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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K/A
Amendment No. 210-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___to _____
Commission File Number 001-31932
__________________________
Ontrak, Inc.
(Exact name of registrant as specified in its charter)
__________________________

Delaware88-0464853
(State or other jurisdiction of incorporation)(I.R.S. Employer Identification Number)

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 ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $0.0001 per shareOTRKThe NASDAQ Global Market
9.50% Series A Cumulative Perpetual Preferred Stock, Exchange$0.0001 par valueOTRKPThe NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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 June 28, 2019,30, 2020, the last business day of the registrant’s second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) was $140,851,867$194,131,885 based on the $19.22$24.74 closing sales price of the common stock on The NASDAQ Capital Market on that date.

As of March 6, 2020,3, 2021, there were 16,726,96417,690,285 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.Portions of the 2021 definitive Proxy Statement are incorporated by reference into Part III of this Form 10-K.


EXPLANATORY NOTE

This Annual Report on Form 10-K/A (Amendment No. 2) amends the Annual Report on Form 10-K originally filed with the Securities and Exchange Commission (the “SEC”) by Ontrak, Inc. (the “Company”) on March 16, 2020 and as amended by Amendment No. 1 thereto filed with the SEC on April 29, 2020 (as so amended, the “Original 10-K”) to correct certain typographical errors contained in Exhibits 32.1 and 32.2 to the Original 10-K. For the convenience of the reader, this Form 10-K/A sets forth the Original 10-K, in its entirety, as amended to reflect such corrections to Exhibits 32.1 and 32.2. Except for the information described above and the change of our corporate name from Catasys, Inc. to Ontrak, Inc. on July 6, 2020 and related change in our NASDAQ ticker symbol from CATS to OTRK effective July 7, 2020 as reflected on the cover page and signature pages of this Amendment No. 2, the Company has not modified or updated disclosures provided in the Original 10-K in this Amendment. Accordingly, this Amendment does not reflect events occurring after the respective filing dates of the Original 10-K or modify or update those disclosures affected by subsequent events, including any developments relating to the coronavirus (COVID-19) pandemic. Information not affected by this Amendment is unchanged and reflects the disclosures made at the respective times the Original 10-K was filed.






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Item 16.Form 10-K Summary2735

In this Annual Report on Form 10-K, except as otherwise statedall references to “Ontrak,” “Ontrak, Inc.,” “we,” “us,” “our” or the context otherwise requires, the terms “the Company,” “our Company,” “we,” “us” or “our” refer to Catasys,“Company” mean Ontrak, Inc., ourits wholly-owned subsidiaries and variable interest entities, and our wholly-owned subsidiaries. Ourexcept 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.stock" and the Company’s 9.50% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, is referred to as “Series A Preferred Stock.




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PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed due to factors such as, 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.1A - “Risk Factors” and Item 7.“Management’s7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements.

ITEM 1.    BUSINESS
Overview
Catasys,Ontrak, Inc. (“Ontrak,” “Company,” “we,” “us” or “our”) was incorporated in the State of Delaware on September 29, 2003. Unless the context requires otherwise, the words “Catasys,” “we,” “Company,” “us” and “our” refer to Catasys, Inc.
CatasysOntrak was founded with a passion for engaging with and helping improve the health and save lives of anyone impacted by behavioral health conditions. We are a leading Artificial Intelligence (“AI”)-powered and technology-enabledtelehealth-enabled, virtualized healthcare company, whose mission is to help improve the health and harness proprietary bigsave the lives of as many people as possible. Our technology enabled platform, PRE™(Predict-Recommend-Engage), organizes and automates healthcare data integration and analytics through the application of machine intelligence to deliver analytic insights. Our 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 artificial intelligence and telehealth, combined with human interaction, toengagement, we deliver improved member health and costvalidated outcomes and savings to health plans. We identify, engage and treat health planhealthcare payors.

Our technology-enabled Ontrak™ solutions, a critical component of the PRE platform, are designed to provide integrated healthcare solutions to members with unaddressed behavioral health conditions that worsen medical comorbidities.
conditions. We apply advanced data analytics and predictive modelinghave a unique ability 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 planthese members, who do not typicallyotherwise seek behavioral healthcare, by leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Our technology enabled OnTrak solution is an integrated suite of services that includesWe integrate evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, nurse-ledalong with care coaching and local community support. We believe thatin-market Community Care Coordinators who address the program is currently improvingsocial and environmental determinants of health, including loneliness. As behavioral health conditions cause or exacerbate chronic medical conditions such as diabetes, hypertension, coronary artery disease, chronic obstructive pulmonary disease, and congestive heart failure, our programs seek to improve member health and at the same time, demonstrating reduced medical utilization, driving a reduction in total health plan costsdeliver validated cost savings of more than 50% for enrolled members.members to healthcare payors.
We operate as one segment in the United States and we have contracted with leading national and regional health plans to make OnTrakthe Ontrak program available to eligible members in twenty eight states.30 states and our nation's capital.
Recent Developments
Corporate Name and Ticker Symbol Change
On July 6, 2020, we changed our corporate name from Catasys, Inc. to Ontrak, Inc. and changed our NASDAQ ticker symbol from CATS to OTRK effective July 7, 2020. We believe the change in our name leverages our national brand recognition of the Company's Ontrak solutions among our health plan members, health plan customers and network of behavioral health providers.
Acquisition
On October 28, 2020, we completed the acquisition of LifeDojo Inc. (“LifeDojo”), a comprehensive, science-backed behavior change platform based in San Francisco, California. 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. This acquisition expands the total addressable market by enabling the creation of lower cost digital interventions across behavioral
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health and chronic disease populations. LifeDojo's member-facing apps also enhances our market leading behavioral engagement capabilities.
Customer Notification

On February 26, 2021, we were notified by our largest customer that the participation status with this customer will be terminated effective June 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 the Ontrak program. For the year ended December 31, 2020, this customer accounted for approximately 58% of our total revenue.
Our Market
The true impact of behavioral health is often under-identified by organizations that provide healthcare benefits. Individuals with unaddressed behavioral health conditions that worsen chronic medical comorbidities cost health plans and employers a disproportionate amount of the total healthcare costs.
According to the U.S. Census Bureau in 2017, there were over 295 million lives in the U.S. covered by various private managed care programs, including Preferred Provider Organizations, Health Maintenance Organizations, self-insured employers and managed Medicare/Medicaid programs.  Each year, based on our analysis, approximately 1.9% of commercial plan members will have a substance dependence diagnosis, and that figure may be lesser or greater for specific payors depending on the health plan demographics and location.  A smaller, high-cost subset of this populationthese patients with behavioral health conditions drives the majority of the claims costs for the overall substance dependent population. OneAccording to Milliman's research report titled "How do individuals with behavioral health conditions contribute to physical and total healthcare spending?" dated August 13, 2020, the behavioral subgroup patients constituted 5.7% of the total commercial population of insured lives but accounted for 44% of total commercial healthcare costs. Furthermore, it was noted in McKinsey and Co.'s article titled "A holistic approach for the U.S. behavioral health crisis during the COVID-19 pandemic," dated August 6, 2020, that in the post-COVID-19 period, traumatic stress, unemployment, and social isolation will lead to exacerbation of existing behavioral health conditions and onset of new conditions that could drive $100 billion to $140 billion of additional spending on behavioral and physical health services in 2020 and 2021.
The National Institute of Mental Health reports that nearly one in five adults in the United States of America are impacted by one of the following behavioral health issues:
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Substance abuse. Scientific research indicates that not only can drugs interfere with normal brain functioning, but they can also have long-lasting effects that persist even after the drug is no longer being used. Data indicates that at some point, changes may occur in the brain that can turn drug and alcohol abuse into substance dependence—a chronic, relapsing, and sometimes fatal disease. Those dependent on drugs may suffer from compulsive drug craving and usage and be unable to stop drug use or remain drug abstinent without effective treatment. Professional medical treatment may be necessary to end this physiologically-based compulsive behavior.
Anxiety Disorders. According to the National Institute of Mental Health, anxiety disorders are the most common mental illness in the U.S., affecting an estimated 19.1% of adults aged 18 years or older.
Depression. In 2016,2017, an estimated 10.317.3 million U.S. adults aged 18 or older, or approximately 4.3%7.1% of all U.S. adults, had at least one major depressive episode in the past year, according to the National Institute of Mental Health. Patients with substance dependence and mood disorders were ranked four out of the top 10 reasons leading to readmission rates for Medicaid patients.
When considering behavioral health-related costs, many organizations have historically only looked at direct treatment costs–usually behavioral claims. For the members we seek to engage our solution, costs associated with behavioral health treatment represent a small portion of their overall healthcare claims, while the medical costs are significant.

significant, as most patients with behavioral health conditions do not receive the appropriate treatment they need for other existing medical conditions.
Our Solution
Our OnTrakOntrak technology enabled solution includes the identification, engagement and treatment of health plan members with unaddressed behavioral health conditions that worsen medical comorbidities.conditions. We specifically focus on members with anxiety, depression and/or substance use disorder(s). We apply by applying claims-based analytics and predictive modeling to first identify health plan members with medical costs that may be impacted through behavioral health treatment with the OnTrakOntrak program. These members may or may not be diagnosed with a behavioral condition. We then conduct multichannel outreach to eligibleengage and enroll these members. Enrolled members receive nurse-led care coaching and the opportunity to participate in telehealth or face-to-face evidence-based psychosocial and pharmacological treatment and in some cases, in-market Community Care Coordinator support.from our proprietary network of third-party providers. We believe the benefits of OnTrakOntrak include improved clinical outcomes and decreased costs for the payor, as well as improved quality of life for the member. We provide outcomes reporting to payors on a periodic basis to demonstrate the value of the program.
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Our business strategy is to deliver proven, repeatable clinical and financial outcomes to health plans for their members with unaddressed behavioral conditions that worsen medical comorbidities. We do this by identifying, engaging and treating these members through our OnTrakOntrak solution. Our OnTrakOntrak solution to date has focused on substance use disorder, anxiety and depression.
Our OnTrakOntrak solution combines care coaching, innovative psychosocial and medical treatment delivered through a proprietary provider network and in-market support from Community Care Coordinators. The solution is designed to help payors treat and manage populations struggling with substance use disorder, depression and anxiety to improve their health and thereby decrease their overall health care costs.
We are currently marketing our OnTrakOntrak solution to payors on a case rate, monthly fee, or fee for service basis, which involves educating them on the disproportionately high cost of their population with unaddressed behavioral health conditions that exacerbate medical comorbidities, and demonstrating the potential for OnTrakOntrak to reduce these costs.

Regulatory Matters
EmployeesThe healthcare industry is highly regulated and continues to undergo significant changes. Healthcare companies are subject to extensive and complex federal, state and local laws, regulations and judicial decisions. For more information about regulatory matters, see discussion under "Risks related to our healthcare industry" in Item 1A - Risk Factors of this Form 10-K.
AsHuman Capital Resources
We believe our employees are among our most important resources and are critical to the continued success of December 31, 2019, we employed 395 full-time employees.our business. We are focused on attracting and retaining talented and experienced individuals across all areas of our business and committed to hiring, developing and supporting a diverse and inclusive workplace. All of our employees are required to adhere to a professional code of conduct and comply with annual training on, but not limited to, raising awareness, preventing and reporting any type of unlawful discrimination. We are not a party to any labor agreements and none of our employees are represented by a labor union.

As of December 31, 2020, we had a total of 726 employees, which included 723 full-time, one part-time and two temporary employees, and represents an 84% year-over-year increase in our total employee headcount. A majority of our employee base is comprised of care coaches, member engagement specialists and other staff directly involved in member care, as well as research and development, engineering and administrative team members. We expect our headcount growth to continue for the foreseeable future as we continue to make investments to support the growth of our business.

In addition, as of December 31, 2020, we had a total of approximately 40 independent contractors who provide us various consulting services, including recruiting, health network providers, marketing and other professional services, that are important to the operation of our business.
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CorporateAvailable Information
We were incorporated in the State of Delaware on September 29, 2003. Our principal executive offices are located at 2120 Colorado Ave.,Avenue, Suite 230, Santa Monica, CACalifornia 90404, and our telephone number is (310) 444-4300.
Our corporate website address is www.catasys.com,www.ontrak-inc.com, the contents of which are not incorporated herein. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). The Securities and Exchange CommissionSEC maintains an internet site that contains our public filings with the Securities and Exchange CommissionSEC and other information regarding our company, at www.sec.gov. The contents of these websites are not incorporated into this Annual Report. Further, our references to the URLs for these websites are intended to be inactive textual reference only.

ITEM 1A.    RISK FACTORS
In evaluating us and our common stock,securities, we urge you to carefully consider the risks and other information in this Annual Report on Form 10-K. Any of the risks discussed in this Annual Report on Form 10-K, 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. If any of these risks occur, our business, results of operations and financial condition could be harmed, the
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price of our common stock could decline, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this Annual Report on Form 10-K.

Summary of Risk Factors

Below is a summary of the principal factors that make an investment in our securities speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our securities.

We have a limited operating history, have incurred significant losses since our inception and may be unable to obtain additional funds before we achieve positive cash flows.
We may fail to manage our growing business and may not be successful in identifying or completing any acquisitions necessary to continue such growth. Any such acquisition completed may not be successfully integrated with our operations or yield additional value for stockholders.
Our programs and solutions may not be as effective as we believe and may not achieve broad market acceptance and announcements of disappointing results may lead to declines in the market prices of our securities.
Our business currently depends upon four large customers; the loss of any one of such customers would have a material adverse effect on us.
We depend upon our senior management and key consultants and their loss or unavailability could put us at a competitive disadvantage.
We need to attract and retain highly skilled personnel; we may be unable to effectively manage growth with our limited resources.
Customers may not achieve the savings we expect are created by our programs and solutions, which could adversely impact our business.
Market acceptance of our programs and solutions depends in large part on the willingness of third party payors to cover them, which is beyond our control.
We may be unable to protect our intellectual property rights and we may be liable for infringing the intellectual property rights of others.
Ongoing healthcare legislative and regulatory reform measures may have a material adverse effect on our business and results of operations.
We must comply with significant government regulations, including with respect to licensure and privacy matters.
The agreement with our lenders regarding our outstanding senior secured indebtedness contains significant restrictions on our business and operations and requires ongoing compliance with detailed financial covenants. Any failure to comply with the terms of such indebtedness would have a material adverse effect on our business and our securities.
Our Series A Preferred Stock has no fixed maturity date, ranks junior to our currently outstanding indebtedness, is entitled to the payment of dividends only to the extent we may do so under Delaware corporate law, is subject to restrictions on transfer contained in our charter and has limited voting rights.
Our Chairman and CEO controls over 51% of the outstanding common stock and may determine all matters presented for stockholder approval, including the election of directors, significant corporate transactions and our dissolution.
The price of our common stock and preferred stock may be volatile.
The market prices for our common stock and preferred stock may be adversely impacted by future events.
Our certificate of incorporation, bylaws and Delaware law have anti-takeover provisions that could discourage, delay or prevent a change in control, which may cause our stock price to decline.

Risk Factors
Risks related to our business

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We have a limited operating history, expect to continue to incur substantial operating losses and may be unable to obtain additional financing.

We have been unprofitable since our inception in 2003 and expect to incur substantial additional operating losses and negative cash flow from operations for at least the next twelve months. At December 31, 2019,2020, cash and restricted cash equivalents was $13.6$103.2 million and accumulated deficit was $331$354.0 million. During the year ended December 31, 2019, our cash and cash equivalents used by operating activities was ($16.9) million. Additionally, we had working capital of $6.3 million. We expect our current cash resources to cover expenses through at least the next twelve12 months however,from the filing date of this Form 10-K. However, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

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 OnTrakOntrak program within existing health plan customers.customers as well as completing equity and debt 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 needed to support the anticipated growth. Additional management plans include adding new customers, 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 will generate positive cash flow in the near future. We believe we will have enough capital to cover expenses through the foreseeable future and we 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 aadditional debt or equity financing.

Wemayneed additional funding, and we cannot guarantee that we will find adequate sources of capital in the future.

We have incurred negative cash flows from operations since inception and have expended, and expect to continue to expend, substantial funds to grow our business. We may require additional funds before we achieve positiveare able to generate enough cash flows and we may never become cash flow positive.to fund our operations.

If we raise additional funds by issuing equity securities, such financing will result in further dilution to our stockholders. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. If
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we raise funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations in addition to those referenced above.

We do not know whether additional financing will be available on commercially acceptable terms, or at all. If adequate funds are not available or are not available on commercially acceptable terms, we may need to continue to downsize, curtail program development efforts or halt our operations altogether.

We may fail to successfully manage and grow our business, which could adversely affect our results of operations, financial condition and business.

Continued expansion could put significant strain on our management, operational and financial resources. The need to comply with the rules and regulations of the SEC will continue to place significant demands on our financial and accounting staff, financial, accounting and information systems, and our internal controls and procedures, any of which may not be adequate to support our anticipated growth. The need to comply with the state and federal healthcare, security and privacy regulation will continue to place significant demands on our staff and our policies and procedures, any of which may not be adequate to support our anticipated growth. We may not be able to effectively hire, train, retain, motivate and manage required personnel. Our failure to manage growth effectively could limit our ability to satisfy our reporting obligations, or achieve our marketing, commercialization and financial goals.

We may be unable to successfully execute on our growth initiatives, business strategies or operating plans.

We are continually executing a number of growth initiatives, strategies and operating plans designed to enhance our business. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets and cost savings, that we expect to achieve or it may be more costly to do so than we anticipate. A variety of risks could cause us not to realize some or all of the expected benefits. These risks include, among others, delays in the
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anticipated timing of activities related to such growth initiatives, strategies and operating plans, increased difficulty and cost in implementing these efforts, including difficulties in complying with new regulatory requirements and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition and results of operations may be materially adversely affected.

We may periodically consummate opportunistic acquisitions of other companies, and we may not realize expected benefits or such acquisitions or we may have difficulties integrating acquired companies into our operations in a cost-effective manner, if at all.

We may periodically consummate opportunistic acquisitions of businesses, assets, personnel or technologies that allow us to complement our existing operations, expand our market coverage, enter new geographic markets, or add new business capabilities. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets. In October 2020, we completed a strategic acquisition and are focused on integrating this acquisition into our operations. No assurance can be given that the benefits or synergies we may expect from an acquisition will be realized to the extent or in the time frame we anticipate. We may lose key employees, customers, vendors and other business partners of a company we acquire after announcement of acquisition plans. In addition, an acquisition may involve a number of risks and difficulties, including expansion into new geographic markets and business areas in which our management has limited prior experience, the diversion of management’s attention to the operations and personnel of the acquired company, the integration of the acquired company’s personnel, operations and technology systems and applications, changing relationships with customers, vendors or strategic partners, differing regulatory requirements including in new geographic markets and new business areas, and potential short-term adverse effects on our operating results. These challenges can be magnified as the size of the acquisition increases. Any delays or unexpected costs incurred in connection with the integration of an acquired company or otherwise related to an acquisition could have a material adverse effect on our business, financial condition and results of operations.

An acquisition may require significant expenses and can result in increased debt or other contingent liabilities, adverse tax consequences, deferred compensation charges, the recording and later amortization of amounts related to deferred compensation and certain purchased intangible assets, and the refinement or revision of fair value acquisition estimates following the completion of an acquisition, any of which items could negatively impact our business, financial condition and results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline. An acquisition also could absorb substantial cash resources, require us to incur or assume debt obligations, or involve our issuance of additional equity securities. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company. An acquired entity also may be leveraged or dilutive to our earnings per share, or may have unknown liabilities. In addition, the combined entity may have lower than expected revenues or higher expenses and therefore may not achieve the anticipated results. Any of these factors relating to an acquisition could have a material adverse impact on our business, financial condition and results of operations.

Our programs may not be as effective as we believe them to be, which could limit our potential revenue growth.

Our belief in the efficacy of our OnTrakOntrak solution is based on a limited experience with a relatively small number of patients.members. Such results may not be statistically significant, have not been subjected to close scientific scrutiny, and may not be indicative of the long-term future performance of treatment with our programs. If the initially indicated results cannot be successfully replicated or maintained over time, utilization of our programs could decline substantially. There are no standardized methods for measuring efficacy of programs such as ours. Even if we believe our solutions are effective, our customers could determine they are not effective by utilizing different outcomesoutcome measures. In addition, even if our customers determine our solutions are effective they may discontinue them because they determine that the aggregate cost savings are not sufficient or that our programs do not have a high enough return on investment. Our success is dependent on our ability to enroll third-party payor members in our OnTrakOntrak solutions. Large scale outreach and enrollment efforts have not been conducted and only for limited time periods and we may not be able to achieve the anticipated enrollment rates.

Our OnTrakOntrak solution may not become widely accepted, which could limit our growth.

Our ability to achieve further marketplace acceptance for our OnTrakOntrak solution is dependent on our ability to demonstrate financial and clinical outcomes from our agreements. If we are unable to secure sufficient contracts to achieve recognition or acceptance of our OnTrakOntrak solution or if our program does not demonstrate the expected level of clinical improvement and cost savings, it is unlikely that we will be able to achieve widespread market acceptance.

Disappointing results for our solutions or failure to attain our publicly disclosed milestones could adversely affect market acceptance and have a material adverse effect on our stock price.
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Disappointing results, later-than-expected press release announcements or termination of evaluations, pilot programs or commercial OnTrakOntrak solutions could have a material adverse effect on the commercial acceptance of our solutions, our stock price and on our results of operations. In addition, announcements regarding results, or anticipation of results, may increase volatility in our stock price. In addition to numerous upcoming milestones, from time to time we provide financial guidance and other forecasts to the market. While we believe that the assumptions underlying projections and forecasts we make publicly available are reasonable, projections and forecasts are inherently subject to numerous risks and uncertainties. Any failure to achieve milestones, or to do so in a timely manner, or to achieve publicly announced guidance and forecasts, could have a material adverse effect on our results of operations and the price of our common stock.

We face business disruption and related risks resulting from the recent outbreak of the novel coronavirus 2019 (COVID-19), pandemic, which could have a material adverse effect on our business and results of operations.

Our business could be disrupted and materially adversely affected by the recent outbreakCOVID-19 pandemic, including as a result of COVID-19.mutations of such virus and the global spread of viral variants that may be more contagious or resistant to currently known treatments. As a result of measures imposed by the governments in affected regions, businesses and schools have been from time to time suspended due to quarantines intended to contain this outbreak and many people have been forced to work from home in those areas. The spread of COVID-19 from China to other countries has resulted in the Director GeneralAs a result of the World Health Organization declaringglobal pandemic, trade and business activities around the outbreak of COVID-19 as a Public Health Emergency of International Concern (PHEIC), based on the advice of the Emergency Committee under the International Health Regulations (2005), and the Centers for Disease Control and Prevention in the U.S. issued a warning on February 25, 2020 regarding the likely spread of COVID-19 to the U.S. While the COVID-19 outbreak is still in very early stages,world have been adversely affected, international stock and commodity markets have begunfluctuated widely and many regions are exhibiting signs of economic recession. Several programs were enacted in different countries in efforts to reflect the uncertainty associated with the slow-down in the Chinese economyalleviate rising levels of unemployment and theeconomic dislocation created by significantly reduced levels of international travel experienced sincesocial and business activity, although their longer term effectiveness is still uncertain particularly in view of a "second wave" effect of the beginningspread of Januarythe contagion and the significant decline in the Dow Industrial Average at the end of February 2020 was largely attributed to the effects of COVID-19.related variants. We are stillcontinuously assessing our business operations and system supports and the impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-019COVID-19 or its consequences, including downturns in business sentiment generally or in our sector in particular.particular, or its effects on our members or outreach pool.

Our industry is highly competitive, and we may not be able to compete successfully.

The healthcare business in general, and the behavioral health treatment business in particular, are highly competitive. While we believe our products and services are unique, we operate in highly competitive markets. We compete with other healthcare management service organizations, care management and disease management companies, including Managed Behavioral Healthcare Organizations (MBHOs), other specialty healthcare and managed care companies, and healthcare technology companies that are offering treatment and support of behavioral health on-line and on mobile devices. Most of our competitors are significantly larger and have greater financial, marketing and other resources than us. We believe that our ability to offer customers a comprehensive and integrated behavioral health solution, including the utilization of our analytical models and innovative member engagement methodologies, will enable us to compete effectively. However, there can be no assurance that we will not encounter more effective competition in the future, that we will have financial resources to continue to improve our offerings or that we will be successful improving them, which would limit our ability to maintain or increase our business.

Our competitors may develop and introduce new processes and products that are equal or superior to our programs in treating behavioral health conditions. Accordingly, we may be adversely affected by any new processes and products developed by our competitors.

A substantial percentage of our revenues are attributable to four large customers, any or all of which may terminate our services at any time.

Four customers accountaccounted for an aggregate of 85%94% and 76%85% of our total revenue for the yearsyear ended December 31, 2020 and 2019, and 2018, respectively, and fourrespectively. Also, two customers represented an aggregate of 89% and 88%99% of our total accounts receivable as of December 31, 20192020 and 2018, respectively.three customers represented an aggregate of 85% of our total accounts receivable as of December 31, 2019. On February 26, 2021, we were notified by our largest customer that the participation status with this customer will be terminated effective June 26, 2021 and were advised to stop enrollment of new members await guidance from the customer on transition plans for the 8,100 members who are currently benefiting from the Ontrak program. For the year ended December 31, 2020, this customer accounted for approximately 58% of our total revenue. We expect that revenues from a limited number of customers will continue for the foreseeable future. Sales to these customers are made pursuant to agreements with flexible termination provisions, generally entitling the customer to terminate with or without cause on limited notice to us. We may not be able to keep our key customers, or these customers may decrease their enrollment levels. Any substantial decrease or delay in revenues relating to one or more of our key customers would harm our financial results. If revenues relating to current key customers cease or are reduced, we may not obtain sufficient enrollments from other customers necessary to offset any such losses or reductionsreductions.
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We depend on key personnel, the loss of which could impact the ability to manage our business.
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We are highly dependent on our senior management and key operating and technical personnel. The loss of the services of any member of our senior management and key operating and technical personnel could have a material adverse effect on our
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business, operating results and financial condition. We also rely on consultants and advisors to assist us in formulating our strategy.

We will need to hire additional employees in order to achieve our objectives. There is currently intense competition for skilled executives and employees with relevant expertise, and this competition is likely to continue. The inability to attract and retain sufficient personnel could adversely affect our business, operating results and financial condition.

Our success depends largely upon the continued services of our key executive officers. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.

To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for qualified professionals. We may not be successful in continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with experience working in the healthcare market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have.

In addition, in making employment decisions, particularly in high-technology industries, job candidates often consider the value of the stock options or other equity instruments they are to receive in connection with their employment. Volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain highly skilled personnel. Further, the requirement to expense stock options and other equity instruments may discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. Failure to attract new personnel or failure to retain and motivate our current personnel, could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on our ability to recruit, retain and develop a very large and diverse workforce. We must transform our culture in order to successfully grow our business.

Our products and services and our operations require a large number of employees. A significant number of employees have joined us in recent years as we continue to grow and expand our business. Our success is dependent on our ability to transform our culture, align our talent with our business needs, engage our employees and inspire our employees to be open to change, to innovate and to maintain member- and client-focus when delivering our services. Our business would be adversely affected if we fail to adequately plan for succession of our executives and senior management; or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs, in light of the current rapidly changing environment. While we have succession plans in place and we have employment arrangements with a limited number of key executives, these do not guarantee that the services of these or suitable successor executives will continue to be available to us.

We may be subject to future litigation, which could result in substantial liabilities that may exceed our insurance coverage.

All significant medical treatments and procedures, including treatment utilizing our programs, involve the risk of serious injury or death. While we have not been the subject of any such claims, our business entails an inherent risk of claims for personal injuries and substantial damage awards. We cannot control whether individual physicians and therapists will apply the appropriate standard of care in determining how to treat their patients. While our agreements typically require physicians to indemnify us for their negligence, there can be no assurance they will be willing and financially able to do so if claims are made. In addition, our license agreements require us to indemnify physicians, hospitals or their affiliates for losses resulting from our negligence.

We currently have insurance coverage for personal injury claims, directors’ and officers’ liability insurance coverage, and errors and omissions insurance. We may not be able to maintain adequate liability insurance at acceptable costs or on favorable terms. We expect that liability insurance will be more difficult to obtain and that premiums will increase over time and as the volume of patients treated with our programs increases. In the event of litigation, we may sustain significant damages or settlement expense (regardless of a claim's merit), litigation expense and significant harm to our reputation.

If third-party payors fail to provide coverage and adequate payment rates for our solutions, our revenue and prospects for profitability will be harmed.

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Our future revenue growth will depend in part upon our ability to contract with health plans and other insurance payors for our OnTrakOntrak solutions. In addition, insurance payors are increasingly attempting to contain healthcare costs, and may not cover or provide adequate payment for our programs. Adequate insurance reimbursement might not be available to enable us to realize an appropriate return on investment in research and product development, and the lack of such reimbursement could have a material adverse effect on our operations and could adversely affect our revenues and earnings.

We may not be able to achieve promised savings for our OnTrakOntrak contracts, which could result in pricing levels insufficient to cover our costs or ensure profitability.

Many of our OnTrakOntrak contracts are based upon anticipated or guaranteed levels of savings for our customers and achieving other operational metrics resulting in incentive fees based on savings. If we are unable to meet or exceed promised savings, achieve agreed upon operational metrics, or favorably resolve contract billing and interpretation issues with our customers, we may be required to refund from the amount of fees paid to us any difference between savings that were guaranteed and the savings, if any, which were actually achieved; or we may fail to earn incentive fees based on savings. Accordingly, during or at the end of the contract terms, we may be required to refund some or all of the fees paid for our services. This exposes us to significant risk that contracts negotiated and entered into may ultimately be unprofitable. In addition, managed care operations are at risk for costs incurred to provide agreed upon services under our solution. Therefore, failure to anticipate or control costs could have a materially adverse effect on our business.

Our ability to use our net operating losses to offset future taxable income has been limited in certain cases and may be subject to certain limitations.limitations in the future.

Our net operating loss carryforwards ("NOLs") will begin to expire in 2023. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. We may be found to have experienced an ownership changechanges in the past and can continue to experience ownership changes under Section 382 as a result of events in the past or the issuance of shares of common or preferred stock, or a combination thereof. If so,As a result of such ownership changes, 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.

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 intellectual property
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Risks related to our intellectual property
Confidentiality agreements with employees, treating physicians and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we rely in part on confidentiality provisions in our agreements with employees, treating physicians, and others. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We may be subject to claims that we infringe the intellectual property rights of others, and unfavorable outcomes could harm our business.

Our future operations may be subject to claims, and potential litigation, arising from our alleged infringement of patents, trade secrets, trademarks or copyrights owned by other third parties. Within the healthcare, drug and bio-technology industry, many companies actively pursue infringement claims and litigation, which makes the entry of competitive products more difficult. We may experience claims or litigation initiated by existing, better-funded competitors and by other third parties. Court-ordered injunctions may prevent us from continuing to market existing products or from bringing new products to market and the outcome of litigation and any resulting loss of revenues and expenses of litigation may substantially affect our ability to meet our expenses and continue operations.

Risks related to our healthcare industry

Recent changes in insurance and health care laws have created uncertainty in the health care industry.

The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly expanded health insurance coverage to uninsured Americans and changed the way health care is financed by both governmental and private payers.payors. Following the 2016 federal elections, which resulted in the election of the Republican presidential nominee and Republican majorities in both houses of Congress, there were renewed legislative efforts to significantly modify or repeal the Health Care Reform Law and certain executive policy changes designed to modify its impact, including the enactment of the Tax Cuts and Jobs Act in December 2017 which repealed the penalties under the Health Care Reform Law for uninsured persons. WeIn light of the recent 2020 federal elections, which resulted in the election of the Democrat presidential nominee and Democratic majorities in both the Senate and House, we cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on our business. There may also be other risks and uncertainties associated with the Health Care Reform Law. If we fail to comply or are unable to effectively manage such risks and uncertainties, our financial condition and results of operations could be adversely affected.

Our policies and procedures may not fully comply with complex and increasing regulation by state and federal authorities, which could negatively impact our business operations.

The healthcare industry is highly regulated and continues to undergo significant changes as third-party payors, such as Medicare and Medicaid, traditional indemnity insurers, managed care organizations and other private payors, increase efforts to control cost, utilization and delivery of healthcare services. Healthcare companies are subject to extensive and complex federal, state and local laws, regulations and judicial decisions. Our failure or the failure of our treating physicians, to comply with applicable healthcare laws and regulations may result in the imposition of civil or criminal sanctions that we cannot afford, or require redesign or withdrawal of our programs from the market.
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We may become subject to medical liability claims, which could cause us to incur significant expenses and may require us to pay significant damages if not covered by insurance.

Our business entails the risk of medical liability claims against both our providers and us. Although we carry insurance covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our insurance coverage. We carry professional liability insurance for ourselves, and we separately carry a general insurance policy, which covers medical malpractice claims. In addition, professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services. As a result, adequate professional liability insurance may not be available to us in the future at acceptable costs or at all.

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Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our providers from our operations, which could have a material adverse effect on our business, financial condition and results of operations. In addition, any claims may adversely affect our business or reputation.


Our business practices may be found to constitute illegal fee-splitting or corporate practice of medicine, which may lead to penalties and adversely affect our business.

Many states, including California where our principal executive offices are located, have laws that prohibit business corporations, such as us, from practicing medicine, exercising control over medical judgments or decisions of physicians or other health care professionals (such as nurses or nurse practitioners), or engaging in certain business arrangements with physicians or other health care professionals, such as employment of physicians and other health care professionals or fee-splitting. The state laws and regulations and administrative and judicial decisions that enumerate the specific corporate practice and fee-splitting rules vary considerably from state to state and are enforced by both the courts and government agencies, each with broad discretion. Courts, government agencies or other parties, including physicians, may assert that we are engaged in the unlawful corporate practice of medicine, fee-splitting, or payment for referrals by providing administrative and other services in connection with our treatment programs. As a result of such allegations, we could be subject to civil and criminal penalties, our contracts could be found invalid and unenforceable, in whole or in part, or we could be required to restructure our contractual arrangements. If so, we may be unable to restructure our contractual arrangements on favorable terms, which would adversely affect our business and operations.

Our business practices may be found to violate anti-kickback, physician self-referral or false claims laws, which may lead to penalties and adversely affect our business.

The healthcare industry is subject to extensive federal and state regulation with respect to kickbacks, physician self-referral arrangements, false claims and other fraud and abuse issues.

The federal anti-kickback law (the “Anti-Kickback Law”) prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program. “Remuneration” is broadly defined to include anything of value, such as, for example, cash payments, gifts or gift certificates, discounts, or the furnishing of services, supplies, or equipment. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the health care industry.

Recognizing the breadth of the Anti-Kickback Law and the fact that it may technically prohibit many innocuous or beneficial arrangements within the health care industry, the Office of Inspector General (“OIG”) has issued a series of regulations, known as the “safe harbors.” Compliance with all requirements of a safe harbor immunizes the parties to the business arrangement from prosecution under the Anti-Kickback Law. The failure of a business arrangement to fit within a safe harbor does not necessarily mean that the arrangement is illegal or that the OIG will pursue prosecution. Still, in the absence of an applicable safe harbor, a violation of the Anti-Kickback Law may occur even if only one purpose of an arrangement is to induce referrals. The penalties for violating the Anti-Kickback Law can be severe. These sanctions include criminal and civil penalties, imprisonment, and possible exclusion from the federal health care programs. Many states have adopted laws similar to the Anti-Kickback Law, and some apply to items and services reimbursable by any payor, including private insurers.

In addition, the federal ban on physician self-referrals, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare patients to an entity providing certain “designated health services” if the physician or an immediate family member of the physician has any financial relationship with the entity. A “financial relationship” is created
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by an investment interest or a compensation arrangement. Penalties for violating the Stark Law include the return of funds received for all prohibited referrals, fines, civil monetary penalties, and possible exclusion from the federal health care programs. In addition to the Stark Law, many states have their own self-referral bans, which may extend to all self-referrals, regardless of the payor.

The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government. Under the False Claims Act, a person acts knowingly if he has actual knowledge of the information or acts in deliberate ignorance or in reckless disregard of the truth or falsity of the information. Specific intent to defraud is not required. Violations of other laws, such as the Anti-Kickback Law or the FDA prohibitions against promotion of off-label uses of drugs, can lead to liability under the federal False Claims Act. The qui tam provisions of the False Claims Act allow a private individual to bring an action on behalf of the federal government and to share in any amounts paid by the defendant to the government in connection with the action. The number of filings of qui tam actions has increased significantly in recent years. When an entity is determined to have violated the False Claims Act, it may be
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required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each false claim. Conduct that violates the False Claims Act may also lead to exclusion from the federal health care programs. Given the number of claims likely to be at issue, potential damages under the False Claims Act for even a single inappropriate billing arrangement could be significant. In addition, various states have enacted similar laws modeled after the False Claims Act that apply to items and services reimbursed under Medicaid and other state health care programs, and, in several states, such laws apply to claims submitted to all payors.

On May 20, 2009, the Federal Enforcement and Recovery Act of 2009, or FERA, became law, and it significantly amended the federal False Claims Act. Among other things, FERA eliminated the requirement that a claim must be presented to the federal government. As a result, False Claims Act liability extends to any false or fraudulent claim for government money, regardless of whether the claim is submitted to the government directly, or whether the government has physical custody of the money. FERA also specifically imposed False Claims Act liability if an entity “knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” As a result, the knowing and improper failure to return an overpayment can serve as the basis for a False Claims Act action. In March 2010, Congress passed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the ACA, which also made sweeping changes to the federal False Claims Act. The ACA also established that Medicare and Medicaid overpayments must be reported and returned within 60 days of identification or when any corresponding cost report is due.

Finally, the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations created the crimes of health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including a private insurer. The false statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for health care benefits, items, or services. A violation of this statute is a felony and may result in fines, imprisonment, or exclusion from the federal health care programs.

Federal or state authorities may claim that our fee arrangements, our agreements and relationships with contractors, hospitals and physicians, or other activities violate fraud and abuse laws and regulations. If our business practices are found to violate any of these laws or regulations, we may be unable to continue with our relationships or implement our business plans, which would have an adverse effect on our business and results of operations. Further, defending our business practices could be time consuming and expensive, and an adverse finding could result in substantial penalties or require us to restructure our operations, which we may not be able to do successfully.

Our business practices may be subject to state regulatory and licensure requirements.

Our business practices may be regulated by state regulatory agencies that generally have discretion to issue regulations and interpret and enforce laws and rules. These regulations can vary significantly from jurisdiction to jurisdiction, and the interpretation of existing laws and rules also may change periodically. Some of our business and related activities may be subject to state health care-related regulations and requirements, including managed health care, utilization review (UR) or third-party administrator-related regulations and licensure requirements. These regulations differ from state to state, and may contain network, contracting, and financial and reporting requirements, as well as specific standards for delivery of services, payment of claims, and adequacy of health care professional networks. If a determination is made that we have failed to comply with any applicable state laws or regulations, our business, financial condition and results of operations could be adversely affected.
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If our providers or experts are characterized as employees, we would be subject to employment and withholding liabilities.

We structure our relationships with our providers and experts in a manner that we believe results in an independent contractor relationship, not an employee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is generally indicative of an employment relationship. Although we believe that our providers and experts are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. If such regulatory authorities or state, federal or foreign courts were to determine that our providers or experts are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay social security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our providers or experts are our employees could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to healthcare anti-fraud initiatives, which may lead to penalties and adversely affect our business.

State and federal government agencies are devoting increased attention and resources to anti-fraud initiatives against healthcare providers and the entities and individuals with whom they do business, and such agencies may define fraud
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expansively to include our business practices, including the receipt of fees in connection with a healthcare business that is found to violate any of the complex regulations described above. While to our knowledge we have not been the subject of any anti-fraud investigations, if such a claim were made, defending our business practices could be time consuming and expensive and an adverse finding could result in substantial penalties or require us to restructure our operations, which we may not be able to do successfully.

Our use and disclosure of patient information is subject to privacy and security regulations, which may result in increased costs.

In providing administrative services to healthcare providers and operating our treatment programs, we may collect, use, disclose, maintain and transmit patient information in ways that will be subject to many of the numerous state, federal and international laws and regulations governing the collection, use, disclosure, storage, privacy and security of patient-identifiable health information, including the administrative simplification requirements of the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (HIPAA) and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH). The HIPAA Privacy Rule restricts the use and disclosure of certain patient information (“Protected Health Information” or “PHI”), and requires safeguarding that information. The HIPAA Security Rule and HITECH establish elaborate requirements for safeguarding PHI transmitted or stored electronically. HIPAA applies to covered entities, which may include healthcare facilities and also includes health plans that will contract for the use of our programs and our services. HIPAA and HITECH require covered entities to bind contractors that use or disclose protected health information (or “Business Associates”) to compliance with certain aspects of the HIPAA Privacy Rule and all of the HIPAA Security Rule. In addition to contractual liability, Business Associates are also directly subject to regulation by the federal government. Direct liability means that we are subject to audit, investigation and enforcement by federal authorities. HITECH imposes new breach notification obligations requiring us to report breaches of “Unsecured Protected Health Information” or PHI that has not been encrypted or destroyed in accordance with federal standards. Business Associates must report such breaches so that their covered entity customers may in turn notify all affected patients, the federal government, and in some cases, local or national media outlets. We may be required to indemnify our covered entity customers for costs associated with breach notification and the mitigation of harm resulting from breaches that we cause. If we are providing management services that include electronic billing on behalf of a physician practice or facility that is a covered entity, we may be required to conduct those electronic transactions in accordance with the HIPAA regulations governing the form and format of those transactions. Services provided under our OnTrakOntrak solution not only require us to comply with HIPAA and HITECH but also Title 42 Part 2 of the Code of Federal Regulations (“Part 2”). Part 2 is a federal, criminal law that severely restricts our ability to use and disclose drug and alcohol treatment information obtained from federally-supported treatment facilities. Our operations must be carefully structured to avoid liability under this law. Our OnTrakOntrak solution qualifies as a federally funded treatment facility which requires us to disclose information on members only in compliance with Title 42.

In addition to the federal privacy regulations, there are a number of state laws governing the privacy and security of health and personal information. The penalties for violation of these laws vary widely and the area is rapidly evolving.

In 2018, California passed a privacy lawthe California Consumer Privacy Act (the “CCPA”), which gives consumers significant rights over the use of their personal information, including the right to object to the “sale” of their personal information. In 2020, Californians voted to enact the California Privacy Rights Act (CPRA), which amends the CCPA by expanding consumers' rights in their personal information and creating a new governmental agency to interpret and enforce the statute. Most provisions of the CPRA will become effective on January 1, 2023. While certain information covered
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by HIPAA is generally exempt from the applicability of the CCPA as amended by the CPRA, the rights of consumers under the CCPA may restrict our ability to use personal information in connection with our business operations.The CCPA also provides a private right of action for certain security breaches.

In 2019, New York passed a law known as the SHIELD Act, which will, as of March 21, 2020, requireexpands data breach reporting obligations and requires companies to have robust data security programs in place. OtherMore recently, New York and other states, including Washington, have introduced significant privacy bills, and Congress is debating federal privacy legislation, which if passed, may restrict our business operations and require us to incur additional costs for compliance.

In addition, several foreign countries and governmental bodies, including the E.U., Brazil and Canada, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents, including identifiable health information, which are often more restrictive than those in the U.S. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personally identifiable information, including health information, identifying, or which may be used to identify, an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol (IP) addresses, device identifiers and other data. Although we currently conduct business only in the United States of America, these laws and regulations could become applicable to us in the event we expand our operations into other countries. These and other obligations may be modified and interpreted in different ways by courts, and new laws and regulations may be enacted in the future.

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Within the EEA, the General Data Protection Regulation ("GDPR") took full effect on May 25, 2018, superseding the 1995 European Union Data Protection Directive and becoming directly applicable across E.U. member states. The GDPR includes more stringent operational requirements for processors and controllers of personal data for companies(including health information) established in and outside of the EEA, and those outside the EEA that collect and use personal data, including health information, imposes significant penalties for non-compliance and has broader extra-territorial effect. As the GDPR is a regulation rather than a directive, it applies throughout the EEA, but permits member states to enact supplemental requirements if they so choose. Noncompliance with the GDPR can trigger fines of up to the greater of €20 million or 4% of global annual revenues. Further, a Data Protection Act substantially implementing the GDPR was enacted in the U.K., effective in May 2018. It remains unclear, however, if the U.K.'s withdrawal from the E.U. will ultimately transpire and, if it does, how U.K. data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the U.K. will be regulated.regulated in light of the U.K.'s withdrawal from the E.U. In addition, some countries are considering or have enacted legislation requiring local storage and processing of data that could increase the cost and complexity of delivering our services.

We believe that we have taken the steps required of us to comply with laws governing the privacy and security of personal information, including health information privacy and security laws and regulations, in all applicable jurisdictions, both state and federal. However, we may not be able to maintain compliance in all jurisdictions where we do business. Failure to maintain compliance, or changes in state or federal privacy and security laws could result in civil and/or criminal penalties and could have a material adverse effect on our business, including significant reputational damage associated with a breach. Under HITECH, we are subject to prosecution or administrative enforcement and increased civil and criminal penalties for non-compliance, including a four-tiered system of monetary penalties. We are also subject to enforcement by state attorneys general who were given authority to enforce HIPAA under HITECH, and who have authority to enforce state-specific data privacy and security laws. If regulations change, if we expand the territorial scope of our operations, or if it is determined that we are not in compliance with privacy regulations, we may be required to modify aspects of our program, which may adversely affect program results and our business or profitability.
Certain of our professional healthcare employees, such as nurses, must comply with individual licensing requirements.
All of our healthcare professionals who are subject to licensing requirements, such as our care coaches, are licensed in the state in which they provide professional services in person. While we believe our nurses provide coaching and not professional services, one or more states may require our healthcare professionals to obtain licensure if providing services telephonically across state lines to the state’s residents. Healthcare professionals who fail to comply with these licensure requirements could face fines or other penalties for practicing without a license, and we could be required to pay those fines on behalf of our healthcare professionals. If we are required to obtain licenses for our nurses in states where they provide telephonic coaching, it would significantly increase the cost of providing our product. In addition, new and evolving agency interpretations, federal or state legislation or regulations, or judicial decisions could lead to the implementation of out-of-state licensure requirements in additional states, and such changes would increase the cost of services and could have a material effect on our business.
Security breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation.
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In the ordinary course of our business, we collect and store sensitive data, including legally protected patient health information, personally identifiable information about our employees, intellectual property, and proprietary business information. We manage and maintain our applications and data utilizing an off-site co-location facility. These applications and data encompass a wide variety of business critical information including research and development information, commercial information and business and financial information.

The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers, viruses, breaches or interruptions due to employee error or malfeasance, terrorist attacks, earthquakes, fire, flood, other natural disasters, power loss, computer systems failure, data network failure, Internet failure or lapses in compliance with privacy and security mandates. We may be subject to distributed denial of service (DDOS) attacks by hackers aimed at disrupting service to patients and customers. Our response to such DDOS attacks may be insufficient to protect our network and systems. In addition, there has been a continuing increase in the number of malicious software attacks in the technology industry, including malware, ransomware, and ransomware.email phishing scams, particularly since the start of the COVID-19 pandemic. Any such virus, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are designed to detect and respond to such security incidents and breaches of privacy and security mandates. Nonetheless, we cannot guarantee our backup systems, regular data backups, security protocols, network protection mechanisms and other procedures currently in place, or that may be in place in the future, will be adequate to prevent or remedy network and service interruption, system failure, damage to one or more of our systems, data loss, security breaches or other data security incidents. We might be required to expend significant capital and resources to protect against or address such incidents. Any access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information (such as HIPAA and state data security laws), government enforcement actions and regulatory penalties. We may also be required to indemnify our customers for costs associated with having their data on our system breached. Unauthorized access, loss or dissemination could also interrupt our operations, including our ability to provide treatment, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, or we may lose one or more of our customers, especially if they felt their data may be breached, any of which could adversely affect our business.

Certain of our professional healthcare employees, such as nurses, must comply with individual licensing requirements.

All of our healthcare professionals who are subject to licensing requirements, such as our care coaches, are licensed in the state in which they provide professional services in person. While we believe our nurses provide coaching and not professional services, one or more states may require our healthcare professionals to obtain licensure if providing services telephonically
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across state lines to the state’s residents. Healthcare professionals who fail to comply with these licensure requirements could face fines or other penalties for practicing without a license, and we could be required to pay those fines on behalf of our healthcare professionals. If we are required to obtain licenses for our nurses in states where they provide telephonic coaching, it would significantly increase the cost of providing our product. In addition, new and evolving agency interpretations, federal or state legislation or regulations, or judicial decisions could lead to the implementation of out-of-state licensure requirements in additional states, and such changes would increase the cost of services and could have a material effect on our business.


Risks related to our Note Agreement

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 athe Note Agreement (the “Note Agreement”(as amended to date, 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”“2024 Notes”). On the Closing Date, we issued an aggregate of $35.0 million in principal amount of 2024 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 toon August 25, 2020, we issued an additional $10.0 million in principal amount of Notes during the period from the Closing Date until September 24, 2021.2024 Notes.

The Note Agreement contains customary covenants, including, among others, covenants that restrict the 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 the us 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 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 and the 2024 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;
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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.

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. We have in the past required waivers to or modifications of such covenant requirements which the lender has granted.
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There can be no assurance that we will not require additional such waivers or modifications or on what terms the lender will be willing to provide them, if at all. 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 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.

Risks related to our preferred stock

Our Series A Preferred Stock ranks junior to all of our indebtedness and other liabilities.

In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Preferred Stock only after all of our indebtedness and other liabilities have been paid. The rights of holders of the Series A Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the Series A Preferred Stock. Also, the Series A Preferred Stock effectively ranks junior to all existing and future indebtedness and to the indebtedness and other liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of dividends due on the Series A Preferred Stock.

At December 31, 2020, our total liabilities equaled approximately $84.0 million. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Preferred Stock then outstanding.

Certain of our existing or future debt instruments may restrict the authorization, payment or setting apart of dividends on the Series A Preferred Stock. The Note Agreement restricts the payment of dividends on the Series A Preferred Stock and contains events of default which could result in acceleration of such indebtedness upon the occurrence of certain events, including failure to meet certain financial covenants and the payment of dividends on, or redemption amounts in respect of, the Series A Preferred Stock in violation of the Note Agreement. While the conditional amendment to the Note Agreement entered into in connection with our issuance of the Series A Preferred Stock (the “Conditional Amendment”) permits the payment of dividends on the Series A Preferred Stock for the first eight periods following issuance, thereafter we may only pay such dividends so long as there is no default or event of default under the Note Agreement. Accordingly, there can be no assurance that we will remain in compliance with the terms of the Conditional Amendment, and if we default, we may be contractually prohibited from paying dividends on the Series A Preferred Stock or any amounts in redemption of or otherwise in respect of, the Series A Preferred Stock. Also,
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future offerings of debt or senior equity securities may adversely affect the market price of the Series A Preferred Stock. If we decide to issue debt or senior equity securities in the future, it is possible that these securities will be governed by an indenture or other instruments containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of the Series A Preferred Stock and may result in dilution to owners of the Series A Preferred Stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity 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. The holders of the Series A Preferred Stock will bear the risk of our future offerings, which may reduce the market price of the Series A Preferred Stock and will dilute the value of their holdings in us.

We may not be able to pay dividends on the Series A Preferred Stock if we have insufficient cash or available ‘surplus’ as defined under Delaware law to make such dividend payments.

Our ability to pay cash dividends on the Series A Preferred Stock requires us to have either net profits or positive net assets (total assets less total liabilities) over our capital, and that we have sufficient working capital in order to be able to pay our debts as they become due in the usual course of business. Our ability to pay dividends may also be impaired if any of the risks described in this Form 10-K, including the documents incorporated by reference herein, were to occur. Also, payment of our dividends depends upon our financial condition and other factors as our board of directors may deem relevant from time to time. We cannot assure you that our businesses will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock, if any, and preferred stock, including the Series A Preferred Stock to pay our indebtedness or to fund our other liquidity needs.

We have established a segregated account that will be funded with a portion of the proceeds from sales of Series A Preferred Stock to pre-fund quarterly dividend payments on the Series A Preferred Stock until August 2022, although the payment of such amounts on deposit to holders of the Series A Preferred Stock is subject to compliance with applicable laws and with the foregoing limitations. Additionally, once the funds in the segregated account are exhausted, there can be no assurance that we will have sufficient cash flow from operations to continue such dividend payments. The amounts on deposit are also assets of our consolidated entity and while we have agreed not to use such amount for any corporate purposes other than payments of dividends on the Series A Preferred Stock, such account will be subject to a lien in favor of the collateral agent for the 2024 Notes and otherwise be available to our creditors generally in the event holders of our indebtedness or other obligations arising in the ordinary course of business seek to pursue remedies under bankruptcy or insolvency laws or otherwise. In addition, our Board of Directors may determine that the use of such amount on deposit for other corporate purposes is required pursuant to the exercise of their fiduciary duties to our common stockholders. You should be aware that the pre-funded dividends may not be available to make such payments in the amounts and at the times required under the terms of the Series A Preferred Stock offering.

Our Certificate of Incorporation contains provisions limiting the transferability and conversion of the Series A Preferred stock.

As noted above, 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 and certain of our other securities coming within the rules of the Internal Revenue Service under Section 382, including the Series A Preferred Stock as such does not meet the exception provided by Section 1504(a) of the Code and related Treasury Regulation §1.382.-2(a)(3)(i) (collectively, “382 Stock”).While the Board of Directors has approved the issuance of our Series A Preferred Stock after determining that such issuance is not likely to result in a prohibited ownership shift, the Protective Amendment will continue to apply to the Series A Preferred Stock after issuance, including the restrictions on transfer and exchange.

The market for our Series A Preferred Stock may not provide investors with adequate liquidity.

Our Series A Preferred Stock is listed on the Nasdaq Global Market. However, the trading market for the Series A Preferred Stock may not be maintained and may not provide investors with adequate liquidity. The liquidity of the market for the Series A Preferred Stock depends on a number of factors, including prevailing interest rates, our financial condition and operating results, the number of holders of the Series A Preferred Stock, the market for similar securities and the interest of securities dealers in making a market in the Series A Preferred Stock. We cannot predict the extent to which investor interest in our Company will maintain the trading market in our Series A Preferred Stock, or how liquid that market will be. If an active market is not maintained, investors may have difficulty selling shares of our Series A Preferred Stock.

Future issuances of preferred stock may reduce the value of the Series A Preferred Stock.

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We may sell additional shares of preferred stock on terms that may differ from the Series A Preferred Stock. Such shares could rank on parity with or, subject to the voting rights referred to above (with respect to issuances of new series of preferred stock), senior to the Series A Preferred Stock as to distribution rights or rights upon liquidation, winding up or dissolution. The subsequent issuance of additional shares of Series A Preferred Stock, or the creation and subsequent issuance of additional classes of preferred stock on parity with the Series A Preferred Stock, could dilute the interests of the holders of Series A Preferred Stock offered hereby. Any issuance of preferred stock that is senior to the Series A Preferred Stock would not only dilute the interests of the holders of Series A Preferred Stock, but also could affect our ability to pay distributions on, redeem or pay the liquidation preference on the Series A Preferred Stock.

Market interest rates may materially and adversely affect the value of the Series A Preferred Stock.

One of the factors that influences the price of the Series A Preferred Stock is the dividend yield on the Series A Preferred Stock (as a percentage of the market price of the Series A Preferred Stock) relative to market interest rates. Continued increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of the Series A Preferred Stock to expect a higher dividend yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for dividend payments). Thus, higher market interest rates could cause the market price of the Series A Preferred Stock to materially decrease.

The special exchange right that the Series A Preferred Stock is entitled to may make it more difficult for a party to acquire us or discourage a party from acquiring us.

The Series A Preferred Stock special exchange right may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing certain of our change of control transactions under circumstances that otherwise could provide the holders of our Series A Preferred Stock with the opportunity to realize a premium over the then-current market price of such equity securities or that stockholders may otherwise believe is in their best interests.

Holders of the Series A Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.”

Distributions paid to corporate U.S. holders of the Series A Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-corporate U.S. holders of the Series A Preferred Stock may be subject to tax at the preferential tax rates applicable to “qualified dividend income,” if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. We do not currently have any accumulated earnings and profits. Additionally, we may not have sufficient current earnings and profits during future fiscal years for the distributions on the Series A Preferred Stock to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.”

Holders of the Series A Preferred Stock may be subject to tax if we make or fail to make certain adjustments to the Exchange Rate of the Series A Preferred Stock even though you do not receive a corresponding cash dividend.

The exchange rate for the Series A Preferred Stock special exchange right is subject to adjustment in certain circumstances. A failure to adjust (or to adjust adequately) such exchange rate after an event that increases your proportionate interest in us could be treated as a deemed taxable dividend to you. If you are a non-U.S. holder, any deemed dividend may be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable treaty, which may be set off against subsequent payments on the Series A Preferred Stock. In April 2016, the Internal Revenue Service issued new proposed income tax regulations in regard to the taxability of changes in exchange rights that will apply to the Series A Preferred Stock when published in final form and may be applied to us before final publication in certain instances.

Our revenues, operating results and cash flows may fluctuate in future periods, and we may fail to meet investor expectations, which may cause the price of our Series A Preferred Stock to decline.

Variations in our quarterly and year-end operating results are difficult to predict, and our income and cash flows may fluctuate significantly from period to period. If our operating results fall below the expectations of investors or securities analysts, the price of our Series A Preferred Stock could decline substantially. Specific factors that may cause fluctuations in our operating results include:

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The Series A Preferred Stock represents perpetual equity interests in us, and it has no maturity or mandatory redemption date and are not redeemable at the option of investors under any circumstances. As a result, the Series A Preferred Stock will not give rise to a claim for payment of a principal amount at a particular date. As a result, holders of the Series A Preferred Stock may be required to bear the financial risks of an investment in the Series A Preferred Stock for an indefinite period of time. In addition, the Series A Preferred Stock will rank junior to all our current and future indebtedness and other liabilities. The Series A Preferred Stock will also rank junior to any other senior securities we may issue in the future with respect to assets available to satisfy claims against us.

The Series A Preferred Stock has not been rated.

We have not sought to obtain a rating for the Series A Preferred Stock. No assurance can be given, however, that one or more rating agencies might not independently determine to issue such a rating or that such a rating, if issued, would not adversely affect the market price of the Series A Preferred Stock. Also, we may elect in the future to obtain a rating for the Series A Preferred Stock, which could adversely affect the market price of the Series A Preferred Stock. Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward, placed on a watch list or withdrawn entirely at the discretion of the issuing rating agency if in its judgment circumstances so warrant. Any such downward revision, placing on a watch list or withdrawal of a rating could have an adverse effect on the market price of the Series A Preferred Stock.

The market price of the Series A Preferred Stock could be substantially affected by various factors.

The market price of the Series A Preferred Stock depends on many factors, which may change from time to time, including:

prevailing interest rates, increases in which may have an adverse effect on the market price of the Series A Preferred Stock;
trading prices of similar securities;
our history of timely dividend payments;
the annual yield from dividends on the Series A Preferred Stock as compared to yields on other financial instruments;
general economic and financial market conditions;
government action or regulation;
the financial condition, performance and prospects of us and our competitors;
changes in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;
our issuance of additional preferred equity or debt securities;
actual or anticipated variations in quarterly operating results of us and our competitors; and
the ongoing impact of the global COVID-19 pandemic.

As a result of these and other factors, holders of the Series A Preferred Stock may experience a decrease, which could be substantial and rapid, in the market price of the Series A Preferred Stock, including decreases unrelated to our operating performance or prospects.

A holder of Series A Preferred Stock has extremely limited voting rights.

The voting rights for a holder of Series A Preferred Stock are limited. Our shares of common stock are the only class of our securities that carry full voting rights. Voting rights for holders of the Series A Preferred Stock exist primarily with respect to voting on amendments to our certificate of incorporation, including the certificate of designations relating to the Series A Preferred Stock, that materially and adversely affect the rights of the holders of Series A Preferred Stock or authorize, increase or create additional classes or series of our capital stock that are senior to the Series A Preferred Stock. Other than the limited circumstances described in the Certificate of Designations establishing the Series A Preferred Stock and except to the extent required by law, holders of Series A Preferred Stock do not have any voting rights.

Risks related to our common stock
Our common stock
has limited trading volume, and it is therefore susceptible tohighpricevolatility.
Our common stock is listed on the NASDAQ Capital Market under the symbol “CATS” and has at times experienced limited trading volumes. As such, our common stock may be more susceptible to significant and sudden price changes than stocks that are widely followed by the investment community and actively traded. The liquidity of our common stock depends upon the presence in the marketplace of willing buyers and sellers. We cannot assure you that you will be able to find a buyer for your shares. We could also subsequently fail to satisfy the standards for continued NASDAQ listing, such as standards having to do with a minimum share price, the minimum number of public shareholders or the aggregate market value of publicly held shares. Any holder of our securities should regard them as a long-term investment and should be prepared to bear the economic risk of an investment in our securities for an indefinite period.
Failure to maintain effective internal controls could adversely affect our operating results and the market for our common stock.

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Section 404 of the Sarbanes-Oxley Act of 2002 requires that we maintain internal control over financial reporting that meets applicable standards. As with many smaller companies with small staff, material weaknesses in our financial controls and procedures may be discovered. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction and adversely affect our ability to raise capital.


More than 50%51% of our outstanding common stock is beneficially owned by our chairman and chief executive officer, who has the ability to substantially influence the election of directors and other matters submitted to stockholders.
10,419,788
10,363,344 shares are beneficially held of record by Acuitas Group Holdings, LLC (“Acuitas”), whose sole managing member is our Chairman and Chief Executive Officer, which represents beneficial ownership of approximately 50% 55% of our outstanding shares of common stock. As a result, he has and is expected to continue to have the ability to significantlysignificantly influence the election of our Board of Directors and the outcome of all other matters submitted to our stockholders. His interest may not always coincide with our interests or the interests of other stockholders, and he may act in a manner that advances his best interests and not necessarily those of other stockholders. One consequence to this substantial influence or control is that it may be difficult for investors to remove management of our Company. It could also deter unsolicited takeovers, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.

Our stock price may be subject to substantial volatility, and the value of our stockholders' investment may decline.

The price at which our common stock trades fluctuates as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results and actual or anticipated announcements of our OnTrakOntrak solution, announcements regarding new or discontinued OnTrakOntrak solution contracts, new products or services by us or competitors, regulatory investigations or determinations, acquisitions or strategic alliances by us or our competitors, recruitment or departures of key personnel, the gain or loss of significant customers, changes in the estimates of our operating performance, actual or threatened litigation, market conditions in our industry and the economy as a whole.

Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock, including:

● announcements of new products or services by us or our competitors;
● current events affecting the political, economic and social situation in the United States;
● trends in our industry and the markets in which we operate;
● changes in financial estimates and recommendations by securities analysts;
● acquisitions and financings by us or our competitors;
● the gain or loss of a significant customer;
● quarterly variations in operating results;
● the operating and stock price performance of other companies that investors may consider to be comparable;
● purchases or sales of blocks of our securities; and
● issuances of stock.
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our common stock to establish future payment obligations to stockholders of acquisition targets in the past and may continue to do so in the future; any decline in the market price regardless of whether due to our performance or external market dynamics would give rise to a payment obligation to such holders. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.

Future sales of common stock by existing stockholders, or the perception that such sales may occur, could depress our stock price.

The market price of our common stock could decline as a result of sales by, or the perceived possibility of sales by, our existing stockholders. Most of our outstanding shares are eligible for public resale pursuant to Rule 144 under the Securities Act of 1933, as amended. As of December 31, 2019,2020, approximately 9.2 millionmillion shares of our common stock are held by our affiliates and may be sold pursuant to an effective registration statement or in accordanceaccordance with the volume and other limitations of Rule 144 or pursuant to other exempt transactions. Future sales of common stock by significant stockholders, including those who acquired their shares in private placements or who are affiliates, or the perception that such sales may occur, could depress the price of our common stock.

Future issuances of common stock and hedging activities may depress the trading price of our common stock.

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Any future issuance of equity securities, including the issuance of shares upon direct registration, upon satisfaction of our obligations, compensation of vendors, exercise of outstanding warrants, or effectuation of a reverse stock split, could dilute the interests of our existing stockholders, and could substantially decrease the trading price of our common stock. As of March December 31, 20206, 2020,, we havehad outstanding options to purchase approximately 3,964,118 shares of our common stock and warrants to purchase approximately 1,539,9263,616,314 shares of our common stock at exercise prices ranging from $7.50 to $60.16 per share and warrants to purchase 1,465,927 shares of our common stock at exercise prices ranging from $1.80 to $105.60 per$18.71 per share. Also, as of December 31, 2020, we had a total of 30,000 unvested RSUs outstanding. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, in connection with acquisitions, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

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. 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.

Provisions in our certificate of incorporation and Delaware law could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable to you.

Our amended and restated certificate of incorporation and the Delaware General Corporation Law contain provisions (including the Section 382 Ownership Limit) that may have the effect of making more difficult or delaying attempts by others to obtain control of our Company, even when these attempts may be in the best interests of stockholders. In addition, our amended and restated certificate of incorporation authorizes our Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.” These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.

We do not expect to pay dividends in the foreseeable future.

We have paid no cash dividends on our common stock to date, and we intend to retain our future earnings, if any, to fund the continued development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future.future on our common stock. Further, any payment of cash dividends will also depend on our financial condition, results of operations, capital
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requirements and other factors, including contractual restrictions to which we may be subject, and will be at the discretion of our Board of Directors.
A
fewof our outstanding warrants contain anti-dilution provisions that, if triggered, could cause dilution to our then-existing stockholders and adversely affect our stock price.
A few of our outstanding warrants contain anti-dilution provisions. As a result, if we, in the future, issue or grant any rights to purchase any of our common stock or other securities convertible into our common stock for a per share price less than the exercise price of our warrants, the exercise price, or in the case of some of our warrants the exercise price and number of shares of common stock, will be reduced. If our available funds and cash generated from operations are insufficient to satisfy our liquidity requirements in the future, then we may need to raise substantial additional funds in the future to support our working capital requirements and for other purposes. If shares of our common stock or securities exercisable for our common stock are issued in consideration of such funds at an effective per share price lower than our existing warrants, then the anti-dilution provisions would be triggered, thus possibly causing 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.
The exercise of our outstanding warrants may result in a dilution of our current stockholders' voting power and an increase in the number of shares eligible for future resale in the public market, which may negatively impact the market price of our stock.

The exercise of some or all of our outstanding warrants could significantly dilute the ownership interests of our existing stockholders. As of March 6,December 31, 2020, we had outstanding warrants to purchase an aggregate of 1,539,926 1,465,927 shares of common stock at exercise prices ranging from $1.80 to $18.71 per share. To the extent warrants are exercised, additional shares of common stock will be issued, and such issuance may dilute existing stockholders and increase the number of shares eligible for resale in the public market.
In addition to the dilutive effects described above, the exercise of those warrants would lead to a potential increase in the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our shares.
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 1B.    UNRESOLVED STAFF COMMENTS
Not Applicable.
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ITEM 2.    PROPERTIES
Our principal executive and administrative offices are located in leased office space in Santa Monica, California.
We believe that the current office space is adequate to meet our needs.
ITEM 3.    LEGAL PROCEEDINGS
From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities. As of the date of this Annual Report on Form 10-K, we are not a party to any litigation the outcome of which, if determined adversely to
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us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position.position, except for the following:
Loss Contingency

On March 3, 2021, a purported securities class action was filed in the United States District Court for the Central District of California, entitled Farhar v. Ontrak, Inc., Case No. 2:21-cv-01987 (C.D. Cal. filed Mar. 3, 2021). In this action, plaintiff, purportedly on behalf of a putative class of purchasers of Ontrak securities from November 5, 2020 through February 26, 2021, alleges that the Company and certain of its officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by intentionally or recklessly making false and/or misleading statements and/or failing to disclose that (i) Ontrak’s largest customer evaluated Ontrak on a provider basis, valuing Ontrak’s performance based on achieving the lowest cost per medical visit rather than clinical outcomes or medical cost savings; (ii) as a result, Ontrak’s largest customer did not find Ontrak’s program to be effective and was reasonably likely to terminate its contract with Ontrak; (iii) because this customer accounted for a significant portion of Ontrak’s revenue, loss of the customer would have an outsized impact on Ontrak’s financial results; and (iv) as a result of the foregoing, Ontrak’s positive statements about its business, operations and prospects were materially misleading and/or lacked a reasonable basis. The complaint has not yet been served. We believe that the allegations lack merit and intend to defend against this action vigorously.

ITEM 4.    MINE SAFETY DISCLOSURES
Not Applicable.


PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ Global Market under the symbol "OTRK."
Holders
As of March 3, 2021, there were approximately 41 stockholders of record of our common stock.
Securities Authorized for Issuance under Equity Compensation Plans
Informationregarding compensation plans under which equity securities may be issued is included in Item 12 of Part III of this report through incorporation by reference to our definitive proxy statement to be filed in connection with our 2021 Annual Meeting of Stockholders.
Unregistered Sales of Securities
All sales of unregistered securities during the year ended December 31, 2019 2020were previously disclosed in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.8-K, except as follows:
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In November and December 2020, we issued a total of 74,984 unregistered, restricted shares of our common stock as partial consideration for our acquisition of LifeDojo Inc. We issued these shares in reliance upon Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.
Issuer Purchase of Equity Securities
None.
ITEM 6.    SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that involve a variety of risks and uncertainties. Ouruncertainties, many of which are beyond our control, which may cause our actual results mayto differ materially from those discussed due todiscussed. These factors such as,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 1.A.1A. -“Risk Factors.”
OVERVIEW
General
Ontrak 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 OnTrakOntrak™ program. We then uniquely engage health plan members who do not typically seek behavioral healthcare by leveraging proprietary enrollment capabilities built on deep insights into the drivers of care avoidance. Our technology enabled OnTrak solutionOntrak program is an integrated suite of services that includes evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, nurse-ledalong with care coaching and localin-market community support.care coordinators who address the social and environmental determinants of health, including loneliness. We believe that the program is currently improvingCompany's programs seek to improve member health and at the same time, driving a reduction in total health plan costs after completiondeliver validated cost savings of the OnTrak program.more than 50% for enrolled members to healthcare payors.
We operate as one segment in the United States and we have contracted with leading national and regional health plans to make OnTrakthe Ontrak program available to eligible members in 30 states, as well as the nation's capital.

Recent Developments
Acquisition

On October 28, states.2020, we completed the acquisition of LifeDojo Inc. (“LifeDojo”), a comprehensive, science-backed behavior change platform based in San 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 of October 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
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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 until August 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 after August 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 and November 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, every February 28, May 30, August 31, and November 30, as applicable, beginning on or about November 30, 2020. Dividends will accumulate and be cumulative from, and including, the date of original issuance, which was August 25, 2020.

On November 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 on November 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 on November 30, 2020. At December 31, 2020, we had undeclared dividends of $0.7 million.
Company Name and Ticker Symbol Change
On July 6, 2020, we changed our corporate name from Catasys, Inc. to Ontrak, Inc. and changed our NASDAQ ticker symbol from CATS to OTRK effective July 7, 2020. We believe the change in our name leverages our national brand recognition of the Company's Ontrak solutions among our health plan members, health plan customers and network of behavioral health providers.
Customer Notification

On February 26, 2021, we were notified by our largest customer that the participation status with this customer will be terminated effective June 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 the Ontrak program. For the year ended December 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 (in thousands):decisions:
Revenues.Revenue. Our revenues are mostly generated from fees charged to health plan customers related to health plan members enrolled in our OnTrakOntrak 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. The Company’sOur performance obligation is satisfied over the 12 month periodlength of the OnOntrak program as our services our delivered.
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Effective outreach pool.Outreach Pool. Our Effective Outreach Pool arerepresents 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 treatmentenrollment in the OnTrakOntrak 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,Year Ended December 31,
20192018Change% Change
(in thousands, except outreach pool)(in thousands, except outreach pool)20202019Change% Change
RevenueRevenue$35,095  $15,177  $19,918  131 %Revenue$82,837 $35,095 $47,742 136 %
Effective outreach poolEffective outreach pool108,000  41,000  67,000  163 %Effective outreach pool152,000 108,000 44,000 41 %
Cash flow from operationsCash flow from operations$(16,901) $(8,574) $(8,327) (97)%Cash flow from operations$(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 fromrelated to health plan customers whose health plan members are enrolled in our program is recognized over the termenrollment period of the program, which is typically twelve months.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, charged byand other direct costs incurred to serve 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 paymentshealth plan customers. All costs are recognized in the period in which an eligible member receives services.

Operating Expenses

Our operating expenses consistsconsist 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;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 researchengineers and software development staff, including salaries, benefits, bonuses and stock-based compensation;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;compensation, professional fees;fees, insurance premiums;premiums, and other corporate expenses.

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Interest Expense, net

Interest expense consists primarily of interest expense from our note agreements, accretion of debt discount, and amortization of debt issuance costs.costs and finance leases.
Other ExpensesIncome (Expense), net

Other expensesincome (expense) consists primarily 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 the loan payoff, and employee severance costs.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 and certain selected operating statistics for each of the periods indicated (in thousands):
Year Ended December 31,
20192018
Revenue$35,095  $15,177  
Cost of revenue20,408  11,119  
Gross profit14,687  4,058  
Operating expenses34,701  17,684  
Operating loss(20,014) (13,626) 
Other income (expense)(2,538) 40  
Interest expense(3,047) (570) 
Change in fair value of warrant liability(60) (56) 
Net loss$(25,659) $(14,212) 

Year Ended December 31,
20202019
Revenue$82,837 $35,095 
Cost of revenue43,603 20,408 
Gross profit39,234 14,687 
Operating expenses:
   Research and development12,923 5,439 
   Sales and marketing4,525 4,735 
   General and administrative36,709 24,527 
Total operating expenses54,157 34,701 
Operating loss(14,923)(20,014)
Other expense, net(1,213)(2,598)
Interest expense, net(7,219)(3,047)
Loss before income taxes(23,355)(25,659)
Income tax benefit645 — 
Net loss$(22,710)$(25,659)

Revenue
The 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 (in thousands, except percentages):indicated:
Year Ended December 31,
20192018
Commercial revenue$21,753  $9,495  
Percentage of commercial revenue to total revenue62 %63 %
Government revenue$13,342  $5,682  
Percentage of government revenue to total revenue38 %37 %
Total revenue$35,095  $15,177  
Year Ended December 31,
(in thousands, except percentages)20202019ChangeChange %
Commercial revenue$47,741 $21,753 $25,988 119 %
Percentage of commercial revenue to total revenue58 %62 %(4)%
Government revenue$35,096 $13,342 $21,754 163 %
Percentage of government revenue to total revenue42 %38 %%
Total revenue$82,837 $35,095 $47,742 136 %
Revenue increased $19.9$47.7 million, or 131%136%, in 2019 when2020 as compared to 2018.2019. Enrolled members increased 4,043, or 137% in 2019 whenby 8,706 as of December 31, 2020 compared to 2018. The increase isDecember 31, 2019, or 124%. These increases were attributable to the continued expansion of our OnTrakOntrak program with our existing health plan customers.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,Year Ended December 31,
(in thousands)20192018Change% Change
(in thousands, except percentages)(in thousands, except percentages)20202019Change% Change
Cost of revenueCost of revenue$20,408  $11,119  $9,289  84 %Cost of revenue$43,603 $20,408 $23,195 114 %
Gross profitGross profit$14,687  $4,058  $10,629  262 %Gross profit39,234 14,687 24,547 167 
Gross profit marginGross profit margin41.8 %26.7 %Gross profit margin47 %42 %%
Cost of revenue increased $9.3$23.2 million, or 84%114%, in 20192020 as compared to 2018.2019. The increase in cost of revenue was primarily due to $6.1a $13.6 million increase in higher employee-related costs due to highermember facing headcount and $2.5a $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 of December 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 revenuesrevenue 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,Year Ended December 31,
(in thousands)20192018Change% Change
Operating expense$34,701  $17,684  $17,017  96 %
(in thousands, except percentages)(in thousands, except percentages)20202019Change% Change
Operating expenses:Operating expenses:
Research and development Research and development$12,923 $5,439 $7,484 138 %
Sales and marketing Sales and marketing4,525 4,735 (210)(4)
General and administrative General and administrative36,709 24,527 12,182 50 
Total operating expensesTotal operating expenses$54,157 $34,701 $19,456 56 
Operating lossOperating loss$(20,014) $(13,626) $(6,388) 47 %Operating loss$(14,923)$(20,014)$5,091 (25)%
Operating loss marginOperating loss margin(57.0)%(89.8)%Operating loss margin(18.0)%(57.0)%39.0 %
Total operating expense increased $17.0$19.5 million, or 96%56%, in 20192020 as compared to 2018.2019. The increase in operating expenses was primarily due to $7.5a $12.2 million increase in our general and administrative costs, which was primarily related to $9.1 million of higher employee-related costs duerelated to higher headcount $8.2and $3.6 million of higher vendor related costs to support our growing operationsoperations. In addition, the increase in operating expenses included a $7.5 million increase in our research and $1.5 milliondevelopment costs, which was primarily related to an increase of $5.5 million in employee-related costs and a severance payment made$1.3 million increase in professional consulting costs, as we invest in continued enhancement of our technology and related tools to a former employee.support the growth of our business.
We expect our operating expenses to increase for the foreseeable future as we continue to growmake 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 initiates.initiatives.
Other Expense, net
Year Ended December 31,
(in thousands, except percentages)20202019Change% Change
Other expense, net$1,213 $2,598 $(1,385)(53)%
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Year Ended December 31,
(in thousands)20192018Change% Change
Other expense$5,645  $586  $5,059  863 %
Other expense, increased $5.1net decreased $1.4 million, or 863%53%, in 20192020 as compared to 2018.2019. 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 Ended December 31,
(in thousands, except percentages)20202019Change% 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 otherinterest expenses was primarily due to a $2.5 million increaseinterest and debt discount amortization expense related to our 2024 Notes entered into in interest expenses for our notes and $2.6 millionSeptember 2019, as well as higher average outstanding loan balance in 2020 compared to 2019.
Income Tax Benefit
Income tax benefit for the terminationyear ended December 31, 2020 was $0.6 million, which was a result of existing notes.

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 equivalents was $13.6$103.2 million as of December 31, 2019.2020. We had working capital of approximately $6.3$87.2 million as of December 31, 2019.2020. 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 however,from the filing date of this Form 10-K. However, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.
In September 2019, the Company entered into 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
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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 (the "2024 Notes"), which bear interest at either a floating rate plus an applicable margin in the case of 2024 Notes subject to cash interest payments or a floating rate plus a slightly higher applicable margin in the case of 2024 Notes as to which current interest has been 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.
Our ability to fund our ongoing operations is dependent on increasing the number of members that enroll in the OnTrakOntrak program. We currently operate our OnTrakOntrak solutions in twenty seven states.30 states, as well as the nation's capital. We provide services to commercial (employer funded), managed Medicare Advantage, and 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 OnTrakOntrak program within existing health plan customers.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,Year Ended December 31,
2019201820202019
Net cash used in operating activitiesNet cash used in operating activities$(16,901) $(8,574) Net cash used in operating activities$(6,282)$(16,901)
Net cash provided by investing activities$—  $62  
Net cash used in investing activitiesNet cash used in investing activities(4,638)— 
Net cash provided by financing activitiesNet cash provided by financing activities$27,349  $7,303  Net cash provided by financing activities100,112 27,349 
Net increase in cash and restricted cash Net increase in cash and restricted cash$89,192 $10,448 
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We used $16.9$6.3 million of cash from operating activities during the year ended December 31, 20192020 compared with $8.6$16.9 million during the same period in 2018.2019. The increase$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 investmentsincreased non-cash expenses in data science, IT2020 such as payment in-kind interest and software developmentstock-based compensation expense in 2020 compared to support growth2019, 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 drive efficiency.
Capital expenditures fornone in the year ended December 31, 20192019. 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 2018$1.7 million of capital expenditures, which were not significant.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, upgradeincrease 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 $27.3$100.1 million for the year ended December 31, 2019,2020, compared with net cash provided by financing activities of $7.3$27.3 million for the year ended December 31, 2018. Cash2019. 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, 2019 is $13.6 million.
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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.
Contractual ObligationsDebt
Our principal commitments consistSee Note 8 of obligationsthe Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for outstanding debt, leasesa 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 office space, contractual commitments for professional service projectspreferred stock offering and third-party consulting firms. The following table summarizes our contractual obligations at December 31, 2019 (in thousands):

TotalLess than a year1-3 Years3-5 YearsMore than 5 Years
Long-term debt obligations$36,502  $—  $—  $36,502  $—  
Lease obligations$3,184  $737  $1,475  $972  $—  
Other contractual obligations$377  $309  $68  $—  $—  

related preferred stock dividends.
Off-Balance Sheet Arrangements
As of December 31, 2019,2020, 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
RevenueThe Company generates virtual healthcare service revenue from contracts with customers is recognized when, or as we satisfy ourit satisfies its performance obligations by transferring the promised goods or services to the customers. A good orcustomers 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 good or 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 our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determinethe Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expectthe Company expects to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we considerthe 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, we considerthe Company considers the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of ourthe Company's influence, such as the judgment and actions of third parties.
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Catasys 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. The Company’s performance obligation is satisfied over time as the OnTrak service is provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing a continuous service to the customer. Contracts with minimum performance guarantees or price concessions include variable consideration and are subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees and price concessions. The Company has constrained revenue for expected price concessions during the year ended December 31, 2019.
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 charged byand other direct costs incurred in delivering our third party administrators for processing these claims.performance obligation. 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.
Cash and Cash Equivalents
The Company considersWe consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents. Cash is deposited with what we believe are highly credited, quality financial institutions. The deposited cash may exceedexceeds Federal Deposit Insurance Corporation (“FDIC”) insured limits. The CompanyWe 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 share-based paymentRSU 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.
From time to time, we have retained terminated employees as part-time consultants upon their departure from the company. Because the employees continue to provide services to us, their options continue to vest in accordance with the original terms. Due to the change in classification of the option awards, the options are considered modified at the date of termination. The modifications are treated as exchanges of the original awards in return for the issuance of new awards. At the date of termination, the unvested options are no longer accounted for as employee awards under FASB’s accounting rules for share-based expense but are instead accounted for as new non-employee awards. The accounting for the portion of the total grants that have already vested and have been previously expensed as equity awards is not changed. There were no employees moved to consulting status for the years ended December 31, 2019 and 2018, respectively.
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Income Taxes
We account for income taxes using the liability method in accordance with Accounting Standards Committee (“ASC”) 740 “Income Taxes”.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 additional 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.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related financial information required to be filed hereunder are indexed under Item 15 of this report and are incorporated herein by reference.
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that 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.
Changes in Internal Control
There were no changes in our internal controls over financial reporting during the fourth quarter of our year ended December 31, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) and for assessing the effectiveness of our internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United States generally accepted accounting principles (GAAP).
Our internal control over financial reporting is supported by written policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019,2020, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based upon this assessment, our management believes that, as of December 31, 2019,2020, our internal control over financial reporting was effective based on those criteria.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness
Auditor’s Report on Internal Control over Financial Reporting

This Annual Report does not include an attestation report of the Company'sour independent registered public accounting firm regarding internal control over financial reporting as of December 31, 2019 has been auditedreporting. Management’s report was not subject to attestation by EisnerAmper LLP, the Company'sour independent registered certified public accounting firm. Theirfirm pursuant to rules of the SEC that permit us to provide only management’s report which is set forth in Part II, Item 8, Financial Statements, of this Annual Report on Form 10-K, expresses an unqualified opinion of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019.

Report.
ITEM 9B.    OTHER INFORMATION
None.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table lists our executive officers and directors serving at April 24, 2020. Our executive officers are elected annually by our Board of Directors and serve at the discretion of the Board of Directors. Each current director is serving a term that will expire at the Company's next annual meeting. There are no family relationships among any of our directors or executive officers.

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NameAgePositionDirector Since
Terren S. Peizer59Director, Chairman of the Board and Chief Executive Officer2003
Brandon H. LaVerne (1)48Chief Financial Officer-
Curtis Medeiros (2)45President and Chief Operating Officer-
Richard A. Berman74Director, Chairman of the Audit Committee, and Member of the Nomination and Governance Committee2014
Michael Sherman59Director, Chairman of the Compensation Committee and Chairman of the Nomination and Governance Committee2017
Edward Zecchini58Director, Compensation Committee Member2018
Diane Seloff55Director and Audit Committee Member2018
Robert Rebak (3)52Director, Nomination and Governance Committee Member2019
Gustavo Giraldo (4)48Director, Member of the Audit Committee and Member of the Compensation Committee2019
(1)Mr. LaVerne was appointed to serve as the Chief Financial Officer of the Company on March 16, 2020.
(2)Mr. Curtis Medeiros was appointed to serve as the President and Chief Operating Officer of the Company replacing Mr. Richard Anderson on December 2, 2019.
(3) Mr. Rebak was appointed to serve as a member of the board of directors in July 2019.
(4) Mr. Giraldo was appointed to serve as a member of the board of directors in November 2019.


Terren S. Peizer is the founder of our Company and an entrepreneur, investor, and financier with a particular interest in healthcare, having founded and successfully commercialized several healthcare companies. He has served as its Chief Executive Officer and Chairman of the Board of Directors since the Company’s inception in 2004. Mr. Peizer is also the founder, Chairman and CEO NeurMedix, Inc., a biotechnology company with a focus on inflammatory, neurological and neuro-degenerative diseases. In addition to his roles with Catasys and NeurMedix, Mr. Peizer is Chairman of Acuitas Group Holdings, LLC, his personal investment vehicle, and holding company that is the owner of all of his portfolio company interests. Through Acuitas, Mr. Peizer owns Acuitas Capital, LLC, an industry leader in investing in micro and small capitalization equities, having invested over $1.5 billion directly into portfolio companies. Mr. Peizer has been the largest beneficial shareholder of, and has held various senior executive positions with, several other publicly-traded growth companies, including having served as Chairman of Cray, Inc. a supercomputer company. Mr. Peizer has a background in venture capital, investing, mergers and acquisitions, corporate finance, and previously held senior executive positions with the investment banking firms Goldman Sachs, First Boston, and Drexel Burnham Lambert. He received his B.S.E. in Finance from The Wharton School of Finance and Commerce.

We believe Mr. Peizer’s qualifications to serve on our board of directors include his role as an investor and executive positions in several private and public companies, including numerous companies in the healthcare field. He has extensive knowledge and experience in the financial and healthcare industries and provides extensive insight and experience with capital markets and publicly traded companies at all stages of development.

Brandon H. LaVerne has served as the Company’s Chief Financial Officer since March 2020. Prior to joining the Company, Mr. LaVerne worked at PCM, Inc. from October 1998 until its sale in August 2019 and most recently served as its Chief Financial Officer, Chief Accounting Officer, Treasurer and Assistant Secretary since July 2007. Prior to joining PCM, Inc. Mr. LaVerne worked as the Corporate Accounting Supervisor for Computer Sciences Corporation from September 1996 to October 1998, and started his career with Deloitte & Touche LLP in September 1993. Mr. LaVerne received his Bachelor of Science in Accounting from University of Southern California and is a Certified Public Accountant.

Curtis Medeiros has served asourPresident and Chief Operating Officer since December 2019. Prior to joining the Company, Mr. Medeiros was the President at OPTUM Analytics overseeing a group that served the analytical needs of external payers, providers and life sciences companies since July 2019. Mr. Medeiros was the President of OPTUM Life Sciences at UnitedHealth Group from 2014 to April 2016, where he focused on creating novel collaboration opportunities that addressed health system challenges. From June 2014 to April 2016, Mr. Medeiros was the Chief Operating Officer and Senior Vice President at OPTUM Life Sciences where he led the OPTUM Life Sciences business, which drives client value by providing best
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in class real-world data, analytics, consulting and collaborations aimed at improving the health care system for all stakeholders. Prior to joining OPTUM in June 2010, Mr. Medeiros served as a Senior Director at Merck Research Laboratories from January 2009 to May 2010. Mr. Medeiros holds a bachelor’s degree in Chemical Engineering from MIT and an MBA from Harvard Business School.

Richard A. Berman has served as the Company’s director since 2014. Heis the Associate Vice President of Strategic initiatives for the University of South Florida Research and Innovation, visiting professor of social entrepreneurship in the Muma College of Business, and a professor in the institute of innovation and advanced discovery. As a recognized global leader, Mr. Berman has held positions in health care, education, politics and management. He has worked with several foreign governments, the United Nations, the U.S. Department of Health and Welfare, the FDA, and as a cabinet level official for the state of New York. He has also worked with McKinsey & Co, NYU Medical Center, Westchester Medical, Korn-Ferry International, Howe-Lewis International and numerous startup companies. In 1995, Mr. Berman was selected by Manhattanville College to serve as its tenth President. Mr. Berman is credited with the turnaround of the College, where he served until 2009. Mr. Berman serves on the board of several organizations and is an elected member of the National Academy of Medicine of the National Academy of Sciences (Formerly known as the Institute of Medicine). Mr. Berman received his BBA, MBA, and MPH from the University of Michigan and holds honorary doctorates from Manhattanville College and New York Medical College.

We believe Mr. Berman’s qualifications to serve on our board of directors include his extensive experience as an executive in several healthcare firms. In addition, as a board member of a health plan we believe he has an understanding of our customer base and current developments and strategies in the health insurance industry.

Michael Sherman has served as the Company’s director since July 2017. He has worked in finance for over 30 years, having last served as a Managing Director in Investment Banking, at Barclays Plc. Prior to Barclays, Mr. Sherman was at Lehman Brothers, Inc. and Salomon Brothers Inc. Mr. Sherman specialized in equity capital markets and covered Healthcare companies, in addition to companies in other sectors. Mr. Sherman also is currently a Board Member at BioVie, Inc., a specialty pharmaceutical company. Mr. Sherman began his career in finance as a lawyer at Cleary, Gottlieb, Steen & Hamilton in New York City and Hong Kong.

We believe that Mr. Sherman’s qualifications to serve on our board of directors include his experience in the banking and securities industry, and his experience in the healthcare industry.

Edward Zecchini has served as the Company’s director since October 2018. Mr. Zecchini currently serves as Managing Member of IT Analytics LLC. Prior to that, Mr. Zecchini served as Chief Information Officer at Remedy Partners, Inc. from April 2014 to October 2019, Executive Vice President and Chief Technology Officer at Sandata Technologies, LLC, from May 2010 to March 2014. Earlier in his career he held senior level positions at HealthMarkets, Inc., Thomson Healthcare and SportsTicker, Inc. Mr. Zecchini has over thirty years of experience in the healthcare and information technology industries. Mr. Zecchini holds a Bachelor of Arts degree from the State University of New York at Oswego. Mr. Zecchini’s business expertise, including his background and extensive experience in information technology and management makes him well-qualified to serve as a member of the board of directors. He is also a Director of Cryoport Inc. Mr. Zecchini became a member of the Cryoport, Inc. (NASDAQ: symbol “CYRX.”) board of directors in September 2013 and serves as Chairman of the Compensation Committee and member of the Audit Committee and Scientific and Technology Committee

We believe Mr. Zecchini’s qualifications to serve on our board of directors include his experience in the healthcare industry, and his current and past experience in numerous private and publicly traded companies.

Diane Seloff has served as the Company’s director since October 2018. She is currently the Interim Chief Operating Officer at CareBridge and was part of the founding leadership team. She served as Chief Operating Officer at Aspire Health since October 2013 through August 2019 including engaged in the sale to Anthem in June of 2018 and led the integration with Anthem and CareMore. As Aspire Health’s Chief Operating Officer, Ms. Seloff built all the corporate functions for the company in its first two years and was responsible for running and transforming Aspire Health’s operations. She previously held senior executive roles in operations and development at other healthcare services and technology companies, including Vanderbilt University Medical Center from October 2007 to July 2013. Ms. Seloff began her career as a management consultant—first at Arthur Andersen & Company and later at KPMG Peat Marwick. Ms. Diane Seloff possesses over 25 years of experience in the broader healthcare industry and has diverse experience in operations, human capital, finance, technology, strategic planning and business development in healthcare, financial services, and logistics. Ms. Seloff received her MBA from Columbia University in 1990 and received her BS in Engineering from University of Michigan in 1984.

We believe Ms. Seloff’s qualifications to serve on our board of directors include her extensive experience as an executive in several healthcare firms. In addition, as a board member we believe she has an understanding of our customer base and current developments and strategies in the health insurance industry.
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Robert Rebak has served as the Company’s director since July 2019. Mr. Rebak currently serves as the Chief Executive Officer of Forefront Telecare, a behavioral telehealth company serving seniors in rural health systems in 20 US states, where he is responsible for company vision, strategy, growth, culture, and overall operating performance since January 2019. From June 2016 to June 2018, he served as the President and Chief Executive Officer of AbleTo, a behavioral telehealth company serving adult health plan members nationwide. From November 2014 to March 2016, he served as President, Consumer Solutions for Sharecare, a health and wellness patient engagement platform. He joined Sharecare through its acquisition of QualityHealth, a digital patient acquisition and engagement platform, where he was Chairman and Chief Executive Officer from February 2009 to November 2014. Mr. Rebak previously served as Managing Partner of Rosetta, from June 2005 to January 2007. He joined Rosetta through its acquisition of SimStar, where he served as President of the healthcare-specific digital marketing firm from February 1999 to June 2005. He has raised over $60 million in growth capital from both strategic and financial investors and has led two successful company sale transactions. Mr. Rebak has served on both private equity backed companies and not-for-profit Boards, and currently serves as a Board Director of the Quell Foundation. Mr. Rebak holds an MBA in Finance and Marketing from the University of Chicago Booth School of Business and a BA in History and Economics from Vanderbilt University.

We believe Mr. Rebak ’s qualifications to serve on our board of directors include his experience in the banking and securities industry and his experience in the healthcare industry.

Gustavo Giraldo has served as the Company’s director since November 2019. Mr. Giraldo currently serves as the Regional Vice President and the Head of Latin America for Centene Corporation.From April 2016 to December 2019, Mr. Giraldo served as the president of behavioral and specialty health at Magellan Healthcare, where he has been responsible for the strategic development and profitable growth of Magellan Healthcare’s health plan, employer, provider segments, state carve-out behavioral health and federal markets. From April 2015 to April 2016, Mr. Giraldo served as the Chief Operating Officer for Chubb’s Latin American life, accident and health business where he was responsible for the lead sales and distribution for a division of the company. He served as the Chief Operating Officer of Cigna’s Chinese life insurance joint venture from September 2001 to March 2015, and the Founder and Regional Managing Director for Cigna’s Asian health insurance businesses. Mr. Giraldo has more than 20 years of leadership in the insurance industry, including a track record of initiating, leading and growing domestic and global healthcare businesses. Mr. Giraldo earned his bachelor’s degree in mathematics from The Florida State University in 1996 and his master’s degree in business administration from the University of Pennsylvania’s Wharton School of Business in 2006.

We believe Mr. Giraldo’s qualifications to serve on our board of directors include his experience in the healthcare industry and his current and past experience in numerous private and publicly traded companies.

Independence of the Board of Directors

Our common stock is traded on the NASDAQ Capital Market. The Board of Directors has determined that six of the members of the Board of Directors qualify as “independent,” as defined by the listing standards of the NASDAQ. Consistent with these considerations, after review of all relevant transactions and relationships between each director, or any of his family members, and the Company, its senior management and its independent auditors, the Board has determined further that Messrs. Berman, Sherman, Zecchini, Rebak, Giraldo and Ms. Seloff are independent under the listing standards of NASDAQ. In making this determination, the Board of Directors considered that there were no new transactions or relationships between its current independent directors and the Company, its senior management and its independent auditors since last making this determination.

2019 Meetings and Attendance

During 2019, the Board held 5 meetings. All Directors attended at least 75% or more of the aggregate number of meetings of the Board and Board Committees on which they served.

Committees of the Board of Directors

Audit committee

Our audit committee currently consists of three directors, Messrs. Berman and Giraldo and Ms. Seloff with Mr. Berman serving as the chairman of the audit committee. Mr. Giraldo was appointed to serve as a member of the Audit Committee in November 2019. The audit committee had 4 meetings during the 2019 year. The Board of Directors has determined that each of the members of the audit committee were independent as defined by the NASDAQ rules, meet the applicable requirements for audit committee members, including Rule 10A-3(b) under the Exchange Act, and that Mr. Berman qualifies as an “audit
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committee financial expert” as defined by Item 401(h)(2) of Regulation S-K. The duties and responsibilities of the audit committee include (i) selecting, evaluating and, if appropriate, replacing our independent registered accounting firm, (ii) reviewing the plan and scope of audits, (iii) reviewing our significant accounting policies, any significant deficiencies in the design or operation of internal controls or material weakness therein and any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation and (iv) overseeing related auditing matters.

A copy of the audit committee’s written charter is publicly available through the “Investors-Governance” section of our website at www.catasys.com.

Nominations and governance committee

Our nominations and governance committee currently consists of three members Messrs. Sherman, Berman and Rebak, who are all independent as defined by the NASDAQ rules. Mr. Rebak was appointed to serve as a member of the nominations and governance committee in November 2019. The nominations and governance committee had 5 meetings during 2019. Mr. Sherman serves as the chairman of the nominations and governance committee. The committee nominates new directors and periodically oversees corporate governance matters.

The charter of the nominations and governance committee provides that the committee will consider board candidates recommended for consideration by our stockholders, provided the stockholders provide information regarding candidates as required by the charter or reasonably requested by us within the timeframe proscribed in Rule 14a-8 of Regulation 14A under the Exchange Act, and other applicable rules and regulations. Recommendation materials are required to be sent to the nominations and governance committee c/o Catasys, Inc., 2120 Colorado Ave., Suite 230, Santa Monica, CA 90404. There are no specific minimum qualifications required to be met by a director nominee recommended for a position on the board of directors, nor are there any specific qualities or skills that are necessary for one or more of our directors to possess, other than as are necessary to meet any requirements under the rules and regulations applicable to us. The nominations and governance committee considers a potential candidate's experience, areas of expertise, and other factors relative to the overall composition of the board of directors.

The nominations and governance committee considers director candidates that are suggested by members of the board of directors, as well as management and stockholders. The committee may also retain a third-party executive search firm to identify candidates. The process for identifying and evaluating nominees for director, including nominees recommended by stockholders, involves reviewing potentially eligible candidates, conducting background and reference checks, interviews with the candidate and others (as schedules permit), a meeting to consider and approve the candidate and, as appropriate, preparing and presenting to the full board of directors an analysis with respect to particular recommended candidates. The nominations and governance committee endeavors to identify director nominees who have the highest personal and professional integrity, have demonstrated exceptional ability and judgment, and, together with other director nominees and members, are expected to serve the long term interest of our stockholders and contribute to our overall corporate goals.

A copy of the nominations and governance committee’s written charter is publicly available through the “Investors-Governance” section of our website at www.catasys.com.

Compensation committee

The compensation committee currently consists of three directors Messrs. Sherman, Zecchini, and Giraldo, who are independent as defined by the NASDAQ rules. Mr. Giraldo was appointed to serve as a member of the Compensation Committee in November 2019. During 2019, the compensation committee held three meetings. Mr. Sherman serves as the chairman of the compensation committee. The compensation committee reviews and recommends to the board of directors for approval and compensation of our executive officers.

A copy of our compensation committee written charter is publicly available through the “Investors-Governance” section of our website at www.catasys.com.

Executive Officers

The following sets forth information regarding Mr. Christopher Shirley, a non-director and our former Chief Financial Officer, Mr. Richard A. Anderson, our former President and Chief Operating Officer, Mr. Curtis Medeiros, our current President and Chief Operating Officer, and Mr. Brandon H. LaVerne, our newly appointed Chief Financial Officer as of the date of this 10-
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K/A. For information regarding Terren S. Peizer, our Chief Executive Officer and Chairman, see “Director, Executive Officers and Corporate Governance” above.

Christopher Shirley served as the Company’s Chief Financial Officer from May 2017 to March 2020. He joined the Company with approximately 20 years of finance experience, including senior leadership roles at healthcare technology and big data companies. Most recently, Mr. Shirley served as the Chief Financial Officer of Sentient Science Corporation from September 2016 until February 2017. Previously, as CFO of GE Intelligent Platforms from March 2015 until September 2016, he led the finance function during a period of rapid expansion. Prior to joining GE Digital, from March 2014 until March 2015, Mr. Shirley was the Financial Integration Leader for GE Healthcare, where he led the financial integration and delivery of deal model expectations following its acquisition of API Healthcare. Before his role as Financial Integration Leader for GE Healthcare, Mr. Shirley served as Global Finance Manager of GE Healthcare beginning in June 2011. Mr. Shirley obtained his BS in finance from DePaul University in 1999.

Richard A. Anderson served as a member of our management team from April 2005 to December 2019, and previously served as a director from July 2003 to November 2018. He served as our President and Chief Operating Officer since July 2008; in this role he was primarily responsible for the creation and leadership of our OnTrak solution. He has more than twenty-five years of experience in business development, strategic planning, operations, finance and management, with more than 15 years of that in the healthcare field. Prior to joining the Company, he held senior level financial and operational positions in healthcare and financial companies, and served as a director in PriceWaterhouseCoopers LLP’s business assurance and transaction support practices. He received a B.A. in Business Economics from University of California, Santa Barbara.

Mr. Curtis Medeiros has served asourPresident and Chief Operating Officer since December 2019. Prior to joining the Company, Mr. Medeiros was the President at OPTUM Analytics overseeing a group that served the analytical needs of external payers, providers and life sciences companies since July 2019. Mr. Medeiros was the President of OPTUM Life Sciences at UnitedHealth Group from 2014 to April 2016, where he focused on creating novel collaboration opportunities that addressed health system challenges. From June 2014 to April 2016, Mr. Medeiros was the Chief Operating Officer and Senior Vice President at OPTUM Life Sciences where he led the OPTUM Life Sciences business, which drives client value by providing best in class real-world data, analytics, consulting and collaborations aimed at improving the health care system for all stakeholders. Prior to joining OPTUM in June 2010, Mr. Medeiros served as a Senior Director at Merck Research Laboratories from January 2009 to May 2010. Mr. Medeiros holds a bachelor’s degree in Chemical Engineering from MIT and an MBA from Harvard Business School.


Brandon H. LaVerne has served as the Company’s Chief Financial Officer since March 2020. Prior to joining the Company, Mr. LaVerne worked at PCM, Inc. from October 1998 until its sale in August 2019 and most recently served as its Chief Financial Officer, Chief Accounting Officer, Treasurer and Assistant Secretary since July 2007. Prior to joining PCM, Inc. Mr. LaVerne worked as the Corporate Accounting Supervisor for Computer Sciences Corporation from September 1996 to October 1998, and started his career with Deloitte & Touche LLP in September 1993. Mr. LaVerne received his Bachelor of Science in Accounting from University of Southern California and is a Certified Public Accountant.

Code of Ethics

Our Board of Directors has adopted a code of ethics applicable to our chief executive officer, chief financial officer and persons performing similar functions. Our code of ethics is accessible on our website at http://www.catasys.com. Disclosure regarding any amendments to, or waivers from, provisions of the code of ethicsitem will be included in a Current Report on Form 8-Kour Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within four business120 days following the date of the amendment or waiver.fiscal year ended December 31, 2020, and is incorporated herein by reference.

Delinquent Section 16(a) Reports

Section 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), requires our directors and executive officers, and persons who own more than 10% of our outstanding common stock, to file with the SEC, initial reports of ownership and reports of changes in ownership of our equity securities. Such persons are required by SEC regulations to furnish us with copies of all such reports they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us regarding the filing of required reports, we believe that all Section 16(a) reports applicable to our directors, executive officers and greater-than-ten-percent beneficial owners with respect to fiscal 2019 were timely filed, except that an initial report of ownership was filed late by Messrs. Rebak, Giraldo and Medeiros.
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Anti-Hedging Policy

We have adopted an insider trading policy that includes a provision restricting trading of any interest or provision relating to the future price of our securities, such as a put, call or short sale.
ITEM 11.    EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forthinformation required by this item will be included in our Proxy Statement for the total compensation paid during2021 Annual Meeting of Stockholders to be filed with the last two fiscal years ended December 31, 2019 and 2018 to (1) our Chief Executive Officer, (2) our two next most highly compensated executive officers who earned more than $100,000 duringSEC within 120 days of the fiscal year ended December 31, 20192020, and were serving as executive officers as of such date, and (3) our former President and Chief Operating Officer, who would have qualified pursuant to foregoing clause (2) except that he was not serving as an executive officer as of December 31, 2019.is incorporated herein by reference.


All
Other
Name andCompen-
Principal PositionYearSalary ($)Bonus ($)Stock/Option Award ($)
sation ($)
(4)
Total ($)
Terren S. Peizer,2019450,000--13,233463,233
Chairman and2018450,000-1,946,30915,4972,411,806
Chief Executive Officer
Richard A. Anderson,2019421,278-2,659,03634,3673,114,681
Former President and2018408,205-868,85827,8841,304,947
Chief Operating Officer(1)
Curtis Medeiros201916,346-3,706,661-3,723,007
President and
Chief Operating Officer (2)






Christopher Shirley,2019285,000-851,61517,9401,154,555
Chief Financial2018285,00015,000-16,013316,013
Officer (3)


(1) Mr. Richard A. Anderson resigned from his position as the President and Chief Operating Officer of the Company on December 2, 2019.As part of his separation agreement, Mr. Anderson continued as a Special Advisor to the Company, with a
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transition period beginning December 2, 2019 and ending one-year from this date (the “Transition Period”).During the Transition Period, Mr. Anderson will receive: (1) the equivalent of his one year’s base salary, payable in equal installments consistent with the Company’s regular payroll cycle; (2) existing health benefits through December 2, 2020 or until such time as Mr. Anderson becomes eligible for similar benefits through another employer; (3) at the beginning of the 2019 fiscal year and prior to Mr. Anderson’s resignation, $1.5 million of performance based award was deemed to be granted when the fiscal year 2019 performance targets were approved and set by the board of directors.This was ultimately forfeited upon resignation and as part of his separation agreement, 115,950 of his stock options previously granted under our 2017 stock incentive plan became immediately vested, resulting in additional $1.1 million black-scholes value in 2019 and (4) a vacation payout of $48,000 payable at the conclusion of the Transition Period.On December 30, 2019, Mr. Anderson exercised his right to cease providing services to the Company under his separation agreement and will continue receiving severance according to the terms listed under the Transition Period.
(2) Mr. Curtis Medeiros was appointed to serve as the President and Chief Operating Officer of the Company replacing Mr. Richard Anderson on December 2, 2019.
(3) Mr. Shirley resigned from his position as the Chief Financial Officer of the Company effective March 16, 2020.
(4) Includes group medical and dental benefits, group life insurance premiums, accidental death, long-term disability insurance and parking.





Narrative Disclosures to Summary Compensation Table

Executive employment agreements

Chief Executive Officer

We entered into a five-year employment agreement with our Chairman and Chief Executive Officer, Terren S. Peizer, effective as of September 29, 2003, which automatically renews after each five-year term. Mr. Peizer received an annual base salary of $450,000 in each of 2019 and 2018. Mr. Peizer is also eligible for an annual bonus targeted at 100% of his base salary based on goals and milestones established and reevaluated on an annual basis by mutual agreement between Mr. Peizer and the Board of Directors. Mr. Peizer did not receive any annual bonus during the fiscal years ended December 31, 2019 and 2018. His base salary and bonus target will be adjusted each year to not be less than the median compensation of similarly positioned CEO’s of similarly situated companies. Mr. Peizer receives executive benefits including group medical and dental insurance, term life insurance equal to 150% of his salary, accidental death and long-term disability insurance, grossed up for taxes. Mr. Peizer was not granted any equity awards during 2019 and was granted 397,693 equity awards during 2018. All unvested options vest immediately in the event of a change in control, termination without good cause or resignation with good reason. In the event that Mr. Peizer is terminated without good cause or resigns with good reason prior to the end of the term, he will receive a lump sum payment equal to the remainder of his base salary and targeted bonus for the year of termination, plus three years of additional salary, bonuses and benefits. If any of the provisions above result in an excise tax, we will make an additional “gross up” payment to eliminate the impact of the tax on Mr. Peizer.

President and Chief Operating Officer

We entered into a three-year employment agreement with Mr. Medeiros dated November 15, 2019 and commencing on December 2, 2019 (the “Commencement Date”), with an option to renew for an additional three-year term unless terminated by either party within 90 days of the end of the original term. Mr. Medeiros received an annual base salary of $16,346 in 2019.Mr. Medeiros was eligible for an annual bonus targeted at 100% of his base salary based on achieving certain milestones.Mr. Medeiros did not receive any annual bonus during the fiscal period ended December 31, 2019. Mr. Medeiros received executive benefits, including group medical and dental insurance, term life insurance, accidental death and long-term disability insurance. Mr. Medeiros was granted 300,000 equity awards during 2019 and a common stock grant valued at $400,000 based upon the closing price of our stock on his Commencement Date. All unvested options vest immediately in the event of a change in control.In the event that Mr. Medeiros is terminated without good cause the option will continue to vest for a period of twelve months following the date of termination.In the event that Mr. Medeiros is terminated without good cause or resigns with good reason prior to the end of the term, on the six month anniversary of his termination he will receive a lump sum payment equal to twelve months base salary plus a pro-rata share of any bonus earned for the year of termination.

Former President and Chief Operating Officer

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We entered into a four-year employment agreement with our former President and Chief Operating Officer, Richard A. Anderson, effective April 19, 2005, as amended on July 16, 2008, as amended as of December 30, 2008 and as amended on April 10, 2018. The April 10, 2018 amendment to his employment agreement has a five-year term, and automatically renews for additional three-year terms unless otherwise terminated. Mr. Anderson received an annual base salary of $421,278 in 2019 and $408,205 in 2018. Mr. Anderson was eligible for an annual bonus targeted at 50% of his base salary based on achieving certain milestones. Mr. Anderson did not receive any annual bonus during the fiscal years ended December 31, 2019 and 2018. Mr. Anderson’s compensation was adjusted each year by an amount not less than the Consumer Price Index. Mr. Anderson received executive benefits, including group medical and dental insurance, term life insurance, accidental death and long-term disability insurance. Mr. Anderson was not granted any equity awards during 2019 and granted 1,040,000 equity awards during 2018. Mr. Anderson resigned from his position as the President and Chief Operating Officer of the Company on December 2, 2019.As part of his separation agreement, Mr. Anderson continued as a Special Advisor to the Company, with a transition period beginning December 2, 2019 and ending one-year from this date (the “Transition Period”).During the Transition Period, Mr. Anderson will receive (1) the equivalent of his one year’s base salary, payable in equal installments consistent with the Company’s regular payroll cycle; (2) existing health benefits continued through December 2, 2020 or until such time as Mr. Anderson becomes eligible for similar benefits through another employer; (3) 115,950 of his stock options previously granted under our 2017 stock incentive plan which shall immediately vest, and (4) a vacation payout of $48,000 payable at the conclusion of the Transition Period.On December 30, 2019, Mr. Anderson exercised his right to cease providing services to the Company under his separation agreement and will continue receiving severance according to the terms listed under the Transition Period.




Former Chief Financial Officer

We entered into a two-year employment agreement with Mr. Shirley effective May 31, 2017, which automatically renews for an additional two-year term unless terminated by either party within 90 days of the end of the initial term. Mr. Shirley’s employment agreement was amended on December 16, 2019, pursuant to which Mr. Shirley’s base salary was increased from $285,000 to $345,000 annually, and Mr. Shirley was entitled to receive a qualified incentive stock option to purchase 65,000 shares of common stock under and subject to all the provisions of the Company’s 2017 Stock Incentive Plan. Mr. Shirley received an annual base salary of $285,000 in 2019 and $285,000 in 2018, and is eligible for a bonus targeted at 40% of his base salary based on achieving certain milestones. Mr. Shirley did not receive any annual bonus during the fiscal year ended December 31, 2019 and received a guaranteed bonus of $15,000 during the 2018 year. Mr. Shirley was granted 65,000 equity awards during 2019 and no equity awards during 2018.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth all outstanding equity awards held by our named executive officers as of December 31, 2019.


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Number of
Number ofSecurities
SecuritiesUnderlying
UnderlyingUnexercisedOption
UnexercisedOptions (#)ExerciseOption
Options (#)Unexer-PriceExpiration
NameExercisablecisable($)Date
Terren S. Peizer24,750-105.6012/09/20
-642,307(1)7.5012/19/27
-397,693(1)7.5008/02/28
24,7501,040,000
Richard A. Anderson115,950-(2)7.5003/29/20
Curtis Medeiros-300,000(3)15.5512/02/29
Christopher Shirley (4)67,50067,500(5)7.5012/19/27
2,60062,400(6)16.4812/16/29
70,100129,900

(1) Mr. Peizer’s options shall vest on January 1, 2023, if the Volume 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.
(2) Per Mr. Anderson’s separation agreement 115,950 of Mr. Anderson’s previously issued stock options became immediately vested and all other option grants made to him during his employment terminated.
(3) One third of Mr. Medeiros stock options vest one-year from grant date and the remaining stock options vest equally over the next 24 months.
(4) Mr. Shirley resigned from his position as the Chief Financial Officer of the Company effective March 16, 2020.
(5) One quarter of Mr. Shirley’s stock options vest one-year from grant date and the remaining stock options vest equally over the next 36 months.
(6) 2,600 of Mr. Shirley’s stock options shall vest on each of 25 equal monthly installments beginning on December 19, 2019.






POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL

Potential payments upon termination

The following summarizes the payments that the named executive officers would have received if their employment had terminated on December 31, 2019.

If Mr. Peizer's employment had terminated due to disability, he would have received insurance and other fringe benefits for a period of one year thereafter, with a value equal to approximately $10,000. If Mr. Peizer had been terminated without good cause or resigned for good reason, he would have received a lump sum payment of $2,729,000, based upon: (i) three years of additional salary at $450,000 per year; (ii) three years of additional bonus of $450,000 per year; and (iii) three years of fringe benefits, with a value equal to approximately $29,000.

If Mr. Medeiros had been or is terminated without good cause, he would have received a lump sum payment of approximately $425,000, equal to one year of salary, payable on the six month anniversary of his termination plus a pro-rata share of any bonus earned for the year of termination.

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If Mr. Shirley had been or is terminated without good cause, he would have received a lump sum payment of approximately $172,500, equal to six months’ salary, plus a pro-rata share of any bonus earned in the year of termination.

Potential payments upon change in control

Upon a change in control, the unvested stock options of each of our named executive officers would have vested, with the values set forth above.

If Mr. Peizer had been terminated without good cause or resigned for good reason within twelve months following a change in control, he would have received a lump sum payment of $2,729,000, as described above, plus a tax gross up of approximately $682,000.

DIRECTOR COMPENSATION

The following table provides information regarding compensation that was earned or paid to the individuals who served as non-employee directors during the year ended December 31, 2019. Except as set forth in the table, during 2019, directors did not earn nor receive cash compensation or compensation in the form of stock awards, option awards or any other form.


Option
Nameawards ($)Total ($)
Richard A. Berman91,67191,671
Richard J. Berman (1)33,87333,873
Michael Sherman83,60983,609
Edward J. Zecchini290,780290,780
Sharon R. Gabrielson (2)175,815175,815
Diane Seloff272,798272,798
Robert Rebak (3)186,287186,287
Gustavo A. Giraldo (4)--

(1) Mr. Berman resigned from his position as a director of the Company on July 16, 2019.
(2) Ms. Gabrielson resigned from her position as a director of the Company on November 15, 2019.
(3) Mr. Rebak was appointed to serve as a member of our board of directors in July 2019.
(4) Mr. Giraldo was appointed to serve as a member of our board of directors in November 2019.

Notes to director compensation table:

Amounts reflect the compensation expense recognized in the Company's financial statements in 2019 for non-employee director stock options, in accordance with FASB ASC Topic 718. As such, these amounts do not correspond to the compensation actually realized by each director for the period.




Outstanding equity awards held by non-employee directors as of December 31, 2019, were as follows:


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Aggregate
grant date
Optionsfair market value
outstandingoptions
(#)outstanding ($)
Richard A. Berman150,032$777,513
Richard J. Berman (1)25,17298,950
Michael Sherman98,834250,826
Edward J. Zecchini85,551535,927
Sharon R. Gabrielson (2)35,647219,773
Diane Seloff85,551513,449
Robert Rebak (3)85,5511,117,722
Gustavo A. Giraldo (4)8,36079,576
574,698$3,593,736

(1) Mr. J. Berman resigned from his position as a director of the Company on July 16, 2019.
(2) Ms. Gabrielson resigned from her position as a director of the Company on November 15, 2019.
(3) Mr. Rebak was appointed to serve as a member of our board of directors in July 2019.
(4) Mr. Giraldo was appointed to serve as a member of our board of directors in November 2019.

There were a total of 574,698 stock options outstanding to directors as of December 31, 2019, with an aggregate grant date fair value of $3.6 million, the last of which vest in June 2022. There were 293,623 options granted to non-employees during 2019 and 235,081 options granted to non-employees during 2018.

















EQUITY COMPENSATION PLAN INFORMATION

The following table provides certain aggregate information with respect to all of the Company’s equity compensation plans in effect as of December 31, 2019.


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Plan Category
(a)
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
right

(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders (1)4,006,351$10.92325,162
Equity compensation plans not approved by security holders---
Total4,006,351$10.92325,162

(1) We adopted our 2017 Stock Incentive Plan (the “2017 Plan”) in 2017. In August 2018, stockholders approved an amendment to the 2017 Plan to provide for an additional 1,400,000 shares to be issued in connection with awards granted thereunder (the “2017 Amended Plan”). Under the 2017 Amended Plan, we can grant incentive stock options, non-qualified stock option, restricted and unrestricted stock awards and other stock-based awards. As of December 31, 2019, 325,162 equity awards remained reserved for future issuance under the 2017 Plan.



Compensation Committee Interlocks and Insider Participation

Currently, our Compensation Committee consists of Messrs. Michael Sherman, Edward Zecchini, and Gustavo A. Giraldo. No current or expected member of the Compensation Committee, nor any of our Named Executive Officers, has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity.

No current or expected member of our Compensation Committee is or has been an officer or employee of the Company. None of our executive officers currently serves, or in the past year has served, as a member of the Board or Compensation Committee (or other Board committee performing equivalent functions) of any entity that has one or more of its executive officers serving on our Board or Compensation Committee.









ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
38



TableThe information required by this item will be included in our Proxy Statement for the 2021 Annual Meeting of Contents

The following table sets forth certain information with respectStockholders to the beneficial ownership of our common stock as of April 24, 2020 for (a) each stockholder known by us to own beneficially more than 5% of our common stock (b) our named executive officers, (c) each of our directors, and (d) all of our current directors and executive officers as a group. Beneficial ownership is determined in accordancebe filed with the rulesSEC within 120 days of the SECfiscal year ended December 31, 2020, and includes voting or investment power with respect to the securities. We deem shares of common stock that may be acquiredis incorporated herein by an individual or group within 60 days of April 24, 2020 pursuant to the exercise of options or warrants to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them based on information provided to us by these stockholders. Percentage of ownership is based on 16,982,992 shares of common stock outstanding on April 24, 2020.


Total
Sharescommon
CommonbeneficiallystockPercent
stockownedbeneficiallyof
Name of beneficial owner (1)owned (2)(3)ownedclass (3)
Directors and Named Executive Officers:
Terren S. Peizer (4)9,119,1551,273,93910,393,09456.9%
Richard A. Berman (5)-154,056154,056*
Michael Sherman (6)15,550102,992118,542*
Edward J. Zecchini (7)-42,77642,776*
Diane Seloff (8)-42,77642,776*
Robert Rebak (9)8,20021,38829,588*
Gustavo Giraldo (10)-3,5503,550*
Curtis Medeiros (11)65,821-65,821*
Brandon H. LaVerne (12)---*
All directors, director nominee and named executive officers as a group (9 persons)9,208,7261,641,47710,850,20358.3%
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* Less than 1%

(1) Except as set forth below, the mailing address of all individuals listed is c/o Catasys, Inc., 2120 Colorado ve., Suite 230, Santa Monica, CA 90404.
(2) The number of shares beneficially owned includes shares of common stock in which a person has sole or shared voting power and/or sole or shared investment power. Except as noted below, each person named reportedly has sole voting and investment powers with respect to the common stock beneficially owned by that person, subject to applicable community property and similar laws.
(3) On April 24, 2020, there were 16,982,992 shares of common stock outstanding. Common stock not outstanding but which underlies options and rights (including warrants) vested as of or vesting within 60 days after April 24, 2020, is deemed to be outstanding for the purpose of computing the percentage of the common stock beneficially owned by each named person (and the directors and executive officers as a group), but is not deemed to be outstanding for any other purpose.
(4) Consists of warrants to purchase 1,249,189 shares of common stock and options to purchase 24,750 shares of common stock, which are exercisable within 60 days. 9,130,849 shares of common stock are held of record by Acuitas Group Holdings, LLC, a limited liability company 100% owned by Terren S. Peizer, and as such, Mr. Peizer may be deemed to beneficially own or control. Mr. Peizer disclaims beneficial ownership of any such securities.
(5) Includes options to purchase 154,056 shares of common stock, which are exercisable within the next 60 days.
(6) Consists of 15,550 shares of common stock and options to purchase 102,992 shares of common stock, which are exercisable within the next 60 days.
(7) Includes options to purchase 42,776 shares of common stock, which are exercisable within the next 60 days.
(8) Includes options to purchase 42,776 shares of common stock, which are exercisable within the next 60 days.
(9) Mr. Rebak was appointed to serve as a member of the Board on July 18, 2019.Consists of 8,200 shares of common stock and options to purchase 21,388 shares of common stock, which are exercisable within the next 60 days.
(10) Mr. Giraldo was appointed to serve as a member of the Board on November 19, 2019.Includes options to purchase 3,550 shares of common stock, which are exercisable within the next 60 days.
(11) Mr. Medeiros was appointed to serve as the President and Chief Operating Officer of the Company on December 2, 2019.Consists of 65,821 shares of common stock.
(12) Mr. LaVerne was appointed to serve as the Chief Financial Officer of the Company on March 16, 2020.


reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Review and Approval of Transactions with Related Persons

Either the audit committee or the Board of Directors approves all related party transactions. The procedureinformation required by this item will be included in our Proxy Statement for the review, approval or ratification2021 Annual Meeting of related party transactions involves discussing the proposed transaction with management, discussing the proposed transactionStockholders to be filed with the external auditors, reviewing financial statementsSEC within 120 days of the fiscal year ended December 31, 2020, and related disclosures, and reviewing the details of major deals and transactions to ensure that they do not involve related party transactions. Members of management have been informed and understand that they are to bring related party transactions to the audit committee or the Board of Directors for pre-approval. These policies and procedures are evidenced in the audit committee charter and our code of ethics.is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES

The following table presents fees for professional audit services renderedinformation required by EisnerAmper LLP (“EisnerAmper”)this item will be included in our Proxy Statement for the audit2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the Company’s annual financial statements for thefiscal year ended December 31, 20192020, and 2018 and fees billed for other services rendered during those periods.
20192018
Audit fees (1)$348,250$156,100
Audit-related fees--
Tax fees:--
All other fees:--
Total$348,250$156,100
is incorporated herein by reference.

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(1) Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent registered public accounting firm can reasonably be expected to provide, such as statutory audits.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Public Accountant

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of our independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm.

Prior to engagement of an independent registered public accounting firm for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the Audit Committee for approval.

1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only an independent registered public accounting firm can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.

2. Audit-Related services are for assurance and related services that are traditionally performed by an independent registered public accounting firm, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.

3. Tax services include all services performed by an independent registered public accounting firm’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.

4. Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from our independent registered public accounting firm.

Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires our independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage our independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging our independent registered public accounting firm.

The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.


PART IV

ITEM 15.    EXHIBITS,EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1),(2)Financial Statements
The Financial Statements and Financial Statement Schedules listed on page F-1 of this document are filed as part of this filing.
(a)(3)     Exhibits
The following exhibits are filed as part of this report:
Exhibit
No.
Description
41



Table of Contents
3.1
3.63.2
3.3
3.4
3.5
3.6
4.1
4.2
33



Table of Contents
4.3
4.4
4.5
4.64.6*
10.1#
10.2#
10.3#
10.4#
10.7#10.5#
10.810.6
10.9#10.7
10.8
10.9
10.10
10.11
10.12#
10.10#10.13#
10.14#
10.15#
34



Table of Contents
14.1
21.1**
23.2*23.1 *
31.1***
31.2***
42



Table of Contents
32.1**
32.2**
101.INS*XBRL Instance Document
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
104*Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)
____________________________
*    FurnishedFiled herewith.
**    Previously filed.
*** FiledFurnished herewith.
#    Management contract or compensatory plan or arrangement.


ITEM 16.    FORM 10-K SUMMARY
Not applicable
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.

ONTRAK, INC.
Date: August 6, 2020March 9, 2021By:/s/ TERREN S. PEIZER
Terren S. Peizer
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitle(s)Date
/s/ TERREN S. PEIZERChairman of the Board of DirectorsAugust 6, 2020March 9, 2021
Terren S. Peizerand Chief Executive Officer
(Principal Executive Officer)
/s/ CURTIS MEDEIROSPresident, Chief Operating Officer August 6, 2020March 9, 2021
Curtis Medeiros 
/s/ BRANDON H. LAVERNEChief Financial OfficerAugust 6, 2020March 9, 2021
Brandon H. LaVerne(Principal Financial and 
Accounting Officer)
/s/ RICHARD A. BERMANDirectorAugust 6, 2020March 9, 2021
Richard Berman
/s/ EDWARD ZECCHINIDirectorAugust 6, 2020March 9, 2021
Edward Zecchini
/s/ MICHAEL SHERMANDirectorAugust 6, 2020March 9, 2021
Michael Sherman
/s/ ROBERT REBAKDirectorAugust 6, 2020March 9, 2021
Robert Rebak
/s/ GUSTAVO GIRALDODirectorAugust 6, 2020March 9, 2021
Gustavo Giraldo
/s/ DIANE SELOFFDirectorAugust 6, 2020March 9, 2021
Diane Seloff
/s/ KATHERINE QUINNDirectorMarch 9, 2021
Katherine Quinn

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CATASYS,ONTRAK, INC.
Index to Consolidated Financial Statements and Financial Statement Schedules
Financial Statements

F-2
F-4
F-5
F-6
F-7
F-8

Financial Statement Schedules
All financial statement schedules are omitted becauseas they are either not applicable not required, or the information required is shownpresented in the Financial Statements or Notes thereto.consolidated financial statements and notes thereto included in this Form 10-K.

F-1



Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of Ontrak, Inc., f/k/a Catasys, Inc.


Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Ontrak, Inc., f/k/a Catasys, Inc. and Subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, stockholders’ deficit,equity (deficit), and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20192020 and 2018,2019, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2020 expressed an unqualified opinion.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases effective January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Calculation of variable consideration related to price concessions

As described further in Note 2 to the financial statements, the variable contract revenue is recognized at the amount that reflects the consideration the Company expects to receive in exchange for providing services directly to customers. The transaction price of the Company’s revenue contract is variable as it is calculated net of estimated price concessions. Management estimates the value of variable consideration based upon historical experience and other factors, including evaluation of expected adjustments, past adjustments and collection experience in relation to amounts billed, current contract and reimbursement terms. As disclosed by Management, the evaluation of these historical and other factors involves complex, subjective judgements.

We identified the calculation of variable consideration related to price concessions as a critical audit matter due to the significant judgment and estimation required by management in their process. These estimates require the consideration of key assumptions such as insurance coverage levels which has estimation uncertainty. This in turn led to a high degree of auditor judgment, subjectivity and effort in applying the procedures related to those assumptions.

F-2



Table of Contents
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures also included, among others, (i) obtaining an understanding of management’s process and evaluating the design of controls over management’s calculation of variable consideration related to price concessions, as well as the relevance and use of historical experience data as an input into the estimate, (ii) testing the completeness and accuracy of the input data, (iii) evaluating the historical accuracy of management’s process for developing the estimate of the amount which will ultimately be collected and (iv) developing an independent expectation of the amount expected to be collected. We used a retrospective approach that includes historical sales and collection data in developing our independent expectations and in testing management’s process.




/s/ EisnerAmper LLP



We have served as the Company’s auditor since 2018.


EISNERAMPER LLP
Iselin, New Jersey
March 16, 2020

9, 2021







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Table of Contents

Opinion on Internal Control over Financial Reporting

We have audited Catasys, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of Catasys, Inc. and Subsidiaries as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years then ended and the related notes and our report dated March 16, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

An entity’s internal control over financial reporting is a process designed 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. An entity’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ EisnerAmper LLP


EISNERAMPER LLP
Iselin, New Jersey
March 16, 2020
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Table of Contents
CATASYS,ONTRAK, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
December 31,
2019
December 31,
2018
20202019
AssetsAssetsAssets
Current assets:Current assets:Current assets:
Cash, cash equivalents and restricted cash$13,610  $3,162  
Cash and cash equivalents Cash and cash equivalents$86,907 $13,610 
Restricted cash - current Restricted cash - current9,127 
Receivables, net Receivables, net3,615  1,382   Receivables, net16,682 3,615 
Unbilled receivables Unbilled receivables2,093  —   Unbilled receivables4,426 2,093 
Deferred costs - current Deferred costs - current2,352 341 
Prepaid expenses and other current assets Prepaid expenses and other current assets1,074  1,108   Prepaid expenses and other current assets4,144 733 
Total current assetsTotal current assets20,392  5,652  Total current assets123,638 20,392 
Long-term assets:Long-term assets:Long-term assets:
Property and equipment, net Property and equipment, net150  263   Property and equipment, net2,273 528 
Restricted cash, long-term408  408  
Deferred commissions112  —  
Right-of-use assets2,793  —  
Restricted cash - long-term Restricted cash - long-term7,176 408 
Goodwill Goodwill5,727 
Intangible assets, net Intangible assets, net3,561 
Other assets Other assets367 112 
Operating lease right-of-use asset Operating lease right-of-use asset1,959 2,415 
Total assetsTotal assets$23,855  $6,323  Total assets$144,701 $23,855 
Liabilities and stockholders' deficit
Liabilities and stockholders' equity (deficit)Liabilities and stockholders' equity (deficit)
Current liabilities:Current liabilities:Current liabilities:
Accounts payable Accounts payable$1,385  $497   Accounts payable$1,287 $1,385 
Accrued compensation and benefits Accrued compensation and benefits3,640  1,537   Accrued compensation and benefits4,723 3,640 
Deferred revenue Deferred revenue5,803  4,195   Deferred revenue20,954 5,803 
Current portion of lease liabilities519  —  
Current portion of operating lease liability Current portion of operating lease liability434 374 
Other accrued liabilities Other accrued liabilities2,060  1,501   Other accrued liabilities9,012 2,205 
Warrant liabilitiesWarrant liabilities691  86  Warrant liabilities691 
Total current liabilitiesTotal current liabilities14,098  7,816  Total current liabilities36,410 14,098 
Long-term liabilities:Long-term liabilities:Long-term liabilities:
Long-term debt, net Long-term debt, net31,597  7,472   Long-term debt, net45,719 31,597 
Long-term lease liabilities2,069  —  
Long-term operating lease liability Long-term operating lease liability1,403 1,836 
Long-term finance lease liabilities Long-term finance lease liabilities418 233 
Total liabilitiesTotal liabilities47,764  15,288  Total liabilities83,950 47,764 
Commitments and contingenciesCommitments and contingencies00
Commitments and contingencies (Note 8)
Stockholders' deficit:
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding—  —  
Common stock, $0.0001 par value, 500,000,000 shares authorized; 16,616,165 and
16,185,146 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
  
Additional paid in capital307,403  296,688  
Stockholders' equity (deficit):Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 3,770,265 and 0 shares issued and outstanding at December 31, 2020 and 2019, respectively Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 3,770,265 and 0 shares issued and outstanding at December 31, 2020 and 2019, respectively
Common stock, $0.0001 par value, 500,000,000 shares authorized; 17,543,218 and
16,616,165 shares issued and outstanding at December 31, 2020 and 2019, respectively
Common stock, $0.0001 par value, 500,000,000 shares authorized; 17,543,218 and
16,616,165 shares issued and outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital Additional paid-in capital414,773 307,403 
Accumulated deficit Accumulated deficit(331,314) (305,655)  Accumulated deficit(354,024)(331,314)
Total stockholders' deficit(23,909) (8,965) 
Total liabilities and stockholders' deficit$23,855  $6,323  
Total stockholders' equity (deficit)Total stockholders' equity (deficit)60,751 (23,909)
Total liabilities and stockholders' equity (deficit)Total liabilities and stockholders' equity (deficit)$144,701 $23,855 
See accompanying notes to the consolidated financial statements.
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CATASYS,ONTRAK, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31,
20192018
Revenue$35,095  $15,177  
Cost of revenue20,408  11,119  
Gross profit14,687  4,058  
Operating expenses34,701  17,684  
Operating loss(20,014) (13,626) 
Other income (expense)(2,538) 40  
Interest expense(3,047) (570) 
Change in fair value of warrant liability(60) (56) 
Net loss$(25,659) $(14,212) 
Net loss per share, basic and diluted$(1.56) $(0.89) 
Weighted-average shares used to compute basic and diluted net loss per share16,418  15,955  
Year Ended December 31,
20202019
Revenue$82,837 $35,095 
Cost of revenue43,603 20,408 
Gross profit39,234 14,687 
Operating expenses:
   Research and development12,923 5,439 
   Sales and marketing4,525 4,735 
   General and administrative36,709 24,527 
Total operating expenses54,157 34,701 
Operating loss(14,923)(20,014)
Other expense, net(1,213)(2,598)
Interest expense, net(7,219)(3,047)
Loss before income taxes$(23,355)$(25,659)
Income tax benefit645 
Net loss(22,710)(25,659)
Dividends on preferred stock - declared and undeclared(1,987)
Net loss attributable to common stockholders$(24,697)$(25,659)
Net loss per common share - basic and diluted$(1.44)$(1.56)
Weighted-average common shares outstanding - basic and diluted17,112 16,418 
See accompanying notes to the consolidated financial statements.
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CATASYS,ONTRAK, INC.
Consolidated Statements of Stockholders' DeficitEquity (Deficit)
(in thousands, except share and per share data)
Common StockAdditional
Paid-In
Capital
SharesAmountAccumulated
Deficit
Total Stockholders' Deficit
Balance at December 31, 201715,889,171  $ $294,220  $(293,324) $898  
Adoption of accounting standard, ASC 606—  —  —  1,881  1,881  
Balance at Balance at January 1, 201815,889,171  $ $294,220  (291,443) $2,779  
Common stock issued for services24,000  —  112  —  112  
Warrants issued for services—  —  86  —  86  
Warrants issued in connection with A/R facility—  —  64  —  64  
Cashless warrant exercise241,975  —  —  —  —  
Cash warrant exercise30,000  —  150  —  150  
Shared-based compensation expense—  —  2,056  —  2,056  
Net loss—  —  —  (14,212) (14,212) 
Balance at December 31, 201816,185,146  $ $296,688  $(305,655) $(8,965) 
Reclassification of warrant liability to equity upon
adoption of ASU 2017-11
—  —  86  —  86  
Warrants issued for services—  —  43  —  43  
Warrants issued in connection with 2024 notes—  —  2,354  —  2,354  
Exercise of warrant232,461  —  1,128  —  1,128  
Exercise of stock options195,351  —  1,894  —  1,894  
Stock compensation expense3,207  —  5,210  —  5,210  
Net loss—  —  —  (25,659) (25,659) 
Balance at December 31, 201916,616,165  $ $307,403  (331,314) $(23,909) 
Preferred StockCommon StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total Stockholders'
Equity (Deficit)
SharesAmountSharesAmount
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 exercised— — 232,461 — 1,128 — 1,128 
Warrants issued for services— — — — 2,397 — 2,397 
Stock options exercised— — 195,351 — 1,894 — 1,894 
Stock-based compensation expense— — 3,207 — 5,210 — 5,210 
Net loss— — — — — (25,659)(25,659)
Balance at December 31, 20190 $0 16,616,165 $2 $307,403 $(331,314)$(23,909)
Preferred stock issued, net3,770,265 — — 86,553 — 86,553 
Preferred dividends declared— — — — (1,241)— (1,241)
Stock issued in acquisition— — 74,984 — 5,035 — 5,035 
Warrants exercised— — 72,112 — 133 — 133 
Reclassification of warrant liability to equity— — — — 1,924 — 1,924 
Stock options exercised— — 737,281 — 6,171 — 6,171 
401(k) employer match— — 16,952 — 669 — 669 
Stock-based compensation expense— — 25,724 — 8,126 — 8,126 
Net loss— — — — — (22,710)(22,710)
Balance at December 31, 20203,770,265 $0 17,543,218 $2 $414,773 $(354,024)$60,751 

See accompanying notes to the consolidated financial statements.
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Table of Contents
CATASYS,ONTRAK, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,Year Ended December 31,
2019201820202019
Cash flows used in operating activities
Cash flows from operating activitiesCash flows from operating activities
Net lossNet loss$(25,659) $(14,212) Net loss$(22,710)$(25,659)
Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense Stock-based compensation expense5,210  2,056   Stock-based compensation expense8,126 5,210 
Write-off of debt issuance costs Write-off of debt issuance costs1,505  —   Write-off of debt issuance costs1,505 
Paid-in-kind interest expense Paid-in-kind interest expense3,500 
Depreciation Depreciation133  288   Depreciation303 133 
Amortization Amortization696  187   Amortization1,624 696 
Deferred taxes Deferred taxes(654)
Warrants issued for services Warrants issued for services43  86   Warrants issued for services43 
Change in fair value of warrants Change in fair value of warrants60  56   Change in fair value of warrants1,233 60 
Common stock issued for consulting services—  112  
Loss on disposal of fixed asset—  70  
Change in fair value of contingent consideration Change in fair value of contingent consideration(20)
401(k) employer match in common shares 401(k) employer match in common shares691 
Deferred rent Deferred rent(26) (91)  Deferred rent(26)
Changes in operating assets and liabilities: Changes in operating assets and liabilities: Changes in operating assets and liabilities:
Receivables Receivables(13,014)(2,233)
Unbilled receivables Unbilled receivables(2,333)(2,093)
Prepaid and other assets Prepaid and other assets(5,677)(246)
Accounts payable Accounts payable888  893   Accounts payable(175)888 
Deferred revenue Deferred revenue15,057 1,608 
Lease liabilities Lease liabilities684  —   Lease liabilities(373)684 
Other accrued liabilities Other accrued liabilities2,529  —   Other accrued liabilities8,140 2,529 
Prepaid and other current assets(246) (311) 
Deferred revenue1,608  3,163  
Receivables(2,233) (871) 
Unbilled receivables(2,093) —  
Net cash used in operating activitiesNet cash used in operating activities(16,901) (8,574) Net cash used in operating activities(6,282)(16,901)
Cash flows from investing activitiesCash flows from investing activities
Purchases of property and equipment Purchases of property and equipment(1,757)
Acquisition of LifeDojo, net of cash acquired Acquisition of LifeDojo, net of cash acquired(2,881)
Net cash used in investing activitiesNet cash used in investing activities(4,638)
Cash flows provided by investing activities
Purchases of property and equipment—  (9) 
Deposits and other assets—  71  
Net cash provided by investing activities—  62  
Cash flows provided by financing activities
Proceeds from secured promissory note—  7,500  
Cash flows from financing activitiesCash flows from financing activities
Proceeds from issuance of preferred stock Proceeds from issuance of preferred stock87,359 
Preferred stock issuance costs Preferred stock issuance costs(806)
Dividends paid Dividends paid(1,241)
Proceeds from revolving loan Proceeds from revolving loan7,500  —   Proceeds from revolving loan7,500 
Repayment of revolving loan Repayment of revolving loan(15,000) —   Repayment of revolving loan(15,000)
Proceeds from A/R facility Proceeds from A/R facility1,938  —   Proceeds from A/R facility36,527 
Repayment of A/R facility Repayment of A/R facility(1,938) —   Repayment of A/R facility(1,938)
Proceeds from loan Proceeds from loan36,527  —   Proceeds from loan10,000 1,938 
Debt issuance costs Debt issuance costs(2,813) (317)  Debt issuance costs(128)(2,813)
Debt termination related fees Debt termination related fees(1,956) —   Debt termination related fees(1,956)
Proceed from warrant exercise Proceed from warrant exercise1,128  150   Proceed from warrant exercise133 1,128 
Proceed from options exercise Proceed from options exercise1,894  —   Proceed from options exercise6,171 1,894 
Capital lease obligations69  (30) 
Finance lease obligations Finance lease obligations(186)69 
Financed insurance premium payments Financed insurance premium payments(1,190)
Net cash provided by financing activitiesNet cash provided by financing activities27,349  7,303  Net cash provided by financing activities100,112 27,349 
Net increase (decrease) in cash and restricted cash10,448  (1,209) 
Net change in cash and restricted cashNet change in cash and restricted cash89,192 10,448 
Cash and restricted cash at beginning of periodCash and restricted cash at beginning of period3,570  4,779  Cash and restricted cash at beginning of period14,018 3,570 
Cash and restricted cash at end of periodCash and restricted cash at end of period$14,018  $3,570  Cash and restricted cash at end of period$103,210 $14,018 
Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:
Interest paid Interest paid$2,961 $870 
Right of use asset obtained in exchange for lease obligation Right of use asset obtained in exchange for lease obligation$2,574  $—   Right of use asset obtained in exchange for lease obligation2,574 
Interest paid870  363  
Non cash financing and investing activities:
Non-cash financing and investing activities:Non-cash financing and investing activities:
Stock issued in acquisition of LifeDojo Stock issued in acquisition of LifeDojo$5,035 $
Financed insurance premiums Financed insurance premiums3,344 
Warrant issued in connection with 2024 Note Warrant issued in connection with 2024 Note2,354 
Reclassification of warrant liability to equity Reclassification of warrant liability to equity1,924 86 
Finance lease and accrued purchases of property and equipment Finance lease and accrued purchases of property and equipment500 250 
Contingent consideration and cash holdback relating to acquisition of LifeDojo Contingent consideration and cash holdback relating to acquisition of LifeDojo605 
Reclassification of warrant liability to equity upon amendment of the
loan agreement
86  —  
Warrant issued in connection with 2024 Note$2,354  $—  
See accompanying notes to the consolidated financial statements.
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CATASYS,ONTRAK, INC.
Notes to Consolidated Financial Statements
Note 1. Organization
Company Overview
Catasys,Ontrak, Inc. (“Catasys”Ontrak” or the “Company”), formerly known as Catasys, Inc., is technology-enabledan AI-powered and telehealth-enabled, virtualized 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 PREPRE™TM (Predict-Recommend-Engage),(Predict-Recommend-Engage) platform organizes and automates healthcare data integration and analytics through the application of machine intelligence to deliver analytic insights. The Company's PRE Platformplatform 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 receivinggetting 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.payors.

The Company’s integrated, technology-enabled OnOntrakTrakTM solution,programs, a critical component of the Catasys PRE platform, isare designed to identify and treatprovide healthcare solutions to 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 CompanyOntrak has thea unique 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. OnTrakOntrak 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. The Company’s programs seek to improve member health and deliver validated cost savings to healthcare payors of more than 50% for enrolled members. Ontrak solutions are available to members of leading national and regional health plans in 30 states and in Washington, D.C.


Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include Catasys,Ontrak, Inc., its wholly-owned subsidiaries and its variable interest entities (VIE's)(VIEs). The accompanying consolidated financial statements for Catasys,Ontrak, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and instructions to Form 10-K and Article 10 of Regulation S-X. All intercompany balances and transactions have been eliminated in consolidation.
At December 31, 2019,2020, cash and restricted cash equivalents was $13.6$103.2 million and the Company had a working capital of approximately $6.3$87.2 million. The Company could continue to incur negative cash flows and operating losses for the next twelve months.months, with an average monthly cash burn rate of approximately $0.5 million for the year ended December 31, 2020. The Company expect its current cash resources to cover expenses through at least the next twelve months from the date of this report, however,report. 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 OnTrakOntrak solutions in NaN states.30 states and the District of Columbia. 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.
Certain prior year amounts have been reclassified for consistency with the current year presentation.

Management’s Plans
Historically, we have seen and continue to see net losses, net loss from operations, negative cash flow from operating activities, and historical working capital deficits as we continue through a period of rapid growth. The accompanying financial statements do not reflect any adjustments that might result if we were unable to continue as a going concern. We have alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding our OnTrak program within existing health plan customers. To support this increased demand for services, we invested and will
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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 equity and debt 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 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 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgements and assumptions that affect the reported amounts in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates include expense accruals, accounts receivable allowances, accrued claims payable, the useful life of amortizable assets subject to depreciation and amortization, revenue recognition, the valuation of warrant liabilities and contingent consideration, and shared-based compensation. ActualDue to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.
Revenue Recognition
The Company generates virtual healthcare service revenue from contracts with customers as it satisfies its performance obligations to customers and their members.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.
The Company's 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. The Company’s performance obligation is satisfied over time as the OnTrak service is provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing a continuous service to the customer. Contracts with minimum performance guarantees or price concessions include variable consideration and are subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees and price concessions. The Company has constrained revenue for expected price concessions during the year ended December 31, 2019.
Cost of Revenue
Cost of revenue consists primarily of salaries related to care coaches, outreach specialists and other staff directly involved in member care, healthcare provider claims payments, and fees charged by third party administrators for processing these claims. Salaries and fees charged by 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the
date of purchase. The Company's cash balance does not contain any cash equivalents.equivalents at December 31, 2020 and 2019.
Commissions
Commissions paid to our sales force and engagement specialists are deferred 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
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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.
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For the year ended December 31, 2020 and 2019, amortization expense relating to deferred commission costs was $1.7 million and $0.03 million, respectively.
Property & Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, as noted below. We capitalize computer software that meet both the definition of internal-use software and defined criteria for capitalization. See discussion below under "Capitalized Internal Use Software Costs" for more information.

Estimated Useful Lives (years)
Software3
Computers and equipment3 - 7
Right of use assets - finance leases3
Leasehold improvements5

Capitalized Internal Use Software Costs

We account for the costs of computer software obtained or developed for internal use in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). We capitalize certain costs in the development of our internal use software when the preliminary project stage is completed and it is probable that the project will be completed and performed as intended. These capitalized costs include personnel and related expenses for employees and costs of third-party consultants who are directly associated with and who devote time to internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements to the Company’s internal use software solutions are also capitalized. Costs incurred for training, maintenance and minor modifications or enhancements are expensed as incurred. Capitalized software development costs are amortized using the straight-line method over an estimated useful life of three years.

Leases

ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We recognize ROU lease assets and lease liabilities at lease commencement on our consolidated balance sheet based on the present value of lease payments over the lease term using a discount rate determined based on our incremental borrowing rate since the rate implicit in each lease is not readily determinable. We elected the package of practical expedients, which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification of any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component. We also elected the hindsight practical expedient, which allows us to use hindsight in determining the lease term. We do not record an ROU asset and corresponding lease liability for leases with an initial term of 12 months or less (“short-term leases”). The terms in our leases may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Judgment is required in our assessment as to whether renewal or termination options are reasonably certain to be exercised and factors such as contractual terms compared to current market rates, the importance of the facility and location to the Company’s operations, among others, are considered. Lease payments are made in accordance with the lease terms and lease expense, including short-term lease expense, is recognized on a straight-line basis over the lease term.
Share-Based Compensation
Stock Options and Restricted Stock Units – Employees and Directors
Stock-based compensation for stock options and RSUs granted is measured based on the grant-date fair value of the awards and recognized on a straight-line basis over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). The Company estimates the fair value of RSU awards based on the closing stock price of our common shares on the date of grant. The Company estimates the fair value of employee stock options using the Black-Scholes option-pricing model. Forfeitures are recognized as they occur.

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Stock Options and Warrants – Non-employees
Stock-based compensation for stock options and warrants granted to non-employees is measured based on the grant-date fair value of the awards and recognized on a straight-line basis over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). The Company estimates the fair value of employee stock options using the Black-Scholes option-pricing model.
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
The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse. To date, no current income tax liability has been recorded due to the Company's accumulated net losses.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a
valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to
be realized. The Company's net deferred tax assets have been fully reserved by a valuation allowance.
Basic and DilutedLossper Share
Basic loss per share is computed by dividing the net loss to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing the loss for the period by the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the period.
Common equivalent shares, consisting of approximately 5,557,326 and 5,370,274 of shares as of December 31, 2019 and 2018, respectively, issuable upon the exercise of stock options and warrants, have been excluded from the diluted earnings per share calculation because their effect is anti-dilutive.
Fair Value Measurements 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure fair value. The fair value hierarchy distinguishes between (1)market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’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:
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Level Input:Input Definition:
Level IInputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level IIInputs, 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 IIIUnobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following tables summarize fair value measurements by level at December 31, 20192020 and 2018,2019, respectively, for assets and liabilities measured at fair value on a recurring basis (in thousands):

Balance at December 31, 2019
Level ILevel IILevel IIITotal
Letter of credit1
$408  $—  $—  $408  
Total assets$408  $—  $—  $408  
Warrant liabilities$—  $—  $691  $691  
Total liabilities$—  $—  $691  $691  

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Balance at December 31, 2020
Level ILevel IILevel IIITotal
Letter of credit (1)
$408 $$$408 
Total assets$408 $$$408 
Contingent consideration (2)
$$$485 $485 
Total liabilities$$$485 $485 

Balance at December 31, 2019
Level ILevel IILevel IIITotal
Letter of credit (1)
$408 $$$408 
Total assets$408 $$$408 
Warrant liabilities (3)
$$$691 $691 
Total liabilities$$$691 $691 
_______________
(1) $0.4 million was included in restricted"Restricted cash long-term,- long-term" on our consolidated balance sheets as of December 31, 2020 and 2019.
(2) Contingent consideration was included in "Other accrued liabilities" on our consolidated balance sheet as of December 31, 2019.2020.

(3) See Note 9 below under "
Balance at December 31, 2018
Level ILevel IILevel IIITotal
Letter of credit2
$479  $—  $—  $479  
Total assets$479  $—  $—  $479  
Warrant liabilities$—  $—  $86  $86  
Total liabilities$—  $—  $86  $86  
2 $71,000 is included in cashStock Options and restricted cash and $408,000 is included in restricted cash, long-term, on our balance sheet as of December 31, 2018.Warrants – Non-employees" for more information about warrants.

Financial instruments classified as Level III in the fair value hierarchy as of December 31, 2019,2020, represent liabilities measured at market value on a recurring basis which include warrant liabilities.liabilities and contingent consideration relating to a stock price guarantee in an acquisition. In accordance with current accounting rules, the warrant liabilities and contingent consideration liability are being marked-to-market each quarter-end until they are completely settled or expire. The warrants are valued using the Black-Scholes option-pricing model, using both observable and unobservable inputs and assumptions consistent with those used in the estimate of fair value of employee stock options. See "Warrant LiabilitiesLiabilities" below. The fair value of contingent consideration liability is valued using the Monte Carlo simulation model, using both observable and unobservable inputs and assumptions.

The carrying value of the Senior Secured2024 Notes is estimated to approximate their fair value as the variable interest rate of the Senior Secured2024 Notes approximates the market rate for debt with similar terms and risk characteristics.
The fair value measurements using significant Level III inputs, and changes therein, for the years ended December 31, 2020 and 2019 and 2018 arewere as follows:
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follows (in thousands):
Level III
Warrant
Liabilities
Balance as of December 31, 2017$30 
Issuance of warrants— 
Change in fair value56 
Balance as of December 31, 2018$86 
Reclassification of warrant liability to equity upon adoption of ASU Adoption APIC Reclassification2017-11(86)
Issuance of warrants631 
Change in fair value60 
Balance as of December 31, 2019$691 
Reclassification of warrant liability to equity upon exercise of warrant(1,337)
Reclassification of warrant liability to equity upon change in classification(587)
Change in fair value1,233 
Balance as of December 31, 2020$
Capital Leases
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Level III
Contingent
Consideration
Balance as of December 31, 2019$
Contingent consideration - acquisition of LifeDojo505 
Change in fair value(20)
Balance as of December 31, 2020$485 

The $0.5 million of contingent liability as of December 31, 2020 was included in "Other accrued liabilities" on our consolidated balance sheet. We recorded at the lowera gain of the net present value of the minimum lease payments or the$0.02 million relating to a change in fair value of the leased asset atcontingent consideration relating to stock price guarantee in "Other expense, net" on our consolidated statement of operations for the inception of the lease. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. All lease agreements meet at least one of the five requirements of a capital lease in accordance with ASC 842 of the codification.year ended December 31, 2020.

Variable Interest Entities
Generally, an entity is defined as a Variable Interest Entity (“VIE”) under current accounting rules if it either lacks sufficient equity to finance its activities without additional subordinated financial support, or it is structured such that the holders of the voting rights do not substantively participate in the gains and losses of the entity. When determining whether an entity that meets the definition of a business, qualifies for a scope exception from applying VIE guidance, the Company considers whether: (i) it has participated significantly in the design of the entity, (ii) it has provided more than half of the total financial support to the entity, and (iii) substantially all of the activities of the VIE are conducted on its behalf. A VIE is consolidated by its primary beneficiary, the party that has the power to direct the activities that most significantly affect the economics of the VIE and has the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE. The primary beneficiary assessment must be re-evaluated on an ongoing basis.
As discussed under the heading Management Services Agreement (“MSA”) below, the Company has an MSA with a Texas nonprofit health organization (“TIH”) and a California Professional Corporation (“CIH”). Under the MSA’s,MSAs, the equity owners of TIH and CIH have only a nominal equity investment at risk, and the Company absorbs or receives a majority of the entity’s expected losses or benefits. The Company participates significantly in the design of these MSA’s.MSAs. The Company also agrees to provide working capital loans to allow for TIH and CIH to fund their day to day obligations. Substantially all of the activities of TIH and CIH include its decision making, approval or are conducted for its benefit, as evidenced by the facts that (i) the operations of TIH and CIH are conducted primarily using the Company's licensed network of providers and (ii) under the MSA, the Company agrees to provide and perform all non-medical management and administrative services for the entities. Payment of the Company's management fee is subordinate to payments of the obligations of TIH and CIH, and repayment of the working capital loans is not guaranteed by the equity owner of the affiliated medical group or other third party. Creditors of TIH and CIH do not have recourse to the Company's general credit.
Based on the design of the entity and the lack of sufficient equity to finance its activities without additional working capital loans the Company has determined that TIH and CIH are VIE’s.VIEs. The Company is the primary beneficiary required to consolidate the entities as it has power and potentially significant interests in the entities. Accordingly, the Company is required to consolidate the assets, liabilities, revenues and expenses of the managed treatment centers.
Management Services Agreement
In April 2018, the Company executed an MSA with TIH and in July 2018, the Company executed an MSA with CIH. Under the MSA’s,MSAs, the Company licenses to TIH and CIH the right to use its proprietary treatment programs and related trademarks and provide all required day-to-day business management services, including, but not limited to:
general administrative support services;
information systems;
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recordkeeping;
billing and collection;
obtaining and maintaining all federal, state and local licenses, certifications and regulatory permits.
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All clinical matters relating to the operation of TIH and CIH and the performance of clinical services through the network of providers shall be the sole and exclusive responsibility of the TIH and CIH Board free of any control or direction from the Company.
TIH pays the Company a monthly fee equal to the aggregate amount of (a) its costs of providing management services (including reasonable overhead allocated to the delivery of its services and including salaries, rent, equipment, and tenant improvements incurred for the benefit of the medical group, provided that any capitalized costs will be amortized over a five-year period), (b) 10%-15% of the foregoing costs, and (c) any performance bonus amount, as determined by TIH at its sole discretion. The Company's management fee is subordinate to payment of the entities’ obligations.
CIH pays the Company a monthly fee equal to the aggregate amount of (a) its costs of providing management services (including reasonable overhead allocated to the delivery of its services and including salaries, rent, equipment, and tenant improvements incurred for the benefit of the entity, provided that any capitalized costs will be amortized over a five-year period), and (b) any performance bonus, as determined by CIH at its sole discretion.
The Company's consolidated balance sheets includeincluded the following assets and liabilities from its VIE'sVIEs (in thousands):
December 31,
2019
December 31,
2018
Cash and cash equivalents$379  $45  
Accounts receivable564  94  
Prepaid and other current assets26  29  
Total assets$969  $168  
Accounts payable$ $ 
Accrued liabilities100  14  
Deferred revenue73  —  
Intercompany payable685  147  
Total liabilities$867  $168  

December 31,
20202019
Cash and cash equivalents$1,206 $379 
Accounts receivable564 
Unbilled accounts receivable272 
Prepaid and other current assets46 26 
Total assets$1,524 $969 
Accounts payable$$
Accrued liabilities234 100 
Deferred revenue76 73 
Payables to Ontrak1,695 685 
Total liabilities$2,014 $867 
Warrant Liabilities
The assumptions used in the Black-Scholes option-pricing model arewere determined as follows:
December 31,
December 31, 2019December 31, 201820202019
VolatilityVolatility98.04 %102.90 %Volatility96.30 %97.96% - 98.04%
Risk-free interest rateRisk-free interest rate1.81 %2.63 %Risk-free interest rate0.65 %1.81 %
Weighted average expected life (in years)Weighted average expected life (in years)6.251.29Weighted average expected life (in years)5.426.25
Dividend yieldDividend yield%%Dividend yield%%

For the years ended December 31, 20192020 and 2018,2019, losses related to the revaluation of warrant liabilities, which were $0.1recorded in "Other expense, net" in the consolidated statements of operations, were $1.2 million and $0.06 million, respectively.
Concentration of Credit Risk
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Financial instruments, which potentially subject us to a concentration of risk, include cash, restricted cash and accounts receivable. All of our customers are based in the United States at this time andand we are not subject to exchange risk for accounts receivable.
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The Company maintains its cash in domestic financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC)("FDIC"). Under FDIC rules, the company is entitled to aggregate coverage as defined by the Federal regulation per account type per separate legal entity per financial institution. The Company has incurred no losses as a result of any credit risk exposures.
For the year ended December 31, 2020, 4 customers accounted for approximately 94% of revenues and 2 customers accounted for approximately 99% of accounts receivable.
For the year ended December 31, 2019, 4 customers accounted for approximately 85% of revenues and 43 customers accounted for approximately 89%85% of accounts receivable.
For the year ended December 31, 2018, 4 customers accounted for approximately 76% of revenues and 4 customers accounted for approximately 88% of accounts receivable.

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 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 calculatingMarch 2020, the right-of-use assetFinancial Accounting Standards Board ("FASB") issued Accounting Standard Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The guidance provides optional expedients and lease liability, the Company electedexceptions to combine leaseaccounting for contracts, hedging relationships and non-lease components.other transactions affected by reference rate reform if certain criteria are met. The Company also electedguidance is effective for all entities as of March 12, 2020 through December 31, 2022, and may be applied prospectively to exclude short-term leases having initial termscontract modifications entered through December 31, 2022. The adoption of ASU 2020-04 on March 12, months or less from the new guidance as an accounting policy election and recognizes rent expense2020 did not have a material effect on a straight-line basis over the lease term.

our consolidated financial statements.
In JuneAugust 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-50No. 2018-15, Intangibles—Goodwill 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)Other—Internal-Use Software (Subtopic 350-40): (Part I)Customer’s 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 withImplementation Costs Incurred in a Scope ExceptionCloud Computing Arrangement That Is a Service Contract (“ASU 2017-11”2018-15”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software under Subtopic 350-40. The amendments require certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are intendedincurred. Capitalized implementation costs related to simplifya hosting arrangement that is a service contract will be amortized over 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 basisterm of the pricinghosting arrangement including reasonably certain renewals, beginning when the module or component of future equity offerings. Under the newhosting arrangement is ready for its intended use. The 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.2019, including interim periods within that fiscal year. The adoption of this ASU 2017-112018-15 prospectively on January 1, 20192020 did not have a material impacteffect on itsour consolidated financial statements.

Recently Issued Accounting Pronouncements
In August 2018, the FASB issued Accounting Standard Update (“ASU”)ASU No. 2018-13, Fair Value Measurement (Topic 820) ("ASU 2018-13"), which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including, among
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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. The adoption of ASU 2018-13 on January 1, 2020 did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In October 2020, the FASB issued ASU No. 2020-10, "Codification Improvements" ("ASU 2020-10"), which includes amendments to improve consistency of disclosures by ensuring that all guidance that require disclosures or provides an option for an entity to provide information in the notes to the financial statement is codified in the disclosure section of the codification. ASU 2020-10 is effective for public companies, other than smaller reporting companies, for fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-10 is effective for fiscal years beginning after December 15, 2021, and interim periods beginning after December 15, 2022. The Company is currently evaluating the impact of adoption of ASU 2020-10 on its consolidated financial statements and related footnote disclosures.
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06").” ASU 2020-06 modifies and simplifies accounting for convertible instruments, and eliminates certain separation models that require separating embedded conversion features from convertible instruments. ASU 2020-06 also addresses how convertible instruments are accounted for in the diluted earnings per share calculation. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. We arepermitted, but no earlier the fiscal year beginning after December 15, 2020. The Company is currently assessingevaluating the impact that adopting this new accounting guidance will haveof adoption of ASU 2020-06 on ourits consolidated financial statements and related footnote disclosures.
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In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which enhances and simplifies various aspects of income tax accounting guidance. The guidance is effective for the Company in the first quarter of 2021, although early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU 2019-12 on its consolidated financial statements and related footnote disclosures.
In June 2016, the FASB issued Accounting Standards UpdateASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments,”Instruments” (“ASU 2016-13”). The ASU, which requires recognition of an estimate of lifetime expected credit losses as an allowance. For companies eligible to be smaller reporting company as defined by the Securities and Exchange Commission (“SEC”), ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022, including interim periods within those annual periods. The Company is currently evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements and related footnote disclosures.


Note 3. Restricted Cash
At December 31, 2020, we had $15.7 million of cash restricted solely for the purpose of 7 future quarterly dividend payments on our Series A Cumulative Perpetual Preferred Stock (see detailed discussion in Note 4 below under "Preferred Stock"), of which $9.0 million was included in "Restricted cash - current" and $6.7 million was included in "Restricted cash - long-term." Also, $0.4 million relating to a letter of credit required as part of our corporate headquarters office lease and $50,000 cash balance required under our 2024 Note were included in "Restricted cash - long-term" as of December 31, 2020. At December 31, 2019, we had $0.4 million relating to the letter of credit required as part of our corporate headquarters office lease included in "Restricted cash - long-term."
The following table provides a reconciliation of cash, cash equivalents and restricted cash total as presented in the consolidated statement of cash flows for the years ended December 31, 2020 and 2019 (in thousands):

December 31,
20202019
Cash and cash equivalents$86,907 $13,610 
Restricted cash - current9,127 
Restricted cash - long term7,176 408 
Cash, cash equivalents and restricted cash$103,210 $14,018 


Note 4. Property and Equipment

Property and equipment consisted of the following (in thousands):

December 31,
20202019
Software$2,441 $1,247 
Computers and equipment893 461 
ROU assets - finance lease934 378 
Leasehold improvements17 
Software development in progress
   Subtotal4,290 2,086 
Less: Accumulated depreciation and amortization2,017 1,558 
    Property and equipment, net$2,273 $528 

During the year ended December 31, 2020, we capitalized $1.1 million of costs relating to development of internal use software and recorded approximately $0.2 million of amortization expense relating to these capitalized internal use software costs. There were 0 capitalized costs relating to development of internal use software, and 0 related amortization expense, during the year ended December 31, 2019.

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Note 5. Acquisition

We account for acquisitions under ASC 805, Business Combinations, in which the acquisition method of accounting requires us to record assets acquired and liabilities assumed in an acquisition at their respective estimated fair values at the date of acquisition. The excess of the total purchase price over the estimated fair value of the assets acquired and liabilities assumed is recorded as goodwill. Such valuations require management to make significant estimates and assumptions which are believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the one year period following the completion of an acquisition referred to as the measurement period, we may record adjustments to the fair values of assets acquired and liabilities assumed with corresponding adjustments to goodwill as additional information becomes available. Any adjustment after the measurement period is reflected through earnings.

LifeDojo

On October 28, 2020, we completed the acquisition of LifeDojo Inc. (“LifeDojo”), a comprehensive, science-backed behavior change platform based in San 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 2 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 of October 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 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. This acquisition was not significant to our consolidated financial statements.

Note 6. Goodwill and Intangible Assets

Goodwill

The carrying amount of indefinite-lived goodwill was as follows (in thousands):

Goodwill
Balance at December 31, 2019$
Acquisition of LifeDojo5,727
Balance at December 31, 2020$5,727 

The $5.7 million of goodwill related to the acquisition of LifeDojo is not deductible for tax purposes.

Intangible Assets

The following table sets forth amounts recorded for intangible assets subject to amortization (in thousands):

At December 31, 2020Weighted Average Estimated Useful Life (years)Gross ValueAccumulated AmortizationNet Carrying Value
Acquired software technology3$3,500 $(194)$3,306 
Customer relationships5270(15)255
     Total$3,770 $(209)$3,561 

Amortization expense for intangible assets was $0.2 million for the year ended December 31, 2020. There were 0 intangible assets and 0 amortization expense for the year ended December 31, 2019.

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At December 31, 2020, estimated amortization expense for intangible assets for each of the five years thereafter was as follows (in thousands):
2021$1,215 
20221,221
20231,026
202454
202545
  Total$3,561 

Note 7. Common Stock and Preferred Stock
Net loss per shareLoss Per Common Share

Basic net loss per common share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per common 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 common share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.


Basic and diluted net loss per common share were as follows (in thousands, except per share amounts) are as follows::


December 31,December 31,
20192018
Net loss$(25,659) $(14,212) 
Weighted-average shares of common stock outstanding16,418  15,955  
Net loss per share - basic and diluted$(1.56) $(0.89) 

Year Ended December 31,
20202019
Net loss$(22,710)$(25,659)
Dividends on preferred stock - declared and undeclared(1,987)
Net loss attributable to common stockholders$(24,697)$(25,659)
Weighted-average shares of common stock outstanding17,112 16,418 
Net loss per common share - basic and diluted$(1.44)$(1.56)


The following common equivalent shares as of December 31, 2019 and 2018, respectively, issuable upon the exercise of stock options and warrants have been excluded from the calculation of diluted earnings per common share calculation as their effect iswas anti-dilutive:

December 31,December 31,December 31,
2019201820202019
Warrants to purchase common stockWarrants to purchase common stock1,550,975  1,608,996  Warrants to purchase common stock1,465,927 1,550,975 
Options to purchaseOptions to purchase4,006,351  3,761,278  Options to purchase3,616,314 4,006,351 
Total shares excluded from net loss per shareTotal shares excluded from net loss per share5,557,326  5,370,274  Total shares excluded from net loss per share5,082,241 5,557,326 

Preferred Stock

In August 2020, we completed the offering of 1,700,000 shares of 9.50% Series A Cumulative Perpetual Preferred Stock (the "Series A Preferred Stock") and in September 2020, we completed the closing of the underwriters' full exercise of the over-allotment option of 255,000 additional shares of Series A Preferred Stock, resulting in aggregate gross proceeds of $48.9 million to the Company (or $45.1 million net of underwriting fees and other offering expenses). In mid-September 2020, we began an at-the-market ("ATM") offering of the Series A Preferred Stock through a designated broker for up to 2,000,000 shares, of which we sold 5,027 shares in November 2020. In December 2020, we terminated the ATM offering and began an underwritten offering of the Series A Preferred Stock, under which we completed the offering of 1,730,000 shares of Series A Preferred Stock as well as




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the issuance of 80,238 shares of Series A Preferred Stock under the over-allotment option, resulting in total gross proceeds, including the proceeds of the ATM offering, of $44.9 million (or $41.4 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." The Company, generally, may not redeem the Series A Preferred Stock until August 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 after August 25, 2025, the Company may, at its 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 the Company 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 the Company fails to pay dividends for six or more quarters, whether or not declared or consecutive) and in certain other events.

Holders of Series A Preferred Stock of record at the close of business of each respective record date (February 15, May 15, August 15 and November 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, every February 28, May 30, August 31, and November 30, as applicable, beginning on or about November 30, 2020. Dividends will accumulate and be cumulative from, and including, the date of original issuance, which was August 25, 2020.

On November 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 on November 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 the Company 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 on November 30, 2020. At December 31, 2020, we had undeclared dividends of $0.7 million.

Note 4.8. Debt
2024 Notes

In September 2019, theThe Company entered intois party to a Note Purchase 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”) (the "Amended Note Agreement"), as amended, pursuant to which the Company initially issued $35.0 million aggregate principal amount of senior secured notes (the "Initial 2024 Notes"). UnderIn August 2020, pursuant to a Second Amendment to the Note Purchase Agreement (the "Second Amendment"), the Company issued an additional $10.0 million principal amount of senior secured notes as provided under the additional note purchase commitment of the Note Agreement (together with the Initial 2024 Notes, the "2024 Notes"). The Second Amendment included changes in certain definitions in the Note Agreement intended to permit the Company initially issuedto issue the Series A Preferred Stock in an amount not to exceed $50 million and to pay dividends thereon under specified conditions, including a waiver of the mandatory prepayment of the 2024 Notes with the proceeds of the Series A Preferred Stock offering. The Second Amendment also modified the Leverage Ratio covenant, Consolidated Adjusted EBITDA covenant, Minimum Consolidated Liquidity covenant and Minimum Revenue covenant providing increased financial flexibility to the Company. In September 2020, the Company and the Holders entered into a Third Amendment to the Note Purchase Agreement, which increased the maximum amount allowed for issuances of the Series A Preferred Stock to $100 million. In late September 2020, the Company and the Holders entered into a Fourth Amendment to the Note Purchase Agreement, which changed certain definitions and covenants in the Note Agreement primarily intended to reduce the Company’s information reporting obligations to the Holders under specified conditions. The Company was subsequently notified on March 3, 2021, that pursuant to Section C of the Fourth Amendment to the Note Purchase Agreement, the Collateral Agent is rescinding all amendments under the Fourth Amendment and the Fourth Amendment shall immediately cease to be effective and all provisions amended by the Fourth Amendment shall revert to their respective formulations prior to the execution of the Fourth Amendment.In December 2020, the Company and the Holders entered into a Fifth Amendment to the Note Purchase Agreement, which increased the maximum amount allowed for issuances of the Series A Preferred Stock to $125 million.

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$35.0 million aggregate principal amount of senior secured notes (the "2024 Notes"), whichThe 2024 Notes bear interest, based on the Company's election, at either a floating rate plus an applicable margin in the case of 2024 Notes subject tobased on cash interest payments or a floating rate plus a slightly higher applicable margin based on interest payment in the case of 2024 Notes as to which current interest has been accrued during the period ending September 24, 2020, which resulted in interest rate of 15.75% for the year-ended December 31, 2019.kind. The applicable margins are subject to stepdowns, in each case, following the achievement of certain financial ratios. The Company has elected forLIBOR index is expected to be discontinued by the $35 million in aggregate principal amountend of 2024 Notes issued on the datecalendar year 2021. The terms of the Note Agreement that suchallow for a replacement rate if the LIBOR index is discontinued. At December 31, 2020, the effective weighted average annual interest shall be payable in cash. The Holder is obligatedrate applicable to purchase up to an additional $10.0 million in principal amount ofthe outstanding 2024 Notes during the period from the date of the Note Agreement until the second anniversary thereof. was 15.03%. The entire principal amount of the 2024 Notes is due and payable on the fifth anniversary of the Note Agreement (September 24, 2024) 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 principal amount of the 2024 Notes increased by $3.5 million in the form of payment in kind of the interest component during the year ended December 31, 2020.

The Amended 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 certain 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 if and when requested by Holders, maintain its property in good repair, maintain insurance and comply with applicable laws. The Amended 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 Amended 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 and all assets of the Company serves as collateral. 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 Datedate of the Note Agreement must be accompanied by a prepayment premium. The Company was in compliance with all of its debt covenants as of December 31, 2020.

In accounting for the issuance of the 2024 Notes, the Company separated the 2024 Notes into liability and equity components. The fair value of the liability component was estimated using an interest rate for debt with terms similar to the 2024 Notes. The carrying amount of the equity component was calculated by measuring the fair value based on the Black-Scholes model. The gross proceeds from the transaction was allocated between liability and equity based on the proportionate value. The debt discount is accreted to interest expense over the term of the 2024 Notes using the interest method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.
The assumptions used in the Black-Scholes option-pricing model remain unchanged and are determined as follows:


December 31, 2019
Volatility98.01 %
Risk-free interest rate1.58 %
Expected life (in years)7
Dividend yield0 %


The Company is in compliance with all debt covenants at December 31, 2019.net carrying amounts of the liability components consisted of the following (in thousands):

December 31,
20202019
Principal$50,001 $36,502 
Less: debt discount(4,282)(4,905)
Net carrying amount$45,719 $31,597 

2022 Loan

In June 2018, the Company entered into a venture loan and security agreement (the “2022 Loan”) with Horizon Technology Finance Corporation (“Horizon”), which provides for up to $7.5 million in loans to the Company. In addition, in June 2018, the Company entered into a loan and security agreement (the “A/R Facility”) in connection with a $2.5 million receivables financing
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facility with Corporate Finance, a division of Heritage Bank of Commerce (“Heritage”). The Company borrowed and subsequently repaid $1.9 million on the A/R Facility during the six months ended June 30, 2019.

In March 2019, the Company entered into an amended and restated 2022 Loan with Horizon, which provides for up to $15.0 million in loans to the Company, including initial term loans in the amount of $7.5 million previously funded under the
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original agreement and an additional up to $7.5 million loan in three revolving tranches of $2.5 million in availability, subject to the Company's 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. The Company concurrently entered into an amendment to the previously disclosed $2.5 million A/R Facility with Heritage intended primarily to reflect the amendment and restatement of the Amended Loan Agreement. The Company havehad met all three of the Billing Requirements and as a result havehad incurred the full $7.5 million under the Amended Loan Agreement. In connection with our entry into the Amended Loan Agreement, the Company issued Horizon 40,279 seven-year warrants to purchase an aggregate of $600,000 (depending on the level of availability under the Amended Loan Agreement) at the trailing volume weighted average price (“VWAP”) of our common stock on the NASDAQ Capital Market for the five days preceding the relative dates of grants at a per share exercise price equal to the lower of (i) $9.93 or (ii) the price per share of any securities that may be issued by us in an equity financing during the 18 months following the agreement date.

The 2022 Loan bearsbore interest at a floating coupon rate of the amount by which one-month LIBOR exceeds 2.00% plus 9.75%. After September 30, 2020, upon the earlier of (i) payment in full of the principal balance of the 2022 Loan, (ii) an event of default and demand by Lender of payment in full or (iii) on the Loan Maturity Date (September 30, 2022), as applicable, the Company shall pay to Lender a payment equal to the greater of $150,000 or 6% of the outstanding principal balance on August 31, 2020.

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)"Other expense, net" in the consolidated statement of operations.operations for the year ended December 31, 2019.

2024 Notes and 2022 Loan

The 2024 Notes and 2022 Loan consist of the following (in thousands):

December 31,December 31,
Liability component20192018
Principal$36,502  $7,950  
Less: debt discount(4,905) (478) 
Net carrying amount$31,597  $7,472  

The following table sets forth total interest expense recognized related to the 2024 Notes and 2022 Loan (in thousands):
December 31,December 31,
20192018
Contractual interest expense$2,653  $388  
Accretion of debt discount394  182  
Total$3,047  $570  

December 31,
20202019
Contractual interest expense$6,429 $2,653 
Accretion of debt discount750 394 
Total$7,179 $3,047 
Other
In August 2020, the Company financed a portion of its insurance premiums totaling $0.3 million at an annual effective rate of 8.25%, payable in 10 equal monthly installments beginning on September 1, 2020 and a down payment of $86,000 at inception. In November 2020, the Company financed $3.0 million of insurance premiums at an annual effective rate of 4.95%, payable in 10 equal monthly installments beginning on December 8, 2020 and a down payment of $0.8 million at inception. At December 31, 2020, a total of $2.2 million relating to these financed insurance premiums was outstanding, which was included as part of "Other accrued liabilities" on our consolidated balance sheet.

Note 5.9. Stock Based Compensation
Our 2017 Stock Incentive Plan (the “2017 Plan”) and 2010 Stock Incentive Plan (the “2010 Plan”) provides for the issuance of 4,530,0714,806,513 shares of our common stock. We have granted stock options to executive officers, employees, members of our board of directors, and certain outside consultants.consultants, and restricted stock units ("RSUs") to employees. 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 December 31, 2019, we had 4,006,351 vestedThe terms and unvested stock options outstanding and 328,369 shares reserved for future awards.
Share-based compensation expense was approximately $5.2 million and $2.1 million for the years ended December 31, 2019 and 2018, respectively.
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conditions upon which RSUs vest vary among grants; however, RSUs generally vest over four years on a straight-line basis. As of December 31, 2020, we had 3,616,314 vested and unvested stock options outstanding, and 30,000 unvested RSUs. We had 198,636 shares reserved and available for future awards as of December 31, 2020.
Stock-based compensation expense was approximately $8.1 million and $5.2 million for the years ended December 31, 2020 and 2019, respectively. The Company issued $0.4 million of common stock to one of the Company's executives during the quarter ended March 31, 2020 and it is included in stock-based compensation expense for the year ended December 31, 2020.
During the quarter ended September 30, 2019, the Company determined that it was not probable to achieve its internal performance targets for a tranche of warrants issued for the fiscal year 2019, resulting in the reversal of the compensation expense recognized previously for the shares that were 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 year ended December 31, 2019.
The assumptions used in the Black-Scholes option-pricing model arewere determined as follows:

Year Ended December 31,
December 31, 2019December 31, 201820202019
VolatilityVolatility100.34 %100.34% - 102.90Volatility78.00 %100.34 %
Risk-free interest rateRisk-free interest rate1.63%-2.60%2.56% - 2.85%Risk-free interest rate0.00%-1.55%1.63%-2.60%
Expected life (in years)Expected life (in years)2.85-6.082.4 - 6.08Expected life (in years)2.63-6.082.85-6.08
Dividend yieldDividend yield%%Dividend yield%%
The expected volatility assumptions have been based on the historical and expected volatility of our stock, measured over a period generally commensurate with the expected term. The weighted average expected option term for the year ended December 31, 2019,2020, reflects the application of the simplified method prescribed in Securities and Exchange Commission (“SEC”)SEC's Staff Accounting Bulletin (“SAB”) No. 107 (as amended by SAB 110), which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

Stock Options – Employees and Directors
A summary of stock option activity for employee and director grants iswas as follows:
Number of
Shares Outstanding
Weighted-
Average
Exercise Price
Balance, December 31, 20171,885,383  $11.46  
Stock options granted1,985,539  7.70  
Stock options forfeited and canceled(109,644) 14.29  
Balance, December 31, 20183,761,278  $9.44  
Exercisable at December 31, 2018721,766  $17.14  
Stock options granted1,459,289  14.18  
Stock options exercised(195,351) 9.69  
Stock options forfeited and canceled(1,068,865) 10.36  
Balance at December 31, 20193,956,351  $10.93  
Exercisable at December 31, 20191,062,178  $11.24  

Share-based compensation expense relating to stock options granted to employees and directors was $5.1 million and $2.1 million for the years ended December 31, 2019 and 2018, respectively.
Number of
Shares Outstanding
Weighted-
Average
Exercise Price
Outstanding at December 31, 20194,006,351 $10.93 
Granted945,788 26.80 
Exercised(737,281)8.37 
Forfeited(569,739)12.07 
Expired(28,805)104.25 
Outstanding at December 31, 20203,616,314 14.66 
Options vested and exercisable at December 31, 2020945,148 $11.68 
As of December 31, 2019,2020, there was $18.0$22.8 million of unrecognized compensation costs related to non-vested share-based compensation arrangements granted to employees and directors under the Plan. These costs are expected to be recognized over a weighted-average period of 2.672.14 years.
Restricted Stock Units - Employees
We estimate the fair value of RSUs based on the closing price of our common stock on the date of grant. The following table summarizes our RSU award activity during the year ended December 31, 2020 issued under the 2017 Plan:
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Restricted Stock UnitsWeighted-
Average
Grant Date Fair Value
Non-vested at December 31, 2019$
Granted30,000 51.98 
Non-vested at December 31, 202030,000 51.98 


As of December 31, 2020, there was $1.5 million of unrecognized compensation cost related to unvested outstanding RSUs. We expect to recognize these costs over a weighted average period of 3.89 years.
Stock Options and Warrants – Non-employees
The Company issued 50,000did 0t issue any stock options to consultants as ofduring the year ended December 31, 20192020 compared to 50,000 stock options at a weighted average exercise price of $9.93.$9.93 for the year ended December 31, 2019. Stock optioncompensation expense related to consultants was $0.1 million for the year ended December 31, 2020 and $0.1 million for the year ended December 31, 2019. As of December 31, 2020, there was $0.1 million of total unrecognized compensation cost related to non-vested stock compensation arrangements granted to non-employees under the 2017 Amended Plan, which is expected to be recognized over a weighted-average period of approximately 1.17 years.
In addition to stock options granted under the Plan, we have also granted warrants to purchase common stock to certain non-employees that have been approved by our Board of Directors.
A summary of warrants granted toactivity for non-employees was as follows:
Number of WarrantsWeighted Average
Exercise Price
Outstanding as of December 31, 20191,550,975 $6.08 
Exercised (1)
(85,048)7.14 
Outstanding as of December 31, 20201,465,927 6.02 
Warrants exercisable as of December 31, 20201,465,927 6.02 
_______________________
(1) Included in total number of warrants exercised are 12,936 shares that were net settled at the election of the warrant holders during the year ended December 31, 2020.
There were 0 warrants issued during the year ended December 31, 2020, compared with 228,607 warrants during the year ended December 31, 2019. Of the total outstanding warrants as of December 31, 20192020, 1,249,189 warrants were held by an entity controlled by the Company's chairman and 2018 is as follows:chief executive officer.
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Number of
Warrants Outstanding
Weighted-
Average
Exercise Price
Warrants issued in connection with debt agreements224,440  $16.04  
Warrants issued for services4,167  13.82  
Balance at December 31, 2019228,607  $16.00  

Number of Warrants OutstandingWeighted-
Average
Exercise Price
Warrants issued in connection with debt agreements9,720  $7.72  
Warrants issued for services24,000  4.68  
Balance at December 31, 201833,720  $5.56  

A summary of warrant activity for the years ended December 31, 2019 and 2018 is as follows:
Number of
Warrants Outstanding
Weighted-
Average
Exercise Price
Balance at December 31, 20172,011,528  $4.85  
Warrants granted33,720  5.56  
Warrants exercised(436,252) (4.70) 
Balance at December 31, 20181,608,996  $4.71  
Warrants granted228,607  16.00  
Warrants exercised(232,461) (4.85) 
Warrants expired(54,167) (12.46) 
Balance at December 31, 20191,550,975  $6.08  


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
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upon the Company’s stock price reaching a certain price at a specific performance period and the total amount of compensation
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expense recognized is based on a Monte Carlo simulation that factors in the probability of the award vesting.
Issuances The following table summarizes the Company's outstanding awards under this structure are as follows:structure:
Grant DatePerformance MeasuresVesting TermPerformance Period# of SharesExercise Price
December 2017Weighted 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, 2023January 1, 2023642,307  $7.50  
August 2018Weighted 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, 2023January 1, 2023397,693  $7.50  
April 2018The 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 yearAmended and vested 115,950 options based on severance agreementAmended and vested 115,950 options based on severance agreement115,950  $7.50  
August 2018The 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 yearAmended and fully forfeited based on severance agreementAmended and fully forfeited based on severance agreement—  $7.50  

Grant DatePerformance MeasuresVesting TermPerformance Period# of SharesExercise Price
December 2017Weighted 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, 2023January 1, 2023642,307 $7.50 
August 2018Weighted 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, 2023January 1, 2023397,693 $7.50 

During the quarter ended March 31, 2020, the Company amended the option agreement of one of the Company's former executives to vest additional options previously forfeited and extend the period to exercise, resulting in $0.6 million of additional stock-based compensation expense, which is included in stock-based compensation expense for the year ended December 31, 2020.
During the quarter ended December 31, 2019, the Company entered into a separation agreement with a former executive. As part of the agreement, 115,950 of previously forfeited awards were immediately vested. As a result, $1.1 million of stock compensation expense was recorded during the quarter and classified in operating expenses within the consolidated statement of operations. The remaining awards were forfeited.
During the quarter ended September 30, 2019, the Company determined that it iswas 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 did not vest.
During the quarter ended December 31, 2019, the company entered into a separation agreement with a key executive as part of restructuring the organization. As part of the agreement, 115,950 of previously forfeited awards were immediately vested. As a result, $1.1 million of stock compensation expense was recorded during the quarter and has been classified in operating expenses' within the consolidated statement of operations. The remaining awards has been forfeited.
Note 6.10. Leases
OperatingThe Company determines whether an arrangement is a lease, or contains a lease, at inception and recognizes right-of-use assets and lease liabilities, initially measured at present value of the lease payments, on our balance sheet and classifies the leases
In September 2018, the as either operating or financing leases. The Company signed an operating leaseleases office space for the newour corporate headquarters in Santa Monica, CA (“Santa Monica Headquarters”).California, which is accounted for as an operating lease and various computer equipment used in the operation of our business, which are accounted for as finance leases. The operating lease agreement includes 7,869 square feet of office space for a lease term of 60 months, commencingwhich commenced in July 2019, which is 30 days following date the premises were ready for occupancy. Thewith base annual rent isof approximately $0.6 million subject to annual adjustments. The finance leases are generally for 36 month terms.
The Company’s operating lease liability resulted from the lease of therelating to its 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;clauses. The renewal options have not been included in the calculation of the operating 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
Quantitative information for our leases was as a lessor or have any leases classified as financing leases. The discount rate used in measuring the lease liability and right of use assets were determined by reviewing our incremental borrowing rate at the measurement date.follows (in thousands):

As of December 31, 2019, the Company has an operating lease liability of approximately $2.2 million and right-of-use asset of approximately $2.4 million, which are included in the consolidated balance sheets.
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As
December 31,
Consolidated Balance SheetsBalance Sheet Classification20202019
Assets
Operating lease asset"Operating lease right-of-use-asset"$1,959 $2,415 
Finance lease assets"Property and equipment, net"721378
Total lease assets$2,680 $2,793 
Liabilities
Current
     Operating lease liability"Current portion of operating lease liability"$434 $374 
     Finance lease liabilities"Other accrued liabilities"321145
Non-current
     Operating lease liability"Long-term operating lease liability"1,4031,836
     Finance lease liabilities"Long-term finance lease liabilities"418233
Total lease liabilities$2,576 $2,588 

Year Ended December 31,
Consolidated Statements of Operations20202019
Operating lease expense$663 $443 
Short-term lease rent expense104 58 
Variable lease expense37 73 
     Total rent expense$804 $574 
Finance lease expense:
  Amortization of leased assets$209 $38 
  Interest on lease liabilities31 
     Total$240 $43 

Year Ended December 31,
Consolidated Statements of Cash Flows20202019
Cash paid for amounts included in the measurement of lease liabilities:
   Operating cash flows from operating lease$580 $381 
   Financing cash flows from finance leases186 48 

December 31,
Other Information20202019
Weighted-average remaining lease term (years)
   Operating lease3.84.5
   Financing leases2.42.9
Weighted-average discount rate (%)
   Operating lease10.15 %10.15 %
   Finance leases10.88 %7.89 %
The following table sets forth maturities of December 31, 2019, supplemental information related to operating leases was as followsour lease liabilities (in thousands):

Consolidated Statement of OperationsOperating
Leases
Operating lease expense$443 
Short-term lease rent expense58 
Total rent expense$501 
Consolidated Statements of Cash Flows
Operating cash flows from operating leases$381 
Right-of-use assets obtained in exchange for lease obligations$2,574 
Other Information
Weighted-average remaining lease term4.5 years
Weighted-average discount rate10.15 %

As of December 31, 2019, the future minimum lease payments under operating leases are as follows (in thousands):
Operating
Leases
2020$581  
2021603  
2022623  
2023644  
2024329  
Total lease payments$2,780  
Less: imputed interest(570) 
Present value of lease liabilities$2,210  
Less: current portion(374) 
Lease liabilities, non-current$1,836  

Total rent expense under operating leases was approximately $0.4 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively.

Capital leases
The Company entered into agreements to lease computer equipment during the year ended December 31, 2019. The computer equipment under capital leases is included in right of use asset within the consolidated balance sheets and was $0.4 million as of December 31, 2019. Lease amortization at December 31, 2019 was approximately $0.1 million.
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As of December 31, 2019, the future minimum lease payments under capital leases are as follows (in thousands):
Capital
Leases
Total lease payments$406 
Less: interest(28)
Present value of lease liabilities$378 
Less: current portion(145)
Lease liabilities, non-current$233 
At December 31, 2020
Operating LeaseFinancing LeasesTotal
2021$601 $363 $964 
2022622302924
2023643139782
2024332332
Total lease payments2,1988043,002 
    Less: imputed interest(361)(65)(426)
Present value of lease liabilities1,8377392,576
    Less: current portion(434)(321)(755)
Lease liabilities, non-current$1,403 $418 $1,821 

Note 7.11. Income Taxes
The components of our income tax benefit consisted of the following (in thousands):
Year Ended December 31,
20202019
Current:
   State$$
Total current taxes
Deferred:
    Federal(540)
    State(114)
Total deferred taxes(654)
    Income tax benefit$(645)$

The income tax benefit for the year ended December 31, 2020 was a result of the deferred tax liability recorded at the time of the LifeDojo acquisition that was subsequently reversed at December 31, 2020.

As of December 31, 2019,2020, the Company had net federal operating loss carry forwards and state operating loss carry forwards of approximately $277$295 million and $39$159 million, respectively. The net federal operating loss carry forwards begin to expire in 2023, and net state operating loss carry forwards begin to expire in 2019.2020.

As of December 31, 2020, the Company completed an analysis of its ownership changes since formation in accordance with Section 382 of the Internal Revenue Code of 1986, as amended. As a result of the study, the Company expects federal and state NOLs of approximately $151 million and $90 million, respectively, to expire unutilized and the Company has reduced its gross deferred tax asset associated with the NOL carryforward, for the amount that is expected to expire unutilized, with an offsetting reduction to the valuation allowance.
Due to such uncertainties surrounding the realization of the deferred tax assets, the Company maintains a valuation allowance of $70.1$38.6 million and $64.1$70.1 million against all of its deferred tax assets as of December 31, 20192020 and 2018,2019, respectively. For the years ended December 31, 20192020 and 2018,2019, the total change in valuation allowance was $6.0$(31.6) million and $1.7$6.0 million, respectively. Realization of the deferred tax assets will be primarily dependent upon the Company's ability to generate sufficient taxable income.
Net deferred tax assets and liabilities for the years ended December 31, 2019 and 2018 arewere as follows (in thousands):
20192018
Net operating losses$66,405  $62,800  
Stock-based compensation1,648  873  
Interest expense1,494  —  
Accrued liabilities and reserves744  218  
Fixed assets51  72  
Lease liability658  —  
Other temporary differences23  315  
Prepaid expenses(186) (176) 
Right-of-use asset(710) —  
Valuation allowance(70,127) (64,102) 
Net deferred tax asset$—  $—  

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Year Ended December 31,
20202019
Net operating losses$34,593 $66,405 
Stock-based compensation1,888 1,648 
Interest expense3,253 1,494 
Accrued liabilities and reserves322 744 
Fixed assets(864)51 
Lease liability655 658 
Other temporary differences200 23 
Deferred commission(612)
Prepaid expenses(192)(186)
Right-of-use assets(681)(710)
Valuation allowance(38,562)(70,127)
   Net deferred tax asset$$

The Company has provided a valuation allowance in full on its net deferred tax assets in accordance with ASC 740 Income Taxes.- "Income Taxes" ("ASC 740"). Because of the Company's continued losses, management assessed the realizability of its net deferred tax assets as being less than the more-likely-than-not criteria set forth by ASC 740. Furthermore, certain portions of the Company's net operating loss carryforwards were acquired, and therefore subject to further limitation set forth under the federal tax code, which could further limit the Company's ability to realize its deferred tax assets.
A reconciliation between the statutory federal income tax rate and the effective income tax rate for the years ended December 31, 2019 and 2018 ispresented was as follows:
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Year Ended December 31,
20202019
Tax at federal statutory rate21.0 %21.0 %
Stock-based compensation1.9 (1.2)
Section 162(m)(4.2)
Change in federal valuation allowance121.0 (19.6)
Reduction in federal NOL carryforward DTA due to 382 study results(135.6)
Other(1.3)(0.2)
   Effective tax rate2.8 %%

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20192018
Tax at federal statutory rate21.0 %21.0 %
Stock-based compensation(1.2)%(29.3)%
Deferred revenue— %(2.8)%
Change in Foreign NOLS due to liquidation— %(8.3)%
Other(0.2)%3.3 %
Change in federal valuation allowance(19.6)%16.1 %
Change in federal NOLs due to 382 study results— %— %
Tax provision— %— %

The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. There were 0 interest and penalties for the years ended December 31, 20192020 and 2018,2019, respectively. The Company files income tax returns with the Internal Revenue Service (“IRS”) and various states with sufficient nexus. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for tax years prior to 2014,2016, and by the IRS for tax years through 2016.2017. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized and such tax years are closed.
There are currently no income tax audits in any jurisdictions for open tax years and, as of December 31, 2019,2020, there have been no material changes to our tax positions. 
Under Section 382 of the Internal Revenue Code of 1986, as amended, or the IRC, substantial changes in our ownership may limit the amount of net operating loss and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the company of more than 50% within a three-year testing period. Any such annual limitation may significantly reduce the utilization of the net operating loss carryforwards before they expire.
Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions which, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition. The Company intends to complete a study in the future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation.

Note 8.12. Commitments and Contingencies
The Company has various non-cancelable operating leases for its offices and its managed hosting facilities and services. These leases expire at various times through 2025. Certain lease agreements contain renewal options, rent abatement and escalation clauses. The Company recognizes rent expense on a straight-line basis over the lease term, commencing when the Company takes possession of the property. Certain of the Company’s office leases entitle the Company to receive a tenant allowance from the landlord. The Company records tenant allowances as a deferred rent credit, which the Company amortizes on a straight-line basis, as a reduction of rent expense, over the term of the underlying lease. Total rent expense under operating leases was approximately $0.4 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively. The Company entered into financing agreements for computer equipment for $0.4 million. Interest is expensed straight line over three years.
Future minimum lease payments under capital leases and non-cancelable operating leases at December 31, 2019 are as follows (in thousands):
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YearAmount
2020$737  
2021757  
2022717  
2023644  
2024328  
$3,183  
From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities. As of the date of this Annual Report on Form 10-K, we were not party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position except the following:
Loss Contingency

On March 3, 2021, a purported securities class action was filed in the United States District Court for the Central District of California, entitled Farhar v. Ontrak, Inc., Case No. 2:21-cv-01987 (C.D. Cal. filed Mar. 3, 2021). In this action, plaintiff, purportedly on behalf of a putative class of purchasers of Ontrak securities from November 5, 2020 through February 26, 2021, alleges that the Company and certain of its officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by intentionally or recklessly making false and/or misleading statements and/or failing to disclose that (i) Ontrak’s largest customer evaluated Ontrak on a provider basis, valuing Ontrak’s performance based on achieving the lowest cost per medical visit rather than clinical outcomes or medical cost savings; (ii) as a result, Ontrak’s largest customer did not find Ontrak’s program to be effective and was reasonably likely to terminate its contract with Ontrak; (iii) because this customer accounted for a significant portion of Ontrak’s revenue, loss of the customer would have an outsized impact on Ontrak’s financial results; and (iv) as a result of the foregoing, Ontrak’s positive statements about its business, operations and prospects were materially misleading and/or lacked a reasonable basis. The complaint has not yet been served. We believe that the allegations lack merit and intend to defend against this action vigorously.

Note 9.13. Related Party Transactions

Accounts payable outstanding with Mr. Peizer, for travel and expenses isthe Company's Chief Executive Officer, was approximately $0.4$0.2 million and $0.4 million as of December 31, 2020 and 2019, and 2018, respectively.
Note 14. Subsequent Event

Note 10. Restricted Cash
In September 2018,On February 26, 2021, the Company entered into a lease agreementwas notified by its largest customer that the participation status with this customer will be terminated effective June 26, 2021. The Company has been advised to stop enrollment of new members for this customer and await guidance from the customer on transition plans for the new corporate office space in Santa Monica, California which required a stand-by letter of credit as guarantee for future rent in8,100 members who are currently benefiting from the amount of $0.4 million. As of December 31, 2019, long-term restricted cash related toOntrak program. For the Santa Monica lease totaled $0.4 million.
The following table provides a reconciliation of cash, cash equivalents and restricted cash total as presented in the consolidated statement of cash flows for the yearsyear ended December 31, 2019 and 2018 (in thousands):
20192018
Cash and cash equivalents$13,610  $3,091  
Restricted cash (current and long-term)408  479  
Total cash, cash equivalents and restricted cash$14,018  $3,570  


2020, this customer accounted for approximately 58% of our total revenue.






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