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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Catasys, Inc.    CATS

CATASYS, INC.

(CATS)
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CATASYS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 05:17pm EDT
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



We are a 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 PRETM
(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 aren't getting 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, COPD, 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 are contracted to make OnTrak available to members of leading national and
regional health plans in 27 states: Alabama, California, Connecticut, Delaware,
Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland,
Massachusetts, Mississippi, Missouri, Nebraska, New Jersey, North Carolina,
Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West
Virginia and Wisconsin.



Recent Developments



In March 2019, we entered into an amended and restated venture loan and security
agreement (as so amended and restated, the "Amended Loan Agreement") with
Horizon, which provides for up to $15.0 million in loans to us, including
initial term loans in the amount of $7.5 million previously funded under the
original Loan Agreement entered into in June 2018 and an additional up to $7.5
million loan in three revolving tranches of $2.5 million in availability,
subject to our achievement of trailing three month billings exceeding $5.0
million, $7.0 million and $8.0 million, respectively (collectively, the "Billing
Requirements").  An initial advance of $2.5 million was funded upon the
execution and delivery of the Amended Loan Agreement, subject to repayment if
the foregoing $5.0 million threshold is not reached by July 1, 2019.  We
concurrently entered into an amendment to the previously disclosed $2.5 million
A/R Facility with Heritage intended primarily to reflect the amendment and
restatement of the Amended Loan Agreement. We have met all three of the Billing
Requirements and as a result have incurred the full $7.5 million under the
Amended Loan Agreement.



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In March 2019, in connection with our entry into the Amended Loan Agreement, we
issued Horizon 40,279 seven-year warrants to purchase an aggregate of $600,000
(depending on the level of availability under the Amended Loan Agreement) at the
trailing volume weighted average price ("VWAP") of our common stock on the
NASDAQ Capital Market for the five days preceding the relative dates of grants
at a per share exercise price equal to the lower of (i) $9.93 or (ii) the price
per share of any securities that may be issued by us in an equity financing
during the 18 months following the agreement date.



In May 2019, we 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, we issued Horizon 5,561 seven-year warrants
to purchase an aggregate of $100,000 (depending on the level of availability
under the Loan Agreement) at the trailing VWAP of our common stock on the NASDAQ
Capital Market for the five days preceding the relative dates of grants at a per
share exercise price equal to the lower of (i) $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, we 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, we issued Horizon 5,345 seven-year warrants to
purchase an aggregate of $100,000 (depending on the level of availability under
the Loan Agreement) at the trailing VWAP of our common stock on the NASDAQ
Capital Market for the five days preceding the relative dates of grants at a per
share exercise price equal to the lower of (i) $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").



                             RESULTS OF OPERATIONS



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



                                               For the Three Months Ended            For the Six Months Ended
(in thousands)                                          June 30,                             June 30,
                                                2019                2018              2019               2018
Revenue                                     $       7,681$       3,273$     14,492$      5,184
Cost of revenue                                     4,365               2,941            7,392              5,228
Gross profit (loss)                                 3,316                 332            7,100                (44 )

Operating expenses                                  8,223               4,477           14,522              8,348
Operating loss                                     (4,907 )            (4,145 )         (7,422 )           (8,392 )

Other income                                            8                   -               14                 40
Interest expense                                     (471 )               (36 )           (792 )              (37 )
Change in fair value of warrant liability            (120 )               (19 )           (211 )              (29 )
Net loss                                    $      (5,490 )$      (4,200 )$     (8,411 )$     (8,418 )








Revenues

                             Three Months Ended June 30,                            Six Months Ended June 30,
(In thousands,
except
percentages)        2019        2018        Change $      Change %        2019        2018        Change $      Change %
Revenue            $ 7,681$ 3,273$    4,408           135 %   $
14,492     $ 5,184$    9,308           180 %




The increase in revenue for the three months ended June 30, 2019 was
substantially driven by customer launches and enrollment increases which
contributed $3.8 million of the increase in total revenue year over year. The
remaining increase was primarily due to $0.6 million of unbilled receivables
resulting from estimated variable consideration included in the transaction
price.



The increase in revenue for the six months ended June 30, 2019 was substantially
driven by customer launches and enrollment increases which contributed $7.8
million of the increase in total revenue year over year. The remaining increase
was primarily due to $1.5 million of unbilled receivables resulting from
estimated variable consideration included in the transaction price.



                                       18
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Cost of Revenue

                              Three Months Ended June 30,                            Six Months Ended June 30,
(In thousands,
except
percentages)        2019        2018        Change $       Change %       2019        2018        Change $       Change %
Cost of Revenue    $ 4,365$ 2,941$    1,424             48 %   $ 7,392$ 5,228$    2,164             41 %




The increase in cost of revenue for the three months ended June 30, 2019 was
substantially driven by an increase of $1.1 million in employee
compensation-related costs driven by headcount growth related to our care
coaches, outreach 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 $0.2 million.



The increase in cost of revenue for the six months ended June 30, 2019 was substantially driven by an increase of $1.6 million in employee compensation-related costs driven by headcount growth related to our care coaches, outreach 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 $0.4 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. The costs
for such staff are included in cost of healthcare services during training and
ramp-up periods.





Operating Expenses

                              Three Months Ended June 30,                            Six Months Ended June 30,
(In thousands,
except
percentages)        2019        2018        Change $       Change %        2019        2018        Change $       Change %
Operating
Expenses           $ 8,223$ 4,477          3,746             84 %   $
14,522     $ 8,348$    6,174             74 %






The increase in operating expenses for the three months ended June 30, 2019 was
substantially driven by an increase of $3.1 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, software licenses and equipment costs increased by
$0.5 million.



The increase in operating expenses for the three months ended June 30, 2019 was
substantially driven by an increase of $4.8 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, software licenses and equipment costs increased
by $0.9 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 June 30,                               Six Months Ended June 30,
(In thousands,
except
percentages)         2019           2018       Change $       Change %        2019          2018       Change $       Change %
Interest expense   $    471$     36$     435           1208 %   $    792$     37$     755           2041 %



The increase in interest expense for the three months ended June 30, 2019 reflects incurring the additional two revolving tranches in May 2019 and June 2019.

The increase in interest expense for the six months ended June 30, 2019 reflects entering into the Amended Loan Agreement with Horizon in March 2019 and incurring the additional two revolving tranches in May 2019 and June 2019.

Amortization of debt discount associated with such loan is included in this increase.




                                       19
--------------------------------------------------------------------------------



                        LIQUIDITY AND CAPITAL RESOURCES



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



                                                Six Months Ended June 30,
(In thousands)                                  2019                2018
Net cash used in operating activities       $      (5,955 )$      (3,834 )
Net cash provided by financing activities   $       9,852$       4,658
Net increase in cash and restricted cash    $       3,897       $         824






Cash and restricted cash was $7.5 million as of June 30, 2019. As of August 12,
2019, we had a balance of approximately $5.1 million cash on hand. We had
working capital deficit of approximately $461,000 as of June 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 is approximately $1.0
million per month, for the six months ended June 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 March 2019, we entered into an amended and restated venture loan and security
agreement (as so amended and restated, the "Amended Loan Agreement") with
Horizon, which provides for up to $15.0 million in loans to us, including
initial term loans in the amount of $7.5 million previously funded under the
original Loan Agreement entered into in June 2018 and an additional up to $7.5
million loan in three revolving tranches of $2.5 million in availability,
subject to our achievement of trailing three month billings exceeding $5.0
million, $7.0 million and $8.0 million, respectively (collectively, the "Billing
Requirements").  An initial advance of $2.5 million was funded upon the
execution and delivery of the Amended Loan Agreement, subject to repayment if
the foregoing $5.0 million threshold is not reached by July 1, 2019.  We
concurrently entered into an amendment to the previously disclosed $2.5 million
A/R Facility with Heritage intended primarily to reflect the amendment and
restatement of the Amended Loan Agreement. We have met all three of the Billing
Requirements and as a result have incurred the full $7.5 million under the
Amended Loan Agreement.



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 fees from our launched
programs and expect to increase enrollment and fees throughout 2019.



Historically, we have seen and continue to see net losses, net loss from
operations, negative cash flow from operating activities, and historical working
capital deficits as we continue through a period of rapid growth. The
accompanying financial statements do not reflect any adjustments that might
result if we were unable to continue as a going concern. We have alleviated
substantial doubt by both entering into contracts for additional
revenue-generating health plan customers and expanding our OnTrak program within
existing health plan customers. To support this increased demand for services,
we invested and will continue to invest in additional headcount needed to
support the anticipated growth. Additional management plans include increasing
the outreach pool as well as improving our current enrollment rate. We will
continue to explore ways to increase margins on both existing and new members.



We have a growing customer base and believe we are able to fully scale our
operations to service the contracts and future enrollment providing leverage in
these investments that we expect to generate positive cash flow by the end of
2019. We believe we will have enough capital to cover expenses through the
foreseeable future and we will continue to monitor liquidity. In the event we
add more health plans than budgeted, increase the size of the outreach pool by
more than we anticipate, decide to invest in new products or seek out additional
growth opportunities, we will seek additional financing.



Operating Activities



For the six months ended June 30, 2019, cash used in operating activities was
$6.0 million. The negative cash flows resulted primarily from our net loss of
$8.4 million and unbilled receivables of $1.1 million, partially offset by
stock-based compensation of $2.6 million. Working capital uses of cash included
an increase in accounts receivable of $1.2 million, primarily as a result of the
timing of billings and collections.



The increase in cash used in operating activities for the six months ended June 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 six months ended June 30, 2019 and June 30, 2018.




                                       20
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Financing Activities


Our net cash provided by financing activities was $9.9 million for the six months ended June 30, 2019, compared with net cash provided by financing activities of $4.7 million for the six months ended June 30, 2018. Cash provided by financing activities for the six months ended June 30, 2019 consisted primarily of gross proceeds from the issuance of debt in the amount of $7.5 million, proceeds from options exercise in the amount of $1.5 million, and proceeds from warrant exercise of $1.0 million.

As a result of the above our cash and restricted cash balance as of June 30, 2019 is $7.5 million.




As discussed above, we currently expend cash at a rate of approximately $1.0
million per month, for the six months ended June 30, 2019. We also anticipate
cash inflow to increase during 2019 as we continue to service our executed
contracts and sign new contracts. We expect our current cash resources to cover
our operations through at least the next twelve months; however, delays in
cash collections, revenue, or unforeseen expenditures could impact this
estimate.



                         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 Consolidated Financial Statements.

© Edgar Online, source Glimpses

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