of marketing and promotional events, corporate communications, online marketing, product marketing and other payorsbrand-building activities. Research and development expenses consist primarily of personnel and related expenses for our OnTraksolutions.Key elementsresearch and development staff, including salaries, benefits, bonuses and stock-based compensation; the cost of our business strategy include:●Demonstrating the potential for improved clinical outcomes and reduced cost associated with using our OnTrak solution with key managed care and other third-party payors;●Educating third-party payors on the disproportionately high cost of their substance dependent population;●Providing our OnTrak solution to third-party payors for reimbursement on a case rate, fee for service, or monthly fee basis; and●Generating outcomes data from our OnTrak solution to demonstrate improved health and cost reductions, and utilize outcomes data to facilitate broader adoption.As an early entrant into offering outcomes based, integrated engagementcertain third-party service providers. Research and treatment programsdevelopment costs are expensed as incurred. General and administrative expenses consist primarily of personnel and related expenses for anxiety, depressionadministrative, legal, finance and substance use disorders, we believe we will be well positioned to address increasing market demand. We believe our OnTrak solution will help fill the gap that exists today: a lack of programs that focus on identifying, engaginghuman resource staff, including salaries, benefits, bonuses and treating smaller populations with disproportionately high costs driven by behavioral health conditions to improve their health and reduce overall health care costs.Reporting SegmentWe manage and report our operations through one business segment: healthcare services. The healthcare services segment includes the OnTrak solutions marketed to health plansstock-based compensation; professional fees; insurance premiums; and other third party payors.Summary financial information forcorporate expenses.reportable segment is as follows:last two fiscal years ended December 31, 2016periods indicated (in thousands):Year Ended December 31, 2019 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) Change in fair value of warrant liability (60) (56) Net loss $ (25,659) $ (14,212) 2015: $ 7,075 $ 2,705 4,670 2,433 8,838 9,049 141 122 13,649 11,604 (6,574 ) (8,899 ) 106 64 (5,354 ) (2,590 ) - (88 ) - (4,410 ) (2,424 ) (195 ) 2,093 11,665 (5,774 ) (2,761 ) (17,927 ) (7,214 ) 9 9 $ (17,936 ) $ (7,223 ) $ (0.33 ) $ (0.18 ) 55,074 40,372 Year ended December 31, 2016government insured members remained consistent year over year. The following table sets forth our sources of revenue for each of the periods indicated (in thousands, except percentages):Year Ended December 31, 2019 2018 Commercial revenue $ 21,753 $ 9,495 Percentage of commercial revenue to total revenue 62 % 63 % Government revenue $ 13,342 $ 5,682 Percentage of government revenue to total revenue 38 % 37 % Total revenue $ 35,095 $ 15,177 year ended December 31, 2015Summaryour existing health plan customers.Consolidated Operating ResultsLoss from operations before provision for income taxes for the twelve months ended December 31, 2016 was $17.9Revenue, Gross Profit and Gross MarginYear Ended December 31, (in thousands) 2019 2018 Change % 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 % with $7.2 million for the twelve months ended December 31, 2015.to 2018. The increase in loss from operationscost of revenue was primarily due to the decrease$6.1 million in the changehigher employee-related costs due to higher headcount and $2.5 million in fair value of warrants of $9.6 million, the increase in the change in fair value of derivative liability of $3.0 million, an increase in interest expense of $2.8 million, the increase in the loss on debt extinguishment of $2.2 million, offset by the decrease in the loss from operations of $2.3 million, and a decrease in the loss on the exchange of warrants of $4.4 million.RevenuesDuring the twelve months ended December 31, 2016, we have launched OnTrak in several new populations, which has resulted in a significant increase in the number of patients enrolled in our solutions compared with the same period in 2015. For the twelve months ended December 31, 2016, enrollment increased by more than 57% over the same period in 2015. Recognized revenue increased by $4.4 million, or 162%, for the year ended December 31, 2016, compared with the same period in 2015. We reserve a portion, and in some cases all, of the fees we receive related to enrolled members, as the fees are subject to performance guarantees or are received as case rates in advance at the time of enrollment. Fees deferred for performance guarantees are recognized when those guarantees are satisfied and fees received in advance are recognized ratably over the period of enrollment. Deferred revenue decreased by $158,000 since December 31, 2015.Operating ExpensesCost of Healthcare ServicesCost of healthcare services consists primarily of salaries related to our care coaches, healthcare provider claims payments to our network of physicians and psychologists, and fees charged by our third party administrators for processing these claims.Year Ended December 31, (in thousands) 2019 2018 Change % 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) % of $2.2 million in cost of healthcare services for the year ended December 31, 2016 compared with the same period in 2015, relates primarily to the increase in members being treated, the addition of care coaches, outreach staff, community care coordinators and other staff to manage the increasing number of enrolled members. In addition, we hire staff in preparation for anticipated future customer contracts and corresponding increases in members eligible for OnTrak. The costs for such staff are included in Cost of Healthcare Services during training and ramp-up periods.General and Administrative ExpensesTotal general and administrative expense decreased by $211,000 for the year ended December 31, 2016, compared with the same period in 2015. The decreaseoperating expenses was primarily due to decreases in share-based compensation expense$7.5 million of higher employee-related costs due to higher headcount, $8.2 million of higher vendor related costs to support our growing operations and $1.5 million related to stock options issueda severance payment made to a former employee.board of directors during the first quarter of 2015, investor relations, and costs for legal services.Depreciation and AmortizationDepreciation and amortization was immaterialoperating expenses to increase for the years ended December 31, 2016 and 2015.Interest ExpenseInterest expense for the year ended December 31, 2016 increased by $2.8 million compared with the sameforeseeable future as we continue to grow our business, but expect our operating expenses to decrease as a percentage of revenue over time. Our operating expenses may fluctuate as a percentage of our total revenue from period in 2015. The expense is directly relatedto period due to the multiple financings that were done during 2016timing and 2015.Loss on Exchangeextent of WarrantYear Ended December 31, (in thousands) 2019 2018 Change % Change Other expense $ 5,645 $ 586 $ 5,059 863 % loss of $4.4 million on the exchange of warrants related to the exchange of 21,277,220 warrants for 21,277,220 shares of common stock during 2015. Thereincrease in other expenses was no such warrant exchange during 2016.Loss on Debt ExtinguishmentThe loss of $2.4 million on the debt extinguishment related to exchange of the August 2016 promissory notes for the December 2016 8% senior convertible debentures. There was no such debt extinguishment during 2015.Change in Fair Value of Warrant LiabilitiesWe have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, and December 2016. The warrants are being accounted for as liabilities in accordance with FASB accounting rules,primarily due to anti-dilution provisionsa $2.5 million increase in some warrants that protect the holders from declines ininterest expenses for our stock price, which is considered outside our control. The warrants are marked-to-market each reporting period, using the Black-Scholes pricing model, until they are completely settled or expire.The decrease in the change in fair value of warrants of $9.6notes and $2.6 million for the twelve months ended December 31, 2016 primarily related to the exchangetermination of warrants during 2015.We will continue to mark-to-market the warrants each quarter until they are completely settled or expire.Change in fair value of derivative liabilityThe increase in the change in fair value of derivative liabilities was $3.0 million for the twelve months ended December 31, 2016 compared with the same period in 2015. The derivative liability was the result of the issuance of the July 2015 convertible debenture.We will continue to mark-to-market the derivative liability each quarter until they are completely settled.LiquidityGoing ConcernAs of February 24, 2017, we had a balance of approximately $585,000 cash on hand. We had working capital deficit of approximately $20.7equivalents was $13.6 million as of December 31, 2016.2019. We had working capital of approximately $6.3 million as of December 31, 2019. We have incurred significant net losses and negative operating cash flows since our inception. We expect to continue to incur negative cash flows and net losses for the next twelve months. Our current cash burn rate is approximately $450,000 per month. We expect our current cash resources and contracted bridge loans to cover our operationsexpenses through March 31, 2017;at least the next twelve months, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate. We areneedthe case of additional capital, however, there is no assurance that additional capital can be timely raised2024 Notes subject to cash interest payments or a floating rate plus a slightly higher applicable margin in an amount which is sufficient for us or on terms favorable to us and our stockholders, if at all. If we do not obtain additional capital, there is significant doubtthe case of 2024 Notes as to whether we can continuewhich current interest has been capitalized during the period ending September 24, 2020. The Company has elected for the $35 million in aggregate principal amount of 2024 Notes issued on the date of the Note Agreement that such interest shall be payable in cash. The Holder is obligated to operate as a going concernpurchase up to an additional $10.0 million in principal amount of 2024 Notes during the period from the date of the Note Agreement until the second anniversary thereof. The entire principal amount of the 2024 Notes is due and whether we will need to curtailpayable on the fifth anniversary of the Note Agreement unless earliercease operations or seek bankruptcy relief. If we discontinue operations, we may not have sufficient funds to pay any amounts to our stockholders. and continue as a going concern is dependent on increasing the number of members that are eligible for our solutions by signing new contracts, identifying more eligible membersenroll in existing contracts, and generating fees from existing and new contracts and the success of management’s plan to increase revenue and continue to control expenses.OnTrak program. We currently operate our OnTrak solutions in eighteentwenty seven states. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and duel eligible (Medicare and Medicaid) populations. Wegenerated feesseen and continue to see net losses, net loss from our launched programsoperations, negative cash flow from operating activities, and expect to increase enrollment and fees throughout 2017. However, there can be no assurance that we will generate such fees or that new programs will launchhistorical working capital deficits as we expect.We are in needcontinue through a period of additional capital, however, there is no assurance that additional capital can be timely raised in an amount which is sufficient for us or on terms favorable to us and our stockholders, if at all. If werapid growth. The accompanying financial statements do not obtain additional capital, there is a significant doubt asreflect any adjustments that might result if we were unable to whether we can continue to operate as a going concernconcern. We have alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding our OnTrak program within existing health plan customers. To support this increased demand for services, we invested and will continue to invest in additional headcount needed to support the anticipated growth. needcontinue to curtail or cease operationsmonitor liquidity. If we add more health plans than budgeted, increase the size of the outreach pool by more than we anticipate, decide to invest in new products or seek bankruptcy relief. Ifout additional growth opportunities, we discontinue operations, we may not have sufficient funds to pay any amounts towould consider financing these options with either a debt or equity financing.stockholders.Cash FlowsYear Ended December 31, 2019 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 $5.7$16.9 million of cash from operating activities during the year ended December 31, 20162019 compared with $5.2$8.6 million during the same period in 2015.2018. The increase in cash used in operating activities reflectsprimarily relates to the increase in members being treated, the addition of care coaches, outreach specialists, community care coordinators and other staff to manage the increasing number of enrolled members, and the addition of staffinvestments in preparation for anticipated future increases in members eligible for OnTrak. Significant non-cash adjustmentsdata science, IT and software development to operating activities for the year ended December 31, 2016 included an amortization of debt discountsupport growth and issuance costs of $4.7 million, a loss on debt extinguishment of $2.4 million, share-based compensation of $697,000, and a $5.8 million fair value adjustment on derivative liability, offset by a fair value adjustment on warrant liability of $2.1 million. 20162019 and 2018 were not material.Wesignificant. We anticipate that capital expenditures will increase in the future as we replace our computer systems that are reaching the end of their useful lives, upgrade equipment to support our increased number of enrolled members, and enhance the reliability and security of our systems. These future capital expenditure requirements will depend upon many factors, including obsolescence or failure of our systems, progress with expanding the adoption of our solutions, our marketing efforts, the necessity of, and time and costs involved in obtaining, regulatory approvals, competing technological and market developments, and our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements.$5.8$27.3 million for the year ended December 31, 2016,2019, compared with net cash provided by financing activities of $5.5$7.3 million for the year ended December 31, 2015.2018. Cash provided by financing activities for the year ended December 31, 2016 primarily2019 consisted of the netgross proceeds from the issuance of debt in the 8% senior convertible debenture.discusseda result of the above we currently expendour cash at a rateand cash equivalents as of approximately $450,000 per month. We also anticipate cash inflow to increase during 2017 as we continue to service our executed contracts and sign new contracts. December 31, 2019 is $13.6 million.March 31, 2017;at least the next twelve months, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate. We are in needus or on terms favorable to usoutstanding debt, leases for our office space, contractual commitments for professional service projects and third-party consulting firms. The following table summarizes our stockholders, ifcontractual obligations at all. If we do not obtain additional capital, there is a significant doubt as to whether we can continue to operate as a going concern, and we will need to curtail or cease operations or seek bankruptcy relief. If we discontinue operations, we may not have sufficient funds to pay any amounts to our stockholders.Total Less than a year 1-3 Years 3-5 Years More than 5 Years Long-term debt obligations $ 36,502 $ — $ — $ 36,502 $ — Lease obligations $ 3,184 $ 737 $ 1,475 $ 972 $ — Other contractual obligations $ 377 $ 309 $ 68 $ — $ — 2016,2019, we had no off-balance sheet arrangements. the estimation of the fair value of warrant liabilities, and the estimation of the fair value of our derivative liabilities involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.Share-based stock, stock options and warrants for services from non-employees based on an estimate ofby estimating the fair value of stock options and warrants issued using the Black-Scholes pricing model. This model’s calculations includeincorporate the exercise price, the market price of shares on grant date, the weighted average assumptions for risk-free interest rates,rate, expected life of the option or warrant, expected volatility of our stock and expected dividend yield.The amountsFor options and warrants issued as compensation to non-employees for services that are fully vested and non-forfeitable at the time of issuance, the estimated value is recorded in equity and expensed when the financial statements for share-based compensationservices are performed and benefit is received. For unvested shares, the change in fair value during the period is recognized in expense could vary significantly if we were to use different assumptions. For example,using the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. If we were to use a different volatility than the actual volatility of our stock price, there may be a significant variance in the amounts of share-based expense from the amounts reported. The weighted average expected option term for the twelve months ended December 31, 2016 and 2015 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, which defines the life as the average of the contractual term of the options and the weighted averagegraded vesting period for all option tranches.retainhave retained terminated employees as part-time consultants upon their resignationdeparture from the Company.company. Because the employees continue to provide services to us, their options continue to vest in accordance with the terms set forth under their original grants.terms. Due to the change in classification of the option awards, the options are considered modified at the date of termination. The modifications are treated as exchanges of the original awards in return for the issuance of new awards. At the date of termination, the unvested options are no longer accounted for as employee awards andunder FASB’s accounting rules for share-based expense but are instead accounted for as new non-employee awards. The accounting for the portion of the total grants that have already vested and have been previously expensed as equity awards is not changed. There were no employees moved to consulting status for the twelve monthsyears ended December 31, 2016.There was one employee moved to consulting status2019 and 2018, respectively.twelve months ended December 31, 2015. The employee was 100% vested at the date of termination so no entry was recorded, and the employee is no long a consultant as of December 31, 2016.Warrant LiabilitiesWe have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, and December 2016. The warrants are being accounted for as liabilitiesliability method in accordance with FASB accounting rules,Accounting Standards Committee (“ASC”) 740 “Income Taxes”. To date, no current income tax liability has been recorded due to anti-dilution provisionsour accumulated net losses. Deferred tax assetssome warrants that protect the holders from declines in our stock price, which is considered outside our control. The warrantstax returns. Deferred tax assets and liabilities are marked-to-market each reporting period, using the Black-Scholes pricing model, until they are completely settled or expire.The warrant liabilities were calculated using the Black-Scholes model based upon the following assumptions: 104.31 133.19 % 1.20%-1.93 0.65-1.76 % 2.25-4.99 0.99-4.29 0 0 % For the year ended December 31, 2016, we recorded on a net gain of $2.1 million, compared withbasis; however, our net deferred tax assets have been fully reserved by a net gain of $11.7 million for the same period in 2015, relatedvaluation allowance due to the revaluationuncertainty of our warrant liabilities.We will continueability to mark the warrantsrealize future taxable income and to market value each reporting period, using the Black-Scholes pricing model until they are completely settled or expire.Derivative LiabilitiesIn July 2015, we entered into a $3.55 million 12% Original Issue Discount Convertible Debenture due January 18, 2016 with Acuitas (the “July 2015 Convertible Debenture”). The conversion price of the July 2015 Convertible Debenture was $1.90 per share, subject to adjustments, including for issuances of common stock and common stock equivalents below the then current conversion price. In October 2015, we entered into an amendment of the July 2015 Convertible Debenture which extended the maturity date of the July 2015 Convertible Debenture from January 18, 2016 to January 18, 2017. In addition, the conversion price of the July 2015 Convertible Debenture was subsequently adjusted to $0.30 per share. The July 2015 Convertible Debenture is unsecured, bears interest at a rate of 12% per annum payable in cash or shares of common stock, subject to certain conditions, at our option, and is subject to mandatory prepayment upon the consummation of certain future financings. The derivative liability associated with the July 2015 Convertible Debenture was calculated using the Black-Scholes model based upon the following assumptions: 104.31 133.19 % 0.44 0.23 % 0.05 1.05 0 0 % The expected volatility assumption for the twelve months ended December 31, 2016 was based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. The weighted average expected lives in years for 2016 reflect the application of the simplified method set out in Security and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 107 (and as amended by SAB 110), which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. We use historical data to estimate the rate of forfeitures assumption for awards granted to employees.For the twelve months ended December 31, 2016 and 2015, we recognized a loss of $5.8 million and $2.8 million, respectively, related to the revaluation of our derivative liability.In April 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-10,Revenue from Contracts with Customers (Topic 606), which amends certain aspectsBoard’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09, which is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company has not yet selected a transition method nor has it determined the effect of the standardNotes to Consolidated Financial Statements included in this Annual Report on its ongoing financial reporting.In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting(“ASU 2016-09”), which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The standard is effective for the Company for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The adoption of ASU 2016-09 did not have a material effect on our consolidated financial positon or results of operations.In February 2015, the FASB issued ASU,Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoptions. Early adoption is permitted. The adoption of ASU 2015-02 did not have a material effect on our consolidated financial position or results of operations.In August 2014, the FASB issued FASB ASU 2014-15,Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern(“ASU 2014-15”).ASU 2014-15 changes the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. Because there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related note disclosures, there is diversity in practice whether, when, and how an entity discloses the relevant conditions and events in its financial statements. As a result, these changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for periods beginning after December 15, 2016. The adoption of ASU 2014-15 did not have a material effect on our consolidated financial position or results of operations.Effects of InflationOur most liquid assets are cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. Because we intend to retain and continue to use our equipment, furniture, and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A.CONTROLS AND PROCEDURES2016,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.overover Financial Reporting●pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;●provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and●provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.2016,2019, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.Framework (2013). Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based upon this assessment, our management believes that, as of December 31, 2016,2019, our internal control over financial reporting was effective based on those criteria. In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas, pursuant to which the Company will receive aggregate gross proceeds of $1,300,000 (the “Loan Amount”) in consideration of the issuance of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “January 2017 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to one hundred percent (100%) of the initial number of shares of common stock issuable upon the conversion of the January 2017 Convertible Debenture, at an exercise price of $0.85 per share (the “January 2017 Warrants”). The Loan Amount is payable in tranches through March 2017. In addition, any warrants issued in conjunction with the December 2016 Convertible Debenture currently outstanding with Acuitas have been increased by an additional 25% warrant coverage, exercisable for an aggregate of 827,293 shares of the Company’s common stock. The January 2017 Warrants include, among other things, price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the January 2017 Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the January 2017 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the January 2017 Warrants, (ii) such time as the January 2017 Warrants are exercised or (iii) contemporaneously with the listing of the Company’s shares of common stock on a registered national securities exchange. In connection with the Subscription Agreement described above, the number of Shamus Warrants were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 352,941 shares of the Company’s common stock.2017 Stock Incentive PlanOn February 27, 2017, the Board of Directors and our stockholders approved the adoption of the 2017 Stock Incentive Plan (the “2017 Plan”). The 2017 Plan allows the Company, under the direction of the Board of Directors or a committee thereof, to make grants of stock options, restricted and unrestricted stock and other stock-based awards to employees, including the Company’s executive officers, consultants and directors. The 2017 Plan allows for the issuance of up to 14,000,000 additional shares of Common Stock pursuant to new awards granted under the 2017 Plan and up to approximately 1,500,000 shares of Common Stock that are represented by options outstanding under the 2010 Plan (defined below) that are forfeited, expire or are cancelled without delivery of shares of Common Stock or which result in the forfeiture of shares of Common Stock back to the Company.This description is qualified in its entirety by reference to the actual terms of the 2017 Plan, a copy of which is attached as Exhibit B to the Company’s preliminary Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on February 28, 2017.
None.ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEfollowing table lists our executive officers and directors serving at February 24, 2017. Our executive officers are elected annually by our Board of Directors and serve at the discretion of the Board of Directors. Each current director is serving a term that will expire at the Company's next annual meeting. There are no family relationships among any of our directors or executive officers. Terren S. Peizeris the founder of our Company and an entrepreneur, investor, and financier with a particular interest in healthcare, having founded and successfully commercialized several healthcare companies. He has served as its Chief Executive Officer and Chairman of the Board of Directors since the Company’s inception in 2004. Mr. Peizer is also the founder, Chairman and CEO NeurMedix, Inc., a biotechnology company with a focus on inflammatory, neurological and neuro-degenerative diseases. In addition to his roles with Catasys and NeurMedix, Mr. Peizer is Chairman of Acuitas Group Holdings, LLC, his personal investment vehicle, and holding company that is the owner of all of his portfolio company interests. Through Acuitas, Mr. Peizer owns Crede Capital Group, LLC an industry leader in investing in micro and small capitalization equities, having invested over $1.2 billion directly into portfolio companies. Mr. Peizer has been the largest beneficial shareholder of, and has held various senior executive positions with, several other publicly-traded growth companies, including having served as Chairman of Cray, Inc. a supercomputer company. Mr. Peizer has a background in venture capital, investing, mergers and acquisitions, corporate finance, and previously held senior executive positions with the investment banking firms Goldman Sachs, First Boston, and Drexel Burnham Lambert. He received his B.S.E. in Finance from The Wharton School of Finance and Commerce. We believe Mr. Peizers’s qualifications to serve on our board of directors include his role as an investor and executive positions in several private and public companies, including numerous companies in the healthcare field. He has extensive knowledge and experience in the financial and healthcare industries, and provides extensive insight and experience with capital markets and publicly traded companies at all stages of development.Richard A. Andersonhas served as a director since July 2003 and as a member of our management team since April 2005. He has been our President and Chief Operating Officer since July 2008; in this role he has been primarily responsible for the creation and leadership of our OnTrak solution. He has more than twenty-five years of experience in business development, strategic planning, operations, finance and management, with more than 15 years of that in the healthcare field. Prior to joining the Company, he held senior level financial and operational positions in healthcare and financial companies, and served as a director in PriceWaterhouseCoopers LLP’s business assurance and transaction support practices. He received a B.A. in Business Economics from University of California, Santa Barbara.We believe Mr. Anderson’s qualifications to serve on the board of directors include his business and healthcare experience, including a diversified background as an executive and in operational roles in both public and private companies. His leadership of our product creation gives him a breadth of knowledge and valuable understanding of our business, operations and customers.SusanE.Etzel has served as the Company’s Chief Financial Officer since July 2011 and prior to that was the Company’s Corporate Controller since February 2011. Prior to joining the Company, she acted as the Controller of Clearant, Inc., a developer of a universal pathogen inactivation technology, from July 2005 until February 2011. Prior to joining the Clearant she held a senior level auditor position at Arthur Anderson LLP. She received a Bachelor of Business Economics with an emphasis in Accounting from the University of California, Santa Barbara.Richard A. Bermanis the interim dean of the USF Patel College of Global Sustainability, visiting social entrepreneurship professor in the Muma College of Business, and a professor in the institute of innovation and discovery. As a recognized global leader, Mr. Berman has held positions in health care, education, politics and management. He has worked with several foreign governments, the United Nations, the U.S. Department of Health and Welfare, the FDA, and as a cabinet level official for the state of New York. He has also worked with McKinsey & Co, NYU Medical Center, Westchester Medical, Korn-Ferry International, Howe-Lewis International and numerous startup companies. In 1995, Mr. Berman was selected by Manhattanville College to serve as its tenth President. Mr. Berman is credited with the turnaround of the College, where he served until 2009. Mr. Berman serves on the board of several organizations and is an elected member of the National Academy of Medicine of the National Academy of Sciences (Formerly known as the Institute of Medicine). Mr. Berman received his BBA, MBA, and MPH from the University of Michigan and holds honorary doctorates from Manhattanville College and New York Medical College.We believe Mr. Berman’s qualifications to serve on our board of directors include his extensive experience as an executive in several healthcare firms. In addition, as a board member of a health plan we believe he has an understanding of our customer base and current developments and strategies in the health insurance industry.David E. Smith is the President, Chief Executive Officer and Chief Investment Officer of the Trading Advisor. Mr. Smith was the founder and Chief Executive Officer of Coast Asset Management. Mr. Smith has worked in various capacities in the securities industry, including as Vice President of Security Pacific Bank , and Oppenheimer and Company as a bond arbitrageur, and he is also a successful investor in small cap growth companies. Mr. Smith has an MBA from the University of California at Berkeley.We believe Mr. Smith’s qualifications to serve on our board of directors include his extensive background in the banking and securities industries, as well as his experience in corporate governance and management.Marvin Igelman is the Chief Executive Officer of Breaking Data Corporation, formally known as Sprylogics International Inc. (TSX: BKD), a leader in the semantic search technology sector. Previously, he was Chief Executive Officer of Unomobi, Inc. a mobile advertising and messaging platform that was acquired in February 2010 by Poynt Corporation and was previously on the Board of Directors of Jamba Juice (NASDAQ: JMBA). Mr. Igelman was also founder, President and Chief Executive Officer of Brandera Inc., which operated Portfolios.com, a leading online business-to-business site for the Graphic Arts and creative community, and has served as a business development consultant for numerous technology companies, and established a number of other successful ventures. Mr. Igelman has a Bachelor of Laws from Osgoode Hall Law School.We believe Mr. Igelman’s qualifications to serve on our board of directors include his extensive business development experience, and his current and past executive experience in numerous private and publicly traded companies.Steve Gorlin is an entrepreneur who has founded numerous successful biotechnology and pharmaceutical companies over the last 40 years, including Hycor Biomedical, Inc. (acquired by Agilent), Theragenics Corporation (NYSE: TGX), CytRx Corporation (NASDAQ: CYTR), Medicis Pharmaceutical Corporation (sold to Valeant for approximately $2.6 billion), Entremed, Inc. (NASDAQ: ENMD), MRI Interventions (MRIC), DARA BioSciences, Inc. (NASDAQ: DARA), MiMedx (NASDAQ: MDXG), and Medivation, Inc. (NASDAQ: MDVN). Mr. Gorlin served many years on the Business Advisory Council to the Johns Hopkins School of Medicine and on theJohns Hopkins BioMedical Engineering Advisory Board and as well as on the Board of Andrews Institute. He is presently a member of the Research Institute Advisory Committee (RIAC) of Massachusetts General Hospital. Mr. Gorlin founded a number of non-medical related companies, including Perma-Fix, Inc., Pretty Good Privacy, Inc. (sold to Network Associates), Judicial Correction Services, Inc. (solt to Correctional Healthcare), and NTC China. He started the Touch Foundation, a nonprofit organization for the blind and was a principal financial contributor to the founding of Camp Kudzu for diabetic children. He presently serves as Vice Chairman of NantKwest (NASDAQ: NK), CEO of NantibodyFc, Executive Chairman of ViCapsys and Aperisys and serves on the Boards of Medovex, Inc. (MDVX), Catasys, Inc. and NTC China, Inc. We believe Mr. Gorlin’s qualifications to serve on our board of directors include his experience in the healthcare industry, his extensive business development experience, and his current and past executive experience in numerous private and publicly traded companies.Section 16(a) beneficial ownership reporting complianceSection 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), requires our directors and executive officers, and persons who own more than 10% of our outstanding common stock, to file with the SEC, initial reports of ownership and reports of changes in ownership of our equity securities. Such persons areinformation required by SEC regulations to furnish us with copies of all such reports they file. To our knowledge, based solely on a review of the copies of such reports furnished to us regarding the filing of required reports, we believe that all Section 16(a) reports applicable to our directors, executive officers and greater-than-ten-percent beneficial owners with respect to fiscal 2016 were timely filed.Code of EthicsOur Board of Directors has adopted a code of ethics applicable to our chief executive officer, chief financial officer and persons performing similar functions. Our code of ethics is listed hereto as Exhibit 14.1 and is accessible on our website athttp://www.catasys.com. Disclosure regarding any amendments to, or waivers from, provisions of the code of ethicsthis item will be included in a Current Report on Form 8-Kour Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed with the SEC within four business120 days following the date of the amendment or waiver.Independence of the Board of DirectorsOur common stockfiscal year ended December 31, 2019, and is traded on the OTCQB. The Board of Directors has determined that two of the members of the Board of Directors qualify as “independent,” as definedincorporated herein by the listing standards of the NASDAQ. Consistent with these considerations, after review of all relevant transactions and relationships between each director, or any of his family members, and the Company, its senior management and its independent auditors, the Board has determined further that Messrs. Berman and Igelman are independent under the listing standards of NASDAQ. In making this determination, the Board of Directors considered that there were no new transactions or relationships between its current independent directors and the Company, its senior management and its independent auditors since last making this determination.Committees of the Board of DirectorsAudit committeeDuring 2016, the audit committee consisted of two directors, Messrs. Berman and Igelman. The Board of Directors has determined that each of the members of the audit committee were independent as defined by the NASDAQ rules, meet the applicable requirements for audit committee members, including Rule 10A-3(b) under the Exchange Act, and that Mr. Berman qualifies as an “audit committee financial expert” as defined by Item 401(h)(2) of Regulation S-K. The duties and responsibilities of the audit committee include (i) selecting, evaluating and, if appropriate, replacing our independent registered accounting firm, (ii) reviewing the plan and scope of audits, (iii) reviewing our significant accounting policies, any significant deficiencies in the design or operation of internal controls or material weakness therein and any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation and (iv) overseeing related auditing matters.A copy of the audit committee’s written charter is publicly available through the “Investors-Governance” section of our website at www.catasys.com.Nominations and governance committeeOur nominations and governance committee consists of one member who is independent as defined by the NASDAQ rules. During 2016, the committee consisted of two directors, Messrs. Smith, Igelman, and Gorlin, and did not hold any meetings. The committee nominates new directors and periodically oversees corporate governance matters.The charter of the nominations and governance committee provides that the committee will consider board candidates recommended for consideration by our stockholders, provided the stockholders provide information regarding candidates as required by the charter or reasonably requested by us within the timeframe proscribed in Rule 14a-8 of Regulation 14A under the Exchange Act, and other applicable rules and regulations. Recommendation materials are required to be sent to the nominations and governance committee c/o Catasys, Inc., 11601 Wilshire Boulevard, Suite 1100, Los Angeles, California 90025. There are no specific minimum qualifications required to be met by a director nominee recommended for a position on the board of directors, nor are there any specific qualities or skills that are necessary for one or more of our directors to possess, other than as are necessary to meet any requirements under the rules and regulations applicable to us. The nominations and governance committee considers a potential candidate's experience, areas of expertise, and other factors relative to the overall composition of the board of directors.The nominations and governance committee considers director candidates that are suggested by members of the board of directors, as well as management and stockholders. Although it has not been previously utilized, the committee may also retain a third-party executive search firm to identify candidates. The process for identifying and evaluating nominees for director, including nominees recommended by stockholders, involves reviewing potentially eligible candidates, conducting background and reference checks, interviews with the candidate and others (as schedules permit), meeting to consider and approve the candidate and, as appropriate, preparing and presenting to the full board of directors an analysis with respect to particular recommended candidates. The nominations and governance committee endeavors to identify director nominees who have the highest personal and professional integrity, have demonstrated exceptional ability and judgment, and, together with other director nominees and members, are expected to serve the long term interest of our stockholders and contribute to our overall corporate goals.A copy of the nominations and governance committee’s written charter is publicly available through the “Investors-Governance” section of our website atwww.catasys.com.Compensation committeeThe compensation committee consists of up to three directors who are independent as defined by the NASDAQ rules. During 2016, the committee consisted of two directors, Messrs. Berman and Igelman, and did not hold any meetings. The compensation committee reviews and recommends to the board of directors for approval the compensation of our executive officers.A copy of our compensation committee written charter is publicly available through the “Investors-Governance” section of our website atwww.catasys.com.ITEM 11.EXECUTIVE COMPENSATIONSummary Compensation Tablefollowing table sets forthinformation required by this item will be included in our Proxy Statement for the total compensation paid during2020 Annual Meeting of Stockholders to be filed with the last two fiscal years ended December 31, 2016 and 2015 to (1) our Chief Executive Officer, and (2) our two next most highly compensated executive officers who earned more than $100,000 duringSEC within 120 days of the fiscal year ended December 31, 20162019, and were serving as executive officers as of such date. (2) 450,000 (1) - 14,627 464,627 450,000 (1) - 18,899 468,899 386,548 - 28,473 415,021 379,077 - 28,231 407,308 170,000 - - 170,000 170,000 - - 170,000 (1)Mr. Peizer deferred part of his salary for the 2016 and 2015 years.(2)Includes group life insurance premiums and medical benefits.Narrative Disclosures to Summary Compensation TableExecutive employment agreementsChief Executive OfficerWe entered into a five-year employment agreement with our Chairman and Chief Executive Officer, Terren S. Peizer, effective as of September 29, 2003, which automatically renews after each five-year term. Mr. Peizer received an annual base salary of $450,000 in each of 2016 and 2015, part of which was deferred. Mr. Peizer is also eligible for an annual bonus targeted at 100% of his base salary based on goals and milestones established and reevaluated on an annual basisincorporated herein by mutual agreement between Mr. Peizer and the Board of Directors. Mr. Peizer did not receive any annual bonus during the fiscal years ended December 31, 2016 and 2015. His base salary and bonus target will be adjusted each year to not be less than the median compensation of similarly positioned CEO’s of similarly situated companies. Mr. Peizer receives executive benefits including group medical and dental insurance, term life insurance equal to 150% of his salary, accidental death and long-term disability insurance, grossed up for taxes. There were no equity awards granted to Mr. Peizer during 2016 or 2015. All unvested options vest immediately in the event of a change in control, termination without good cause or resignation with good reason. In the event that Mr. Peizer is terminated without good cause or resigns with good reason prior to the end of the term, he will receive a lump sum payment equal to the remainder of his base salary and targeted bonus for the year of termination, plus three years of additional salary, bonuses and benefits. If any of the provisions above result in an excise tax, we will make an additional “gross up” payment to eliminate the impact of the tax on Mr. Peizer.President and Chief Operating OfficerWe entered into a four-year employment agreement with our President and Chief Operating Officer, Richard A. Anderson, effective April 19, 2005, as amended on July 16, 2008. After the initial four-year term, the employment agreement automatically renews for additional three-year terms unless otherwise terminated. Mr. Anderson’s agreement renewed for an additional three-year term in April 2015. Mr. Anderson received an annual base salary of $386,548 in 2016 and $379,077 in 2015. Mr. Anderson is eligible for an annual bonus targeted at 50% of his base salary based on achieving certain milestones. Mr. Anderson did not receive any annual bonus during the fiscal years ended December 31, 2016 and 2015. Mr. Anderson’s compensation will be adjusted each year by an amount not less than the Consumer Price Index. Mr. Anderson received executive benefits, including group medical and dental insurance, term life insurance, accidental death and long-term disability insurance. There were no equity awards granted to Mr. Anderson in 2016 or 2015. All unvested options will vest immediately in the event of a change in control, termination without cause or resignation with good reason. In the event of termination without good cause or resignation with good reason prior to the end of the term, upon execution of a mutual general release, Mr. Anderson will receive a lump sum payment equal to one year of salary and bonus, and will receive continued medical benefits for one year unless he becomes eligible for coverage under another employer's plan. If he is terminated without cause or resigns with good reason within twelve months following a change in control, upon execution of a general release he will receive a lump sum payment equal to eighteen months salary, 150% of the targeted bonus, and will receive continued medical benefits for 18 months unless he becomes eligible for coverage under another employer's plan. Chief Financial OfficerWe entered into a two-year employment agreement with Ms. Etzel effective January 1, 2013. Beginning January 1, 2015, Ms. Etzel is employed on an at-will basis. Ms. Etzel received an annual base salary of $170,000 in 2016 and $170,000 in 2015, and she may be eligible to an annual bonus, to be determined solely by the Company, contingent on achieving certain individual goals and milestones and the overall performance and profitability of the Company. Ms. Etzel did not receive any annual bonus during the years ended December 31, 2016 and 2015.OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDThe following table sets forth all outstanding equity awards held by our named executive officers as of December 31, 2016. (1) ($) 1,150 - 123.20 1,350 - 123.20 2,398 - 193.60 148,500 - 17.60 153,398 - 733 - 112.00 862 - 112.00 1,245 - 176.00 148,500 - 16.00 151,340 - 1,625 - 8.00 POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROLPotential payments upon terminationThe following summarizes the payments that the named executive officers would have received if their employment had terminated on December 31, 2016.If Mr. Peizer's employment had terminated due to disability, he would have received insurance and other fringe benefits for a period of one year thereafter, with a value equal to $10,000. If Mr. Peizer had been terminated without good cause or resigned for good reason, he would have received a lump sum payment of $2,731,000, based upon: (i) three years of additional salary at $450,000 per year; (ii) three years of additional bonus of $450,000 per year; and (iii) three years of fringe benefits, with a value equal to $31,000.If Mr. Anderson had been or is terminated without good cause or resigned for good reason, he would have received a lump sum payment of $580,000 based upon one year's salary plus the full targeted bonus of 50% of base salary. In addition, medical benefits would continue for up to one year, with a value equal to $28,000.Potential payments upon change in controlUpon a change in control, the unvested stock options of each of our named executive officers would have vested, with the values set forth above.If Mr. Peizer had been terminated without good cause or resigned for good reason within twelve months following a change in control, he would have received a lump sum payment of $2,731,000, as described above, plus a tax gross up of $683,000.If Mr. Anderson had been terminated without good cause or resigned for good reason within twelve months following a change in control, he would have received a lump sum payment of $870,000, based upon one-and-a-half year's salary plus one-and-a-half the full targeted bonus of 50% of base salary. In addition, medical benefits would continue for up to one-and-a-half years, with a value equal to $42,000.DIRECTOR COMPENSATIONThe following table provides information regarding compensation that was earned or paid to the individuals who served as non-employee directors during the year ended December 31, 2016. Except as set forth in the table, during 2016, directors did not earn nor receive cash compensation or compensation in the form of stock awards, option awards or any other form. 167,500 167,500 134,000 134,000 134,000 134,000 134,000 134,000 Notes to director compensation table:(1)Amounts reflect the compensation expense recognized in the Company's financial statements in 2016 for non-employee director stock options granted in 2015, in accordance with FASB ASC Topic 718. As such, these amounts do not correspond to the compensation actually realized by each director for the period. See notesto consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information on the assumptions used to value stock options granted to non-employee directors.Outstanding equity awards held by non-employee directors as of December 31, 2016, were as follows: 250,000 $ 502,500 200,000 402,000 200,000 402,000 200,000 402,000 850,000 $ 1,708,500 There were a total of 850,000 stock options outstanding as of December 31, 2016, with an aggregate grant date fair value of $1,708,500, the last of which vest in February 2017. There were no options granted to non-employee directors during 2016.EQUITY COMPENSATION PLAN INFORMATIONThe following table provides certain aggregate information with respect to all of the Company’s equity compensation plans in effect as of December 31, 2016. 1,464,089 $ 6.49 303,674 - - - 1,464,089 $ 6.49 303,674 (1) We adopted our 2010 Stock Incentive Plan (the “2010 Plan”) in 2011. Under the 2010 Plan, we could grant incentive stock options, non-qualified stock option, restricted and unrestricted stock awards and other stock-based awards. As of December 31, 2016, 303,674 equity awards remained reserved for future issuance under the 2010 Plan.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSfollowing table sets forth certain information with respectrequired by this item will be included in our Proxy Statement for the 2020 Annual Meeting of Stockholders to the beneficial ownership of our common stock as of February 24, 2017 for (a) each stockholder known by us to own beneficially more than 5% of our common stock (b) our named executive officers, (c) each of our directors, and (d) all of our current directors and executive officers as a group. Beneficial ownership is determined in accordancebe filed with the rulesSEC within 120 days of the SECfiscal year ended December 31, 2019, and includes voting or investment power with respect to the securities. We deem shares of common stock that may be acquiredis incorporated herein by an individual or group within 60 days of February 24, 2017 pursuant to the exercise of options or warrants to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them based on information provided to us by these stockholders. Percentage of ownership is based on 55,288,458 shares of common stock outstanding on February 24, 2017. (3) 38,358,250 23,710,576 62,068,826 78.6 % - 151,340 151,340 * - 1,625 1,625 * - 250,000 250,000 * 10,066,496 2,499,979 12,566,475 21.7 % - 200,000 200,000 * 450,000 200,000 650,000 * 48,874,746 27,013,520 75,888,266 92.2 % * Less than 1%(1)Except as set forth below, the mailing address of all individuals listed is c/o Catasys, Inc., 11601 Wilshire Boulevard, Suite 1100, Los Angeles, California 90025.(2)The number of shares beneficially owned includes shares of common stock in which a person has sole or shared voting power and/or sole or shared investment power. Except as noted below, each person named reportedly has sole voting and investment powers with respect to the common stock beneficially owned by that person, subject to applicable community property and similar laws.(3)On February 24, 2017, there were 55,288,458 shares of common stock outstanding. Common stock not outstanding but which underlies options and rights (including warrants) vested as of or vesting within 60 days after February 24, 2017, is deemed to be outstanding for the purpose of computing the percentage of the common stock beneficially owned by each named person (and the directors and executive officers as a group), but is not deemed to be outstanding for any other purpose.(4)Consists of warrants to purchase 6,502,226 shares of common stock, options to purchase 153,398 shares of common stock, and convertible debentures to purchase 17,054,952 shares of common stock. 38,358,250 shares of common stock are held of record by Acuitas Group Holdings, LLC, a limited liability company 100% owned by Terren S. Peizer, and as such, Mr. Peizer may be deemed to beneficially own or control. Mr. Peizer disclaims beneficial ownership of any such securities.(5)Includes options to purchase 151,340 shares of common stock, which are exercisable within the next 60 days.(6)Includes options to purchase 1,625 shares of common stock, which are exercisable within the next 60 days.(7)Incudes options to purchase 250,000 shares of common stock, which are exercisable within the next 60 days.(8)Consists of 10,057,074 sharesof common stock held by Shamus, LLC ("Shamus"). As the sole member of Shamus, The Coast Fund L.P. ("Coast Fund") may be deemed to beneficially own all common stock beneficially owned by Shamus. Similarly, as the managing general partner of the Coast Fund, Coast Offshore Management (Cayman), Ltd. ("Coast Offshore Management") may be deemed to beneficially own all common stock beneficially owned by the Coast Fund. Except to the extent it is deemed to beneficially own any common stock beneficially owned by Shamus, neither the Coast Fund nor Coast Offshore Management beneficially owns any common stock. As the president of Coast Offshore Management, Mr. Smith may be deemed to beneficially own all common stock beneficially owned by Coast Offshore Management, Coast Fund and Shamus. In addition, Mr. Smith directly owns (i) 9,422 shares of common stock and (ii) 200,000 shares of common stock issuable upon the exercise of options granted to Mr. Smith for his service on our board of directors that are either currently exercisable or will become exercisable within the next 60 days (iii) warrants to purchase 1,034,759 shares of common stock and (iv) convertible debentures to purchase 1,265,220 shares of common stock. As a result, Mr. Smith may be deemed to beneficially own, in the aggregate, 12,566,475 shares of our common stock.(9)Includes options to purchase 200,000 shares of common stock, which are exercisable within the next 60 days.(10)Consists of 450,000 shares of common stock and options to purchase 200,000 shares of common stock, which are exercisable within the next 60 days.Review and Approval of Transactions with Related PersonsEither the audit committee or the Board of Directors approves all related party transactions. procedureinformation required by this item will be included in our Proxy Statement for the review, approval or ratification2020 Annual Meeting of related party transactions involves discussing the proposed transaction with management, discussing the proposed transactionStockholders to be filed with the external auditors, reviewing financial statements and related disclosures, and reviewing the details of major deals and transactions to ensure that they do not involve related party transactions. Members of management have been informed and understand that they are to bring related party transactions to the audit committee or the Board of Directors for pre-approval. These policies and procedures are evidenced in the audit committee charter and our code of ethics.Certain TransactionsIn July 2015, we entered into $3.55 million 12% Original Issue Discount Convertible Debenture due January 18, 2016 (the “July 2015 Convertible Debenture”) with Acuitas Group Holdings, LLC (“Acuitas”), one hundred percent (100%) of which is owned by Terren S. Peizer, Chairman and Chief Executive OfficerSEC within 120 days of the Company,fiscal year ended December 31, 2019, and five-year warrants to purchase 935,008 sharesis incorporated herein by reference.our common stock, at an exercise price of $1.90 per share, subject to adjustment, including for issuances of common stock and common stock equivalents below the then current conversion or exercise price, as the case may be (the “July 2015 Warrants”).The conversion price of the July 2015 Convertible Debenture is $1.90 per share, subject to adjustments, including for issuances of common stock and common stock equivalents below the then current conversion or exercise price, as the case may be. The July 2015 Convertible Debentures are unsecured, bear interest at a rate of 12% per annum payable in cash or shares of common stock, subject to certain conditions, at our option, and are subject to mandatory prepayment upon the consummation of certain future financings. The conversion price of the July 2015 Convertible Debenture and the July 2015 Warrants were subsequently adjusted to $0.30 per share based upon the September Offering.In September 2015, we entered into a Stock Purchase Agreement with Acuitas, relating to the sale and issuance of approximately 1.5 million shares of common stock for gross proceeds of $463,000 (the “September Offering”). In October 2015, we entered into Stock Purchase Agreements with each of Acuitas, Shamus, LLC (“Shamus”), a Company owned by David E. Smith, a member of our board of directors, and Steve Gorlin, a member of our board of directors, pursuant to which we received gross proceeds of $2.0 million for the sale of approximately 6.7 million shares of the Company’s common stock, at a purchase price of $0.30 per share (the “October Offering”).In August 2016, Acuitas loaned us $225,000. No terms were discussed nor were any agreements executed in connection with such loan, but the $225,000 was paid back out of the August 2016 Notes.In August 2016, we entered into subscription agreements with three accredited investors, (collectively, the “Investors”), including Shamus, pursuant to which we issued to the Investors short-term senior promissory notes in the aggregate principal amount of $2.8 million (the “August 2016 Notes”) and five-year warrants to purchase up to an aggregate of 875,000 shares of our common stock, at an exercise price of $1.10 per share (the “August 2016 Warrants”).The August 2016 Warrants include price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the August 2016 Warrants will be adjusted in the event we issue shares of our common stock for consideration per share less than the then exercise price of the August 2016 Warrants, to the lowest consideration per share for the shares issued or sold in such transaction. The price protection will be in effect until the earliest of (i) the termination date of the August 2016 Warrants, (ii) such time as the Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.
ContentsIn addition, in August 2016, Acuitas, agreed to exchange its existing promissory note for short-term senior promissory notes, in the aggregate principal amount of $2.8 million plus accrued interest, in the form substantially identical to the form of the August 2016 Notes. Acuitas also agreed to exchange certain of its outstanding warrants to purchase an aggregate of 2,028,029 shares of our common stock at an exercise price of $0.33 per share, for warrants to purchase an aggregate of 2,993,561 shares of our common stock at an exercise price of $1.10 per share, in the form substantially identical to the form of the August 2016 Warrants.In December 2016, we exchanged the August 2016 Notes issued to the Investors, which had an aggregate outstanding principal amount of $5.6 million, for (i) 8% Convertible Debentures in the same principal amount due on March 15, 2017 (the “Debentures”) and (ii) five-year warrants to purchase shares of the Company’s common stock in amount equal to forty percent (40%) of the initial number of shares of common stock issuable upon conversion of each Investor’s Debentures, at an exercise price of $1.10 per share (the “December 2016 Warrants”).The December 2016 Warrants include a price protection provision pursuant to which, subject to certain exempt issuances, the then exercise price of the December 2016 Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the December 2016 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the December 2016 Warrants, (ii) such time as the December 2016 Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.In December 2016, we entered into an agreement with Shamus pursuant to which the Company received gross proceeds of $300,000 for the sale of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “December 2016 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to seventy-five percent (75%) of the initial number of shares of common stock issuable upon the conversion of the December 2016 Convertible Debenture, at an exercise price of $0.85 per share (the “Shamus Warrants”).The Shamus Warrants include price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the Shamus Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the Shamus Warrants. Such mechanism will remain in effect until the earliest of (i) the termination date of the Shamus Warrants, (ii) such time as the Shamus Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas, pursuant to which the Company will receive aggregate gross proceeds of $1,300,000 (the “Loan Amount”) in consideration of the issuance of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “January 2017 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to one hundred percent (100%) of the initial number of shares of common stock issuable upon the conversion of the January 2017 Convertible Debenture, at an exercise price of $0.85 per share (the “January 2017 Warrants”). The Loan Amount is payable in tranches through March 2017. In addition, any warrants issued in conjunction with the December 2016 Convertible Debenture currently outstanding with Acuitas have been increased by an additional 25% warrant coverage, exercisable for an aggregate of 827,293 shares of the Company’s common stock.The January 2017 Warrants include, among other things, price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the January 2017 Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the January 2017 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the January 2017 Warrants, (ii) such time as the January 2017 Warrants are exercised or (iii) contemporaneously with the listing of the Company’s shares of common stock on a registered national securities exchange.In connection with the Subscription Agreement described above, the number of Shamus Warrants were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 352,941 shares of the Company’s common stock.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESfollowing table presents fees for professional audit services renderedinformation required by Rose, Synder & Jacobs LLPthis item will be included in our Proxy Statement for the audit2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the Company’s annual financial statements for the yearsfiscal year ended December 31, 20162019, and December 31, 2015, and fees billed for other services renderedis incorporated herein by Rose, Synder & Jacobs LLP during those periods. $ 80,000 $ 82,000 - - - - - - $ 80,000 $ 82,000 (1) Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent registered public accounting firm can reasonably be expected to provide, such as statutory audits.Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Public AccountantConsistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of our independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm.Prior to engagement of an independent registered public accounting firm for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the Audit Committee for approval.1. Auditservices include audit work performed in the preparation of financial statements, as well as work that generally only an independent registered public accounting firm can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.2. Audit-Related services are for assurance and related services that are traditionally performed by an independent registered public accounting firm, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.3. Tax services include all services performed by an independent registered public accounting firm’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.4. Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from our independent registered public accounting firm.Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires our independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage our independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging our independent registered public accounting firm.The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.IVExhibitNo.Description3.1Certificate of Incorporation of Catasys, Inc., filed with the Secretary of State of the State of Delaware on September 29, 2003, incorporated by reference to exhibit of the same number of Catasys Inc.’s Form 8-K filed with the Securities and Exchange Commission on September 30, 2003.3.2Certificate of Amendment to3.3Certificate of Amendment, as corrected by the Certificate of Correction, to Certificate of Incorporation of Catasys, Inc., incorporated by reference to exhibit of the same number to Catasys, Inc’s Registration Statement on Form S-1/A filed with Securities and Exchange Commission on September 9, 2011.3.4Certificate of Amendment of the Certificate of Incorporation of Catasys, Inc., incorporated by reference to exhibit 3.1 of Catasys, Inc.’s current report on Form 8-KDefinitive Schedule 14 C filed with the Securities and Exchange Commission on August 10, 2012.3.5Certificate of Amendment of the Certificate of Incorporation of Catasys, Inc., incorporated by reference to exhibit 3.1 of Catasys, Inc.’s current report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2013.3.64.3Form of 12% Original Issue Discount Convertible Debenture Due January 18, 2016 incorporated by reference to Exhibit 4.1 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on July 31, 2015.4.44.54.6Form4.7Form4.8Form of Warrant incorporated by reference to Exhibit 4.1 of Catasys, Inc.’s current report on Form 8-K filed with the Securities and Exchange Commission on May 30, 2014.4.9Form of 8% Promissory Note, dated March 30, 2016, incorporated by reference to Exhibit 4.9 of Catasys, Inc.’s current report on form 10-K filed with the Securities and Exchange Commission on March 30, 2016.4.10Form of First Amendment and Restated 8% Promissory Note, dated April 27, 2016, incorporated by reference to Exhibit 4.1 of Catasys, Inc.’s current report on Form 10-Q filed with the Securities and Exchange Commission on May 13, 2016.4.11Form of Common Stock Purchase Warrant, dated April 27, 2016, incorporated by reference to Exhibit 4.2 of Catasys, Inc.’s current report on Form 10-Q filed with the Securities and Exchange Commission on May 13, 2016.4.13Form of 8% Promissory Note, dated March 30, 2016, incorporated by reference to Exhibit 4.3 of Catasys, Inc.’s Form 10-Q filed with the Securities and Exchange Commission on May 13, 2016.4.14Form of Common Stock Purchase Warrant, dated March 30, 2016, incorporated by reference to Exhibit 4.4 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on May 13, 2016.4.15Form of Second Amended and Restated Promissory Note, dated May 24, 2016, incorporated by reference to Exhibit 4.1 of Catasys Inc’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.16Form of Common Stock Purchase Warrant, dated May 24, 2016, incorporated by reference to Exhibit 4.2 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.17Form of Third Amended and Restated Promissory Note, dated June 2, 2016, incorporated by reference to Exhibit 4.3 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.18Form on Common Stock Purchase Warrant, dated June 2, 2016, incorporated by reference to Exhibit 4.4 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.19Form of Fourth Amended and Restated Promissory Note, dated June 22, 2016, incorporated by reference to Exhibit 4.5 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.20Form of Common Stock Purchase Warrant, dated June 22, 2016, incorporated by reference to Exhibit 4.6 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.21Form of Fifth Amended and Restated Promissory Note, dated July 5, 2016, incorporated by reference to Exhibit 4.7 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.22Form of Common Stock Purchase Warrant, dated July 5, 2016, incorporated by reference to Exhibit 4.8 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.23Form of Sixth Amended and Restated Promissory Note, dated July 21, 2016, incorporated by reference to Exhibit 4.9 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.24Form of Common Stock Purchase Warrant, dated July 21, 2016, incorporated by reference to Exhibit 4.10 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.25Form of Senior Promissory Note, dated August 15, 2016, incorporated by reference to Exhibit 4.13 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.26Form of Common Stock Purchase Warrant, dated August 15, 2016, incorporated by reference to Exhibit 4.14 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.4.27Form of 8% Senior Convertible Debenture due March 15, 2017, incorporated by reference to Exhibit 4.1 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on December 23, 2016.4.28Form of Common Stock Purchase Warrant, incorporated by reference to Exhibit 4.2 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on December 23, 2016.4.298% Series B Convertible Debenture, dated December 29, 2016, incorporated by reference to Exhibit 4.1 of Catasys, Inc’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016.4.30Common Stock Purchase Warrant, dated December 29, 2016, incorporated by reference to Exhibit 4.2 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2016.4.318% Series B Convertible Debenture, dated January 31, 2017, incorporated by reference to Exhibit 4.1 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2017.4.32Common Stock Purchase Warrant, dated January 31, 2017, incorporated by reference to Exhibit 4.2 filed with the Securities and Exchange Commission on February 1, 2017.10.1#10.3#Amendment to Employment Agreement of Richard A. Anderson, dated JulyMay 16, 2008,2017, incorporated by reference to Exhibit 10.1 of Catasys, Inc.’s current report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2008.10.4#10.5#201010.6Amendment to 12% Original Issue Discount Convertible Debenture incorporated10.7Securities Purchase Agreement, dated October 16, 2015, incorporated by reference to Exhibit 10.1 of Catasys, Inc’s Form 8-K filed with the Securities and Exchange Commission on October 16, 2015.10.8Stock Purchase Agreement, dated September 17, 2015, incorporated by reference to Exhibit 10.1 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on September 18, 2015.10.9Securities Purchase Agreement between Catasys, Inc. and accredited investors dated July 30, 2015 incorporated by reference to Exhibit 10.1 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on July 31, 2015.10.10Form of Lock-Up Agreement incorporated by reference to Exhibit 10.2 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on May 20, 2015.10.11Form of Warrant Exchange Agreement incorporated by reference to Exhibit 10.1 of Catasys, Inc’s Form 8-K filed with the Securities and Exchange Commission on May 20, 2015.10.12Securities Purchase Agreement between Catasys, Inc. and accredited investorsMr. Richard A. Anderson dated April 16, 201510, 2018, incorporated by reference to Exhibit 10.1 of Catasys Inc.’s Form 8-K filed with the Securities and Exchange Commission on April 21, 2015.10.13Office Lease10.9# 10.14First Amendment to the Office Lease between Catasys, Inc. and Trizec Wilshire Center, LLC dated March 6, 2015, incorporated by reference to exhibit 10.27 of Catasys, Inc.’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2015.10.15Form of Subscription Agreement, dated August 15, 2016, between Catasys, Inc. and accredited investors incorporated by reference to Exhibit 10.1 of Catasys Inc.’s Form 10-Q filed with the Securities and Exchange Commission on August 15, 2016.10.16Form of Securities and Exchange Agreement, between Catasys, Inc. and Acuitas Group Holdings, LLC,Mr. Christopher Shirley, incorporated by reference to Exhibit 10.1 of Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on December 23, 2016.20, 2019.10.17Subscription10.18Form of Exchange Agreement, dated August 15, 2016, by and between Catasys, Inc. and Acuitas Group Holdings, LLC, incorporated by reference to Exhibit 4.6 of Catasys, Inc.’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2016.10.19#2017 Stock Incentive Plan, incorporated by reference to Exhibit B of Catasys, Inc.'s Preliminary Information Statement on Schedule 14C filed with the Securities and Exchange Commission on February 28, 2017.14.123.1*CATASYS, INC.CATASYS, INC. Date: February 28, 2017March 16, 2020
(Principal Executive Officer)SignatureTitle(s)DateSignature Title(s) Date /s/ TERREN S. PEIZER February 28, 2017SUSAN E. ETZELChief Financial OfficerFebruary 28, 2017 Susan Etzel(Principal Financial andAccounting Officer)/s/ RICHARD A. ANDERSONFebruary 28, 2017Richard A. Andersonand Director/s/ CHRISTOPHER SHIRLEY Chief Financial Officer March 16, 2020 Christopher Shirley (Principal Financial and Accounting Officer) /s/ RICHARD A. BERMAN February 28, 2017/s/ EDWARD ZECCHINI Director March 16, 2020 Edward Zecchini /s/ DAVID E. SMITHDirectorFebruary 28, 2017David SmithDirector March 16, 2020 Michael Sherman /s/ ROBERT REBAK Director March 16, 2020 /s/ MARVIN IGELMANDirectorFebruary 28, 2017 Marvin Igelman/s/ GUSTAVO GIRALDO Director March 16, 2020 Gustavo Giraldo STEVE GORLINFebruary 28, 2017 Steve Gorlin, INC. AND SUBSIDIARIES20162019 and 2015,2018, and the related consolidated statements of operations, stockholders’ equity (deficit)deficit, and cash flows for each of the years then ended, 2016 and 2015. The Company’s management is responsible for thesethe related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial statements. Our responsibility is to express an opinion on theseposition of the Company as of December 31, 2019 and 2018, and the consolidated financial statements based on our audits.conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2020 expressed an unqualified opinion.consolidated financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting.error or fraud. Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.consolidated financial statements referred to above present fairly,Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013) issued by COSO.financial positionbalance sheets of Catasys, Inc. and Subsidiaries as of December 31, 20162019 and 2015,2018, and the related consolidated resultsstatements of their operations, stockholders’ deficit, and their cash flows for each of the years then ended and the related notes and our report dated March 16, 2020 expressed an unqualified opinion.conformitythe accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.generally acceptedand that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the United Statesentity; and (iii) provide reasonable assurance regarding prevention or timely detection of America.The accompanying consolidatedunauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements have been prepared assumingstatements.Company will continue as a going concern. As discussed degree of compliance with the policies or procedures may deteriorate.Note 1thousands, except share and per share data)December 31,
2019December 31,
2018Assets Current assets: Cash, cash equivalents and restricted cash $ 13,610 $ 3,162 Receivables, net 3,615 1,382 Unbilled receivables 2,093 — Prepaid expenses and other current assets 1,074 1,108 Total current assets 20,392 5,652 Long-term assets: Property and equipment, net 150 263 Restricted cash, long-term 408 408 Deferred commissions 112 — Right-of-use assets 2,793 — Total assets $ 23,855 $ 6,323 Liabilities and stockholders' deficit Current liabilities: Accounts payable $ 1,385 $ 497 Accrued compensation and benefits 3,640 1,537 Deferred revenue 5,803 4,195 Current portion of lease liabilities 519 — Other accrued liabilities 2,060 1,501 Warrant liabilities 691 86 Total current liabilities 14,098 7,816 Long-term liabilities: Long-term debt, net 31,597 7,472 Long-term lease liabilities 2,069 — Total liabilities 47,764 15,288 Commitments and contingencies (Note 8) Stockholders' deficit: Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding — — 2 2 Additional paid in capital 307,403 296,688 Accumulated deficit (331,314) (305,655) Total stockholders' deficit (23,909) (8,965) Total liabilities and stockholders' deficit $ 23,855 $ 6,323 statements,statements.Year Ended December 31, 2019 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) Change in fair value of warrant liability (60) (56) Net loss $ (25,659) $ (14,212) Net loss per share, basic and diluted $ (1.56) $ (0.89) Weighted-average shares used to compute basic and diluted net loss per share 16,418 15,955 Company has continued to incur significant operating losses and negative cash flows from operations during the year ended December 31, 2016 and continues to have negative working capital at December 31, 2016. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result fromstatements.Common Stock Additional
Paid-In
CapitalShares Amount Accumulated
DeficitTotal Stockholders' Deficit Balance at December 31, 2017 15,889,171 $ 2 $ 294,220 $ (293,324) $ 898 Adoption of accounting standard, ASC 606 — — — 1,881 1,881 Balance at Balance at January 1, 2018 15,889,171 $ 2 $ 294,220 (291,443) $ 2,779 Common stock issued for services 24,000 — 112 — 112 Warrants issued for services — — 86 — 86 Warrants issued in connection with A/R facility — — 64 — 64 Cashless warrant exercise 241,975 — — — — Cash warrant exercise 30,000 — 150 — 150 Shared-based compensation expense — — 2,056 — 2,056 Net loss — — — (14,212) (14,212) Balance at December 31, 2018 16,185,146 $ 2 $ 296,688 $ (305,655) $ (8,965) Reclassification of warrant liability to equity upon
adoption of ASU 2017-11— — 86 — 86 Warrants issued for services — — 43 — 43 Warrants issued in connection with 2024 notes — — 2,354 — 2,354 Exercise of warrant 232,461 — 1,128 — 1,128 Exercise of stock options 195,351 — 1,894 — 1,894 Stock compensation expense 3,207 — 5,210 — 5,210 Net loss — — — (25,659) (25,659) Balance at December 31, 2019 16,616,165 $ 2 $ 307,403 (331,314) $ (23,909) outcomeconsolidated financial statements.Year Ended December 31, 2019 2018 Cash flows used in operating activities Net loss $ (25,659) $ (14,212) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 5,210 2,056 Write-off of debt issuance costs 1,505 — Depreciation 133 288 Amortization 696 187 Warrants issued for services 43 86 Change in fair value of warrants 60 56 Common stock issued for consulting services — 112 Loss on disposal of fixed asset — 70 Deferred rent (26) (91) Changes in operating assets and liabilities: Accounts payable 888 893 Lease liabilities 684 — Other accrued liabilities 2,529 — Prepaid and other current assets (246) (311) Deferred revenue 1,608 3,163 Receivables (2,233) (871) Unbilled receivables (2,093) — Net cash used in operating activities (16,901) (8,574) Cash flows provided by investing activities Purchases of property and equipment — (9) Deposits and other assets — 71 Net cash provided by investing activities — 62 Cash flows provided by financing activities Proceeds from secured promissory note — 7,500 Proceeds from revolving loan 7,500 — Repayment of revolving loan (15,000) — Proceeds from A/R facility 1,938 — Repayment of A/R facility (1,938) — Proceeds from loan 36,527 — Debt issuance costs (2,813) (317) Debt termination related fees (1,956) — Proceed from warrant exercise 1,128 150 Proceed from options exercise 1,894 — Capital lease obligations 69 (30) 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 beginning of period 3,570 4,779 Cash and restricted cash at end of period $ 14,018 $ 3,570 Supplemental disclosure of cash flow information: Right of use asset obtained in exchange for lease obligation $ 2,574 $ — Interest paid 870 363 Non cash financing and investing activities: Reclassification of warrant liability to equity upon amendment of the
loan agreement86 — Warrant issued in connection with 2024 Note $ 2,354 $ — that matter./s/ Rose, Snyder & Jacobs LLPEncino, CaliforniaFebruary 27, 2017, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS $ 851 $ 916 1,052 590 420 575 2,323 2,081 410 412 371 387 $ 3,104 $ 2,880 $ 870 $ 753 2,089 1,703 1,525 1,683 575 682 9,796 - 8,122 - 22,977 4,821 117 198 - 3,662 31 66 - 2,348 5,307 509 28,432 11,604 - - 6 6 254,385 253,053 (279,719 ) (261,783 ) (25,328 ) (8,724 ) $ 3,104 $ 2,880 The accompanying Notes to Consolidated Financial Statementsan integral partwilling to follow, and engages people who are not receiving the care they need. By combining predictive analytics with human engagement, the Company delivers improved member health and validated outcomes and savings to healthcare payers.statements.CATASYS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS $ 7,075 $ 2,705 4,670 2,433 8,838 9,049 141 122 13,649 11,604 (6,574 ) (8,899 ) 106 64 (5,354 ) (2,590 ) - (88 ) - (4,410 ) (2,424 ) (195 ) 2,093 11,665 (5,774 ) (2,761 ) (17,927 ) (7,214 ) 9 9 $ (17,936 ) $ (7,223 ) $ (0.33 ) $ (0.18 ) 55,074 40,372 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.CATASYS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 25,244,485 $ 3 $ 213,333 $ - $ (254,560 ) $ (41,224 ) 21,277,220 2 35,531 - - 35,533 76,055 - 172 172 8,410,001 1 2,620 - - 2,621 - - 1,397 - - 1,397 - - - - (7,223 ) (7,223 ) 55,007,761 $ 6 $ 253,053 $ - $ (261,783 ) $ (8,724 ) 45,697 - 46 46 235,000 - 235 235 354 354 697 697 (17,936 ) (17,936 ) 55,288,458 $ 6 $ 254,385 $ - $ (279,719 ) $ (25,328 ) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.CATASYS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS $ (17,936 ) $ (7,223 ) 141 122 - 88 4,651 2,324 2,424 195 - 168 47 10 (70 ) (44 ) 697 1,397 235 172 (2,093 ) (11,665 ) - 4,410 5,774 2,761 (509 ) (111 ) 155 17 (158 ) 1,329 916 882 $ (5,726 ) $ (5,168 ) $ (106 ) $ (107 ) 16 - $ (90 ) $ (107 ) $ - $ 2,463 300 5,910 - (2,681 ) 5,505 - - (185 ) (54 ) (24 ) $ 5,751 $ 5,483 $ (65 ) $ 208 916 708 $ 851 $ 916 $ 149 $ 271 $ 48 $ 41 $ 46 $ - $ 34 $ 54 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.CATASYS, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements1.2. Summary of Significant Accounting PoliciesDescriptionBusinessWe provide data analytics based specialized behavioral health managementPresentationintegrated treatment servicesits variable interest entities (VIE's). The accompanying consolidated financial statements for Catasys, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and instructions to health plansForm 10-K and Article 10 of Regulation S-X. All intercompany balances and transactions have been eliminated in consolidation.ourat least the next twelve months from the date of this report, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate. solution. Our OnTrak solution is designed to improve member health and at the same time lower costs to the insurer for underserved populations where behavioral health conditions are causing or exacerbating co-existing medical conditions. The program utilizes proprietary analytics, member engagement and patient centric treatment that integrates evidence-based medical and psychosocial interventions along with care coaching in a 52-week outpatient program. Our initial focus was members with substance use disorders, but we have expanded our solution to assist members with anxiety and depression. We currently operate our OnTrak solutions in Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. WeNaN states. The Company provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and dueldual eligible (Medicare and Medicaid) populations. Basis of ConsolidationThe Company generates fees from its launched programs and Presentationexpect to increase enrollment and Going ConcernOur financial statementsfees in the near future.prepared onreclassified for consistency with the basis thatcurrent year presentation.willhave seen and continue as a going concern. At December 31, 2016,to see net losses, net loss from operations, negative cash flow from operating activities, and cash equivalents was $851,000 and we had ahistorical working capital deficitdeficits as we continue through a period of approximately $20.7 million. We have incurred significant operating losses and negative cash flows from operations since our inception. During the twelve months December 31, 2016, our cash used in operating activities from continuing operations was $5.7 million. We anticipate that we could continue to incur negative cash flows and net losses for the next twelve months.rapid growth. The accompanying financial statements do not includereflect any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of liabilities that might result from the outcome of this uncertainty. As of December 31, 2016, these conditions raised substantial doubt as to our abilityif we were unable to continue as a going concern. We expecthave alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding our OnTrak program within existing health plan customers. To support this increased demand for services, we invested and willresourcesflow in the near future. We believe we will have enough capital to cover expenses through March 31, 2017; however delays in cash collections, revenue, or unforeseen expenditures could negatively impact our estimate. We are in need of additional capital, however, there is no assurance that additional capital can be timely raised in an amount which is sufficient for us or on terms favorable to us and our stockholders, if at all. If we do not obtain additional capital, there is a significant doubt as to whether we can continue to operate as a going concernthe foreseeable future and we will needcontinue to curtail or cease operationsmonitor liquidity. If we add more health plans than budgeted, increase the size of the outreach pool by more than we anticipate, decide to invest in new products or seek bankruptcy relief. Ifout additional growth opportunities, we discontinue operations, we may not have sufficient funds to pay any amounts to stockholders.Our ability to fund our ongoing operations and continue aswould consider financing these options with either a going concern is dependent on increasing the number of members that are eligible for our programs by signing new contracts and generating fees from existing and new contracts and the success of management’s plan to increase revenue and continue to control expenses. We currently operate our OnTrak solutions in Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and duel eligible (Medicare and Medicaid) populations. We have generated fees from our launched solutions and expect to increase enrollment and fees throughout 2017. However, there can be no assurance that we will generate such feesdebt or that new solutions will launch as we expect.All inter-company transactions have been eliminated in consolidation.generally accepted accounting principles in the United States of America (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates include expense accruals, accounts receivable allowances, accrued claims payable, the useful life of depreciable and amortizable assets, the evaluation of asset impairment,revenue recognition, the valuation of warrant liabilities, the valuation of derivative liabilites, and shared-based compensation. Actual results could differ from those estimates.Our CatasysToThe Company’s performance obligation is satisfied over time as the extent our contracts may includeOnTrak service is provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing a continuous service to the customer. Contracts with minimum performance guarantee; we reserve a portion of the monthly fees that may be at risk until the performance measurement period is completed. To the extent we receive case ratesguarantees or other fees in advance thatprice concessions include variable consideration and are not subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees we recognizeand price concessions. The Company has constrained revenue for expected price concessions during the case rate ratably over the twelve months of our program.Serviceshealthcare servicesrevenue consists primarily of salaries related to our care coaches, outreach specialists and other staff directly involved in member care, healthcare provider claims payments, and fees charged by our third party administrators for processing these claims. Salaries and fees charged by our third party administrators for processing claims are expensed when incurred and healthcare provider claims payments are recognized in the period in which an eligible member receives services. Wedoctorsa customer and licensed behavioral healthcare professionals,are recoverable from future revenue that gave rise to the commissions. Commissions forfee-for-service basis. We determinestraight-line basis over a period of benefit that a member has received services when we receive a claim or in the absence of a claim, by utilizing member data recorded in the eOnTrakTMdatabase within the contracted timeframe, with all required billing elements correctly completed by the service provider.Our 2010 Stock Incentive Plan, as amended (“the Plan”), provides for the issuance of up to 1,825,000 shares of our common stock. Incentive stock options (ISOs) under Section 422A of the Internal Revenue Code and non-qualified options (NSOs) are authorized under the Plan. We have granted stock options to executive officers, employees, members of our board of directors, and certain outside consultants. The terms and conditions upon which options become exercisable vary among grants, but option rights expire no later than ten years from the date of grant and employee and board of director awards generally vest over three to five years. At December 31, 2016, we had an aggregate of 1,464,089 vested and unvested shares outstanding and 303,674 shares available for future awards.Total share-based compensation expense attributable to operations were $697,000 and $1.4 million for the years ended December 31, 2016 and 2015, respectively.We measure and recognizeexpense for all share-based payment awards made to employees and directorsstock options granted is measured based on estimatedthe grant-date fair valuesvalue of the awards and recognized on a straight-line basis over the dateperiod during which the employee is required to perform services in exchange for the award (generally the vesting period of grant. We estimatethe award). The Company estimates the fair value of share-based payment awardsemployee stock options using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest isForfeitures are recognized as expense over the requisite service periods in the consolidated statements of operations.There were no options granted for the year ended December 31, 2016 and 1.3 million options granted for the year ended December 31, 2015.We account the issuance of stock options and warrants granted to non-employees is measured based on the grant-date fair value of the awards and recognized on a straight-line basis over the period during which the employee is required to perform services in exchange for services from non-employees by estimatingthe award (generally the vesting period of the award). The Company estimates the fair value of employee stock options and warrants issued using the Black-Scholes pricingoption-pricing model. This model’s calculations incorporate the exercise price, the market price of shares on grant date, the weighted average risk-free interest rate, expected life of the option or warrant, expected volatility of our stock and expected dividends.From time to time, we have retained terminated employees as part-time consultants upon their departure from the company. Because the employees continue to provide services to us, their options continue to vest in accordance with the original terms. Due to the change in classification of the option awards, the options are considered modified at the date of termination. The modifications are treated as exchanges of the original awards in return for the issuance of new awards. At the date of termination, the unvested options are no longer accounted for as employee awards under FASB’s accounting rules for share-based expense but are instead accounted for as new non-employee awards. The accounting for the portion of the total grants that have already vested and have been previously expensed as equity awards is not changed. There were no employees moved to consulting status for the twelve months ended December 31, 2016. There was one employee moved to consulting status for the twelve months ended December 31, 2015. The employee was 100% vested at the date of termination so no entry was recorded, and the employee is no longer a consultant as of December 31, 2016.We accountaccordance with Accounting Standards Committee (“ASC”) 740 “Income Taxes”.effect when the differences are expected to reverse. To date, no current income tax liability has been recorded due to ourthe Company's accumulated net losses. Deferredliabilities are recognized for temporary differences between the financial statement carrying amounts ofaand liabilities andto the amounts that are reported in the tax returns. Deferred tax assets and liabilities are recorded on a net basis; however, ourmore likely than not expected toallowance due to the uncertainty of our ability to realize future taxable income and to recover our net deferred tax assets.Income (Loss)per Shareincome (loss)loss per share is computed by dividing the net income (loss)loss to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss)loss per share is computed by dividing the net income (loss)loss for the period by the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the period.9,344,2145,557,326 and 3,277,7445,370,274 of shares as of December 31, 20162019 and 2015,2018, respectively, issuable upon the exercise of stock options and warrants, have been excluded from the diluted earnings per share calculation because their effect is anti-dilutive.Cashand CashEquivalentsWe consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents. Cash is deposited with what we believe are highly credited, quality financial institutions. The deposited cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. At December 31, 2016, cash and cash equivalents exceeding federally insured limits totaled $676,000.Level Input:Input Definition:Input Definition: Level I 20162019 and 2015,2018, respectively, for assets and liabilities measured at fair value on a recurring basis: Balance at December 31, 2015 122 - - 122 122 - - 122 - - 509 509 - - 2,348 2,348 - - 2,857 2,857 Balance at December 31, 2016 Balance at December 31, 2019 106 - - 106 Level I Level II Level III Total $ 408 $ — $ — $ 408 106 - - 106 Total assets $ 408 $ — $ — $ 408 - - 5,307 5,307 Warrant liabilities $ — $ — $ 691 $ 691 8,122 8,122 - - 13,429 13,429 Total liabilities $ — $ — $ 691 $ 691 Balance at December 31, 2018 Level I Level II Level III Total $ 479 $ — $ — $ 479 Total assets $ 479 $ — $ — $ 479 Warrant liabilities $ — $ — $ 86 $ 86 Total liabilities $ — $ — $ 86 $ 86 2016,2019, represent our liabilities measured at market value on a recurring basis which include warrant liabilities and derivative liabilities resulting from recent debt and equity financings.liabilities. In accordance with current accounting rules, the warrant liabilities and derivative liabilities are being marked-to-market each quarter-end until they are completely settled or expire. The warrants and derivative liabilities are valued using the Black-Scholes option-pricing model, using both observable and unobservable inputs and assumptions consistent with those used in ourthe estimate of fair value of employee stock options. SeeWarrant Liabilities below.following table summarizes ourcarrying value of the Senior Secured Notes is estimated to approximate their fair value as the variable interest rate of the Senior Secured Notes approximates the market rate for debt with similar terms and risk characteristics.20162019 and 2015: $ 40,585 $ - 2,712 Issuance (exercise) of derivatives, net 1,019 (11,665 ) Change in fair value 2,761 (31,123 ) Debt Modification (1,432 ) $ 509 $ 2,348 4,821 Issuance (exercise) of derivatives, net - (2,093 ) Change in fair value 5,774 2,070 Debt Modification - $ 5,307 $ 8,122 Property and EquipmentProperty and equipment2018 are stated at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful livesfollows:Level III
Warrant
LiabilitiesBalance as of December 31, 2017 $ 30 Issuance of warrants — Change in fair value 56 Balance as of December 31, 2018 $ 86 ASU Adoption APIC Reclassification (86) Issuance of warrants 631 Change in fair value 60 Balance as of December 31, 2019 $ 691 fourfive requirements of a capital lease in accordance with ASC 840842 of the codification.Warrant LiabilitiesIn conjunction withSecurities Purchase Agreements entered intoholders of the voting rights do not substantively participate in April 2015 (the “April Offering”),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 issued five year warrantsconsiders 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 purchasethe 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 aggregate of 530,303 shares of our common stock, at an exercise price of $2.00 per share, subject to adjustment, including for issuances of common stock and common stock equivalentsongoing basis.then current conversionCompany has an MSA with a Texas nonprofit health organization (“TIH”) and a California Professional Corporation (“CIH”). Under the MSA’s, the equity owners of TIH and CIH have only a nominal equity investment at risk, and the Company absorbs or exercise price, as the case may be (the “April 2015 Warrants”). The exercise pricereceives a majority of the April 2015 Warrants was subsequently adjustedentity’s expected losses or benefits. The Company participates significantly in the design of these MSA’s. The Company also agrees to $0.30 per share based upon the September Offering. In July 2016, 66,288provide working capital loans to allow for TIH and CIH to fund their day to day obligations. Substantially all of the April 2015 Warrants were exercised via a cashless exercise,activities of TIH and 464,015CIH include its decision making, approval or are conducted for its benefit, as evidenced by the facts 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 April 2015 Warrants remain outstanding asCompany's management fee is subordinate to payments of December 31, 2016.In May 2015, we entered into the Exchange Agreements whereby 21,277,220 warrants, at an exercise priceobligations of $0.58 per shares, issuedTIH and CIH, and repayment of the working capital loans is not guaranteed by the Company between December 2011equity owner of the affiliated medical group or other third party. Creditors of TIH and May 2014, were exchanged for 21,277,220 shares of common stock (the “Warrant Exchange”). We recognized a $0 and $4.4 million loss relatedCIH do not have recourse to the Warrant Exchange forCompany's general credit.years ended December 31, 2016 and 2015, respectively.In July 2015, we entered into a $3.55 million 12% Original Issue Discount Convertible Debenture due January 18, 2016 (the “July 2015 Convertible Debenture”) with Acuitas Group Holdings, LLC (“Acuitas”), 100% owned by Terren S. Peizer, our Chairman and Chief Executive Officer, and five-year warrants to purchase 935,008 shares of our common stock, at an exercise price of $1.90 per share, subject to adjustment, including for issuances of common stock and common stock equivalents below the then current conversion or exercise price, as the case may be (the “July 2015 Warrants”).The conversion pricedesign of the July 2015 Convertible Debentureentity and the lack of sufficient equity to finance its activities without additional working capital loans the Company has determined that TIH and CIH are VIE’s. The Company is $1.90 per share, subjectthe primary beneficiary required to adjustments, including for issuances of common stockconsolidate the entities as it has power and common stock equivalents belowpotentially significant interests in the then current conversion or exercise price, asentities. Accordingly, the case may be. The July 2015 Convertible Debentures are unsecured, bear interest at a rate of 12% per annum payable in cash or shares of common stock, subjectCompany is required to certain conditions, at our option,consolidate the assets, liabilities, revenues and are subject to mandatory prepayment upon the consummation of certain future financings. In September 2015, the conversion priceexpenses of the managed treatment centers.2015 Convertible Debenture2018, the Company executed an MSA with CIH. Under the MSA’s, the Company licenses to TIH and CIH the July 2015 Warrants were subsequently adjustedright to $0.30 per share, based upon the Stock Purchase Agreement with Acuitas,use its proprietary treatment programs and related trademarks and provide all required day-to-day business management services, including, but not limited to:saleoperation of TIH and issuanceCIH and the performance of approximately 1.5 million sharesclinical services through the network of Common Stock for gross proceedsproviders shall be the sole and exclusive responsibility of $463,000 (the “September Offering”).In March 2016, we entered intothe TIH and CIH Board free of any control or direction from the Company.promissory note with Acuitas Group Holdings, LLC (“Acuitas”), pursuantmonthly fee equal to which we receivedthe aggregate gross proceedsamount of $900,000(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 issuancebenefit of the note withmedical group, provided that any capitalized costs will be amortized over a principalfive-year period), (b) 10%-15% of the foregoing costs, and (c) any performance bonus amount, as determined by TIH at its sole discretion. The Company's management fee is subordinate to payment of the entities’ obligations.$900,000 (the “March 2016 Promissory Note”). The March 2016 Promissory Note is due within 30 days(a) its costs of demand by Acuitas (the “Maturity Date”)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 carries an interest rate on(b) any unpaid principal amount of 8% per annum untilperformance bonus, as determined by CIH at its sole discretion.Maturity Date, after which the interest will increase to 12% per annum. In addition, we issued Acuitas five-year warrants to purchase an aggregate of 450,000 shares of our common stock, at an exercise price of $0.47 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “March 2016 Warrants”). following assets and liabilities from its VIE's (in thousands):December 31,
2019December 31,
2018Cash and cash equivalents $ 379 $ 45 Accounts receivable 564 94 Prepaid and other current assets 26 29 Total assets $ 969 $ 168 Accounts payable $ 9 $ 7 Accrued liabilities 100 14 Deferred revenue 73 — Intercompany payable 685 147 Total liabilities $ 867 $ 168 number of warrants were subsequently increased to 640,909 and the exercise price of the March 2016 Warrants was subsequently reduced to $0.33 per share based upon the May 2016 Promissory Note.In April 2016, we amended and restated the March 2016 Promissory Note to increase the principal amount by $400,000, for a total of $1.3 million (the “April Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 200,000 shares of our common stock, at an exercise price of $0.47 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “April 2016 Warrants”). The number of warrants were subsequently increased to 284,848 and the exercise price of the April 2016 Warrants was subsequently reduced to $0.33 per share based upon the May 2016 Promissory Note.In May 2016, we amended and restated the April 2016 Promissory Note to increase the principal amount by $405,000, for a total of $1.7 million (the “May Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 306,818 shares of our common stock, at an exercise price of $0.33 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “May 2016 Warrants”).In June 2016, we amended and restated the May 2016 Promissory Note to increase the principal amount by $480,000, for a total of $2.2 million (the “June 2016 Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 363,636 shares of our common stock, at an exercise price of $0.33 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “June 2016 Warrants”).In July 2016, we amended and restated the June 2016 Promissory Note to increase the principal amount by $570,000, for a total of $2.8 million (the “July 2016 Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 431,818 shares of our common stock at an exercise price of $0.33 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “July 2016 Warrants”)In August 2016, we entered into subscription agreements with three accredited investors, including Shamus (collectively, the “Investors”), pursuant to which we issued to the Investors short-term senior promissory notesassumptions used in the aggregate principal amount of $2.8 million (the “August 2016 Notes”) and five-year warrants to purchase up to an aggregate of 875,000 shares of our common stock, at an exercise price of $1.10 per share (the “August 2016 Warrants”).The August 2016 Warrants include price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the August 2016 Warrants will be adjusted, in the event we issue shares of our common stock for consideration per share less than the then exercise price of the August 2016 Warrants, to the lowest consideration per share for the shares issued or sold in such transaction. The price protection will be in effect until the earliest of (i) the termination date of the August 2016 Warrants, (ii) such timeBlack-Scholes option-pricing model are determined as the Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.December 31, 2019 December 31, 2018 Volatility 98.04 % 102.90 % Risk-free interest rate 1.81 % 2.63 % Weighted average expected life (in years) 6.25 1.29 Dividend yield 0 % 0 % In addition, in August 2016, Acuitas agreed to exchange its July 2016 Promissory Note for a short-term senior promissory note, in the aggregate principal amount of $2.8 million plus accrued interest, in the form substantially identical to the form of the August 2016 Notes. Acuitas also agreed to exchange certain of its outstanding warrants to purchase an aggregate of 2,028,029 shares of our common stock at an exercise price of $0.33 per share for warrants to purchase an aggregate of 2,993,561 shares of common stock at an exercise price of $1.10 per share, in the form substantially identical to the form of the August 2016 Warrants. In December 2016, we exchanged the August 2016 Notes issued to the Investors, which had an aggregate outstanding principal amount of $5.6 million, for (i) 8% Convertible Debentures in the same principal amount due on March 15, 2017 (the “Debentures”) and (ii) five-year warrants to purchase shares of the Company’s common stock in amount equal to forty percent (40%) of the initial number of shares of common stock, or 2,022,835 warrants, issuable upon conversion of each Investor’s Debentures, at an exercise price of $1.10 per share (the “December 2016 Warrants”). The December 2016 Warrants include a price protection provision pursuant to which, subject to certain exempt issuances, the then exercise price of the December 2016 Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the December 2016 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the December 2016 Warrants, (ii) such time as the December 2016 Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange. In December 2016, we entered into an agreement with Shamus pursuant to which the Company received gross proceeds of $300,000 for the sale of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “December 2016 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to seventy-five percent (75%) of the initial number of shares of common stock, or 264,706 warrants, issuable upon the conversion of the December 2016 Convertible Debenture, at an exercise price of $0.85 per share (the “Shamus Warrants”).The Shamus Warrants include price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the Shamus Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the Shamus Warrants. Such mechanism will remain in effect until the earliest of (i) the termination date of the Shamus Warrants, (ii) such time as the Shamus Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange. The warrant liabilities were calculated using the Black-Scholes model based on upon the following assumptions: 104.31% 133.19% 1.20% - 1.93% 0.65 - 1.76% 2.25 - 4.99 0.99 - 4.29 0% 0% 20162019 and 2015, we recognized a gain of $2.1 million and a gain of $11.7 million, respectively,2018, losses related to the revaluation of our warrant liabilities.2016, two2019, 4 customers accounted for approximately 78%85% of revenues and two4 customers accounted for approximately 81%89% of accounts receivable.2015, three2018, 4 customers accounted for approximately 82%76% of revenues and three4 customers accounted for approximately 90%88% of accounts receivable.Derivative Liability2015, we2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). The amendments in this update are intended to simplify the accounting for certain equity linked financial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the new guidance, a down round feature will no longer need to be considered when determining whether certain financial instruments or embedded features should be classified as liabilities or equity instruments. That is, a down round feature will no longer preclude equity classification when assessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosure requirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU 2017-11 on January 1, 2019 did not have a material impact on its financial statements.December 31, December 31, 2019 2018 Net loss $ (25,659) $ (14,212) Weighted-average shares of common stock outstanding 16,418 15,955 Net loss per share - basic and diluted $ (1.56) $ (0.89) December 31, December 31, 2019 2018 Warrants to purchase common stock 1,550,975 1,608,996 Options to purchase 4,006,351 3,761,278 Total shares excluded from net loss per share 5,557,326 5,370,274 $3.55Note Agreement dated September 24, 2019 (the “Note Agreement”) with certain subsidiaries of the Company party thereto as guarantors, Goldman Sachs Specialty Lending Holdings, Inc. and any other purchasers party thereto from time to time (collectively, the “Holders”). Under the Note Agreement, the Company initially issued12% Original Issue Discount Convertible Debentureaggregate principal amount of senior secured notes (the "2024 Notes"), which bear interest at either a floating rate plus an applicable margin in the case of 2024 Notes subject to cash interest payments or a floating rate plus a slightly higher applicable margin in the case of 2024 Notes as to which current interest has been accrued during the period ending September 24, 2020, which resulted in interest rate of 15.75% for the year-ended December 31, 2019. The applicable margins are subject to stepdowns, in each case, following the achievement of certain financial ratios. The Company has elected for the $35 million in aggregate principal amount of 2024 Notes issued on the date of the Note Agreement that such interest shall be payable in cash. The Holder is obligated to purchase up to an additional $10.0 million in principal amount of 2024 Notes during the period from the date of the Note Agreement until the second anniversary thereof. The entire principal amount of the 2024 Notes is due January 18, 2016and payable on the fifth anniversary of the Note Agreement unless earlier redeemed upon the occurrence of certain mandatory prepayment events, including with Acuitasthe proceeds of equity or debt issuances, 50% of excess cash flow, asset sales and the amount by which total debt exceeds an applicable leverage multiple.December 31, 2019 Volatility 98.01 % Risk-free interest rate 1.58 % Expected life (in years) 7 Dividend yield 0 % “July 2015 Convertible Debenture”“2022 Loan”) with Horizon Technology Finance Corporation (“Horizon”), which provides for up to $7.5 million in loans to the Company. In addition, in June 2018, the Company entered into a loan and security agreement (the “A/R Facility”) in connection with a $2.5 million receivables financing facility with Corporate Finance, a division of Heritage Bank of Commerce (“Heritage”). The conversion priceCompany borrowed and subsequently repaid $1.9 million on the A/R Facility during the six months ended June 30, 2019.July 2015 Convertible Debenture is $1.90 per share,Amended Loan Agreement, subject to adjustments, including for issuances of common stock and common stock equivalents belowrepayment if the then current conversion or exercise price, as the case may be. In October 2015, weforegoing $5.0 million threshold is not reached by July 1, 2019. The Company concurrently entered into an amendment to the previously disclosed $2.5 million A/R Facility with Heritage intended primarily to reflect the amendment and restatement of the July 2015 Convertible Debenture which extended the maturity dateAmended Loan Agreement. The Company have met all three of the July 2015 Convertible Debenture from JanuaryBilling Requirements and as a result have incurred the full $7.5 million under the Amended Loan Agreement. In connection with our entry into the Amended Loan Agreement, the Company issued Horizon 40,279 seven-year warrants to purchase an aggregate of $600,000 (depending on the level of availability under the Amended Loan Agreement) at the trailing volume weighted average price (“VWAP”) of our common stock on the NASDAQ Capital Market for the five days preceding the relative dates of grants at a per share exercise price equal to the lower of (i) $9.93 or (ii) the price per share of any securities that may be issued by us in an equity financing during the 18 2016 to January 18, 2017. In addition,months following the conversion price of the July 2015 Convertible Debenture was subsequently adjusted to $0.30 per share. agreement date.July 2015 Convertible Debenture is unsecured,2022 Loan bears interest at a floating coupon rate of 12% per annum payablethe amount by which one-month LIBOR exceeds 2.00% plus 9.75%. After September 30, 2020, upon the earlier of (i) payment in cashfull of the principal balance of the 2022 Loan, (ii) an event of default and demand by Lender of payment in full or (iii) on the Loan Maturity Date (September 30, 2022), as applicable, the Company shall pay to Lender a payment equal to the greater of $150,000 or 6% of the outstanding principal balance on August 31, 2020.December 31, December 31, Liability component 2019 2018 Principal $ 36,502 $ 7,950 Less: debt discount (4,905) (478) Net carrying amount $ 31,597 $ 7,472 December 31, December 31, 2019 2018 Contractual interest expense $ 2,653 $ 388 Accretion of debt discount 394 182 Total $ 3,047 $ 570 subjectoptions to executive officers, employees, members of our board of directors, and certain outside consultants. The terms and conditions at ourupon which options become exercisable vary among grants; however, option rights expire no later than ten years from the date of grant and is subjectemployee and Board of Director awards generally vest over three to mandatory prepayment uponfive years on a straight-line basis. As of December 31, 2019, we had 4,006,351 vested and unvested stock options outstanding and 328,369 shares reserved for future awards.consummationyears ended December 31, 2019 and 2018, respectively.derivative liability associated with the July 2015 Convertible Debenture was calculated usingassumptions used in the Black-Scholes option-pricing model based upon the following assumptions:are determined as follows: 104.31 133.19 % 0.44 0.23 % 0.05 1.05 0 0 % December 31, 2019 December 31, 2018 Volatility 100.34 % 100.34% - 102.90 Risk-free interest rate 1.63%-2.60% 2.56% - 2.85% Expected life (in years) 2.85-6.08 2.4 - 6.08 Dividend yield 0 % 0 % assumption for the twelve months ended December 31, 2016 wasassumptions have been based on the historical and expected volatility of our stock, measured over a period generally commensurate with the expected term. The weighted average expected lives in yearsoption term for 2016 reflectthe year ended December 31, 2019, reflects the application of the simplified method set outprescribed in SecuritySecurities and Exchange Commission (SEC)(“SEC”) Staff Accounting Bulletin (SAB)(“SAB”) No. 107 (and as(as amended by SAB 110), which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. We use historical dataNumber of
Shares OutstandingWeighted-
Average
Exercise PriceBalance, December 31, 2017 1,885,383 $ 11.46 Stock options granted 1,985,539 7.70 Stock options forfeited and canceled (109,644) 14.29 Balance, December 31, 2018 3,761,278 $ 9.44 Exercisable at December 31, 2018 721,766 $ 17.14 Stock options granted 1,459,289 14.18 Stock options exercised (195,351) 9.69 Stock options forfeited and canceled (1,068,865) 10.36 Balance at December 31, 2019 3,956,351 $ 10.93 Exercisable at December 31, 2019 1,062,178 $ 11.24 estimate the rate of forfeitures assumption for awardsstock options granted to employees.For the twelve months ended December 31, 2016employees and 2015, we recognized a loss of $5.8directors was $5.1 million and $2.8$2.1 million related to the revaluation of our derivative liability, respectively.Recently Issued or Newly Adopted Accounting PronouncementsIn April 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-10,Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09, which is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting(“ASU 2016-09”), which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The standard is effective for the Company for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The adoption of ASU 2016-09 did not have a material effect on our consolidated financial positon or results of operations.In February 2015, the FASB issued ASU,Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoptions. Early adoption is permitted. The adoption of ASU 2015-02 did not have a material effect on our consolidated financial position or results of operations.In August 2014, the FASB issued FASB ASU 2014-15,Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern(“ASU 2014-15”).ASU 2014-15 changes the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. Because there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related note disclosures, there is diversity in practice whether, when, and how an entity discloses the relevant conditions and events in its financial statements. As a result, these changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for periods beginning after December 15, 2016. The adoption of ASU 2014-15 did not have a material effect on our consolidated financial position or results of operations.Note 2. Accounts ReceivableAccounts receivables consisted of the following as of December 31, 2016 and 2015: $ 1,050 $ 587 2 3 $ 1,052 $ 590 - - $ 1,052 $ 590 We use the specific identification method for recording the provision for doubtful accounts, which was $0 as of December 31, 2016 and 2015.Note3. Property and EquipmentProperty and equipment consisted of the following as of December 31, 2016 and 2015: $ 1,712 $ 1,585 318 318 2,030 1,903 (1,620 ) (1,491 ) $ 410 $ 412 Depreciation expense was $141,000 and $110,000 for the years ended December 31, 20162019 and 2015,2018, respectively.Number of
Warrants OutstandingWeighted-
Average
Exercise PriceWarrants issued in connection with debt agreements 224,440 $ 16.04 Warrants issued for services 4,167 13.82 Balance at December 31, 2019 228,607 $ 16.00 Number of Warrants Outstanding Weighted-
Average
Exercise PriceWarrants issued in connection with debt agreements 9,720 $ 7.72 Warrants issued for services 24,000 4.68 Balance at December 31, 2018 33,720 $ 5.56 Number of
Warrants OutstandingWeighted-
Average
Exercise PriceBalance at December 31, 2017 2,011,528 $ 4.85 Warrants granted 33,720 5.56 Warrants exercised (436,252) (4.70) Balance at December 31, 2018 1,608,996 $ 4.71 Warrants granted 228,607 16.00 Warrants exercised (232,461) (4.85) Warrants expired (54,167) (12.46) Balance at December 31, 2019 1,550,975 $ 6.08 Grant Date Performance Measures Vesting Term Performance Period # of Shares Exercise Price December 2017 Weighted Average Price of our common stock is $15.00 for at least twenty trading days within a period of thirty consecutive trading days ending on the trading day prior to January 1, 2023. Fully vest on January 1, 2023 January 1, 2023 642,307 $ 7.50 August 2018 Weighted Average Price of our common stock is $15.00 for at least twenty trading days within a period of thirty consecutive trading days ending on the trading day prior to January 1, 2023. Fully vest on January 1, 2023 January 1, 2023 397,693 $ 7.50 April 2018 The Options will be divided into five equal tranches and Performance Targets to be established by Board of Directors for each tranche at the beginning of the fiscal year Amended and vested 115,950 options based on severance agreement Amended and vested 115,950 options based on severance agreement 115,950 $ 7.50 August 2018 The Options will be divided into five equal tranches and Performance Targets to be established by Board of Directors for each tranche at the beginning of the fiscal year Amended and fully forfeited based on severance agreement Amended and fully forfeited based on severance agreement — $ 7.50 4. 6. LeasesConsolidated Statement of Operations Operating
Leases Operating lease expense $ 443 Short-term lease rent expense 58 Total rent expense $ 501 Consolidated Statements of Cash Flows Operating cash flows from operating leases $ 381 Right-of-use assets obtained in exchange for lease obligations $ 2,574 Other Information Weighted-average remaining lease term 4.5 years Weighted-average discount rate 10.15 % Operating
Leases 2020 $ 581 2021 603 2022 623 2023 644 2024 329 Total lease payments $ 2,780 Less: imputed interest (570) Present value of lease liabilities $ 2,210 Less: current portion (374) Lease liabilities, non-current $ 1,836 Lease ObligationsWeleases certain computer equipment under agreements entered into during 2016 that are classified as capital leases.the year ended December 31, 2019. The computer equipment under capital leases is included in furniture and equipment on ourright of use asset within the consolidated balance sheets and was $103,000 and $110,000$0.4 million as of December 31, 2019. Lease amortization at December 31, 2016 and 2015, respectively. Accumulated depreciation2019 was approximately $0.1 million.2016 and 2015 was approximately $47,000 and $43,000, respectively.The2019, the future minimum lease payments required under the capital leases and the present values of the net minimum lease paymentsare as of December 31, 2016, is as follows: $ 46 34 2 82 (11 ) 71 (40 ) $ 31 Capital
Leases Total lease payments $ 406 Less: interest (28) Present value of lease liabilities $ 378 Less: current portion (145) Lease liabilities, non-current $ 233 5. 7. Income Taxes2016,2019, the Company had net federal operating loss carry forwards and state operating loss carry forwards of approximately $222$277 million and $170$39 million, respectively. The net federal operating loss carry forwards begin to expire in 2024,2023, and net state operating loss carry forwards begin to expire in 2016. The majority2019. foreign net operating loss carry forwards expire over the next seven years.The primary components of temporary differences which give rise to our net deferred tax assets, the Company maintains a valuation allowance of $70.1 million and $64.1 million against all of its deferred tax assets as of December 31, 2019 and 2018, respectively. For the years ended December 31, 2019 and 2018, the total change in valuation allowance was $6.0 million and $1.7 million, respectively. Realization of the deferred tax assets will be primarily dependent upon the Company's ability to generate sufficient taxable income.follows: $ 78,466 $ 78,474 7,429 7,879 664 585 4,894 3,045 (91,453 ) (89,983 ) $ - $ - 2019 2018 Net operating losses $ 66,405 $ 62,800 Stock-based compensation 1,648 873 Interest expense 1,494 — Accrued liabilities and reserves 744 218 Fixed assets 51 72 Lease liability 658 — Other temporary differences 23 315 Prepaid expenses (186) (176) Right-of-use asset (710) — Valuation allowance (70,127) (64,102) Net deferred tax asset $ — $ — followsfollows: -34.0 % -34.0 % 26.2 % 16.8 % 0.0 % 0.0 % 0.2 % 2.1 % -0.5 % -27.0 % 8.0 % 42.1 % -0.1 % 0.0 % Current accounting rules require that companies recognize in the consolidated financial statements the impact2019 2018 Tax at federal statutory rate 21.0 % 21.0 % Stock-based compensation (1.2) % (29.3) % Deferred revenue — % (2.8) % Change in Foreign NOLS due to liquidation — % (8.3) % Other (0.2) % 3.3 % Change in federal valuation allowance (19.6) % 16.1 % Change in federal NOLs due to 382 study results — % — % Tax provision — % — % no0 interest and penalties for the years ended December 31, 20162019 and 2015,2018, respectively. The Company files income tax returns with the Internal Revenue Service (“IRS”) and the state of California.various states with sufficient nexus. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for tax years through 2010,prior to 2014, and by the IRS for tax years through 2011.2016. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized and such tax years are closed.Note6. Equity FinancingsIn October 2015, we entered into Stock Purchase Agreements (the “Purchase Agreements”) with eachThere are currently no income tax audits in any jurisdictions for open tax years and, as of Acuitas, Shamus, and Steve Gorlin, pursuantDecember 31, 2019, there have been no material changes to which the Company received gross proceeds of $2.0 million for the sale of approximately 6.7 million shares of the Company’s common stock, at a purchase price of $0.30 per share.In September 2015, we entered into a Stock Purchase Agreement with Acuitas, relating to the sale and issuance of approximately 1.5 million shares of common stock for gross proceeds of $463,000 (the “September Offering”). In May 2015, we entered into the Exchange Agreements whereby 21,277,220 warrants, at an exercise price of $0.58 per shares, issued by the Company between December 2011 and May 2014, were exchanged for 21,277,220 shares of common stock to eliminate the liability associated with these warrants.Note 7. Share-based CompensationThe Plan provides for the issuance of up to 1,825,000 shares of our common stock. Incentive stock options, underUnder Section 422A382 of the Internal Revenue Code non-qualified options, stock appreciation rights, limited stock appreciation rightsof 1986, as amended, or the IRC, substantial changes in our ownership may limit the amount of net operating loss and restricted stock grants are authorized underresearch and development income tax credit carryforwards that could be utilized annually in the Plan.We grant allfuture to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the company of more than 50% within a three-year testing period. Any such share-based compensation awards at no less thanannual limitation may significantly reduce the fair market valueutilization of ourthe net operating loss carryforwards before they expire.date of grant, and have granted stock and stock optionsfuture upon subsequent disposition. The Company intends to executive officers, employees, members of our Board of Directors and certain outside consultants. The terms and conditions upon which options become exercisable vary among grants; however, option rights expire no later than ten years fromcomplete a study in the date of grant and employee and Board of Director awards generally vest over threefuture to five years on a straight-line basis. At December 31, 2016, we had 1,464,089 vested and unvested stock options outstanding and 303,674 shares reserved for future awards. Total share-based compensation expense amounted to $697,000 million and $1.4 million for the years ended December 31, 2016 and 2015, respectively.Stock Options – Employees and DirectorsThere were no options issued to employeesassess whether an ownership change has occurred or directors during 2016.There were 250,000 options issued to employees during 2015.For the twelve months ended December 31, 2015, we granted 1,050,000 to our non-employee directors.Stock option activity for employee and director grants is summarized as follows: 378,000 $ 19.59 1,300,000 2.20 (207,000 ) 3.29 1,471,000 $ 6.51 - - (7,000 ) 11.31 1,464,000 $ 6.49 The weighted average remaining contractual life and weighted average exercise price of options outstanding as of December 31, 2016 were as follows: $0.00 to $20.00 1,455,000 7.07 $ 5.48 1,293,000 $ 5.89 $20.01 to $1,000.00 9,000 2.03 158.98 9,000 158.98 1,464,000 7.04 $ 6.46 1,302,000 $ 6.99 Share-based compensation expense relating to stock options granted to employees and directors was $697,000 and $1.4 million for the years ended December 31, 2016 and 2015, respectively.As of December 31, 2016,whether there was $318,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted to employees and directors under the Plan. These costs are expected to be recognized over a weighted-average period of 1.3 years.Stock Options and Warrants – Non-employeesIn addition to stock options granted under the Plan, we have also granted options and warrants to purchase our common stock to certain non-employees that have been approved by our Board of Directors. There were nomultiple ownership changes since the Company's formation.granted during 2016rent abatement and 2015, respectively.Warrantsgranted to non-employees outstanding as of December 31, 2016 and 2015, respectively, are summarized as follows: - $ - 6,156,102 0.85 - - 6,156,102 $ 0.85 - $ - 1,465,311 0.30 341,251 2.16 1,806,562 $ 0.65 There were no warrants to purchase common stock issued for consulting services for the twelve months ended December 31, 2016. There were 300,000 warrants to purchase common stock issued for investor relations services for the twelve months ended December 31, 2015.Share-based compensation expense relating to stock options and warrants granted to non-employees amounted to $0 and $3,000 for the years ended December 31, 2016 and 2015, respectively.Common StockIn October 2015, we issued 200,000 common shares in connection with the April Offering.In May 2015, we entered into the Exchange Agreements whereby 21,277,220 warrants, at an exercise price of $0.58 per shares, issued by theescalation clauses. The Company between December 2011 and May 2014, were exchanged for 21,277,220 shares of common stock to eliminate the liability associated with these warrants.During 2016 and 2015, we issued 235,000 and 76,000 shares of common stock, respectively, for consulting services valued at $235,000 and $172,000, respectively. Generally, the costs associated with shares issued for services are being amortized to the relatedrecognizes rent expense on a straight-line basis over the related service periods.Employee Stock Purchase PlanOur qualified employee stock purchase plan (ESPP), approved by our Board of Directors and shareholders and adopted in June 2006, provides that eligible employees (employed at least 90 days) havelease term, commencing when the option to purchase shares of our common stock at a price equal to 85%Company takes possession of the lesserproperty. Certain of the fair market valueCompany’s office leases entitle the Company to receive a tenant allowance from the landlord. The Company records tenant allowances as a deferred rent credit, which the Company amortizes on a straight-line basis, as a reduction of rent expense, over the term of the first day or the last day of each offering period. Purchase options are granted semi-annuallyunderlying lease. Total rent expense under operating leases was approximately $0.4 millionare limited to the number of whole shares that can be purchased by an amount equal to up to 10% of a participant’s annual base salary. As of December 31, 2016, there were no shares of our common stock issued pursuant to the ESPP. There was no share-based compensation expense relating to the ESPP$0.3 million for the years ended December 31, 20162019 and 2015,2018, respectively.Note8. Commitments and ContingenciesOperating Lease CommitmentsWe incurred rent expense of approximately $296,000 and $294,000 The Company entered into financing agreements for the years ended December 31, 2016 and 2015, respectively.��Our principal executive and administrative offices are located in Los Angeles, California and consist of leasedoffice space totaling approximately 9,120 square feet. The initial term of the lease expires in April 2019. Our base rentcomputer equipment for $0.4 million. Interest is currently approximately $31,000 per month, subject to annual adjustments.Rent expense is calculated using the straight-line method based on the totalexpensed straight line over three years.over the initial term of the lease. Landlord tenant improvement allowancesunder capital leases and rent expense exceeding actual rent payments are accounted for as deferred rent liability in the balance sheet and amortized on a straight-line basis over the initial term of the respective leases.Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more, consist of the following at December 31, 2016: $ 376 $ 387 $ 99 Clinical Research CommitmentsNone.Legal ProceedingsFrom time to time, we may be involved in certain legal actions and claims arising in the ordinary courseYear Amount 2020 $ 737 2021 757 2022 717 2023 644 2024 328 $ 3,183 9.9. Related Party DisclosureMr. Gorlin, an affiliate of the company, entered into securities purchase agreements during the fiscal year ended December 31, 2015, and received approximately 300,000 shares of common stock in exchange for gross proceeds of approximately $90,000.Terren Peizer, Chairman and Chief Executive Officer, transferred his securities ownership in Catasys to Acuitas from Crede Capital Group, LLC during 2015. Mr. Peizer owns 100% of both entities.In August 2016, Acuitas loaned us $225,000. No terms were discussed nor were any agreements executed in connection with such loan, but the $225,000 was paid back out of the August 2016 Notes.In August 2016, Acuitas, agreed to exchange its existing promissory note for short-term senior promissory notes, in the aggregate principal amount of $2.8 million plus accrued interest, in the form substantially identical to the form of the August 2016 Notes. Acuitas also agreed to exchange certain of its outstanding warrants to purchase an aggregate of 2,028,029 shares of our common stock at an exercise price of $0.33 per share, for warrants to purchase an aggregate of 2,993,561 shares of our common stock at an exercise price of $1.10 per share, in the form substantially identical to the form of the August 2016 Warrants. In December 2016, we exchanged the August 2016 Notes issued to the Acuitas, which had an aggregate outstanding principal amount of $2.8 million, for (i) 8% Convertible Debentures in the same principal amount due on March 15, 2017 (the “Debentures”) and (ii) five-year warrants to purchase shares of the Company’s common stock in amount equal to forty percent (40%) of the initial number of shares of common stock issuable upon conversion of each Investor’s Debentures, at an exercise price of $1.10 per share (the “December 2016 Warrants”).Acuitas entered into securities purchase agreements as of December 31, 2015 and received approximately 6,953,334 shares of common stock in exchange for gross proceeds of approximately $2.1 million. In addition, Acuitas received warrants to purchase an aggregate 935,008 shares of common stock, at a price of $0.30 per share, as of December 31, 2015.In addition, we have a $3.7 million Convertible Debenture outstanding with Acuitas, which includes $577,000 in interest as of December 31, 2016. We also have accountsAccounts payable outstanding with Mr. Peizer for travel and expenses of $194,000is approximately $0.4 million and $130,000$0.4 million as of December 31, 20162019 and 2015,2018, respectively.August 2016, weSeptember 2018, the Company entered into subscription agreements with Shamus, pursuant toa lease agreement for the new corporate office space in Santa Monica, California which we issued short-term senior promissory notesrequired a stand-by letter of credit as guarantee for future rent in the aggregate principal amount of $1.0 million$0.4 million. As of December 31, 2019, long-term restricted cash related to the Santa Monica lease totaled $0.4 million.five-year warrants to purchase up to an aggregate of 318,182 shares of our common stock, at an exercise price of $1.10 per share. 3In December 2016, we exchanged the subscription agreement with Shamus, which had an aggregate outstanding principal amount of $1.0 million, for (i) 8% Convertible Debenturesrestricted cash total as presented in the same principal amount due on March 15, 2017 (the “Debentures”) and (ii) five-year warrants to purchase sharesconsolidated statement of the Company’s common stock in amount equal to forty percent (40%) of the initial number of shares of common stock issuable, or 363,636 warrants, upon conversion of each, at an exercise price of $1.10 per share. In addition, in December 2016, we entered into an agreement with Shamus pursuant to which we received gross proceeds of $300,000cash flows for the sale of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “December 2016 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to seventy-five percent (75%) of the initial number of shares of common stock issuable, or 264,706 warrants, upon the conversion of the December 2016 Convertible Debenture, at an exercise price of $0.85 per share (the “Shamus Warrants”).Shamus entered into securities purchase agreements during the fiscal years ended December 31, 20152019 and received approximately 956,667 shares of common stock in exchange for gross proceeds of approximately $287,000.Note 10.Short-term DebtIn April 2015, we entered into a Securities Purchase Agreement with several institutional accredited investors, pursuant to which we received aggregate gross proceeds of $2.0 million from the investors for the sale of approximately $2.12 million principal amount of 12% Original Issue Discount Convertible Debentures due January 18, 2016 (the “April 2015 Bridge Notes”) and the April 2015 Warrants. The closing of the April 2015 Bridge Notes transaction occurred on April 17, 2015. We received aggregate net proceeds of $1,815,000. We used $560,000 of the net proceeds to repay our outstanding indebtedness due to Acuitas incurred by way of short term, interest free loans in the first and second quarters of 2015.The conversion price of the April 2015 Bridge Notes and the exercise price of the April 2015 Warrants was $2.00 per share, subject to adjustment, including for issuances of common stock and common stock equivalents below the then current conversion or exercise price, as the case may be. The April 2015 Bridge Notes were unsecured, bear interest at a rate of 12% per annum payable quarterly in cash or shares of common stock, subject to certain conditions, at our option, and were subject to mandatory prepayment upon the consummation of certain future financings. The exercise price of the April 2015 Warrants was subsequently adjusted to $0.30 per share based upon the September Offering.In July 2015, we entered into a promissory note with Acuitas, pursuant to which we received gross proceeds of $3.35 million for the sale of $3.35 million in principal amount (the “Promissory Note”). The Promissory Note was due on August 21, 2015, and carried an interest rate on any unpaid principal amount of 8% per annum until the maturity date, after which the interest rate would increase to 12% per annum. We used approximately $2.2 million of the net proceeds of this transaction to redeem the April 2015 Bridge Notes. Following the redemption, all of the April 2015 Bridge Notes were extinguished.In July 2015, we issued the July 2015 Convertible Debenture and the July 2015 Warrants for the Promissory Note.The conversion price of the July 2015 Convertible Debenture was $1.90 per share, subject to adjustments, including for issuances of common stock and common stock equivalents below the then current conversion or exercise price, as the case may be. The July 2015 Convertible Debentures are unsecured, bear interest at a rate of 12% per annum payable in cash or shares of common stock, subject to certain conditions, at our option, and are subject to mandatory prepayment upon the consummation of certain future financings. The conversion price of the July 2015 Convertible Debenture and the exercise price of the July 2015 Warrants were subsequently adjusted to $0.30 per share based upon the September Offering.In October 2015, we amended the July 2015 Convertible Debenture which extended the maturity date of the July 2015 Convertible Debenture from January 18, 2016 to January 18, 2017 and extended the date we must consummate a public offering from December 31, 2015 to June 30, 2016. In accordance with ASC 470-50, Debt Modifications and Extinguishments, we recognized a $195,000 loss on extinguishment of debt in connection with the loan modification.In March 2016, we entered into a promissory note with Acuitas Group Holdings, LLC (“Acuitas”), pursuant to which we received aggregate gross proceeds of $900,000 for the issuance of the note with a principal amount of $900,000 (the “March 2016 Promissory Note”). The March 2016 Promissory Note is due within 30 days of demand by Acuitas (the “Maturity Date”), and carries an interest rate on any unpaid principal amount of 8% per annum until the Maturity Date, after which the interest will increase to 12% per annum. In addition, we issued Acuitas five-year warrants to purchase an aggregate of 450,000 shares of our common stock, at an exercise price of $0.47 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “March 2016 Warrants”). The number of warrants were subsequently increased to 640,909 and the exercise price of the March 2016 Warrants was subsequently reduced to $0.33 per share based upon the May 2016 Promissory Note.In April 2016, we amended and restated the March 2016 Promissory Note to increase the principal amount by $400,000, for a total of $1.3 million (the “April Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 200,000 shares of our common stock, at an exercise price of $0.47 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “April 2016 Warrants”). The number of warrants were subsequently increased to 284,848 and the exercise price of the April 2016 Warrants was subsequently reduced to $0.33 per share based upon the May 2016 Promissory Note.In May 2016, we amended and restated the April 2016 Promissory Note to increase the principal amount by $405,000, for a total of $1.7 million (the “May Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 306,818 shares of our common stock, at an exercise price of $0.33 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “May 2016 Warrants”).In June 2016, we amended and restated the May 2016 Promissory Note to increase the principal amount by $480,000, for a total of $2.2 million (the “June 2016 Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 363,636 shares of our common stock, at an exercise price of $0.33 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “June 2016 Warrants”).2019 2018 Cash and cash equivalents $ 13,610 $ 3,091 Restricted cash (current and long-term) 408 479 Total cash, cash equivalents and restricted cash $ 14,018 $ 3,570 In July 2016, we amended and restated the June 2016 Promissory Note to increase the principal amount by $570,000, for a total of $2.8 million (the “July 2016 Promissory Note”). In connection with the amendment, we issued Acuitas five-year warrants to purchase an additional 431,818 shares of our common stock at an exercise price of $0.33 per share, which warrants include, subject to certain exceptions, a full-ratchet anti-dilution protection (the “July 2016 Warrants”).In August 2016, Acuitas loaned us $225,000. No terms were discussed nor were any agreements executed in connection with such loan, but the $225,000 was paid back out of the August 2016 Notes.In August 2016, we entered into subscription agreements (each, the “Subscription Agreement”) with three accredited investors, including Shamus, (collectively, the “Investors”), pursuant to which we issued to the Investors short-term senior promissory notes in the aggregate principal amount of $2.8 million (the “August 2016 Notes”) and five-year warrants to purchase up to an aggregate of 875,000 shares of our common stock, at an exercise price of $1.10 per share (the “August 2016 Warrants”).The August 2016 Warrants include price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the August 2016 Warrants will be adjusted, in the event we issue shares of our common stock for consideration per share less than the then exercise price of the August 2016 Warrants, to the lowest consideration per share for the shares issued or sold in such transaction. The price protection will be in effect until the earliest of (i) the termination date of the August 2016 Warrants, (ii) such time as the Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.In addition, in August 2016, Acuitas agreed to exchange its July 2016 Promissory Note for a short-term senior promissory note in the aggregate principal amount of $2.8 million including accrued interest, in the form substantially identical to the form of the August 2016 Notes. Acuitas also agreed to exchange certain of its outstanding warrants to purchase an aggregate 2,028,029 shares of our common stock at an exercise price of $0.33 per share for warrants to purchase an aggregate 2,993,561 shares of common stock at an exercise price of $1.10 per share. In December 2016, we exchanged the August 2016 Notes issued to the Investors, which had an aggregate outstanding principal amount of $5.6 million, for (i) 8% Convertible Debentures in the same principal amount due on March 15, 2017 (the “Debentures”) and (ii) five-year warrants to purchase shares of the Company’s common stock in amount equal to forty percent (40%) of the initial number of shares of common stock, or 2,022,835 warrants, issuable upon conversion of each Investor’s Debentures, at an exercise price of $1.10 per share (the “December 2016 Warrants”). The December 2016 Warrants include a price protection provision pursuant to which, subject to certain exempt issuances, the then exercise price of the December 2016 Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the December 2016 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the December 2016 Warrants, (ii) such time as the December 2016 Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.In December 2016, we entered into an agreement with Shamus pursuant to which the Company received gross proceeds of $300,000 for the sale of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “December 2016 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to seventy-five percent (75%) of the initial number of shares of common stock, or 264,706 warrants, issuable upon the conversion of the December 2016 Convertible Debenture, at an exercise price of $0.85 per share (the “Shamus Warrants”).The Shamus Warrants include price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the Shamus Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the Shamus Warrants. Such mechanism will remain in effect until the earliest of (i) the termination date of the Shamus Warrants, (ii) such time as the Shamus Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.Note11. Subsequent EventsFinancing Activities In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas, pursuant to which the Company will receive aggregate gross proceeds of $1,300,000 (the “Loan Amount”) in consideration of the issuance of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “January 2017 Convertible Debenture”) and (ii) five-year warrants to purchase shares of the Company’s common stock in an amount equal to one hundred percent (100%) of the initial number of shares of common stock issuable upon the conversion of the January 2017 Convertible Debenture, at an exercise price of $0.85 per share (the “January 2017 Warrants”). The Loan Amount is payable in tranches through March 2017. In addition, any warrants issued in conjunction with the December 2016 Convertible Debenture currently outstanding with Acuitas have been increased by an additional 25% warrant coverage, exercisable for an aggregate of 827,293 shares of the Company’s common stock. The January 2017 Warrants include, among other things, price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the January 2017 Warrants will be adjusted if the Company issues shares of common stock at a price that is less than the then exercise price of the January 2017 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the January 2017 Warrants, (ii) such time as the January 2017 Warrants are exercised or (iii) contemporaneously with the listing of the Company’s shares of common stock on a registered national securities exchange. In connection with the Subscription Agreement described above, the number of Shamus Warrants were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 352,941 shares of the Company’s common stock.2017 Stock Incentive PlanOn February 27, 2017, the Board of Directors and our stockholders approved the adoption of the 2017 Stock Incentive Plan (the “2017 Plan”). The 2017 Plan allows the Company, under the direction of the Board of Directors or a committee thereof, to make grants of stock options, restricted and unrestricted stock and other stock-based awards to employees, including the Company’s executive officers, consultants and directors. The 2017 Plan allows for the issuance of up to 14,000,000 additional shares of Common Stock pursuant to new awards granted under the 2017 Plan and up to approximately 1,500,000 shares of Common Stock that are represented by options outstanding under the 2010 Plan (defined below) that are forfeited, expire or are cancelled without delivery of shares of Common Stock or which result in the forfeiture of shares of Common Stock back to the Company.This description is qualified in its entirety by reference to the actual terms of the 2017 Plan, a copy of which is attached as Exhibit B to the Company’s preliminary Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on February 28, 2017. F-24