ONTRAK, INC. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve a variety of risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those discussed. These factors include, among others, limited operating history, difficulty in developing, exploiting and protecting proprietary technologies, intense competition and substantial regulation in the healthcare industry. Additional information concerning factors that could cause or contribute to such differences can be found in the following discussion, as well as in Item 1A. -"Risk Factors." OVERVIEW GeneralOntrak is a leading AI-powered and telehealth-enabled, virtualized healthcare company. We harness proprietary big data predictive analytics, artificial intelligence and telehealth, combined with human interaction, to deliver improved member health and cost savings to health plans. We identify, engage and treat health plan members with unaddressed behavioral health conditions that worsen medical comorbidities. Our mission is to help improve the health and save the lives of as many people as possible. We apply advanced data analytics and predictive modeling to identify members with untreated behavioral health conditions, whether diagnosed or not, and coexisting medical conditions that may be impacted through treatment in the Ontrak™ program. We then uniquely engage health plan members who do not typically seek behavioral healthcare by leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Our technology enabledOntrak program is an integrated suite of services that includes 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 believe that the Company's programs seek to improve member health and deliver validated cost savings of more than 50% for enrolled members to healthcare payors. We operate as one segment inthe United States and we have contracted with leading national and regional health plans to make theOntrak program available to eligible members in 30 states, as well as the nation's capital. Recent Developments Acquisition OnOctober 28, 2020 , we completed the acquisition ofLifeDojo Inc. ("LifeDojo"), a comprehensive, science-backed behavior change platform based inSan Francisco, California , for total consideration of approximately$8.9 million , including$3.4 million in cash payment, 75,000 shares of our common stock (of which 74,984 shares were issued and 16 fractional shares were settled in cash) worth approximately$5.0 million at close, as well as certain contingent consideration based on a computation, as defined in the merger agreement, in the event the daily closing price per share of our common stock falls below a specified target price of$60 on two consecutive trading days during a six month period beginning on the sixth month anniversary to the twelfth month anniversary of the closing date of the acquisition (measurement period). As ofOctober 28, 2020 , we determined that the fair value of this contingent consideration was$0.5 million . The contingent consideration amount, if any, is generally payable within five 23 -------------------------------------------------------------------------------- Table of Contents business days following completion of the measurement period. LifeDojo provides online behavior change and wellness programs, using a combination of coaching and mobile apps to help members form health habits and change health behaviors. Preferred Stock Offering In 2020, we completed the offering of a total of 3,770,265 shares of 9.50% Series A Cumulative Perpetual Preferred Stock (the "Series A Preferred Stock"), resulting in aggregate gross proceeds of$93.8 million to the Company (or$86.6 million net of underwriting fees and other offering expenses). The Series A Preferred Stock is listed on the Nasdaq Global Market under the symbol "OTRKP." We generally may not redeem the Series A Preferred Stock untilAugust 25, 2025 , except upon the occurrence of a Delisting Event or Change of Control (as defined in the Certificate of Designations establishing the Series A Preferred Stock), and on and afterAugust 25, 2025 , we may, at our option, redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of$25.00 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock has no maturity date and will remain outstanding indefinitely unless redeemed by us or exchanged for shares of common stock in connection with a Delisting Event or Change of Control. Holders of Series A Preferred Stock generally have no voting rights, but will have limited voting rights if we fail to pay dividends for six or more quarters, whether or not declared or consecutive) and in certain other events.
We used a portion of the net proceeds of the initial offering to fund a segregated dividend account for the payments of the first eight quarterly dividend payments on the Series A Preferred Stock and intends to use the remaining net proceeds for general corporate purposes, which may include working capital, M&A and investments in technology.
Holders of Series A Preferred Stock of record at the close of business of each respective record date (February 15 ,May 15 ,August 15 andNovember 15 ) are entitled to receive, when, as and if declared by our Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends at the rate of 9.50% per annum of the$25.00 per share liquidation preference (equivalent to$2.375 per annum per share). Dividends, if and when declared by our Board of Directors, are payable quarterly in arrears, everyFebruary 28 ,May 30 ,August 31 , andNovember 30 , as applicable, beginning on or aboutNovember 30, 2020 . Dividends will accumulate and be cumulative from, and including, the date of original issuance, which wasAugust 25, 2020 . OnNovember 11, 2020 , our Board of Directors declared the first quarterly dividend on the Company's Series A Preferred Stock for shareholders of record as of the close of business onNovember 15, 2020 . The first quarterly cash dividend equaled$0.6333333 per share, representing more than a full quarter as it covered the period from, and including, the first date we issued the Series A Preferred Shares, at 9.50% per annum of liquidation preference of$25.00 per share. As such, we paid cash dividends of$1.2 million onNovember 30, 2020 . AtDecember 31, 2020 , we had undeclared dividends of$0.7 million . CompanyName and Ticker Symbol Change OnJuly 6, 2020 , we changed our corporate name fromCatasys, Inc. toOntrak, Inc. and changed our NASDAQ ticker symbol from CATS to OTRK effectiveJuly 7, 2020 . We believe the change in our name leverages our national brand recognition of the Company'sOntrak solutions among our health plan members, health plan customers and network of behavioral health providers. Customer Notification OnFebruary 26, 2021 , we were notified by our largest customer that the participation status with this customer will be terminated effectiveJune 26, 2021 . We have been advised to stop enrollment of new members for this customer and await guidance from the customer on transition plans for the 8,100 members who are currently benefiting from theOntrak program. For the year endedDecember 31, 2020 , this customer accounted for approximately 58% of our total revenue Metrics The following table sets forth our key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions: •Revenue. Our revenues are mostly generated from fees charged to health plan customers related to health plan members enrolled in ourOntrak program. Our contracts are generally designed to provide cash fees to us on a monthly basis, an upfront case rate, or fee for service based on enrolled members. Our performance obligation is satisfied over the length of theOntrak program as our services our delivered. 24 -------------------------------------------------------------------------------- Table of Contents •Effective Outreach Pool. OurEffective Outreach Pool represents individuals insured by our health plan customers who have been identified through our advanced data analytics and predictive modeling with untreated behavioral health conditions that may be impacted through enrollment in theOntrak program. •Cash flow from operations. Our current business activities result in an outflow of cash flow from operations as we invest strategically into our business to help continue the growth of our operations. Year Ended December
31,
(in thousands, except outreach pool) 2020 2019 Change % Change Revenue$ 82,837 $ 35,095 $ 47,742 136 % Effective outreach pool 152,000 108,000 44,000 41 % Cash flow from operations$ (6,282) $ (16,901) $ 10,619 63 % 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. 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 related to health plan customers whose health plan members are enrolled in our program is recognized over the enrollment period of the program.
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 related processing fees, and other direct costs incurred to serve our health plan customers. All costs are recognized in the period in which an eligible member receives services.
Operating Expenses
Our operating expenses consist of 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, and costs of marketing and promotional events, corporate communications, online marketing, product marketing and other brand-building activities. All advertising related costs are expense as incurred. Research and development expenses consist primarily of personnel and related expenses for our engineers and software development staff, including salaries, benefits, bonuses and stock-based compensation, and the cost of certain third-party service providers. 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, net
Interest expense consists primarily of interest expense from our note
agreements, accretion of debt discount, amortization of debt issuance costs and
finance leases.
Other Income (Expense), net
Other income (expense) consists of gains (losses) associated with changes in
fair value of warrant and contingent liabilities, debt termination costs and
write-off of deferred debt issuance costs associated with loan payoff, as well
as other miscellaneous income (expense).
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Results of Operations
The table below and the discussion that follows summarize our results of
operations for each of the periods indicated (in thousands):
Year Ended December 31,
2020 2019
Revenue $ 82,837 $ 35,095
Cost of revenue 43,603 20,408
Gross profit 39,234 14,687
Operating expenses:
Research and development 12,923 5,439
Sales and marketing 4,525 4,735
General and administrative 36,709 24,527
Total operating expenses 54,157 34,701
Operating loss (14,923) (20,014)
Other expense, net (1,213) (2,598)
Interest expense, net (7,219) (3,047)
Loss before income taxes (23,355) (25,659)
Income tax benefit 645 -
Net loss $ (22,710) $ (25,659)
RevenueThe mix of our revenues between commercial and government insured members remained consistent year over year. The following table sets forth our sources of revenue for each of the periods indicated:
Year Ended December 31,
(in thousands, except percentages) 2020 2019 Change Change %
Commercial revenue $ 47,741 $ 21,753 $ 25,988 119 %
Percentage of commercial revenue to total
revenue 58 % 62 % (4) %
Government revenue $ 35,096 $ 13,342 $ 21,754 163 %
Percentage of government revenue to total
revenue 42 % 38 % 4 %
Total revenue $ 82,837 $ 35,095 $ 47,742 136 %
Revenue increased $47.7 million , or 136%, in 2020 as compared to 2019. Enrolled
members increased by 8,706 as of December 31, 2020 compared to December 31,
2019 , or 124%. These increases were attributable to the continued expansion of
our Ontrak program with our existing health plan customers, including the
Ontrak-A Program expansions in the first half of 2020 for a national health plan
in nine states, including Washington D.C. , and the Ontrak-CI Program expansion
launched in October 2020 for a national health plan in 13 states, as well as the
increase in our enrolled members from existing and new health plans. Revenues
relating to our expansion health plan members are generally billed up front for
the Ontrak program's annual fee based on enrolled members and contributed to an
increase in our deferred revenue at December 31, 2020 , which we expect to
recognize as revenue over the related service performance period. Our deferred
revenue increased by $15.2 million , or 261%, as of December 31, 2020 compared to
the same period last year.
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Cost of Revenue, Gross Profit and Gross Profit Margin
Year Ended December 31,
(in thousands, except percentages) 2020 2019 Change % Change Cost of revenue$ 43,603 $ 20,408 $ 23,195 114 % Gross profit 39,234 14,687 24,547 167 Gross profit margin 47 % 42 % 5 % Cost of revenue increased$23.2 million , or 114%, in 2020 as compared to 2019. The increase in cost of revenue was primarily due to a$13.6 million increase in member facing headcount and a$9.5 million increase in provider related costs as well as third party administrators for processing claims. Our member facing headcount, which includes our care coaches and member engagement specialists, increased by 229, or 89%, to 486 as ofDecember 31, 2020 compared to the same period last year. Gross profit and gross profit margin increased by$24.5 million and 5%, respectively, in 2020 as compared to 2019. The increase in gross profit was primarily due to the increase in our revenue discussed above. The increase in gross profit margin was primarily related to an improvement in hourly compensation costs and member related material printing costs as a percent of revenue, partially offset by an increase in costs for member visit claims from healthcare providers. We expect our cost of revenue to increase as our revenue increases, but expect our gross margin to increase over time as we optimize the efficiency of our operations and continue to scale our business. Operating Expenses Year Ended December
31,
(in thousands, except percentages) 2020 2019 Change % Change Operating expenses: Research and development$ 12,923 $ 5,439 $ 7,484 138 % Sales and marketing 4,525 4,735 (210) (4) General and administrative 36,709 24,527 12,182 50 Total operating expenses$ 54,157 $ 34,701 $ 19,456 56 Operating loss$ (14,923) $ (20,014) $ 5,091 (25) % Operating loss margin (18.0) % (57.0) % 39.0 % Total operating expense increased$19.5 million , or 56%, in 2020 as compared to 2019. The increase in operating expenses was primarily due to a$12.2 million increase in our general and administrative costs, which was primarily related to$9.1 million of higher employee-related costs related to higher headcount and$3.6 million of higher vendor related costs to support our growing operations. In addition, the increase in operating expenses included a$7.5 million increase in our research and development costs, which was primarily related to an increase of$5.5 million in employee-related costs and a$1.3 million increase in professional consulting costs, as we invest in continued enhancement of our technology and related tools to support the growth of our business. We expect our operating expenses to increase for the foreseeable future as we continue to make investments in the growth of our business, but we expect our operating expenses to decrease as a percentage of revenue over time. Our operating expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our operating and strategic initiatives. Other Expense, net Year Ended December 31,
(in thousands, except percentages) 2020 2019 Change
% Change
Other expense, net $ 1,213 $ 2,598 $ (1,385) (53) %
27-------------------------------------------------------------------------------- Table of Contents Other expense, net decreased$1.4 million , or 53%, in 2020 as compared to 2019. The decrease in other expense, net was primarily due to$2.6 million of debt termination related costs as well as write-off of debt issuance costs related to the repayment and termination of our 2022 Loan in 2019, partially offset by the$1.2 million increase in loss related to the change in fair value of the warrant liability in 2020. Interest Expense, net Year EndedDecember 31 ,
(in thousands, except percentages) 2020 2019 Change
% Change
Interest expense, net $ 7,219 $ 3,047 $ 4,172 137 %
Interest expense, net increased $4.2 million , or 137%, in 2020 as compared to
2019. The increase in interest expenses was primarily due to interest and debt
discount amortization expense related to our 2024 Notes entered into in
September 2019 , as well as higher average outstanding loan balance in 2020
compared to 2019.
Income Tax Benefit
Income tax benefit for the year ended December 31, 2020 was $0.6 million , which
was a result of the deferred tax liability recorded at the time of the LifeDojo
acquisition that was subsequently reversed at December 31, 2020 . There were no
income tax benefit for the year ended December 31, 2019 .
Liquidity and Capital Resources
Cash and restricted cash was $103.2 million as of December 31, 2020 . We had
working capital of approximately $87.2 million as of December 31, 2020 . We have
incurred significant net losses and negative operating cash flows since our
inception. We expect our current cash resources to cover expenses through at
least the next twelve months from the filing date of this Form 10-K. However,
delays in cash collections, revenue, or unforeseen expenditures could impact
this estimate.
Our ability to fund our ongoing operations is dependent on increasing the number
of members that enroll in the Ontrak program. We operate our Ontrak solutions in
30 states, as well as the nation's capital. We provide services to commercial
(employer funded), managed Medicare Advantage, managed Medicaid and duel
eligible (Medicare and Medicaid) populations.
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 consolidated 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 as well as completing debt and equity financings
totaling approximately $87 million and $10 million , respectively, in 2020. To
support this increased demand for services, we invested and will continue to
invest in additional headcount and enhancements to technology needed to support
the anticipated growth. Additional management plans include increasing the
effective outreach pool as well as improving our current enrollment rate. We
will continue to explore ways to increase operational efficiencies resulting in
increase in 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 will generate positive cash flow by in the near future.
We believe we will have enough capital to cover expenses through the foreseeable
future and we will continue to monitor liquidity. If we add more health plans
than budgeted, increase the size of the outreach pool by more than we
anticipate, decide to invest in new products or seek out additional growth
opportunities, we would consider financing these options with either a debt or
equity financing.
The following table sets forth a summary of our cash flows for the periods
indicated (in thousands):
Year Ended December 31,
2020 2019
Net cash used in operating activities $ (6,282) $ (16,901)
Net cash used in investing activities (4,638)
-
Net cash provided by financing activities 100,112
27,349
Net increase in cash and restricted cash$ 89,192 $
10,448
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We used $6.3 million of cash from operating activities during the year ended
December 31, 2020 compared with $16.9 million during the same period in 2019.
The $10.6 million decrease in net cash used in operating activities in 2020
primarily relates to decreased in net loss related to higher revenue in 2020
resulting from the increase in members being treated, the addition of care
coaches, outreach specialists, community care coordinators and other staff to
manage the increasing number of enrolled members, and increased non-cash
expenses in 2020 such as payment in-kind interest and stock-based compensation
expense in 2020 compared to 2019, as well as an increase in deferred revenue,
partially offset by an increase in accounts receivable, related to the Ontrak-CI
expansion in the fourth quarter of 2020.
Net cash used in investing activities in 2020 was $4.6 million and none in the
year ended December 31, 2019 . The $4.6 million of net cash used in investing
activities includes $2.9 million relating to the acquisition of LifeDojo in
October 2020 and $1.7 million of capital expenditures, which were primarily
related to capitalized software development costs and purchases of computer
equipment. We anticipate that software development costs and capital
expenditures will increase in the future as we continue our investment in our IT
infrastructure as well as replace our computer systems that are reaching the end
of their useful lives, increase equipment to support our increased number of
enrolled members, and enhance the reliability and security of our systems. These
future capital expenditure requirements will also depend upon many factors,
including obsolescence or failure of our systems, progress with expanding the
adoption of our solutions, number of member facing employees needed based on the
growth of our enrolled members our marketing efforts, the necessity of, and time
and costs involved in obtaining, regulatory approvals, competing technological
and market developments, and our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other
arrangements.
Our net cash provided by financing activities was $100.1 million for the year
ended December 31, 2020 , compared with net cash provided by financing activities
of $27.3 million for the year ended December 31, 2019 . Net cash provided by
financing activities for the year ended December 31, 2020 was primarily related
to $87.4 million of total proceeds from the issuance of our Series A Preferred
Stock, $10.0 million of proceeds from the issuance of the remaining 2024 Notes
and $6.2 million of proceeds received from stock option exercises, partially
offset by a $1.2 million dividend payment on our Series A Preferred Stock and
$1.2 million of payments on our financed insurance premiums. Net cash provided
by financing activities for the year ended December 31, 2019 consisted of the
gross proceeds from the issuance of debt in the amount of $44 million , proceeds
from option exercises of $1.9 million and warrant exercises of $1.1 million ,
partially offset by loan repayment of $16.9 million , debt issuance costs of $2.8
million and debt termination costs of $2.0 million .
As a result of the above, our total cash and cash equivalents, including
restricted cash of $16.3 million , was $103.2 million as of December 31, 2020 .
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.
Debt
See Note 8 of the Notes to the Consolidated Financial Statements in Part II,
Item 8 of this Form 10-K for a detailed discussion about our debt.
Preferred Stock Offering
See Note 7 of the Notes to the Consolidated Financial Statements in Part II,
Item 8 of this Form 10-K for a detailed discussion about our preferred stock
offering and related preferred stock dividends.
Off-Balance Sheet Arrangements
As of December 31, 2020 , we had no off-balance sheet arrangements.
Critical Accounting Policy and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP"). U.S. GAAP requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. We base
our estimates on experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that may
not be readily apparent from other sources. On an
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on-going basis, we evaluate the appropriateness of our estimates and we maintain
a thorough process to review the application of our accounting policies. Our
actual results may differ from these estimates.
We consider our critical accounting estimates to be those that (1) involve
significant judgments and uncertainties, (2) require estimates that are more
difficult for management to determine, and (3) may produce materially different
results when using different assumptions. We have discussed these critical
accounting estimates, the basis for their underlying assumptions and estimates,
and the nature of our related disclosures herein with the audit committee of our
Board of Directors. We believe our accounting policies related to revenue
recognition and share-based compensation expense involve our most significant
judgments and estimates that are material to our consolidated financial
statements. They are discussed further below.
Revenue Recognition
The Company generates virtual healthcare service revenue from contracts with
customers as it satisfies its performance obligations to customers and their
members enrolled in our Ontrak program. The virtual healthcare service is
transferred to a customer when, or as, the customer obtains control of that
service. A performance obligation may be satisfied over time or at a point in
time. Revenue from a performance obligation satisfied over time is recognized by
measuring progress in a manner that depicts the transfer of services to the
customer. Revenue from a performance obligation satisfied at a point in time is
recognized at the point in time that the Company determines the customer obtains
control over the promised service. The amount of revenue recognized reflects the
consideration the Company expects to be entitled to in exchange for those
promised services (i.e., the "transaction price"). In determining the
transaction price, the Company considers multiple factors, including
identification of the performance obligation and the effects of variable
consideration. Variable consideration is included in the transaction price only
to the extent it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainties with respect
to the amount are resolved. In determining when to include variable
consideration in the transaction price, the Company considers the range of
possible outcomes, the predictive value of past experiences, the time period of
when uncertainties expect to be resolved and the amount of consideration that is
susceptible to factors outside the Company's influence, such as the judgment and
actions of third parties.
Cost of Revenue
Cost of revenue consists primarily of salaries related to our care coaches,
outreach specialists and other staff directly involved in member care,
healthcare provider claims payments and related processing fees and other direct
costs incurred in delivering our performance obligation. Salaries and fees
charged by our third party administrators for processing claims are expensed in
the period in which an eligible member receives services.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Financial instruments that potentially
subject us to a concentration of credit risk consist of cash and cash
equivalents. Cash is deposited with what we believe are highly credited, quality
financial institutions. The deposited cash exceeds Federal Deposit Insurance
Corporation insured limits. We cannot provide assurance that we will not
experience losses on these deposits.
Commissions
We defer commissions paid to our sales force and engagement specialists as these
amounts are incremental costs of obtaining a contract with a customer and are
recoverable from future revenue that gave rise to the commissions. Commissions
for initial contracts and member enrollments are deferred on the consolidated
balance sheets and amortized on a straight-line basis over a period of benefit
that has been determined to be six years and one year, respectively.
Share-Based Compensation
Stock Options and Restricted Stock Units - Employees and Directors
We measure and recognize compensation expense for all share-based payment awards
made to employees and directors based on estimated fair values on the date of
grant. We estimate the fair value of RSU awards based on the closing stock price
of our common shares on the date of grant. We estimate the fair value of shares
for stock option awards using the Black-Scholes option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the consolidated statements of
operations. We recognize forfeitures when they occur.
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Stock Options and Warrants - Non-employees
We account for the issuance of stock options and warrants for services from
non-employees by estimating the fair value of stock options and warrants issued
using the Black-Scholes pricing model. This model's calculations incorporate the
exercise price, the market price of shares on grant date, the weighted average
risk-free interest rate, expected life of the option or warrant, expected
volatility of our stock and expected dividends.
For options and warrants issued as compensation to non-employees for services
that are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received. For unvested shares, the change in fair value during the
period is recognized in expense using the graded vesting method.
Income Taxes
We account for income taxes using the liability method in accordance with
Accounting Standards Committee ("ASC") 740 "Income Taxes." To date, no current
income tax liability has been recorded due to our accumulated net losses.
Deferred tax assets and liabilities are recognized for temporary differences
between the financial statement carrying amounts of assets and liabilities and
the amounts that are reported in the tax returns. Deferred tax assets and
liabilities are recorded on a net basis; however, our net deferred tax assets
have been fully reserved by a valuation allowance due to the uncertainty of our
ability to realize future taxable income and to recover our net deferred tax
assets.
Recently Issued or Newly Adopted Accounting Pronouncements
For information regarding recent accounting pronouncements adopted and under
evaluation, refer to Note 2 of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
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