10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

Commission File Number 001-31932  

_______________________

CATASYS, INC.

(Exact name of registrant as specified in its charter)

_______________________

Delaware	88-0464853
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2120 Colorado Ave., Suite 230, Santa Monica, CA 90404

(Address of principal executive offices, including zip code)

(310) 444-4300

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	CATS	The NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,’’ “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

As of November 13, 2019, there were 16,585,199 shares of the registrant's common stock, $0.0001 par value per share, outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			3
	ITEM 1. Condensed Consolidated Financial Statements (unaudited)		3
		Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	4
		Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2019 and 2018	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	6
		Notes to Condensed Consolidated Financial Statements	7
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		16
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		20
	ITEM 4. Controls and Procedures		20
PART II - OTHER INFORMATION			21
	ITEM 1. Legal Proceedings		21
	ITEM 1A. Risk Factors		21
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
	ITEM 3. Defaults Upon Senior Securities		23
	ITEM 4. Mine Safety Disclosures		23
	ITEM 5. Other Information		24
	ITEM 6. Exhibits		24

In this Quarterly Report on Form 10-Q, all 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. The Company’s common stock, par value $0.0001 per share, is referred to as “common stock.”

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

CATASYS, INC

CONDENSED CONSOLIDATED BALANCE SHEETS

 (in thousands, except share and per share data)

(unaudited)

	September 30,			December 31,
	2019			2018
Assets
Current assets:
Cash and restricted cash	$	15,900		$	3,162
Receivables, net		2,272			1,382
Unbilled receivables		2,090			-
Prepaid expenses and other current assets		791			1,108
Total current assets		21,053			5,652
Long-term assets:
Property and equipment, net		175			263
Restricted cash, long-term		408			408
Right-of-use assets		2,814			-
Total assets	$	24,450		$	6,323
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable	$	1,111		$	497
Accrued compensation and benefits		1,784			1,537
Deferred revenue		3,708			4,195
Current portion of lease liabilities		359			-
Other accrued liabilities		2,551			1,501
Total current liabilities		9,513			7,730
Long-term liabilities:
Long-term debt, net		29,868			7,472
Long-term lease liabilities		2,120			-
Warrant liabilities		670			86
Total liabilities		42,171			15,288
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; 16,585,199 and 16,185,146 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		2			2
Additional paid-in capital		304,906			296,688
Accumulated deficit		(322,629	)		(305,655	)
Total stockholders' deficit		(17,721	)		(8,965	)
Total liabilities and stockholders' deficit	$	24,450		$	6,323

See notes to condensed consolidated financial statements.

3

CATASYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	8,845		$	4,369		$	23,337		$	9,553
Cost of revenue		6,119			3,237			13,511			8,465
Gross profit		2,726			1,132			9,826			1,088
Operating expenses		8,322			5,179			22,844			13,527
Operating loss		(5,596	)		(4,047	)		(13,018	)		(12,439	)
Other income / (expense)		(2,550	)		-			(2,536	)		40
Interest expense		(590	)		(241	)		(1,382	)		(278	)
Change in fair value of warrant liability		173			(65	)		(38	)		(94	)
Net loss	$	(8,563	)	$	(4,353	)	$	(16,974	)	$	(12,771	)
Net loss per share, basic and diluted from operations:	$	(0.52	)	$	(0.27	)	$	(1.04	)	$	(0.80	)
Weighted-average shares used to compute basic and diluted net loss per share		16,562			15,917			16,360			15,909

 See notes to condensed consolidated financial statements.

4

CATASYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(in thousands, except share and per share data)

(unaudited)

					Additional
	Common Stock				Paid-In		Accumulated			Total Stockholders'
	Shares		Amount		Capital		Deficit			Deficit
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
Warrant exercised for cash		232,461		-		1,128		-			1,128
Stock option exercised for cash		164,385		-		1,660		-			1,660
Stock compensation expense		3,207		-		2,947		-			2,947
Net loss		-		-		-		(16,974	)		(16,974	)
Balance at September 30, 2019		16,585,199	$	2	$	304,906	$	(322,629	)	$	(17,721	)

					Additional
	Common Stock				Paid-In		Accumulated			Total Stockholders'
	Shares		Amount		Capital		Deficit			Deficit
Balance at June 30, 2019		16,536,992	$	2	$	301,909	$	(314,066	)	$	(12,155	)
Warrants issued in connection with 2024 notes		-		-		2,354		-			2,354
Warrant exercised for cash		20,000		-		100		-			100
Stock option exercised for cash		25,000		-		187		-			187
Stock compensation expense		3,207		-		356		-			356
Net loss		-		-		-		(8,563	)		(8,563	)
Balance at September 30, 2019		16,585,199	$	2	$	304,906	$	(322,629	)	$	(17,721	)

					Additional
	Common Stock				Paid-In		Accumulated			Total Stockholders'
	Shares		Amount		Capital		Deficit			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 January 1, 2018		15,889,171	$	2	$	294,220	$	(291,443	)	$	2,779
Common stock issued for outside services		24,000		-		112		-			112
Warrants issued for services		-		-		86		-			86
Warrants issued in connection with A/R facility		-		-		64		-			64
Warrant exercised for cash		174,015		-		-		-
Stock compensation expense		-		-		2,024		-			2,024
Net loss		-		-		-		(12,771	)		(12,771	)
Balance at September 30, 2018		16,087,186	$	2	$	296,506	$	(304,214	)	$	(7,706	)

					Additional
	Common Stock				Paid-In		Accumulated			Total Stockholders'
	Shares		Amount		Capital		Deficit			Deficit
Balance at June 30, 2018		15,913,171	$	2	$	295,234	$	(299,861	)	$	(4,625	)
Stock compensation expense		-		-		1,272		-			1,272
Warrant exercised for cash		174,015		-		-		-			-
Net loss		-		-		-		(4,353	)		(4,353	)
Balance at September 30, 2018		16,087,186	$	2	$	296,506	$	(304,214	)	$	(7,706	)

See notes to condensed consolidated financial statements.

5

CATASYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For the Nine Months Ended September 30,
	2019			2018
Cash flows used in operating activities
Net loss	$	(16,974	)	$	(12,771	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		2,947			2,024
Write off of debt issuance costs		1,505			-
Depreciation		108			229
Amortization		449			95
Warrants issued for services		43			86
Change in fair value of warrants		38			94
Common stock issued for consulting services		-			112
Loss on disposal of fixed assets		-			69
Deferred rent		(26	)		(67	)
Changes in operating assets and liabilities:
Accounts payable		614			539
Leases liabilities		575			-
Other accrued liabilities		1,164			410
Prepaids and other current assets		149			3
Deferred revenue		(487	)		3,994
Receivables		(890	)		(1,880	)
Unbilled receivables		(2,090	)		-
Net cash used in operating activities		(12,875	)		(7,063	)
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 GS loan		35,025			-
Debt issuance costs		(2,813	)		(336	)
Debt termination related fees		(1,956	)		-
Proceeds from warrant exercise		1,128			-
Proceeds from options exercise		1,660			-
Capital lease obligations		69			(25	)
Net cash provided by financing activities		25,613			7,139
Net increase in cash and restricted cash		12,738			76
Cash and restricted cash at beginning of period		3,570			4,779
Cash and restricted cash at end of period	$	16,308		$	4,855
Supplemental disclosure of cash flow information:
Right of use asset obtained in exchange for lease obligation	$	2,574		$	-
Interest paid		967			-
Non cash financing and investing activities:
Warrant issued in connection with A/R facility	$	-		$	64
Warrant issued in connection with GS facility		2,354			-
Reclassification of warrant liability to equity upon amendment of the loan agreement		86			-
Warrants issued in connection with revolving loan		-			-
Property and equipment acquired through capital leases		250			-

See notes to condensed consolidated financial statements.

6

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization

Company Overview

Catasys, Inc. (“Catasys” or the “Company”) is a leading Artificial Intelligence (“AI”) and technology-enabled healthcare company whose mission is to help improve the health and save the lives of as many people as possible. The Company’s platform, Catasys PRE^TM (Predict-Recommend-Engage), organizes and automates healthcare data integration and analytics through application of machine intelligence to deliver analytic insights. The PRE Platform predicts people whose chronic disease will improve with behavior change, recommends effective care pathways that people are willing 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.

The Company’s integrated, technology-enabled OnTrak solution, a critical component of the Catasys PRE platform, is designed to identify and treat members with behavioral conditions that cause or exacerbate chronic medical conditions such as diabetes, hypertension, coronary artery disease, chronic obstructive pulmonary disease, and congestive heart failure, which result in high medical costs. The Company has the ability to engage these members, who do not otherwise seek behavioral healthcare, leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. OnTrak integrates evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, along with care coaching and in-market Community Care Coordinators who address the social and environmental determinants of health, including loneliness.

Basis of Presentation

The accompanying unaudited condensed consolidated 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 condensed 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 Article 10 of Regulation S-X. Certain information and note disclosures normally included in the annual condensed consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements included all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto included in the most recent Annual Report on Form 10-K for the year-ended December 31, 2018, from which the balance sheet, as of December 31, 2018, has been derived. The Company operates as one segment. Certain prior period amounts reported in condensed consolidated financial statements and notes have been reclassified to conform to current period presentation.

As of September 30, 2019, cash and restricted cash was $16.3 million and working capital was approximately $11.5 million. The Company could continue to incur negative cash flows and operating losses for the next twelve months, with an average monthly cash burn rate is approximately $1.5 million for the nine months ended September 30, 2019. The Company expects the 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.

The Company’s ability to fund ongoing operations is dependent on several factors. The Company aims to increase the number of members that are eligible for its solutions by signing new contracts and identifying more eligible members in existing contracts. Additionally, the Company’s funding is dependent upon the success of management’s plan to increase revenue and control expenses. The Company currently operates its OnTrak solutions in twenty-seven states. The Company provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and dual eligible (Medicare and Medicaid) populations. The Company generates fees from its launched programs and expect to increase enrollment and fees in the near future.

Management’s Plans

Historically, the Company has experienced net losses, net loss from operations, negative cash flow from operating activities as the Company continues through a period of rapid growth. The accompanying financial statements do not reflect any adjustments that might result if the Company unable to continue as a going concern. The Company has alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding its OnTrak program within existing health plan customers. To support this increased demand for services, the Company has secured additional capital by entering into a note agreement for $45 million to invest in additional headcount and related infrastructure costs needed to support the anticipated growth. The Company has a growing customer base and believe it is able to fully scale operations to service the contracts and future enrollment providing leverage in these investments and expect to generate positive cash flow in the near future.

7

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Recently Adopted Accounting Standards

Effective January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the condensed consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.

In calculating the right-of-use asset and lease liability, the Company elected to combine lease and non-lease components. The Company also elected to exclude short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but no earlier than a company's adoption date of ASC 606. The adoption of this ASU 2018-07 on January 1, 2019 did not have a material impact on its financial statements.

In July 2017, 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.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the financial position or results of operations upon adoption.

In August 2018, the FASB issued Accounting Standard Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes, the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

Note 2. Accounts Receivable

The Company applies the specific identification method for assessing provision for doubtful accounts. There was no allowance for doubtful accounts as of September 30, 2019 and December 31, 2018. 

8

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table is a summary of concentration of credit risk by customer revenues and accounts receivables:

	Three Months Ended September 30,						Nine Months Ended September 30,
Percentage of Revenue	2019			2018			2019			2018
Largest customer		45.6	%		26.5	%		33.6	%		25.7	%
2nd largest customer		15.2	%		20.2	%		20.1	%		23.4	%
3rd largest customer		14.4	%		17.0	%		16.3	%		14.9	%
4th largest customer		10.0	%		13.3	%		12.8	%		11.1	%
Remaining customers		14.8	%		23.0	%		17.2	%		24.9	%
		100.0	%		100.0	%		100.0	%		100.0	%

Percentage of
Accounts Receivable	September 30, 2019			December 31, 2018
Largest customer		54.3	%		31.4	%
2nd largest customer		10.1	%		26.4	%
3rd largest customer		8.8	%		16.1	%
4th largest customer		7.5	%		14.1	%
Remaining customers		19.3	%		12.0	%
		100.0	%		100.0	%

Note 3. Common Stock

Net loss per share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, preferred stock and outstanding stock options and warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

Common equivalent shares, consisting of 5,869,312 and 3,641,785 shares as of September 30, 2019 and 2018, respectively, issuable upon the exercise of stock options and warrants have been excluded from the diluted earnings per share calculation as their effect is anti-dilutive.

	September 30, 2019		September 30, 2018
Warrants to purchase common stock		1,550,975		1,795,246
Options to purchase common stock		4,318,337		1,846,539
Total		5,869,312		3,641,785

Warrant Exercises

The Company had the following exercises of warrants for the nine months ended September 30, 2019:

Exercise Date	Exercise Price		Number of Warrants Exercised		Proceeds Received		Number of Common Shares Issued
January 19	$	5.00		20,000	$	100,000		20,000
May 19	$	4.80		172,461	$	827,813		172,461
June 19	$	5.00		20,000	$	100,000		20,000
August 19	$	5.00		20,000	$	100,000		20,000

9

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Option Exercises

The Company had the following exercises of options for the nine months ended September 30, 2019:

Exercise Date	Exercise Price		Number of Options Exercised		Proceeds Received		Number of Common Shares Issued
April 19	$	7.50		9,479	$	71,093		9,479
May 19	$	10.79		129,906	$	1,401,801		129,906
August 19	$	7.50		25,000	$	187,500		25,000

Note 4. Stock Based Awards

The Company’s 2017 Stock Incentive Plan (the “2017 Plan”), provides for the issuance of up to 2,333,334 shares of common stock and an additional 243,853 shares of common stock that are represented by awards granted under the 2010 Stock Incentive Plan (the “2010 Plan”). In August 2018, at the Company’s Annual Stockholders Meeting, stockholders approved an amendment to the 2017 Plan, among other things, to provide for an additional 1,400,000 shares to be issued in connection with awards granted thereunder (the “2017 Amended Plan”). In February 2019, the Company increased the number of shares in the 2017 Plan by 552,884 shares as allowed in the 2017 Plan for annual increases to the number of shares available under the 2017 Plan. Incentive stock options (ISOs) under Section 422A of the Internal Revenue Code and non-qualified options (NSOs) are authorized under the 2017 Amended Plan. The Company has granted stock options to executive officers, employees, members of the Company’s 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 from the date of grant and employee and Board of Director awards generally vest over three to five years on a straight-line basis. As of September 30, 2019, the Company had 4,268,337 vested and unvested stock options issued to Employees and Directors and 50,000 vested and unvested stock options outstanding issued to Non-Employees. There are 47,349 shares reserved for future awards.

Stock compensation expense for employees and directors was $0.4 and $2.9 million for the three and nine months ended September 30, 2019, respectively, compared with approximately $1.3 million and $2.0 million for the same periods in 2018, respectively.

Stock Options - Employees and Directors

A summary of stock option activity for employees and directors is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding as of December 31, 2018		3,761,259		$	9.44
Granted		740,929			12.59
Forfeited		(69,466	)		7.50
Exercised		(164,385	)		10.10
Outstanding as of September 30, 2019		4,268,337		$	10.02
Options vested and expected to vest as of September 30, 2019		4,268,337		$	10.02
Options vested and exercisable as of September 30, 2019		875,024		$	15.39

As of September 30, 2019, there was $10.7 million of total unrecognized compensation cost related to non-vested stock compensation arrangements granted to employees and directors under the 2017 Amended Plan, which is expected to be recognized over a weighted-average period of approximately 2.7 years.     

10

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Performance-Based and Market-Based Awards

The Company’s Compensation Committee designed a compensation structure to align the compensation levels of certain executives to the performance of the Company through the issuance of performance-based and market-based stock options. The performance-based options vest upon the Company meeting certain revenue targets and the total amount of compensation expense recognized is based on the number of shares that the Company determines are probable of vesting. The market-based options vest upon the Company’s stock price reaching a certain price at a specific performance period and the total amount of compensation expense recognized is based on a monte carlo simulation that factors in the probability of the award vesting. The following table summarizes the Company’s issuance of awards under this structure:

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	1/5 of each Tranche vest annually on December 31 of each calendar year, beginning on December 31, 2018	Fiscal Years 2018, 2019, 2020, 2021 and 2022		642,307	$	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	1/5 of each Tranche vest annually on December 31 of each calendar year, beginning on December 31, 2018	Fiscal Years 2018, 2019, 2020, 2021 and 2022		397,693	$	7.50

During the current quarter, the Company determined that it is not probable to achieve its internal performance targets for the tranche issued for the fiscal year 2019, resulting the reversal of the compensation expense recognized previously for the shares that are not expected to vest. As a result, the Company recognized a reversal of compensation expense related to these performance based awards of ($1.1) million for the three months ended September 30, 2019. The reversal in the three months ended September 30, 2019 resulted in no compensation expense for the nine months ended September 30, 2019.

Stock Options and Warrants - Non-Employees

A summary of warrants activity for non-employees is as follows:

	Number of Warrants			Weighted Average Exercise Price
Outstanding as of December 31, 2018		1,608,996		$	4.71
Issued		228,607			16.00
Expired		(54,167	)		12.46
Exercised		(232,461	)		4.85
Outstanding as of September 30, 2019		1,550,975		$	6.08
Warrants exercisable as of September 30, 2019		1,550,975		$	6.08

There were no warrants issued for the three months ended September 30, 2019 and 4,167 warrants issued in exchange for services for the nine months ended September 30, 2019, compared with none for the three months ended and 24,000 for the nine months ended in 2018. Generally, the costs associated with shares issued for services are amortized to the related expense on a straight-line basis over the related service periods. During the three months ended March 31, 2019 and June 30, 2019, the Company issued Horizon warrants to purchase 51,185 shares of common stock (see Note 7) in connection with the Amended Loan Agreement. On September 24, 2019, the Company issued to Goldman Sachs Special Situations Investing Group II, LLC a warrant (the “Lender Warrant”) to purchase 173,255 shares of common stock at a purchase price of $25,000 in a private placement in connection with the issuance of its 2024 Notes (see Note 6) with an exercise price equal to $17.32 and a termination date of September 24, 2026.

There were not any options issued to non-employees in the three months ended September 30, 2019. There were 50,000 options issued to non-employees at a weighted average exercise price of $9.93 for the nine months ended September 30, 2019 compared with none for the same periods in 2018.

As of September 30, 2019, there was approximately $0.3 million of total unrecognized compensation cost related to non-vested stock compensation arrangements granted to non-employees under the 2017 Amended Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.3 years.

Note 5. Leases

The operating lease agreement for the Company’s Los Angeles, CA office space expired in April 2019, therefore there are no remaining operating lease right-of-use assets or liabilities associated with this office as of September 30, 2019.

11

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In September 2018, the Company signed an operating lease for the new corporate headquarters in Santa Monica, CA (“Santa Monica Headquarters”). The lease agreement includes 7,869 square feet for 60 months commencing in July 2019, which is 30 days following date the premises were ready for occupancy. The base annual rent is approximately $0.6 million subject to annual adjustments.

The Company’s lease liability resulted from the lease of the Santa Monica Headquarters which expires in 2024. This lease does not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. The lease includes renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liability and right-of-use asset as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases.

As of September 30, 2019, the Company has an operating lease liability of approximately $2.3 million and right-of-use asset of approximately $2.5 million, which are included in the condensed consolidated balance sheets.

Quantitative information for the operating lease is as follows: 

	For the Three Months Ended		For the Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating lease expense	$	110	$	277
Short-term lease rent expense		19		36
Total rent expense	$	129	$	313

	For the Three Months Ended		For the Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating cash flows from operating leases	$	75	$	238

	September 30, 2019			September 30, 2019
Weighted-average remaining lease term – operating leases (years)		4.7			4.7
Weighted-average discount rate – operating leases		10.15	%		10.15	%

Maturities of the operating lease liabilities are as follows:

(In thousands)	Amount
Remaining three months ended December 31, 2019	$	143
Year ended December 31, 2020		581
Year ended December 31, 2021		603
Year ended December 31, 2022		623
Year ended December 31, 2023		644
Year ended December 31, 2024		328
Total		2,922
Less present value discount		(627	)
Operating lease liabilities	$	2,295

The Company incurred rent expense of approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively, compared to approximately $0.1 million and $0.2 million for the same periods in 2018, respectively.

The Company entered into financing agreements for computer equipment for $0.3 million.  Interest is expensed straight line over three years. 

12

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6. Debt

2024 Notes

In September 2019, the Company issued $45 million principal amount of notes (the “2024 Notes”) pursuant to a Note 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 issued $35.0 million aggregate principal amount of senior secured 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 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 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 and payable on the fifth anniversary of the Note Agreement unless earlier redeemed upon the occurrence of certain mandatory prepayment events, including with the 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.

The Note Agreement contains customary covenants, including, among others, covenants that restrict the Company’s ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances, and covenants that require the Company to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain its property in good repair, maintain insurance and comply with applicable laws. The Note Agreement also includes covenants with respect to the Company’s maintenance of certain financial ratios, including a fixed charge coverage ratio, leverage ratio and consolidated liquidity as well as minimum levels of consolidated adjusted EBITDA and revenue. The Note Agreement also contains customary events of default, including, among others, payment default, bankruptcy events, cross-default, breaches of covenants and representations and warranties, change of control, judgment defaults and an ownership change within the meaning of Section 382 of the Internal Revenue Code. In the case of an event of default, the Holder may, among other remedies, accelerate the payment of all obligations under the 2024 Notes. Any prepayment of the 2024 Notes or reduction of the purchase commitments made on or prior to the second anniversary of the Closing Date must be accompanied by a yield maintenance premium and on or prior to the third anniversary of the Closing Date must be accompanied by a prepayment premium.

In accounting for the Notes at issuance, the Company separated the Notes into debt and equity components pursuant to the accounting standards. The fair value of the debt component was estimated using an interest rate for debt with terms similar to the Notes. The carrying amount of the equity component was calculated by measuring the fair value based on Black-Scholes model. The gross proceeds from the transaction was allocated between debt and equity based on the proportionate value. The debt discount is accreted to interest expense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as it continues to meet the conditions for equity classification.

The Company is in compliance with all debt covenants as of September 30, 2019.

2022 Loan

In June 2018, the Company entered into a venture loan and security agreement (the “2022 Loan”) which provides for up to $7.5 million in loans to the Company. In March 2019, the 2022 Loan was amended to provide up to $15.0 million in loans to the Company. The Loan Agreement bore interest at a floating coupon rate of the amount by which one-month LIBOR exceeds 2.00% plus 9.75%. Upon the issuance of the 2024 Notes, the balance of the 2022 Loan was repaid and terminated. As part of the termination, the Company incurred $1.1 million of early termination costs and wrote off deferred debt issuance costs of $1.5 million, which has been recorded in other income/(expense) in the consolidated statement of operations.

2024 Notes and 2022 Loan

The net carrying amounts of the liability components consists of the following (in thousands):

	September 30, 2019			December 31, 2018
Principal amount	$	35,000		$	7,950
Unamortized debt discount		(5,132	)		(478	)
Net carrying amount	$	29,868		$	7,472

The following table presents the interest expense recognized (in thousands):

	Three months ended September 30				Nine months ended September 30
	2019		2018		2019		2018
Contractual interest expense	$	434	$	205	$	967	$	210
Amortization of debt issuance costs		102		-		248		-
Accretion of debt discount		54		36		167		68
Total Interest	$	590	$	241	$	1,382	$	278

13

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7. Fair Value Measurements 

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

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

The following tables summarize fair value measurements by level as of September 30, 2019 and December 31, 2018, respectively, for assets and liabilities measured at fair value on a recurring basis:

	Balance as of September 30, 2019
(in thousands)	Level I		Level II		Level III		Total
Certificates of deposits (1)	$	408	$	-	$	-	$	408
Total assets	$	408	$	-	$	-	$	408
Warrant liabilities	$	-	$	-	$	670	$	670
Total liabilities	$	-	$	-	$	670	$	670

(1)  $408,000 is included in restricted cash, long-term on the condensed consolidated balance sheet as of September 30, 2019. 

	Balance as of December 31, 2018
(in thousands)	Level I		Level II		Level III		Total
Letter of credit (2)	$	479	$	-	$	-	$	479
Total assets	$	479	$	-	$	-	$	479
Warrant liabilities	$	-	$	-	$	86	$	86
Total liabilities	$	-	$	-	$	86	$	86

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

The following is a rollforward of the warrant liabilities:

	Level III
	Warrant
(in thousands)	Liabilities
Balance as of December 31, 2018	$	86
Issuance of new warrant liability		632
Change in fair value of warrant liability		38
Reclassification of warrant liability to equity upon adoption of ASU 2017-11		(86	)
Balance as of September 30, 2019	$	670

For the three and nine months ended September 30, 2019, the Company recognized a gain (loss) of $(173,000) and $38,000, respectively compared with approximately $65,000 and $94,000 for the same periods in 2018, respectively, related to the revaluation of our warrant liabilities.

14

CATASYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In March 2019, in connection with the Amended Loan Agreement, the Company issued Horizon 40,279 seven-year warrants to purchase an aggregate of $0.6 million (depending on the level of availability under the Amended Loan Agreement) at the trailing volume weighted average price (“VWAP”) of 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 months following the agreement date.

In May 2019, the Company met the $7.0 million Billing Requirement under the Amended Loan Agreement and incurred an additional $2.5 million revolving loan. In connection with the additional revolving loan, the Company issued Horizon 5,561 seven-year warrants to purchase an aggregate of $0.1 million (depending on the level of availability under the Loan Agreement) at the trailing VWAP of 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) $17.98 or (ii) the price per share of any securities that may be issued by us in an equity financing during the 18 months following the agreement date.

In June 2019, the Company met the $8.0 million Billing Requirement under the Amended Loan Agreement and incurred the final $2.5 million revolving loan. In connection with the additional revolving loan, the Company issued Horizon 5,345 seven-year warrants to purchase an aggregate of $0.1 million (depending on the level of availability under the Loan Agreement) at the trailing VWAP of 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) $18.71 or (ii) the price per share of any securities that may be issued by us in an equity financing during the 18 months following the agreement date (the “Horizon Warrants”).

In no event will the Company be required to issue more than 19.9% of its currently outstanding common stock pursuant to the Horizon Warrants.

The Company adopted ASU 2017-11, as of January 1, 2019. However, given the number of variable features, the Horizon Warrants have been classified as a liability at the time of issuance in accordance with ASC 815. We initially valued the Horizon Warrants using a Monte Carlo model and recorded the fair value of the Horizon Warrants as a discount to the debt obligation. As of September 30, 2019, the Company met all Billing Requirements under the Amended Loan Agreement and we will continue to mark-to-market the warrants each month using the Black-Scholes model.

The key assumptions used to value the Horizon Warrants are as follows:

	September 30, 2019
Expected price volatility	98.0%	-	100.2%
Expected term (in years)	6.5	-	7.0
Risk-free interest rate	1.6%	-	2.3%
Dividend yield		0.0%

Note 8. Variable Interest Entities

The amounts and classification of assets and liabilities of the variable interest entities included in the consolidated balance sheets are as follows:

	September 30,		December 31,
(in thousands)	2019		2018
Cash and cash equivalents	$	469	$	45
Accounts receivable		104		94
Prepaid and other current assets		-		29
Total assets	$	573	$	168
Accounts payable	$	15	$	7
Accrued liabilities		42		14
Intercompany payable		603		147
Total liabilities	$	660	$	168

15

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, 2018.

FORWARD-LOOKING STATEMENTS

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, 2018 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-looking statements, except as required by law.

All 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

Catasys is a leading AI and technology-enabled healthcare company whose mission is to help improve the health and save the lives of as many people as possible. Our PRE (Predict-Recommend-Engage) platform predicts people whose chronic disease will improve with behavior change, recommends effective care pathways that people are willing to follow, and engages people who are not receiving the care they need. By combining predictive analytics with human engagement, we deliver improved member health and validated outcomes and savings to healthcare payers.

Our integrated, technology-enabled OnTrak solution, a critical component of the PRE platform, is designed to treat members with behavioral conditions that cause or exacerbate chronic medical conditions such as diabetes, hypertension, coronary artery disease, chronic obstructive pulmonary disease, and congestive heart failure, which result in high medical costs. We have an ability to engage these members, who do not otherwise seek behavioral healthcare, leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. OnTrak integrates evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, along with care coaching and in-market Community Care Coordinators who address the social and environmental determinants of health, including loneliness.

We have OnTrak available to contracted members of leading national and regional health plans in 27 states in the United States of America.

Key Components of Our Results of Operations

Revenue

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. 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 is recognized over the term of the program, which is typically twelve months.

16

Cost of Revenue

Cost of healthcare services consists primarily of salaries related to our care coaches, member engagement specialists and other staff directly involved in member care, healthcare provider claims payments, and 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. We contract with doctors and licensed behavioral healthcare professionals, on a fee-for-service basis. We determine 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 OnTrak^TM database within the contracted timeframe, with all required billing elements correctly completed by the service provider. 

Operating Expenses

Our operating expenses consists our sales and marketing, research and development and general and administrative expenses. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation and commissions; costs of marketing and promotional events, corporate communications, online marketing, product marketing and other brand-building activities. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses and stock-based compensation; the cost of certain third-party service providers; and allocated overhead. Research and development costs are expensed as incurred. General and administrative expenses consist primarily of personnel and related expenses for administrative, legal, finance and human resource staff, including salaries, benefits, bonuses and stock-based compensation; professional fees; insurance premiums; and other corporate expenses.

Interest Expense

Interest expense consists primarily of interest expense from our loans and notes, accretion of debt discount and amortization of debt issuance costs.

Other Income/(Expense)

Other income/(expense) consists primarily of debt termination costs and write-off of deferred debt issuance costs associated with the loan payoff.

RESULTS OF OPERATIONS

The table below and the discussion that follows summarize our results of condensed consolidated operations:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	8,845		$	4,369		$	23,337		$	9,553
Cost of revenue		6,119			3,237			13,511			8,465
Gross profit		2,726			1,132			9,826			1,088
Gross profit margin		31	%		26	%		42	%		11	%
Operating expenses		8,322			5,179			22,844			13,527
Operating loss		(5,596	)		(4,047	)		(13,018	)		(12,439	)
Other income / (expense)		(2,550	)		-			(2,536	)		40
Interest expense		(590	)		(241	)		(1,382	)		(278	)
Change in fair value of warrant liability		173			(65	)		(38	)		(94	)
Net loss	$	(8,563	)	$	(4,353	)	$	(16,974	)	$	(12,771	)

17

Revenues 

	Three Months Ended September 30,									Nine Months Ended September 30,
(In thousands, except percentages)	2019		2018		Change $		Change %			2019		2018		Change $		Change %
Revenue	$	8,845	$	4,369	$	4,476		102	%	$	23,337	$	9,553	$	13,784		144	%

The increase in revenue for the three months ended September 30, 2019 was substantially driven by the increase in enrollment year over year. During the current quarter, we added 1,458 net new enrolled members, as compared to 316 in the same period of the prior year.

The increase in revenue for the nine months ended September 30, 2019 was substantially driven by the increase in enrollment increases revenue year over year. During the current year to date, we added 2,454 net new enrolled members, as compared to 1,361 in the same period of the prior year.

Cost of Revenue 

	Three Months Ended September 30,									Nine Months Ended September 30,
(In thousands, except percentages)	2019		2018		Change $		Change %			2019		2018		Change $		Change %
Cost of Revenue	$	6,119	$	3,237	$	2,882		89	%	$	13,511	$	8,465	$	5,046		60	%

The increase in cost of revenue for the three months ended September 30, 2019 was substantially driven by an increase of $2.1 million in employee compensation-related costs driven by headcount growth related to our care coaches, member engagement specialists, community care coordinators and other staff. Additionally, the healthcare provider claims payments to our network of physicians and psychologists and fees charged by our third-party administrators for processing these claims increased by $0.5 million.

The increase in cost of revenue for the nine months ended September 30, 2019 was substantially driven by an increase of $3.8 million in employee compensation-related costs driven by headcount growth related to our care coaches, member engagement specialists, community care coordinators and other staff. Additionally, the healthcare provider claims payments to our network of physicians and psychologists and fees charged by our third-party administrators for processing these claims increased by $1.0 million.

All of these cost increases are driven by an increasing customer and member base. In addition, we hire staff in preparation for anticipated future customer contracts and corresponding increases in members eligible for OnTrak.

Operating Expenses

	Three Months Ended September 30,												Nine Months Ended September 30,
(In thousands, except percentages)	2019			2018			Change $			Change %			2019			2018			Change $			Change %
Operating Expenses	$	8,322		$	5,179			3,143			61	%	$	22,844		$	13,527		$	9,317			69	%
% of revenue		94	%		119	%		-25	%					98	%		142	%		-44	%

The increase in operating expenses for the three months ended September 30, 2019 was substantially driven by an increase of $1.6 million in employee compensation-related costs driven by headcount growth related to our investments in data science, software development, information technology, operations and other staff. Additionally, professional consultant expenses increased by $0.6 million and software licenses and equipment costs increased by $0.3 million.

The increase in operating expenses for the nine months ended September 30, 2019 was substantially driven by an increase of $6.4 million in employee compensation-related costs driven by headcount growth related to our investments in data science, software development, information technology, sales, operations and other staff. Additionally, professional consultant expenses increased by $1.3 million and software licenses and equipment costs increased by $0.7 million.

We expect our operating expenses to increase for the foreseeable future as we continue to grow our business but decrease as a percentage of our total revenue over the next several years.

Interest Expense

	Three Months Ended September 30,												Nine Months Ended September 30,
(In thousands, except percentages)	2019			2018			Change $			Change %			2019			2018			Change $			Change %
Interest expense	$	590		$	241		$	349			145	%	$	1,382		$	278		$	1,104			397	%
% of revenue		7	%		6	%		1	%					6	%		3	%		3	%

The increase in interest expense for the three months ended September 30, 2019 is due to the interest and debt discount amortization incurred for the additional tranches of loans entered into in May 2019 and June 2019.

18

The increase in interest expense for the nine months ended September 30, 2019 is due to the interest and debt discount amortization incurred for the Amended Loan Agreement with Horizon in March 2019 and the additional tranches of loans entered into in May 2019 and June 2019.

Other Income/(Expense)

	Three Months Ended September 30,												Nine Months Ended September 30,
(In thousands, except percentages)	2019			2018			Change $			Change %			2019			2018			Change $			Change %
Other income / (expense)	$	(2,550	)	$	-		$	(2,550	)		-100	%	$	(2,536	)	$	40		$	(2,576	)		-6439	%
% of revenue		-29	%		0	%		-29	%					-11	%		0	%		-11	%

The increase in other income/(expense) for the three months ended September 30, 2019 is due to the debt termination costs of $1.1 million and write-off of deferred debt issuance cost of $1.5 million.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

The following table presents a summary of our cash flow activity for the periods set forth below:

	For the Nine Months Ended September 30,
(In thousands)	2019			2018
Net cash used in operating activities	$	(12,875	)	$	(7,063	)
Net cash provided by financing activities	$	25,613		$	7,139
Net increase in cash and restricted cash	$	12,738		$	76

Cash and restricted cash was $16.3 million as of September 30, 2019. As of November 11, 2019, we had a balance of approximately $14.8 million cash on hand. We had working capital surplus of approximately $11.5 million as of September 30, 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 average cash burn rate of approximately $1.5 million per month for the nine months ended September 30, 2019. 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.

In September 2019, we issued $45 million principal amount of notes (the “2024 Notes”) pursuant to a Note Agreement dated September 24, 2019 (the “Note Agreement”) with certain of our subsidiaries party thereto as guarantors, Goldman Sachs Specialty Lending Holdings, Inc. and any other purchasers party thereto from time to time (collectively, the “Holder”). Under the Note Agreement, we initially issued $35.0 million aggregate principal amount of senior secured 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 capitalized during the period ending September 24, 2020. We have 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 and payable on the fifth anniversary of the Note Agreement unless earlier redeemed upon the occurrence of certain mandatory prepayment events, including with the 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.

The Note Agreement contains customary covenants, including, among others, covenants that restrict our ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances, and covenants that require us to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain our property in good repair, maintain insurance and comply with applicable laws. The Note Agreement also includes covenants with respect to our maintenance of certain financial ratios, including a fixed charge coverage ratio, leverage ratio and consolidated liquidity as well as minimum levels of consolidated adjusted EBITDA and revenue. The Note Agreement also contains customary events of default, including, among others, payment default, bankruptcy events, cross-default, breaches of covenants and representations and warranties, change of control, judgment defaults and an ownership change within the meaning of Section 382 of the Internal Revenue Code. In the case of an event of default, the Holder may, among other remedies, accelerate the payment of all obligations under the 2024 Notes. Any prepayment of the 2024 Notes or reduction of the purchase commitments made on or prior to the second anniversary of the Closing Date must be accompanied by a yield maintenance premium and on or prior to the third anniversary of the Closing Date must be accompanied by a prepayment premium.

19

Our ability to fund our ongoing operations is dependent on increasing the number of members that are eligible for our solutions by signing new contracts, identifying more eligible members 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. We currently operate our OnTrak solutions in twenty-seven states. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and dual eligible (Medicare and Medicaid) populations. We have generated revenues from our launched programs and expect to increase enrollment and fees throughout 2019.

Historically, the Company has experienced net losses, net loss from operations, negative cash flow from operating activities as the Company continues through a period of rapid growth. The accompanying financial statements do not reflect any adjustments that might result if the Company unable to continue as a going concern. The Company has alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding its OnTrak program within existing health plan customers. To support this increased demand for services, the Company has secured additional capital by entering into a note agreement for $45 million to invest in additional headcount needed to support the anticipated growth. The Company has a growing customer base and believe it is able to fully scale operations to service the contracts and future enrollment providing leverage in these investments and expect to generate positive cash flow in the near future.

Operating Activities

For the nine months ended September 30, 2019, cash used in operating activities was $12.9 million compared with $7.1 million of cash used in operating activities during the nine months ended September 30, 2018. The increase in cash used in operating activities for the nine months ended September 30, 2019 compared to the prior year period was primarily the result of our continued plans to invest in technology and additional headcount needed to support anticipated growth.

Investing Activities

There were no capitalized expenditures for the nine months ended September 30, 2019 and September 30, 2018.

Financing Activities

Our net cash provided by financing activities was $25.6 million for the nine months ended September 30, 2019, compared with net cash provided by financing activities of $7.1 million for the nine months ended September 30, 2018. Cash provided by financing activities for the nine months ended September 30, 2019 consisted primarily of gross proceeds from the issuance of the 2024 notes in the amount of $35 million, 2022 Loans in the amount of $7.5 million and proceeds from stock option exercises of $1.6 million, partially offset by net settlement of the 2022 Loans in the amount of $15 million and debt issuance costs of $2.8 million and debt termination fees of $1.9 million.

As a result of the above our cash and restricted cash balance as of September 30, 2019 is $16.3 million.

OFF BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING ESTIMATES

See Note 2 to the Condensed Consolidated Financial Statements.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.     Controls and Procedures

Disclosure Controls

We have evaluated, with the participation of our principal executive officer and our principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2019. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of September 30, 2019, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

20

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

None.

Item 1A.     Risk Factors

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which we filed with the SEC on March 22, 2019. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

Risks related to our business

The terms of our Note Agreement place restrictions on our operating and financial flexibility, and failure to comply with covenants or to satisfy certain conditions of the agreement may result in acceleration of our repayment obligations, which could significantly harm our liquidity, financial condition, operating results, business and prospects and cause the price of our securities to decline.

On September 24, 2019 (the “Closing Date”), we entered into a Note Agreement (the “Note Agreement”), by and among us, certain of our subsidiaries as guarantors, Goldman Sachs Specialty Lending Holdings, Inc. (with any other purchasers party thereto from time to time, collectively the “Holder”) and Goldman Sachs Specialty Lending Group, L.P., as collateral agent, in connection with the sale of up to $45.0 million aggregate principal amount of senior secured notes (the “Notes”). On the Closing Date, we issued an aggregate of $35.0 million in principal amount of Notes and, subject to the achievement of threshold trailing six month annualized revenue targets and certain other conditions, the Holder is obligated to purchase up to an additional $10.0 million in principal amount of Notes during the period from the Closing Date until September 24, 2021.

The Note Agreement and the Notes could have important consequences for us and our stockholders. For example, the Notes require a balloon payment at maturity in September 2024, which may require us to dedicate a substantial portion of our uncommitted cash flow from operations to this future payment if we feel we cannot be successful in our ability to refinance in the future, thereby further reducing the availability of our cash flow to fund working capital, capital expenditures, and acquisitions, and for other general corporate purposes. In addition, our indebtedness could:

• increase our vulnerability to adverse economic and competitive pressures in our industry;

• place us at a competitive disadvantage compared to our competitors that have less debt;

• limit our flexibility in planning for, or reacting to, changes in our business and our industry; and

• limit our ability to borrow additional funds on terms that are acceptable to us or at all.

The Note Agreement contains restrictive covenants that will restrict our operational flexibility and require that we maintain specified financial ratios. If we cannot comply with these covenants, we may be in default under the Note Agreement.

The Note Agreement contains restrictions and limitations on our ability to engage in activities that may be in our long-term best interests. The Note Agreement contains affirmative and negative covenants that limit and restrict, among other things, our ability to:

• incur additional debt;

• sell assets;

• issue equity securities;

• pay dividends or repurchase equity securities;

• incur liens or other encumbrances;

• make certain restricted payments and investments;

• acquire other businesses; and

• merge or consolidate.

21

The Note Agreement contains a fixed charge coverage ratio covenant, a leverage ratio covenant and minimum revenue and liquidity covenants. Events beyond our control could affect our ability to meet these and other covenants under the Note Agreement. The Note Agreement also contains customary events of default, including, among others, payment default, bankruptcy events, cross-default, breaches of covenants and representations and warranties, change of control, judgment defaults and an ownership change within the meaning of Section 382 of the Internal Revenue Code. Our failure to comply with our covenants and other obligations under the Note Agreement may result in an event of default thereunder. A default, if not cured or waived, may permit acceleration of the Notes. If the indebtedness represented by the Notes is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness (together with accrued interest and fees), or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have serious consequences to our financial condition, operating results, and business, and could cause us to become insolvent or enter bankruptcy proceedings, and shareholders may lose all or a portion of their investment because of the priority of the claims of our creditors on our assets.

If we are unable to generate or borrow sufficient cash to make payments on our indebtedness, our financial condition would be materially harmed, our business could fail, and shareholders may lose all of their investment.

Our ability to make scheduled payments on or to refinance our obligations will depend on our financial and operating performance, which will be affected by economic, financial, competitive, business, and other factors, some of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations to service our indebtedness or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our indebtedness on or before maturity or sell certain of our assets. We cannot assure you that we will be able to restructure or refinance any of our indebtedness on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.

Increases in interest rates could adversely affect our results from operations and financial condition.

The Notes bear interest at either a floating rate plus an applicable margin in the case of Notes subject to cash interest payments or a floating rate plus a slightly higher applicable margin in the case of Notes as to which current interest has been capitalized during the first twelve months following the Closing Date, at the Company’s option. The applicable margins are subject to stepdowns, in each case, following the achievement of certain financial ratios. As a result, an increase in prevailing interest rates would have an effect on the interest rates charged on the Notes, which rise and fall upon changes in interest rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our indebtedness.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

Our federal net operating loss (NOLs) carryforwards could expire unused and be unavailable to offset future income tax liabilities. 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 percentage points 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 future 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.

In order to protect the Company’s significant NOLs, we filed an Amended and Restated Certificate of Incorporation of the Company containing an amendment (the “Protective Amendment”) with the Delaware Secretary of State on October 28, 2019. The Protective Amendment was approved by the Company’s stockholders by written consent dated September 24, 2019.

22

The Protective Amendment is designed to assist in protecting the long-term value of our accumulated NOLs by limiting certain transfers of our common stock. The Protective Amendment’s transfer restrictions generally restrict any direct or indirect transfers of common stock if the effect would be to increase the direct or indirect ownership of the common stock by any person from less than 4.99% to 4.99% or more of the common stock, or increase the percentage of the common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of the common stock. Any direct or indirect transfer attempted in violation of the Protective Amendment will be void as of the date of the prohibited transfer as to the purported transferee.

The Protective Amendment also requires any person attempting to become a holder of 4.99% or more of our common stock to seek the approval of our Board. This may have an unintended “anti-takeover” effect because our Board may be able to prevent any future takeover. Similarly, any limits on the amount of stock that a shareholder may own could have the effect of making it more difficult for shareholders to replace current management. Additionally, because the Protective Amendment may have the effect of restricting a shareholder’s ability to dispose of or acquire our common stock, the liquidity and market value of our common stock might suffer.

The Protective Amendment is not binding with respect to shares of common stock issued prior to its adoption unless the holder of such shares has voted in favor of the Protective Amendment and the resulting transfer restriction is noted conspicuously on the certificate representing such shares, or, in the case of uncertificated shares, the registered owners are notified of the Protective Amendment, or such registered owner has actual knowledge of the Protective Amendment. Therefore, even after the effectiveness of the Protective Amendment, we cannot assure you that we will not experience an ownership change as defined in Section 382, including as a result of a waiver or modification by our Board as permitted by the Protective Amendment.

Risks related to our common stock

There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.

In the future, we may need to raise additional funds through public or private financing, which might include sales of equity securities. The issuance of any additional shares of common stock or securities convertible into, exchangeable for, or that represent the right to receive common stock or the exercise of such securities could be substantially dilutive to holders of shares of our common stock. Holders of shares of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series, although certain holders of the warrants issued in connection with the Note Agreement have preemptive rights on any issuances of preferred stock. The market price of our common stock could decline as a result of sales of shares of our common stock made after this offering or the perception that such sales could occur. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interests in our Company.

Certain of our outstanding warrants contain anti-dilution provisions that, if triggered, could cause dilution to our then-existing stockholders and adversely affect our stock price.

Certain of our outstanding warrants, including those warrants issued in connection with the Note Agreement, 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 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered securities to report which were sold or issued by Catasys without the registration of these securities under the Securities Act of 1933 in reliance on exemptions from such registration requirements, within the period covered by this report, which have not been previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K. 

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures.

Not applicable.

23

Item 5.     Other Information

None.

Item 6.     Exhibits

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of Catasys, Inc., incorporated by reference to Appendix A to Catasys, Inc.’s Definitive Schedule 14 C filed with the Securities and Exchange Commission on October 4, 2019
4.1	Form of Senior Secured Note, incorporated by reference to Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2019.
4.2	Purchase Warrant for Common Shares issued in favor of Special Situations Investing Group II, LLC , dated September 24, 2019, incorporated by reference to Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2019.
10.1	Note Agreement, dated as of September 24, 2019, by and among Catasys, Inc., certain of its subsidiaries party thereto as guarantors, Goldman Sachs Specialty Lending Group, LP, as purchaser and any other purchasers party thereto from time to time and Goldman Sachs Specialty Lending Group, LP, as collateral agent, incorporated by reference to Catasys, Inc.’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2019.
31.1*	Certification by the Chief Executive Officer, pursuant to Rule 13-a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification by the Chief Financial Officer, pursuant to Rule 13-a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification by the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification by the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	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

* filed herewith.

** furnished herewith.

24

SIGNATURES

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

	CATASYS, INC.
Date: November 13, 2019	By:	/s/ TERREN S. PEIZER
		Terren S. Peizer
		Chief Executive Officer (Principal Executive Officer)
Date: November 13, 2019	By:	/s/ CHRISTOPHER SHIRLEY
		Christopher Shirley
		Chief Financial Officer (Principal Financial and Accounting Officer)

25

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Terren S. Peizer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Catasys, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2019	/s/ TERREN S. PEIZER
	Terren S. Peizer
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Christopher Shirley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Catasys, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2019	/s/ CHRISTOPHER SHIRLEY
	Christopher Shirley
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Catasys, Inc. (the “Company) for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Terren S. Peizer, Chief Executive Officer of Catasys certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Catasys.

/s/ TERREN S. PEIZER	November 13, 2019
Terren S. Peizer	Date
Chief Executive Officer
(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Catasys, Inc. (the “Company) for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Christopher Shirley, Chief Financial Officer of Catasys, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Catasys.

/s/ CHRISTOPHER SHIRLEY	November 13, 2019
Christopher Shirley	Date
Chief Financial Officer
(Principal Financial and Accounting Officer)

XML

Note 3 - Common Stock - Option Exercises (Details) - USD ($)	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Proceeds Received	$ 1,660,000
Share-based Payment Arrangement, Tranche One [Member]
Exercise price (in dollars per share)	$ 7.50
Number of Options Exercised (in shares)	9,479
Proceeds Received	$ 71,093
Number of Common Shares Issued (in shares)	9,479
Share-based Payment Arrangement, Tranche Two [Member]
Exercise price (in dollars per share)	$ 10.79
Number of Options Exercised (in shares)	129,906
Proceeds Received	$ 1,401,801
Number of Common Shares Issued (in shares)	129,906
Share-based Payment Arrangement, Tranche Three [Member]
Exercise price (in dollars per share)	$ 7.50
Number of Options Exercised (in shares)	25,000
Proceeds Received	$ 187,500
Number of Common Shares Issued (in shares)	25,000

XML

Note 2 - Accounts Receivable - Concentration of Credit Risk (Details) - Customer Concentration Risk [Member]	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Revenue, Segment Benchmark [Member]
Concentration risk	100.00%	100.00%	100.00%	100.00%
Revenue, Segment Benchmark [Member] | Largest Customer [Member]
Concentration risk	45.60%	26.50%	33.60%	25.70%
Revenue, Segment Benchmark [Member] | Second Largest Customer [Member]
Concentration risk	15.20%	20.20%	20.10%	23.40%
Revenue, Segment Benchmark [Member] | Third Largest Customer [Member]
Concentration risk	14.40%	17.00%	16.30%	14.90%
Revenue, Segment Benchmark [Member] | Fourth Largest Customer [Member]
Concentration risk	10.00%	13.30%	12.80%	11.10%
Revenue, Segment Benchmark [Member] | Remaining Customers [Member]
Concentration risk	14.80%	23.00%	17.20%	24.90%
Accounts Receivable [Member]
Concentration risk			100.00%		100.00%
Accounts Receivable [Member] | Largest Customer [Member]
Concentration risk			54.30%		31.40%
Accounts Receivable [Member] | Second Largest Customer [Member]
Concentration risk			10.10%		26.40%
Accounts Receivable [Member] | Third Largest Customer [Member]
Concentration risk			8.80%		16.10%
Accounts Receivable [Member] | Fourth Largest Customer [Member]
Concentration risk			7.50%		14.10%
Accounts Receivable [Member] | Remaining Customers [Member]
Concentration risk			19.30%		12.00%

XML

Note 7 - Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

	Balance as of September 30, 2019
(in thousands)	Level I		Level II		Level III		Total
Certificates of deposits (1)	$	408	$	-	$	-	$	408
Total assets	$	408	$	-	$	-	$	408
Warrant liabilities	$	-	$	-	$	670	$	670
Total liabilities	$	-	$	-	$	670	$	670

	Balance as of December 31, 2018
(in thousands)	Level I		Level II		Level III		Total
Letter of credit (2)	$	479	$	-	$	-	$	479
Total assets	$	479	$	-	$	-	$	479
Warrant liabilities	$	-	$	-	$	86	$	86
Total liabilities	$	-	$	-	$	86	$	86

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

	Level III
	Warrant
(in thousands)	Liabilities
Balance as of December 31, 2018	$	86
Issuance of new warrant liability		632
Change in fair value of warrant liability		38
Reclassification of warrant liability to equity upon adoption of ASU 2017-11		(86	)
Balance as of September 30, 2019	$	670

Fair Value Measurement Inputs and Valuation Techniques [Table Text Block]

	September 30, 2019
Expected price volatility	98.0%	-	100.2%
Expected term (in years)	6.5	-	7.0
Risk-free interest rate	1.6%	-	2.3%
Dividend yield		0.0%

XML

Note 6 - Debt - Net Carrying Amounts (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Principal amount	$ 35,000	$ 7,950
Unamortized debt discount	(5,132)	(478)
Net carrying amount	$ 29,868	$ 7,472

XML

Note 7 - Fair Value Measurements - Fair Value Measurements Using Significant Level III Inputs (Details) - Warrants [Member] - Fair Value, Inputs, Level 3 [Member] $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Balance	$ 86
Issuance of new warrant liability	632
Change in fair value of warrant liability	38
Reclassification of warrant liability	(86)
Balance	$ 670

XML

Note 4 - Stock Compensation (Details Textual) - USD ($)		1 Months Ended		3 Months Ended		6 Months Ended	9 Months Ended
	Sep. 24, 2019	Feb. 28, 2019	Aug. 31, 2018	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018
Share-based Payment Arrangement, Noncash Expense, Total				$ 400,000	$ 1,300,000		$ 2,947,000	$ 2,024,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total				$ 10,700,000			$ 10,700,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition							2 years 255 days
Class of Warrant or Right, Issued During Period							228,607
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 6.08			$ 6.08				$ 4.71
Warrants Related to Investor Relations Services [Member]
Class of Warrant or Right, Issued During Period				0		0	4,167	24,000
Horizon Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights										40,279
Class of Warrant or Right, Exercise Price of Warrants or Rights										$ 9.93
Horizon Warrants [Member] | Loan Agreement [Member] | Revolving Loan [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									51,185	51,185
Lender Warrant [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	173,255
Proceeds from Issuance of Warrants	$ 25,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 17.32
Performance Shares [Member]
Reversal of Compensation Expense				$ 1,100,000
Share-based Payment Arrangement, Expense							$ 0
The 2017 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized				2,333,334			2,333,334
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized		552,884	1,400,000
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period							10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Number				4,268,337			4,268,337
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares, Ending Balance				50,000			50,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant				47,349			47,349
The 2017 Stock Incentive Plan [Member] | Nonemployees [Member]
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total				$ 300,000			$ 300,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition							2 years 109 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross				0			50,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price							$ 9.93	$ 0
The 2017 Stock Incentive Plan [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period							3 years
The 2017 Stock Incentive Plan [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period							5 years
The 2010 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized				243,853			243,853

XML

Note 4 - Share Compensation - Summary of Warrant Activity (Details) - $ / shares	9 Months Ended
	Sep. 30, 2019
Outstanding, number of warrants (in shares)	1,608,996
Outstanding, weighted average exercise price (in dollars per share)	$ 4.71
Class of Warrant or Right, Issued During Period	228,607
Warrants issued, weighted average exercise price (in dollars per share)	$ 16
Warrants expired, number of warrants (in shares)	(54,167)
Warrants expired, weighted average exercise price (in dollars per share)	$ 12.46
Warrants exercised, number of warrants (in shares)	(232,461)
Warrants exercised, weighted average exercise price (in dollars per share)	$ 4.85
Outstanding, number of warrants (in shares)	1,550,975
Outstanding, weighted average exercise price (in dollars per share)	$ 6.08
Warrants exercisable, number of warrants (in shares)	1,550,975
Warrants exercisable, weighted average exercise price (in dollars per share)	$ 6.08

XML

Note 5 - Leases - Maturities of Operating Lease Liabilities (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Remaining three months ended December 31, 2019	$ 143
Year ended December 31, 2020	581
Year ended December 31, 2021	603
Year ended December 31, 2022	623
Year ended December 31, 2023	644
Year ended December 31, 2024	328
Total	2,922
Less present value discount	(627)
Operating lease liabilities	$ 2,295

XML

Note 3 - Common Stock (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	September 30, 2019		September 30, 2018
Warrants to purchase common stock		1,550,975		1,795,246
Options to purchase common stock		4,318,337		1,846,539
Total		5,869,312		3,641,785

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

Exercise Date	Exercise Price		Number of Warrants Exercised		Proceeds Received		Number of Common Shares Issued
January 19	$	5.00		20,000	$	100,000		20,000
May 19	$	4.80		172,461	$	827,813		172,461
June 19	$	5.00		20,000	$	100,000		20,000
August 19	$	5.00		20,000	$	100,000		20,000

Cash Proceeds Received and Tax Benefit from Share-based Payment Awards [Table Text Block]

Exercise Date	Exercise Price		Number of Options Exercised		Proceeds Received		Number of Common Shares Issued
April 19	$	7.50		9,479	$	71,093		9,479
May 19	$	10.79		129,906	$	1,401,801		129,906
August 19	$	7.50		25,000	$	187,500		25,000

XML

Note 3 - Common Stock

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

Note

3

. Common Stock

Net loss per share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, preferred stock and outstanding stock options and warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

Common equivalent shares, consisting of

5,869,312

and

3,641,785

shares as of

September 30, 2019

and

2018,

respectively, issuable upon the exercise of stock options and warrants have been excluded from the diluted earnings per share calculation as their effect is anti-dilutive.

	September 30, 2019		September 30, 2018
Warrants to purchase common stock		1,550,975		1,795,246
Options to purchase common stock		4,318,337		1,846,539
Total		5,869,312		3,641,785

Warrant

Exercise

s

The Company had the following exercises of warrants for the

nine

months ended

September 30, 2019:

Exercise Date	Exercise Price		Number of Warrants Exercised		Proceeds Received		Number of Common Shares Issued
January 19	$	5.00		20,000	$	100,000		20,000
May 19	$	4.80		172,461	$	827,813		172,461
June 19	$	5.00		20,000	$	100,000		20,000
August 19	$	5.00		20,000	$	100,000		20,000

Option

Exercise

s

The Company had the following exercises of options for the

nine

months ended

September 30, 2019:

Exercise Date	Exercise Price		Number of Options Exercised		Proceeds Received		Number of Common Shares Issued
April 19	$	7.50		9,479	$	71,093		9,479
May 19	$	10.79		129,906	$	1,401,801		129,906
August 19	$	7.50		25,000	$	187,500		25,000

XML

Note 7 - Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note

7

.

Fair Value Measurements 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure fair value. The fair value hierarchy distinguishes between (

1

) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (

2

) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of

three

broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I) and the lowest priority to unobservable inputs (Level III). The

three

levels of the fair value hierarchy are described below:

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

The following tables summarize fair value measurements by level as of

September 30, 2019

and

December 31, 2018,

respectively, for assets and liabilities measured at fair value on a recurring basis:

	Balance as of September 30, 2019
(in thousands)	Level I		Level II		Level III		Total
Certificates of deposits (1)	$	408	$	-	$	-	$	408
Total assets	$	408	$	-	$	-	$	408
Warrant liabilities	$	-	$	-	$	670	$	670
Total liabilities	$	-	$	-	$	670	$	670

( 1 )  $408,000 is included in restricted cash, long-term on the condensed consolidated balance sheet as of September  30, 2019.  

	Balance as of December 31, 2018
(in thousands)	Level I		Level II		Level III		Total
Letter of credit (2)	$	479	$	-	$	-	$	479
Total assets	$	479	$	-	$	-	$	479
Warrant liabilities	$	-	$	-	$	86	$	86
Total liabilities	$	-	$	-	$	86	$	86

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

The following is a rollforward of the warrant liabilities:

	Level III
	Warrant
(in thousands)	Liabilities
Balance as of December 31, 2018	$	86
Issuance of new warrant liability		632
Change in fair value of warrant liability		38
Reclassification of warrant liability to equity upon adoption of ASU 2017-11		(86	)
Balance as of September 30, 2019	$	670

For the

three

and

nine

months ended

September 30, 2019,

the Company recognized a gain (loss) of $(

173,000

) and

$38,000,

respectively compared with approximately

$65,000

and

$94,000

for the same periods in

2018,

respectively, related to the revaluation of our warrant liabilities.

In

March 2019,

in connection with the Amended Loan Agreement, the Company issued Horizon

40,279

seven

-year warrants to purchase an aggregate of

$0.6

million (depending on the level of availability under the Amended Loan Agreement) at the trailing volume weighted average price (“VWAP”) of 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

months following the agreement date.

In

May 2019,

the Company met the

$7.0

million Billing Requirement under the Amended Loan Agreement and incurred an additional

$2.5

million revolving loan. In connection with the additional revolving loan, the Company issued Horizon

5,561

seven

-year warrants to purchase an aggregate of

$0.1

million (depending on the level of availability under the Loan Agreement) at the trailing VWAP of 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)

$17.98

or (ii) the price per share of any securities that

may

be issued by us in an equity financing during the

18

months following the agreement date.

In

June 2019,

the Company met the

$8.0

million Billing Requirement under the Amended Loan Agreement and incurred the final

$2.5

million revolving loan. In connection with the additional revolving loan, the Company issued Horizon

5,345

seven

-year warrants to purchase an aggregate of

$0.1

million (depending on the level of availability under the Loan Agreement) at the trailing VWAP of 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)

$18.71

or (ii) the price per share of any securities that

may

be issued by us in an equity financing during the

18

months following the agreement date (the “Horizon Warrants”).

In

no

event will the Company be required to issue more than

19.9%

of its currently outstanding common stock pursuant to the Horizon Warrants.

The Company adopted ASU

2017

-

11,

as of

January 1, 2019.

However, given the number of variable features, the Horizon Warrants have been classified as a liability at the time of issuance in accordance with ASC

815.

We initially valued the Horizon Warrants using a Monte Carlo model and recorded the fair value of the Horizon Warrants as a discount to the debt obligation. As of

September 30, 2019,

the Company met all Billing Requirements under the Amended Loan Agreement and we will continue to mark-to-market the warrants each month using the Black-Scholes model.

The key assumptions used to value the Horizon Warrants are as follows:

	September 30, 2019
Expected price volatility	98.0%	-	100.2%
Expected term (in years)	6.5	-	7.0
Risk-free interest rate	1.6%	-	2.3%
Dividend yield		0.0%

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 13, 2019
Document Information [Line Items]
Entity Registrant Name	CATASYS, INC.
Entity Central Index Key	0001136174
Trading Symbol	cats
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		16,585,199
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Amendment Flag	false
Title of 12(b) Security	Common Stock, $0.0001 par value

XML

Condensed Consolidated Statements of Stockholders' Deficit (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Dec. 31, 2017	15,889,171
Balance at Dec. 31, 2017	$ 2	$ 294,220	$ (293,324)	$ 898
Reclassification of warrant liability to equity upon adoption of ASU 2017-11
Warrants issued for services		86		86
Warrant exercised for cash (in shares)	174,015
Warrant exercised for cash
Stock compensation expense		2,024		2,024
Net loss			(12,771)	(12,771)
Adoption of accounting standard, ASC 606 at Dec. 31, 2017			1,881	1,881
Balance, adjusted at Dec. 31, 2017	$ 2	294,220	(291,443)	2,779
Common stock issued for outside services (in shares)	24,000
Common stock issued for outside services		112		112
Warrants issued in connection with A/R facility		64		64
Balance (in shares) at Sep. 30, 2018	16,087,186
Balance at Sep. 30, 2018	$ 2	296,506	(304,214)	(7,706)
Balance (in shares) at Jun. 30, 2018	15,913,171
Balance at Jun. 30, 2018	$ 2	295,234	(299,861)	(4,625)
Warrant exercised for cash (in shares)	174,015
Warrant exercised for cash
Stock compensation expense		1,272		1,272
Net loss			(4,353)	(4,353)
Balance (in shares) at Sep. 30, 2018	16,087,186
Balance at Sep. 30, 2018	$ 2	296,506	(304,214)	$ (7,706)
Balance (in shares) at Dec. 31, 2018	16,185,146			16,185,146
Balance at Dec. 31, 2018	$ 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
Warrant exercised for cash (in shares)	232,461
Warrant exercised for cash		1,128		1,128
Number of Options Exercised (in shares)	164,385
Stock option exercised for cash		1,660		1,660
Stock compensation expense (in shares)	3,207
Stock compensation expense		2,947		2,947
Net loss			(16,974)	$ (16,974)
Balance (in shares) at Sep. 30, 2019	16,585,199			16,585,199
Balance at Sep. 30, 2019	$ 2	304,906	(322,629)	$ (17,721)
Balance (in shares) at Jun. 30, 2019	16,536,992
Balance at Jun. 30, 2019	$ 2	301,909	(314,066)	(12,155)
Warrants issued in connection with 2024 notes		2,354		2,354
Warrant exercised for cash (in shares)	20,000
Warrant exercised for cash		100		100
Number of Options Exercised (in shares)	25,000
Stock option exercised for cash		187		187
Stock compensation expense (in shares)	3,207
Stock compensation expense		356		356
Net loss			(8,563)	$ (8,563)
Balance (in shares) at Sep. 30, 2019	16,585,199			16,585,199
Balance at Sep. 30, 2019	$ 2	$ 304,906	$ (322,629)	$ (17,721)

XML

Note 6 - Debt (Details Textual) - USD ($) $ in Thousands	1 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2019	Mar. 31, 2019	Mar. 31, 2019	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2018
Payment for Debt Extinguishment or Debt Prepayment Cost				$ 1,956
Write off of Deferred Debt Issuance Cost				1,505
Corporate Finance [Member] | A/R Facility [Member]
Debt Instrument, Term, Cash Proceeds From Sale of Equity Securities	$ 10,000
Note 2024 [Member]
Debt Instrument, Face Amount	45,000			$ 45,000
Proceeds from Issuance of Long-term Debt, Total	$ 35,000
Loan Agreement [Member]
Debt Instrument, Interest Rate, Stated Percentage		9.75%	9.75%
Payment for Debt Extinguishment or Debt Prepayment Cost		$ 1,100
Loan Agreement [Member] | Other Nonoperating Income (Expense) [Member]
Write off of Deferred Debt Issuance Cost		1,500
Loan Agreement [Member] | Maximum [Member]
Debt Instrument, Face Amount		$ 15,000	$ 15,000			$ 7,500
Loan Agreement [Member] | Minimum [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate, Threshold Percent			2.00%

XML

Note 4 - Stock Compensation - Employee and Director Stock Option Activity (Details) - Employees and Directors [Member] - $ / shares	9 Months Ended
	Sep. 30, 2019
Outstanding, shares (in shares)	3,761,259
Outstanding, weighted average exercise price (in dollars per share)	$ 9.44
Granted, shares (in shares)	740,929
Granted, weighted average exercise price (in dollars per share)	$ 12.59
Forfeited, shares (in shares)	(69,466)
Forfeited, weighted average exercise price (in dollars per share)	$ 7.50
Exercised, shares (in shares)	(164,385)
Exercise price (in dollars per share)	$ 10.10
Outstanding, shares (in shares)	4,268,337
Outstanding, weighted average exercise price (in dollars per share)	$ 10.02
Options vested and expected to vest, share (in shares)	4,268,337
Options vested and expected to vest, weighted average exercise price (in dollars per share)	$ 10.02
Options vested and exercisable, share (in shares)	875,024
Options vested and exercisable, weighted average exercise price (in dollars per share)	$ 15.39

XML

Note 5 - Leases (Details Textual) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($) ft²	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($) ft²
Area of Real Estate Property | ft²		7,869		7,869
Lessee, Operating Lease, Base Rent			$ 600
Operating Lease, Liability, Total	$ 2,295		2,295
Operating Lease, Right-of-Use Asset	2,500		2,500
Operating Lease, Expense	110	$ 100	277	$ 200
Computer Equipment [Member]
Finance Lease, Right-of-Use Asset	$ 300		$ 300
Lessee, Finance Lease, Interest Expense Amortization Period			3 years

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue	$ 8,845,000	$ 4,369,000	$ 23,337,000	$ 9,553,000
Cost of revenue	6,119,000	3,237,000	13,511,000	8,465,000
Gross profit	2,726,000	1,132,000	9,826,000	1,088,000
Operating expenses	8,322,000	5,179,000	22,844,000	13,527,000
Operating loss	(5,596,000)	(4,047,000)	(13,018,000)	(12,439,000)
Other income / (expense)	(2,550,000)		(2,536,000)	40,000
Interest expense	(590,000)	(241,000)	(1,382,000)	(278,000)
Change in fair value of warrant liability	173,000	(65,000)	(38,000)	(94,000)
Net loss	$ (8,563,000)	$ (4,353,000)	$ (16,974,000)	$ (12,771,000)
Net loss per share, basic and diluted from operations: (in dollars per share)	$ (0.52)	$ (0.27)	$ (1.04)	$ (0.80)
Weighted-average shares used to compute basic and diluted net loss per share (in shares)	16,562	15,917	16,360	15,909

XML

Note 2 - Accounts Receivable (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Three Months Ended September 30,						Nine Months Ended September 30,
Percentage of Revenue	2019			2018			2019			2018
Largest customer		45.6	%		26.5	%		33.6	%		25.7	%
2nd largest customer		15.2	%		20.2	%		20.1	%		23.4	%
3rd largest customer		14.4	%		17.0	%		16.3	%		14.9	%
4th largest customer		10.0	%		13.3	%		12.8	%		11.1	%
Remaining customers		14.8	%		23.0	%		17.2	%		24.9	%
		100.0	%		100.0	%		100.0	%		100.0	%

Percentage of
Accounts Receivable	September 30, 2019			December 31, 2018
Largest customer		54.3	%		31.4	%
2nd largest customer		10.1	%		26.4	%
3rd largest customer		8.8	%		16.1	%
4th largest customer		7.5	%		14.1	%
Remaining customers		19.3	%		12.0	%
		100.0	%		100.0	%

XML

Note 2 - Accounts Receivable

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note

2

. Accounts Receivable

The Company applies the specific identification method for assessing provision for doubtful accounts. There was

no

allowance for doubtful accounts as of

September 30, 2019

and

December 31, 2018.

The following table is a summary of concentration of credit risk by customer revenues and accounts receivables:

	Three Months Ended September 30,						Nine Months Ended September 30,
Percentage of Revenue	2019			2018			2019			2018
Largest customer		45.6	%		26.5	%		33.6	%		25.7	%
2nd largest customer		15.2	%		20.2	%		20.1	%		23.4	%
3rd largest customer		14.4	%		17.0	%		16.3	%		14.9	%
4th largest customer		10.0	%		13.3	%		12.8	%		11.1	%
Remaining customers		14.8	%		23.0	%		17.2	%		24.9	%
		100.0	%		100.0	%		100.0	%		100.0	%

Percentage of
Accounts Receivable	September 30, 2019			December 31, 2018
Largest customer		54.3	%		31.4	%
2nd largest customer		10.1	%		26.4	%
3rd largest customer		8.8	%		16.1	%
4th largest customer		7.5	%		14.1	%
Remaining customers		19.3	%		12.0	%
		100.0	%		100.0	%

XML

Note 6 - Debt

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Long-term Debt [Text Block]

Note

6

. Debt

2024

Notes

In

September 2019,

the Company issued

$45

million principal amount of notes (the

“2024

Notes”) pursuant to a Note 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 issued

$35.0

million aggregate principal amount of senior secured 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 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 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 and payable on the

fifth

anniversary of the Note Agreement unless earlier redeemed upon the occurrence of certain mandatory prepayment events, including with the 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.

The Note Agreement contains customary covenants, including, among others, covenants that restrict the Company’s ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances, and covenants that require the Company to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain its property in good repair, maintain insurance and comply with applicable laws. The Note Agreement also includes covenants with respect to the Company’s maintenance of certain financial ratios, including a fixed charge coverage ratio, leverage ratio and consolidated liquidity as well as minimum levels of consolidated adjusted EBITDA and revenue. The Note Agreement also contains customary events of default, including, among others, payment default, bankruptcy events, cross-default, breaches of covenants and representations and warranties, change of control, judgment defaults and an ownership change within the meaning of Section

382

of the Internal Revenue Code. In the case of an event of default, the Holder

may,

among other remedies, accelerate the payment of all obligations under the

2024

Notes. Any prepayment of the

2024

Notes or reduction of the purchase commitments made on or prior to the

second

anniversary of the Closing Date must be accompanied by a yield maintenance premium and on or prior to the

third

anniversary of the Closing Date must be accompanied by a prepayment premium.

In accounting for the Notes at issuance, the Company separated the Notes into debt and equity components pursuant to the accounting standards. The fair value of the debt component was estimated using an interest rate for debt with terms similar to the Notes. The carrying amount of the equity component was calculated by measuring the fair value based on Black-Scholes model. The gross proceeds from the transaction was allocated between debt and equity based on the proportionate value. The debt discount is accreted to interest expense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is

not

to be remeasured as long as it continues to meet the conditions for equity classification.

The Company is in compliance with all debt covenants as of

September 30, 2019.

2022

Loan

In

June 2018,

the Company entered into a venture loan and security agreement (the

“2022

Loan”) which provides for up to

$7.5

million in loans to the Company. In

March 2019,

the

2022

Loan was amended to provide up to

$15.0

million in loans to the Company. The Loan Agreement bore interest at a floating coupon rate of the amount by which

one

-month LIBOR exceeds

2.00%

plus

9.75%.

Upon the issuance of the

2024

Notes, the balance of the

2022

Loan was repaid and terminated. As part of the termination, the Company incurred

$1.1

million of early termination costs and wrote off deferred debt issuance costs of

$1.5

million, which has been recorded in other income/(expense) in the consolidated statement of operations.

2024

Notes and

2022

Loan

The net carrying amounts of the liability components consists of the following (in thousands):

	September 30, 2019			December 31, 2018
Principal amount	$	35,000		$	7,950
Unamortized debt discount		(5,132	)		(478	)
Net carrying amount	$	29,868		$	7,472

The following table presents the interest expense recognized (in thousands):

	Three months ended September 30				Nine months ended September 30
	2019		2018		2019		2018
Contractual interest expense	$	434	$	205	$	967	$	210
Amortization of debt issuance costs		102		-		248		-
Accretion of debt discount		54		36		167		68
Total Interest	$	590	$	241	$	1,382	$	278

XML

Note 2 - Accounts Receivable (Details Textual) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts Receivable, Allowance for Credit Loss, Ending Balance	$ 0	$ 0

XML

Note 6 - Debt (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Debt [Table Text Block]

	September 30, 2019			December 31, 2018
Principal amount	$	35,000		$	7,950
Unamortized debt discount		(5,132	)		(478	)
Net carrying amount	$	29,868		$	7,472

Interest Expense, Debt [Text Block]

	Three months ended September 30				Nine months ended September 30
	2019		2018		2019		2018
Contractual interest expense	$	434	$	205	$	967	$	210
Amortization of debt issuance costs		102		-		248		-
Accretion of debt discount		54		36		167		68
Total Interest	$	590	$	241	$	1,382	$	278

XML

Note 3 - Common Stock - Warrant Exercises (Details) - USD ($)					9 Months Ended
	Aug. 19, 2019	Jun. 19, 2019	May 19, 2019	Jan. 19, 2019	Sep. 30, 2019	Sep. 30, 2018
Exercise Price (in dollars per share)	$ 5	$ 5	$ 4.80	$ 5
Number of Warrants Exercised (in shares)	20,000	20,000	172,461	20,000
Proceeds Received	$ 100,000	$ 100,000	$ 827,813	$ 100,000	$ 1,128,000
Number of Common Shares Issued	$ 20,000	$ 20,000	$ 172,461	$ 20,000

XML

Note 6 - Debt - Interest Expense (Details) - USD ($) $ in Thousands	6 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Contractual interest expense	$ 434	$ 205	$ 967	$ 210
Amortization of debt issuance costs	102		248
Accretion of debt discount	54	36	167	68
Total Interest	$ 590	$ 241	$ 1,382	$ 278

XML

Note 7 - Fair Value Measurements - Fair Value Assumptions, Warrant Liabilities (Details)	Sep. 30, 2019 yr
Measurement Input, Price Volatility [Member] | Minimum [Member]
Expected price volatility	0.98
Measurement Input, Price Volatility [Member] | Maximum [Member]
Expected price volatility	1.002
Measurement Input, Expected Term [Member]
Expected price volatility
Measurement Input, Expected Term [Member] | Minimum [Member]
Expected price volatility	6.5
Measurement Input, Expected Term [Member] | Maximum [Member]
Expected price volatility	7
Measurement Input, Risk Free Interest Rate [Member] | Minimum [Member]
Expected price volatility	0.016
Measurement Input, Risk Free Interest Rate [Member] | Maximum [Member]
Expected price volatility	0.023
Measurement Input, Expected Dividend Rate [Member]
Expected price volatility	0

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets:
Cash and restricted cash	$ 15,900	$ 3,162
Receivables, net	2,272	1,382
Unbilled receivables	2,090
Prepaid and other current assets	791	1,108
Total current assets	21,053	5,652
Long-term assets:
Property and equipment, net	175	263
Restricted cash, long-term	408	408
Right-of-use assets	2,814
Total assets	24,450	6,323
Current liabilities:
Accounts payable	1,111	497
Accrued compensation and benefits	1,784	1,537
Deferred revenue	3,708	4,195
Current portion of lease liabilities	359
Other accrued liabilities	2,551	1,501
Total current liabilities	9,513	7,730
Long-term liabilities:
Long-term debt, net	29,868	7,472
Long-term lease liabilities	2,120
Warrant liabilities	670	86
Total liabilities	42,171	15,288
Stockholders' deficit:
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; no shares issued and outstanding	0	0
Common stock, $0.0001 par value; 500,000,000 shares authorized; 16,585,199 and 16,185,146 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	2	2
Additional paid-in capital	304,906	296,688
Accumulated deficit	(322,629)	(305,655)
Total stockholders' deficit	(17,721)	(8,965)
Total liabilities and stockholders' deficit	$ 24,450	$ 6,323

XML

Note 4 - Stock Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Share-based Payment Arrangement, Option, Activity [Table Text Block]

	Number of Shares			Weighted Average Exercise Price
Outstanding as of December 31, 2018		3,761,259		$	9.44
Granted		740,929			12.59
Forfeited		(69,466	)		7.50
Exercised		(164,385	)		10.10
Outstanding as of September 30, 2019		4,268,337		$	10.02
Options vested and expected to vest as of September 30, 2019		4,268,337		$	10.02
Options vested and exercisable as of September 30, 2019		875,024		$	15.39

Share-based Payment Arrangement, Option, Performance-based and Market-based Awards [Table Text Block]

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	1/5 of each Tranche vest annually on December 31 of each calendar year, beginning on December 31, 2018	Fiscal Years 2018, 2019, 2020, 2021 and 2022		642,307	$	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	1/5 of each Tranche vest annually on December 31 of each calendar year, beginning on December 31, 2018	Fiscal Years 2018, 2019, 2020, 2021 and 2022		397,693	$	7.50

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

Exercise Date	Exercise Price		Number of Warrants Exercised		Proceeds Received		Number of Common Shares Issued
January 19	$	5.00		20,000	$	100,000		20,000
May 19	$	4.80		172,461	$	827,813		172,461
June 19	$	5.00		20,000	$	100,000		20,000
August 19	$	5.00		20,000	$	100,000		20,000

Nonemployees [Member]

Notes Tables

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

	Number of Warrants			Weighted Average Exercise Price
Outstanding as of December 31, 2018		1,608,996		$	4.71
Issued		228,607			16.00
Expired		(54,167	)		12.46
Exercised		(232,461	)		4.85
Outstanding as of September 30, 2019		1,550,975		$	6.08
Warrants exercisable as of September 30, 2019		1,550,975		$	6.08

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows used in operating activities
Net loss	$ (16,974,000)	$ (12,771,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	2,947,000	2,024,000
Write off of debt issuance costs	1,505,000
Depreciation	108,000	229,000
Amortization	449,000	95,000
Warrants issued for services	43,000	86,000
Change in fair value of warrants	38,000	94,000
Common stock issued for consulting services		112,000
Loss on disposal of fixed assets		69,000
Deferred rent	(26,000)	(67,000)
Changes in operating assets and liabilities:
Accounts payable	614,000	539,000
Leases liabilities	575,000
Other accrued liabilities	1,164,000	410,000
Prepaids and other current assets	149,000	3,000
Deferred revenue	(487,000)	3,994,000
Receivables	(890,000)	(1,880,000)
Unbilled receivables	(2,090,000)
Net cash used in operating activities	(12,875,000)	(7,063,000)
Cash flows provided by financing activities
Debt issuance costs	(2,813,000)	(336,000)
Debt termination related fees	(1,956,000)
Proceeds from warrant exercise	1,128,000
Proceeds from options exercise	1,660,000
Capital lease obligations	69,000	(25,000)
Net cash provided by financing activities	25,613,000	7,139,000
Net increase in cash and restricted cash	12,738,000	76,000
Cash and restricted cash at beginning of period	3,570,000	4,779,000
Cash and restricted cash at end of period	16,308,000	4,855,000
Supplemental disclosure of cash flow information:
Right of use asset obtained in exchange for lease obligation	2,574,000
Interest paid	967,000
Non cash financing and investing activities:
Warrant issued in connection with A/R facility		64,000
Warrant issued in connection with GS facility	2,354,000
Reclassification of warrant liability to equity upon amendment of the loan agreement	86,000
Warrants issued in connection with revolving loan
Property and equipment acquired through capital leases	250,000
Secured Promissory Note [Member]
Cash flows provided by financing activities
Proceeds from long term debt		7,500,000
Revolving Loan [Member]
Cash flows provided by financing activities
Proceeds from long term debt	7,500,000
Repayment of long term debt	(15,000,000)
A/R Facility [Member]
Cash flows provided by financing activities
Proceeds from long term debt	1,938,000
Repayment of long term debt	(1,938,000)
GS Loan [Member]
Cash flows provided by financing activities
Proceeds from long term debt	$ 35,025,000

XML

Note 8 - Variable Interest Entities

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Variable Interest Entity Disclosure [Text Block]

Note

8

.

Variable

I

nterest

E

ntities

The amounts and classification of assets and liabilities of the variable interest entities included in the consolidated balance sheets are as follows:

	September 30,		December 31,
(in thousands)	2019		2018
Cash and cash equivalents	$	469	$	45
Accounts receivable		104		94
Prepaid and other current assets		-		29
Total assets	$	573	$	168
Accounts payable	$	15	$	7
Accrued liabilities		42		14
Intercompany payable		603		147
Total liabilities	$	660	$	168

XML

Note 4 - Stock Compensation

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

Note

4

.

Stock

Based Awards

The Company’s

2017

Stock Incentive Plan (the

“2017

Plan”), provides for the issuance of up to

2,333,334

shares of common stock and an additional

243,853

shares of common stock that are represented by awards granted under the

2010

Stock Incentive Plan (the

“2010

Plan”). In

August 2018,

at the Company’s Annual Stockholders Meeting, stockholders approved an amendment to the

2017

Plan, among other things, to provide for an additional

1,400,000

shares to be issued in connection with awards granted thereunder (the

“2017

Amended Plan”). In

February 2019,

the Company increased the number of shares in the

2017

Plan by

552,884

shares as allowed in the

2017

Plan for annual increases to the number of shares available under the

2017

Plan. Incentive stock options (ISOs) under Section

422A

of the Internal Revenue Code and non-qualified options (NSOs) are authorized under the

2017

Amended Plan. The Company has granted stock options to executive officers, employees, members of the Company’s 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 from the date of grant and employee and Board of Director awards generally vest over

three

to

five

years on a straight-line basis. As of

September 30, 2019,

the Company had

4,268,337

vested and unvested stock options issued to Employees and Directors and

50,000

vested and unvested stock options outstanding issued to Non-Employees. There are

47,349

shares reserved for future awards.

Stock compensation expense for employees and directors was

$0.4

and

$2.9

million for the

three

and

nine

months ended

September 30, 2019,

respectively, compared with approximately

$1.3

million and

$2.0

million for the same periods in

2018,

respectively.

Stock Options - Employees and Directors

A summary of stock option activity for employees and directors is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding as of December 31, 2018		3,761,259		$	9.44
Granted		740,929			12.59
Forfeited		(69,466	)		7.50
Exercised		(164,385	)		10.10
Outstanding as of September 30, 2019		4,268,337		$	10.02
Options vested and expected to vest as of September 30, 2019		4,268,337		$	10.02
Options vested and exercisable as of September 30, 2019		875,024		$	15.39

As of

September 30, 2019,

there was

$10.7

million of total unrecognized compensation cost related to non-vested stock compensation arrangements granted to employees and directors under the

2017

Amended Plan, which is expected to be recognized over a weighted-average period of approximately

2.7

years.     

Performance-Based

and Market-Based

Awards

The Company’s Compensation Committee designed a compensation structure to align the compensation levels of certain executives to the performance of the Company through the issuance of performance-based and market-based stock options. The performance-based options vest upon the Company meeting certain revenue targets and the total amount of compensation expense recognized is based on the number of shares that the Company determines are probable of vesting. The market-based options vest upon the Company’s stock price reaching a certain price at a specific performance period and the total amount of compensation expense recognized is based on a monte carlo simulation that factors in the probability of the award vesting. The following table summarizes the Company’s issuance of awards under this structure:

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	1/5 of each Tranche vest annually on December 31 of each calendar year, beginning on December 31, 2018	Fiscal Years 2018, 2019, 2020, 2021 and 2022		642,307	$	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	1/5 of each Tranche vest annually on December 31 of each calendar year, beginning on December 31, 2018	Fiscal Years 2018, 2019, 2020, 2021 and 2022		397,693	$	7.50

During the current quarter, the Company determined that it is

not

probable to achieve its internal performance targets for the tranche issued for the fiscal year

2019,

resulting the reversal of the compensation expense recognized previously for the shares that are

not

expected to vest. As a result, the Company recognized a reversal of compensation expense related to these performance based awards of (

$1.1

) million for the

three

months ended

September 30, 2019.

The reversal in the

three

months ended

September 30, 2019

resulted in

no

compensation expense for the

nine

months ended

September 30, 2019.

Stock Options and Warrants - Non-Employees

A summary of warrants activity for non-employees is as follows:

	Number of Warrants			Weighted Average Exercise Price
Outstanding as of December 31, 2018		1,608,996		$	4.71
Issued		228,607			16.00
Expired		(54,167	)		12.46
Exercised		(232,461	)		4.85
Outstanding as of September 30, 2019		1,550,975		$	6.08
Warrants exercisable as of September 30, 2019		1,550,975		$	6.08

There were

no

warrants issued for the

three

months ended

September 30, 2019

and

4,167

warrants issued in exchange for services for the

nine

months ended

September 30, 2019,

compared with

none

for the

three

months ended and

24,000

for the

nine

months ended in

2018.

Generally, the costs associated with shares issued for services are amortized to the related expense on a straight-line basis over the related service periods. During the

three

months ended

March 31, 2019

and

June 30, 2019,

the Company issued Horizon warrants to purchase

51,185

shares of common stock (see Note

7

) in connection with the Amended Loan Agreement. On

September 24, 2019,

the Company issued to Goldman Sachs Special Situations Investing Group II, LLC a warrant (the “Lender Warrant”) to purchase

173,255

shares of common stock at a purchase price of

$25,000

in a private placement in connection with the issuance of its

2024

Notes (see Note

6

) with an exercise price equal to

$17.32

and a termination date of

September 24, 2026.

There were

not

any options issued to non-employees in the

three

months ended

September 30, 2019.

There were

50,000

options issued to non-employees at a weighted average exercise price of

$9.93

for the

nine

months ended

September 30, 2019

compared with

none

for the same periods in

2018.

As of

September 30, 2019,

there was approximately

$0.3

million of total unrecognized compensation cost related to non-vested stock compensation arrangements granted to non-employees under the

2017

Amended Plan. That cost is expected to be recognized over a weighted-average period of approximately

2.3

years.

XML

Note 4 - Stock Compensation - Performance-based and Market-based Awards (Details) (Parentheticals)	Aug. 31, 2018 $ / shares
Market Based Options [Member]
Common Stock, share price (in dollars per share)	$ 15

XML

Note 5 - Leases - Operating Lease Information (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Operating cash flows from operating leases	$ 75	$ 238
Weighted-average remaining lease term – operating leases (Year)	4 years 255 days	4 years 255 days
Weighted-average discount rate – operating leases	10.15%	10.15%

XML

Note 3 - Common Stock (Details Textual) - shares	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	5,869,312	3,641,785

XML

Note 8 - Variable Interest Entities (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Variable Interest Entities [Table Text Block]

	September 30,		December 31,
(in thousands)	2019		2018
Cash and cash equivalents	$	469	$	45
Accounts receivable		104		94
Prepaid and other current assets		-		29
Total assets	$	573	$	168
Accounts payable	$	15	$	7
Accrued liabilities		42		14
Intercompany payable		603		147
Total liabilities	$	660	$	168

XML

Note 7 - Fair Value Measurements - Fair Value, Assets and Liabilities Measured on a Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2019		Dec. 31, 2018
Total assets	$ 408		$ 479
Warrant liabilities	670		86
Total liabilities	670		86
Certificates of Deposit [Member]
Certificates of deposits	408	[1]	479	[2]
Fair Value, Inputs, Level 1 [Member]
Total assets	408		479
Warrant liabilities
Total liabilities
Fair Value, Inputs, Level 1 [Member] | Certificates of Deposit [Member]
Certificates of deposits	408	[1]	479	[2]
Fair Value, Inputs, Level 2 [Member]
Total assets
Warrant liabilities
Total liabilities
Fair Value, Inputs, Level 2 [Member] | Certificates of Deposit [Member]
Certificates of deposits		[1]		[2]
Fair Value, Inputs, Level 3 [Member]
Total assets
Warrant liabilities	670		86
Total liabilities	670		86
Fair Value, Inputs, Level 3 [Member] | Certificates of Deposit [Member]
Certificates of deposits		[1]		[2]

[1] $408,000 is included in restricted cash, long-term on our balance sheet as of June 30, 2019.

[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.

XML

Note 3 - Common Stock - Antidilutive Securities Excluded from Computation of Earnings Per Share (Details) - shares	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Antidilutive Securities (in shares)	5,869,312	3,641,785
Warrant [Member]
Antidilutive Securities (in shares)	1,550,975	1,795,246
Share-based Payment Arrangement, Option [Member]
Antidilutive Securities (in shares)	4,318,337	1,846,539

XML

Note 1 - Organization (Details Textual) $ in Millions	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 24, 2019 USD ($)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Ending Balance	$ 16.3
Working Capital Deficit	11.5
Cash Used, Per Month	$ 1.5
Number of States in which Entity Operates	27
The 2024 Notes [Member]
Notes Payable, Total		$ 45.0

XML

Note 7 - Fair Value Measurements (Details Textual) - USD ($)	1 Months Ended			3 Months Ended		9 Months Ended
	Jun. 30, 2019	May 31, 2019	Mar. 31, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Fair Value Adjustment of Warrants				$ (173,000)	$ 65,000	$ 38,000	$ 94,000
Class of Warrant Or Right Value of Securities Called By Warrants Or Rights			$ 600,000
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 6.08		$ 6.08		$ 4.71
Class of Warrant or Right, Issued During Period						228,607
Loan Agreement [Member] | Revolving Loan [Member]
Debt Instrument, Second Billings Threshold for Additional Loan		$ 7,000,000
Proceeds from Issuance of Long-term Debt, Total	$ 2,500,000	$ 2,500,000
Debt Instrument, Third Billings Threshold for Additional Loan	$ 8,000,000
Horizon Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights			40,279
Warrants and Rights Outstanding, Term			7 years
Class of Warrant or Right, Exercise Price of Warrants or Rights			$ 9.93
Horizon Warrants [Member] | Maximum [Member]
Maximum Percentage of Outstanding Common Stock To Be Issued For Warrants				19.90%		19.90%
Horizon Warrants [Member] | Loan Agreement [Member] | Revolving Loan [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	51,185		51,185
Warrant Issued in May 2019 [Member]
Warrants and Rights Outstanding, Term	7 years	7 years
Class of Warrant Or Right Value of Securities Called By Warrants Or Rights	$ 100,000	$ 100,000
Class of Warrant or Right, Issued During Period		5,561
Warrant Issued in May 2019 [Member] | Maximum [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 18.71	$ 17.98
Warrant Issued in June 2019 [Member]
Class of Warrant or Right, Issued During Period	5,345
Noncurrent Restricted Cash [Member[
Certificates of Deposit, at Carrying Value				$ 408,000		$ 408,000		$ 408,000
Cash, Cash Equivalents and Restricted Cash [Member]
Certificates of Deposit, at Carrying Value								$ 71,000

XML

Note 8 - Variable Interest Entities - Summary of Amounts and Classification of Assets and Liabilities of the VIE in Our Consolidated Balance Sheets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Cash and cash equivalents	$ 15,900	$ 3,162
Prepaid and other current assets	791	1,108
Total assets	24,450	6,323
Accounts payable	1,111	497
Total liabilities	42,171	15,288
Variable Interest Entity, Primary Beneficiary, Aggregated Disclosure [Member] | TIH [Member]
Cash and cash equivalents	469	45
Accounts receivable	104	94
Prepaid and other current assets		29
Total assets	573	168
Accounts payable	15	7
Accrued liabilities	42	14
Intercompany payable	603	147
Total liabilities	$ 660	$ 168

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited condensed consolidated 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 condensed 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 Article

10

of Regulation S-

X.

Certain information and note disclosures normally included in the annual condensed consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements included all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented. Interim results are

not

necessarily indicative of the results that

may

be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto included in the most recent Annual Report on Form

10

-K for the year-ended

December 31, 2018,

from which the balance sheet, as of

December 31, 2018,

has been derived. The Company operates as

one

segment. Certain prior period amounts reported in condensed consolidated financial statements and notes have been reclassified to conform to current period presentation.

As of

September 30, 2019,

cash and restricted cash was

$16.3

million and working capital was approximately

$11.5

million. The Company could continue to incur negative cash flows and operating losses for the next

twelve

months, with an average monthly cash burn rate is approximately

$1.5

million for the

nine

months ended

September 30, 2019.

The Company expects the 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.

The Company’s ability to fund ongoing operations is dependent on several factors. The Company aims to increase the number of members that are eligible for its solutions by signing new contracts and identifying more eligible members in existing contracts. Additionally, the Company’s funding is dependent upon the success of management’s plan to increase revenue and control expenses. The Company currently operates its OnTrak solutions in

twenty-seven

states. The Company provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and dual eligible (Medicare and Medicaid) populations. The Company generates fees from its launched programs and expect to increase enrollment and fees in the near future.

Management’s Plans

Historically, the Company has experienced net losses, net loss from operations, negative cash flow from operating activities as the Company continues through a period of rapid growth. The accompanying financial statements do

not

reflect any adjustments that might result if the Company unable to continue as a going concern. The Company has alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding its OnTrak program within existing health plan customers. To support this increased demand for services, the Company has secured additional capital by entering into a note agreement for

$45

million to invest in additional headcount and related infrastructure costs needed to support the anticipated growth. The Company has a growing customer base and believe it is able to fully scale operations to service the contracts and future enrollment providing leverage in these investments and expect to generate positive cash flow in the near future.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Standards

Effective

January 1, 2019,

the Company adopted Accounting Standards Codification (“ASC”) Topic

842,

Leases

. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the condensed consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.

In calculating the right-of-use asset and lease liability, the Company elected to combine lease and non-lease components. The Company also elected to exclude short-term leases having initial terms of

12

months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

In

June 2018,

the FASB issued ASU

2018

-

07,

 

Improvements to Nonemployee Share-Based Payment Accounting

(“ASU

2018

-

07”

), which supersedes ASC

505

-

50

and expands the scope of ASC

718

to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after

December 

15,

2018,

including interim periods within those annual periods. Early adoption is permitted, but

no

earlier than a company's adoption date of ASC

606.

The adoption of this ASU

2018

-

07

on

January 1, 2019

did

not

have a material impact on its financial statements.

In

July 2017,

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.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does

not

believe that the impact of recently issued standards that are

not

yet effective will have a material impact on the financial position or results of operations upon adoption.

In

August 2018,

the FASB issued Accounting Standard Update (“ASU”)

No.

2018

-

13,

Fair Value Measurement (Topic

820

)

, which modifies the disclosure requirements on fair value measurements in Topic

820,

Fair Value Measurement, including, among other changes, the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods beginning after

December 15, 2019,

including interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements.

In

June 2016,

the FASB issued ASU

2016

-

13,

Financial Instruments - Credit Losses

(“ASU

2016

-

13”

). The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but

not

limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the

first

quarter of fiscal year

2021.

Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

XML

Note 5 - Leases

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

Note

5

.

Leases

The operating lease agreement for the Company’s Los Angeles, CA office space expired in

April 2019,

therefore there are

no

remaining operating lease right-of-use assets or liabilities associated with this office as of

September 30, 2019.

In

September 2018,

the Company signed an operating lease for the new corporate headquarters in Santa Monica, CA (“Santa Monica Headquarters”). The lease agreement includes

7,869

square feet for

60

months commencing in

July 2019,

which is

30

days following date the premises were ready for occupancy. The base annual rent is approximately

$0.6

million subject to annual adjustments.

The Company’s lease liability resulted from the lease of the Santa Monica Headquarters which expires in

2024.

This lease does

not

require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. The lease includes renewal options and escalation clauses; renewal options have

not

been included in the calculation of the lease liability and right-of-use asset as the Company is

not

reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does

not

act as a lessor or have any leases classified as financing leases.

As of

September 30, 2019,

the Company has an operating lease liability of approximately

$2.3

million and right-of-use asset of approximately

$2.5

million, which are included in the condensed consolidated balance sheets.

Quantitative information for the operating lease is as follows: 

	For the Three Months Ended		For the Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating lease expense	$	110	$	277
Short-term lease rent expense		19		36
Total rent expense	$	129	$	313

	For the Three Months Ended		For the Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating cash flows from operating leases	$	75	$	238

	September 30, 2019			September 30, 2019
Weighted-average remaining lease term – operating leases (years)		4.7			4.7
Weighted-average discount rate – operating leases		10.15	%		10.15	%

Maturities of the operating lease liabilities are as follows:

(In thousands)	Amount
Remaining three months ended December 31, 2019	$	143
Year ended December 31, 2020		581
Year ended December 31, 2021		603
Year ended December 31, 2022		623
Year ended December 31, 2023		644
Year ended December 31, 2024		328
Total		2,922
Less present value discount		(627	)
Operating lease liabilities	$	2,295

The Company incurred rent expense of approximately

$0.1

million and

$0.3

million for the

three

and

nine

months ended

September 30, 2019,

respectively, compared to approximately

$0.1

million and

$0.2

million for the same periods in

2018,

respectively.

The Company entered into financing agreements for computer equipment for

$0.3

million.  Interest is expensed straight line over

three

years. 

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Sep. 30, 2019	Dec. 31, 2018
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	50,000,000	50,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized (in shares)	500,000,000	500,000,000
Common stock, shares issued (in shares)	16,585,199	16,185,146
Common stock, shares outstanding (in shares)	16,585,199	16,185,146

XML

Note 5 - Leases (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Lease, Cost [Table Text Block]

	For the Three Months Ended		For the Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating lease expense	$	110	$	277
Short-term lease rent expense		19		36
Total rent expense	$	129	$	313

Schedule of Operating Leases Information [Table Text Block]

	For the Three Months Ended		For the Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating cash flows from operating leases	$	75	$	238

	September 30, 2019			September 30, 2019
Weighted-average remaining lease term – operating leases (years)		4.7			4.7
Weighted-average discount rate – operating leases		10.15	%		10.15	%

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

(In thousands)	Amount
Remaining three months ended December 31, 2019	$	143
Year ended December 31, 2020		581
Year ended December 31, 2021		603
Year ended December 31, 2022		623
Year ended December 31, 2023		644
Year ended December 31, 2024		328
Total		2,922
Less present value discount		(627	)
Operating lease liabilities	$	2,295

XML

Note 1 - Organization

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note

1.

Organization

Company Overview

Catasys, Inc. (“Catasys” or the “Company”) is a leading Artificial Intelligence (“AI”) and technology-enabled healthcare company whose mission is to help improve the health and save the lives of as many people as possible. The Company’s platform, Catasys PRE

TM

(Predict-Recommend-Engage), organizes and automates healthcare data integration and analytics through application of machine intelligence to deliver analytic insights. The PRE Platform predicts people whose chronic disease will improve with behavior change, recommends effective care pathways that people are willing 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.

The Company’s integrated, technology-enabled OnTrak solution, a critical component of the Catasys PRE platform, is designed to identify and treat members with behavioral conditions that cause or exacerbate chronic medical conditions such as diabetes, hypertension, coronary artery disease, chronic obstructive pulmonary disease, and congestive heart failure, which result in high medical costs. The Company has the ability to engage these members, who do

not

otherwise seek behavioral healthcare, leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. OnTrak integrates evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, along with care coaching and in-market Community Care Coordinators who address the social and environmental determinants of health, including loneliness.

Basis of Presentation

The accompanying unaudited condensed consolidated 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 condensed 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 Article

10

of Regulation S-

X.

Certain information and note disclosures normally included in the annual condensed consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements included all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented. Interim results are

not

necessarily indicative of the results that

may

be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto included in the most recent Annual Report on Form

10

-K for the year-ended

December 31, 2018,

from which the balance sheet, as of

December 31, 2018,

has been derived. The Company operates as

one

segment. Certain prior period amounts reported in condensed consolidated financial statements and notes have been reclassified to conform to current period presentation.

As of

September 30, 2019,

cash and restricted cash was

$16.3

million and working capital was approximately

$11.5

million. The Company could continue to incur negative cash flows and operating losses for the next

twelve

months, with an average monthly cash burn rate is approximately

$1.5

million for the

nine

months ended

September 30, 2019.

The Company expects the 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.

The Company’s ability to fund ongoing operations is dependent on several factors. The Company aims to increase the number of members that are eligible for its solutions by signing new contracts and identifying more eligible members in existing contracts. Additionally, the Company’s funding is dependent upon the success of management’s plan to increase revenue and control expenses. The Company currently operates its OnTrak solutions in

twenty-seven

states. The Company provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and dual eligible (Medicare and Medicaid) populations. The Company generates fees from its launched programs and expect to increase enrollment and fees in the near future.

Management’s Plans

Historically, the Company has experienced net losses, net loss from operations, negative cash flow from operating activities as the Company continues through a period of rapid growth. The accompanying financial statements do

not

reflect any adjustments that might result if the Company unable to continue as a going concern. The Company has alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding its OnTrak program within existing health plan customers. To support this increased demand for services, the Company has secured additional capital by entering into a note agreement for

$45

million to invest in additional headcount and related infrastructure costs needed to support the anticipated growth. The Company has a growing customer base and believe it is able to fully scale operations to service the contracts and future enrollment providing leverage in these investments and expect to generate positive cash flow in the near future.

Recently Adopted Accounting Standards

Effective

January 1, 2019,

the Company adopted Accounting Standards Codification (“ASC”) Topic

842,

Leases

. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the condensed consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.

In calculating the right-of-use asset and lease liability, the Company elected to combine lease and non-lease components. The Company also elected to exclude short-term leases having initial terms of

12

months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

In

June 2018,

the FASB issued ASU

2018

-

07,

 

Improvements to Nonemployee Share-Based Payment Accounting

(“ASU

2018

-

07”

), which supersedes ASC

505

-

50

and expands the scope of ASC

718

to include all share-based payments arrangements related to the acquisition of goods and services from both employees and nonemployees. For public companies, the amendments are effective for annual reporting periods beginning after

December 

15,

2018,

including interim periods within those annual periods. Early adoption is permitted, but

no

earlier than a company's adoption date of ASC

606.

The adoption of this ASU

2018

-

07

on

January 1, 2019

did

not

have a material impact on its financial statements.

In

July 2017,

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.

Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company does

not

believe that the impact of recently issued standards that are

not

yet effective will have a material impact on the financial position or results of operations upon adoption.

In

August 2018,

the FASB issued Accounting Standard Update (“ASU”)

No.

2018

-

13,

Fair Value Measurement (Topic

820

)

, which modifies the disclosure requirements on fair value measurements in Topic

820,

Fair Value Measurement, including, among other changes, the consideration of costs and benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods beginning after

December 15, 2019,

including interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements.

In

June 2016,

the FASB issued ASU

2016

-

13,

Financial Instruments - Credit Losses

(“ASU

2016

-

13”

). The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but

not

limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the

first

quarter of fiscal year

2021.

Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

XML

Note 4 - Stock Compensation - Performance-based and Market-based Awards (Details) - $ / shares	1 Months Ended
	Aug. 31, 2018	Apr. 30, 2018	Dec. 31, 2017
Fully Vest On January 1, 2023 [Member] | Market Based Options [Member]
Granted, shares (in shares)	397,693		642,307
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price	$ 7.50
Vest Annually On December 31 for One Fifth of Each Tranche [Member] | Performance Shares [Member]
Granted, shares (in shares)	397,693	642,307
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price	$ 7.50	$ 7.50

XML

Note 5 - Leases - Operating Leases (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Operating lease expense	$ 110	$ 100	$ 277	$ 200
Short-term lease rent expense	19		36
Total rent expense	$ 129		$ 313