Item 1.Financial Statements

CATASYS,, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

* The financial statements have been retroactively restated to reflect the 1-for-6 reverse-stock split that occurred on April 25, 2017

See accompanying notes to theconsolidated financial statements.

CATASYS,, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

*TheSee notes to consolidated financial statements have been retroactively restated to reflect the 1-for-6 reverse-stock split that occurred on April 25, 2017.statements.

CATASYS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'DEFICIT

(in thousands, except share and per share data)

(unaudited)

See accompanying notes to theconsolidated financial statements.

CATASYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See notes to consolidated financial statements.

CATASYS, INC. AND SUBSIDIARIES

CONDENSEDNOTES TO CONSOLIDATED STATEMENT OF CASH FLOWSFINANCIAL STATEMENTS

(unaudited)

See accompanying notes to the financial statements.

Catasys, Inc.Note 1.   Basis of Consolidation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)Presentation

Note 1. BasisWe 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.  Our mission is to help improve the health and save the lives of Consolidationas many people as possible. 

We apply advanced data analytics and Presentation predictive modeling to identify members with untreated behavioral health conditions, whether diagnosed or not, and coexisting medical conditions that may be impacted through treatment in the OnTrak program.  We then uniquely engage health plan 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 is an 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, demonstrating reduced medical utilization, driving a reduction in total health plan costs for enrolled members.

The accompanying unaudited condensedconsolidated financial statements include Catasys, Inc. and its wholly-owned subsidiaries and variable interest entities. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements for Catasys, Inc. and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and instructions to Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto included in our most recent Annual Report on Form 10-K for the year-ended December 31, 2016,2018, from which the balance sheet, as of December 31, 2016,2018, has been derived. Certain prior period amounts reported in consolidated financial statements and notes have been derived.reclassified to conform to current period presentation.

As of March 31, 2019, cash and restricted cash was $1.7 million and we had a working capital deficit of approximately $2.6 million. We could continue to incur negative cash flows and operating losses for the next twelve months. Our average cash burn rate is approximately $1.5 million per month including a one-time delay in customer collections totaling approximately $925,000. We expect our current cash resources and available borrowings (see Note 8) to cover expenses through at least the next twelve months, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

Our ability to fund ongoing operations is dependent on several factors. We aim to increase the number of members that are eligible for our solutions by signing new contracts and identifying more eligible members in existing contracts. Additionally, our funding is dependent upon the success of management’s plan to increase revenue and control expenses. We currently operate our OnTrak solutions in twenty-four states. 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 programs and expect to increase enrollment and fees throughout 2019.

Management’s Plans

Historically, we have seen 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.

We have a growing customer base and believe we are able to fully scale our operations to service the contracts and future enrollment providing leverage in these investments that we expect will generate positive cash flow by the end of 2019. We believe we will have sufficient capital to cover expenses through the foreseeable future and we will continue to monitor liquidity. In the event 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 will seek to finance these options.

CATASYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

CATASYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

CATASYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9. Fair Value Measurements

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

The following table summarizestables summarize fair value measurements by level at September 30, 2017March 31, 2019 and December 31, 2018, respectively, for assets and liabilities measured at fair value:

Financial instruments classified as Level III in the fair value hierarchy as of September 30, 2017, represent our liabilities measured at market value on a recurring basis which include warrant liabilities resulting from recent debt financing. In accordance with current accounting rules, the warrant liabilities with anti-dilution protection are being marked-to-market each quarter-end until they are completely settled or expire. The warrants are valued using the Black-Scholes option-pricing model, using both observable and unobservable inputs and assumptions consistent with those used in our estimate of fair value of employee stock options. See Warrant Liabilities below.basis:

The following table summarizes our fair value measurements using significant Level III inputs, and changes therein, for the three and nine months ended September 30, 2017:

(1)	$408,000 is included in restricted cash, long term on our balance sheet as of March 31, 2019.

Property and Equipment

Property and equipment 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 lives of the related assets, which range from two to seven years for furniture and equipment. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease term, which is typically five to seven years.

Warrant Liabilities

In March 2017, we entered into amendments with the holders of certain outstanding warrants issued on April 17, 2015 and July 30, 2015 to eliminate certain anti-dilution provisions in such warrants, which caused us to reflect an associated liability of $5.3 million on our balance sheet as of December 31, 2016. Such amendments were contingent upon and did not take effect until the closing of the public offering. For each warrant share underlying the warrants so amended, the holder received the right to purchase an additional .2 shares of common stock. Two of the holders of such warrants, which owners hold warrants to purchase an aggregate of 11,049 shares of common stock, did not agree to the amendment. The warrant holders agreeing to the amendment include Acuitas and another accredited investor, who received additional warrants to purchase 31,167 and 13,258 shares of our common stock. In addition, several warrant agreements that had anti-dilution protection had a provision in the agreement that upon an up-listing to NASDAQ, the anti-dilution protection would be removed. The up-listing to NASDAQ occurred on April 26, 2017. The elimination of the anti-dilution provision resulted in the write-off of $6.2 million of the warrant liability as of September 30, 2017.

        In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas, pursuant to which we received 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 our 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 $5.10 per share (the “January 2017 Warrants”). 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 137,883 shares of the Company’s common stock. Acuitas agreed to extend the maturity date of the January 2017 Convertible Debenture to April 30, 2017 or until we completes a public offering, whichever came first. In April 2017, we used the net proceeds from the public offering to repay the Loan Amount including interest of $1.3 million.

(2)	$71,000 is included in cash and restricted cash and $408,000 is included in restricted cash, long term on our balance sheet as of December 31, 2018.

       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 we issue shares of our 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 our shares of common stock on a registered national securities exchange.CATASYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       In connection with the Subscription Agreement described above, the number of Shamus warrants issued as part of the December 2016 Convertible Debenture were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 14,706 shares of the Company’s common stock.(unaudited)

The following is a rollforward of our warrant liabilities were calculated using the Black-Scholes model based upon the following assumptions:liabilities:

We have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, December 2016, January 2017, February 2017, March 2017, April 2017, and June 2017. Some of the warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in some warrants that protect the holders from declines in 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.

ForFor the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we recognized a loss of $2,000$91,000 and a gain of $1.8 million, respectively, compared with a gain of $1.4 million and $673,000 for the same periods in 2016,$10,000, respectively, related to the revaluation of our warrant liabilities.

Derivative Liability

In July 2015,connection with the Amended Loan Agreement, 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 is $11.40 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.  In October 2016, we entered into an amendment of the July 2015 Convertible Debenture which extended the maturity date of the 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 $1.80 per share. 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. Acuitas agreed to extend the maturity date of the July 2015 Convertible Debenture to April 30, 2017 or until we completed a public offering, whichever came first. In April 2017, the July 2015 Convertible Debenture was converted into 2,385,111 shares of common stock and the derivative liability was written off.

For the three and nine months ended September 30, 2017, we recognized a gain of $0 and $132,000, respectively, compared with a loss of $3.5 million and $6.3 million for the same periods in 2016, related to the revaluation of our derivative liability.

Recently Issued or Newly Adopted Accounting Standards

In April 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-10, Revenue from Contracts with Customers (Topic 606)(“ASU 2016-10”), 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. We are currently evaluating the potential impact of this standard on our consolidated financial statements, as well as the available transition methods. We are currently assessing whether the adoption of ASU 2016-10 will have a material effect on our consolidated financial position or results of operations.

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 beginning 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 position or results of operations.

Note 3. Related Party Disclosure

In January 2017, we entered into the Subscription Agreement with Acuitas pursuant to which we received aggregate gross proceeds of $1.3 million andHorizon 40,279 seven-year warrants to purchase 254,904 shares of common stock. In April 2017, we used the net proceeds from the public offering to repay the Loan Amount including interest of $1.3 million. 

In January 2017, in connection with the Subscription Agreement described above, the number of Acuitas warrants issued as part of the December 2016 Convertible Debenture were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 137,883 shares$600,000 (depending on the level of our common stock.

In March 2017, we entered into an amendment with Acuitas of certain outstanding warrants issued in July 2015 to eliminate certain anti-dilution provisions in such warrants. Such amendment was contingent upon and did not take effect untilavailability under the closing ofLoan Agreement) at the public offering. For each warrant share underlying the warrants so amended, the holder received the right to purchase an additional .2 shares of common stock. Acuitas received additional warrants to purchase 31,167 sharestrailing volume weighted average price of our common stock on the NASDAQ Capital Market for the five days preceding the relative dates of grants (the “Horizon Warrants”) 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 April 2017.

an equity financing during the 18 months following the agreement date (“Horizon Warrants”). In April 2017, Acuitas purchased 181,154 sharesno event will we be required to issue more than 19.9% of our currently outstanding common stock pursuant to the Horizon Warrants. In addition, the Horizon Warrant agreement provides for $869,539 in proceeds in connection withadditional warrant shares to be issued, contingent on additional borrowings under the public offering.

In April 2017, Acuitas converted its July 2015 convertible debenture totaling $4.3 million of principalRevolving Loan, and interest into 2,385,111 shares of common stock.

In April 2017, we used net proceeds from the public offeringdetermined by reference to repay Acuitas the December 2016 8% convertible debenture with accrued interest of $2.9 million.

In April 2017, Terren S. Peizer agreed to settle his deferred salary balance of $1.1 million for 233,734 shares ofa future common stock, resulting in a loss on settlement of liability totaling $83,807 recorded to loss on issuance of common stock.

In addition, we have accounts payable outstanding with Mr. Peizer for travel and expenses of approximately $223,000 price (5-day VWAP when the condition is met).  We adopted, ASU, No. 2017-11, as of September 30, 2017.

       In January 2017, in connection with the Subscription Agreement described above,1, 2019. However, given the number of Shamus warrants issuedvariable features, the Horizon Warrants have been classified as parta liability at the time of issuance and as of March 31, 2019 in accordance with ASC 815. We valued the Horizon Warrants using a Monte Carlo model and the fair value of the December 2016 Convertible DebentureHorizon Warrants were increased from 75%recorded as a discount to 100% warrant coverage, exercisable for an aggregate of 14,706 shares of our common stock.the debt obligation.

In March 2017, Shamus converted $1.3 million of their December 2016 Convertible Debentures and accrued interest for 276,204 shares of our common stock.The key assumptions used to value the Horizon Warrants were as follows:

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements, including the related notes, and the other financial information included elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report and our annual report filed on Form 10-K for the year ended December 31, 2016.2018.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATIONSTATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for our stock and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements, including, without limitation, those relating to the future business prospects, our revenue and income, wherever they occur, are necessarily estimates reflecting the best judgment of our senior management as of the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 20162018 and other reports we filed with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We assume no obligation and do not intend to update these forward lookingforward-looking statements, except as required by law.

OVERVIEWAll references to “Catasys,” “Catasys, Inc.” “we,” “us,” “our” or the “Company” mean Catasys, Inc., wholly-owned subsidiaries and variable interest entities, except where it is made clear that the term means only the parent company.

OVERVIEW

General

We provide harness proprietary big data basedpredictive 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.

We apply advanced data analytics and predictive modeling drivento identify members with untreated behavioral health conditions, whether diagnosed or not, and coexisting medical conditions that may be impacted through treatment in the OnTrak program. We then uniquely engage health plan members who do not typically seek behavioral healthcare services to health plans through our OnTrak solution.by leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Our technology enabled 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.

We have contracted with leading national and regional health plans to the insurer for underserved populations where behavioral health conditions are causing or exacerbating co-existing medical conditions. The program utilizes proprietary analytics and proprietary enrollment, engagement and behavioral modification capabilities to assist members who otherwise do not seek care through a patient centric treatment that integrates evidence-based medical and psychosocial interventions along with care coaching in a 52-week outpatient solution. 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 ourmake OnTrak solutionsavailable to eligible members in Alabama, California, Connecticut, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, Missouri, Nebraska, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin.Wisconsin 

Recent Developments

In March 2019, we entered into an amended and restated venture loan and security agreement (as so amended and restated, the “Amended Loan Agreement”) with Horizon, which provides for up to $15.0 million in loans to us, including initial term loans in the amount of $7.5 million previously funded under the original Loan Agreement entered into in June 2018 and an additional up to $7.5 million loan in three revolving tranches of $2.5 million in availability, subject to our achievement of trailing three month billings exceeding $5.9 million, $7.0 million and $8.0 million, respectively.  An initial advance of $2.5 million was funded upon the execution and delivery of the Amended Loan Agreement, subject to repayment if the foregoing $5.9 million threshold is not reached by July 1, 2019.  We provide servicesconcurrently entered into an amendment to commercial (employer funded), managed Medicare Advantage,the previously disclosed $2.5 million A/R Facility with Heritage intended primarily to reflect the amendment and managed Medicaid and duel eligible (Medicare and Medicaid) populations.restatement of the Amended Loan Agreement.

Recent Developments

Amendments to Outstanding Warrants and Extension of Existing Debentures

In March 2017,connection with our entry into the Amended Loan Agreement, we entered into amendments with the holders of certain outstanding warrants issued on April 17, 2015 and July 30, 2015 to eliminate certain anti-dilution provisions in such warrants, which caused us to reflect an associated liability of $5.3 million on our balance sheet as of December 31, 2016. Such amendments were contingent upon and did not take effect until the closing of the public offering described below. For each warrant share underlying the warrants so amended, the holder received the right to purchase an additional .2 shares of common stock. Two of the holders of such warrants, which owners holdHorizon 40,921 warrants to purchase an aggregate of 11,049 shares of common stock did not agreewith an aggregate value of up to $600,000 (depending on the amendment. The warrant holders agreeing tolevel of availability under the amendment include Acuitas and another accredited investor, who received additional warrants to purchase 31,167 and 13,258 sharesLoan Agreement) at the trailing volume weighted average price of our common stock.stock on the NASDAQ Capital Market for the five days preceding the relative dates of grants (the “Horizon Warrants”). In addition, several warrant agreements that had anti-dilution protection had a provision inno event will the agreement that upon an up-listingCompany be required to NASDAQ, the anti-dilution protection would be removed. The up-listing to NASDAQ occurred on April 26, 2017. The eliminationissue more than 19.9% of the anti-dilution provision resulted in the write-off of $6.9 million of the warrant liability as of September 30, 2017.

Reverse Stock Split

On April 21, 2017, we filed a certificate of amendment to our Certificate of Incorporation, as amended and in effect, with the Secretary of State of the State of Delaware implementing a 1-for-6 reverse stock split of the Company'sits currently outstanding common stock pursuant to which each 6 shares of issued and outstanding common stock converted into 1 share of common stock. Proportionate voting rights and other rights of common stock holders were not affected by the reverse stock split.  No fractional shares of common stock were issued as a result of the reverse stock split; stockholders were paid cash in lieu of any such fractional shares.Horizon Warrants. The 1-for-6 reverse stock split became effective at 5:00 p.m., Eastern Time, on April 24, 2017, and our common stock began trading on the OTCQB Marketplace on a post-split basis at the open of trading on April 25, 2017. Our post-reverse split common stock has a new CUSIP number: 149049 504. Other terms of the common stock were not affected by the reverse stock split.  The common stock will continue to trade under the symbol "CATS." 

All stock options and warrants to purchase common stock outstanding and our common stock reserved for issuance under our equity incentive plans immediately prior to the reverse stock split were appropriately adjusted by dividing the number of affected shares of common stock by six and, as applicable, multiplying the exercise price by six as a result of the reverse stock split.

Public Offering

On April 25, 2017, we entered into an underwriting agreement with Joseph Gunnar & Co., LLC (“Joseph Gunnar”), as underwriter in connection with a public offering of our securities. Pursuant to the underwriting agreement, we agreed to issue and sell an aggregate of 3,125,000 shares of common stock at a public offering price of $4.80 per share and the purchase price to the underwriter after discounts and commissions was $4.464 per share. The closing of the offering occurred on April 28, 2017.

Pursuant to the underwriting agreement, we issued to the underwriter a warrant for the purchase of an aggregate of 156,250 shares of common stock for an aggregate purchase price of $100. The exercise price of the warrantHorizon Warrants is equal to 125% of the public offering price in the offering, or $6.00 per share of common stock.

NASDAQ Uplisting

In connection with the public offering, our common stock began trading on the Nasdaq Capital Market under the symbol “CATS” beginning on April 26, 2017.

Exercise of Over-Allotment Option

Pursuant to the underwriting with Joseph Gunnar dated April 25, 2017, we granted the underwriters a 45-day over-allotment option to purchase up to 468,750 additional shares of common stock at the public offering price less the applicable underwriter discount. On May 2, 2017, the underwriter acquired an additional 303,750 shares pursuant to such over-allotment option.

Operations

        We currently operate our OnTrak solutions in Connecticut, 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 programs and expect to launch additional customers and increase enrollment and fees throughout 2017. However, there can be no assurance that we will generate such fees or that new programs will launch as we expect.$9.93.

RESULTS OF OPERATIONS

Table of Summary Consolidated Financial Information

The table below and the discussion that follows summarize our results of consolidated operations for the three and nine months ended September 30, 2017 compared to the threeMarch 31, 2019 and nine months ended September 30, 2016:2018:

Summary of Consolidated Operating Results

Loss from operations before provision for income taxes for the three and nine months ended September 30, 2017 was $3.1 million and $10.9 million, compared with a net loss of $7.4 million and $16.4 million for the same periods in 2016, respectively. The difference primarily relates to the change in fair value of warrant liability and derivative liability for the three and nine months ended September 30, 2017, compared to the same periods in 2016.

Revenues

During the ninethree months ended September 30, 2017,March 31, 2019, we have expanded OnTrak for one customer into two new lines of business, another customer expanded into their largest state by membership, and launched enrollment with aone new health plan in Oklahoma. In addition, atPennsylvania and continued to increase enrollment. Since the endthree months ended March 31, 2018 we have signed new contracts with two new health plans, expanded with several of our current health plans into new service lines, and expanded with new and existing health plans from 19 to 22 states. For the second quarter 2017 we saw a significant increase in our eligible member population as a result of another customer with programs in eight states resolving a previous data extraction issue. That increase in eligible membership is expected to primarily impact future quarters. These expansions were offset to some extentthree months ended March 31, 2019, net enrollment increased by two customers exiting certain health exchange and Medicaid markets, and one customer suspending new enrollments. Overall, there was a net increase in the number of patients enrolled in our solutions compared withapproximately 97% over the same period in 2016. Enrolled members as of September 30, 2017 was 33% greater than September 30, 2016. Recognized revenue decreased by $141,000 and increased by $1.4 million, or (11)% and 42%, for the three and nine months ended September 30, 2017, compared with the same periods in 2016, respectively. 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 increased by $1.7 million from December 31, 2016.2018.

Cost of Healthcare ServicesRevenue

Cost of healthcare servicesrevenue consists primarily of salaries related to our care coaches, outreach specialists, healthcare provider claims payments to our network of physicians and psychologists, and fees charged by our third partythird-party administrators for processing these claims.  The increase of $411,000 and $979,000 for the three and nine months ended September 30, 2017,March 31, 2019, compared with the same periods in 2016, respectively,2018, relates primarily 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. 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 Costcost of Healthcare Serviceshealthcare services during training and ramp-up periods.

General and Administrative Operating Expenses