We have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, December 2016, January 2017, February 2017, March 2017, April 2017, and MarchJune 2017. TheSome of the warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in some warrants that protect the holders from declines in our stock price, which is considered outside our control.  The warrants are marked-to-market each reporting period, using the Black-Scholes pricing model, until they are completely settled or expire.

ForFor the three and nine months ended March 31,September 30, 2017, and 2016, we recognized a loss of $5.2$2,000 and a gain of $1.8 million, respectively, compared with a gain of $1.4 million and $228,000,$673,000 for the same periods in 2016, respectively, related to the revaluation of our warrant liabilities.

Derivative Liability

In July 2015, we entered into a $3.55 million 12% Original Issue Discount Convertible Debenture due January 18, 2016 with Acuitas (the “July 2015 Convertible Debenture”). The conversion price of the July 2015 Convertible Debenture is $11.40 per share, subject to adjustments, including for issuances of common stock and common stock equivalents below the then current conversion or exercise price, as the case may be.  In October 2015,2016, we entered into an amendment of the July 2015 Convertible Debenture which extended the maturity date of the July 2015 Convertible Debenture from January 18, 2016 to January 18, 2017. In addition, the conversion price of the July 2015 Convertible Debenture was subsequently adjusted to $1.80 per share. The July 2015 Convertible Debenture isDebentures are unsecured, bearsbear interest at a rate of 12% per annum payable in cash or shares of common stock, subject to certain conditions, at our option, and isare subject to mandatory prepayment upon the consummation of certain future financings. Acuitas agreed to extend the maturity date of the July 2015 Convertible Debenture to April 30, 2017 or until we completecompleted a public offering, whichever comescame first. The derivative liability associated withIn April 2017, the July 2015 Convertible Debenture was calculated usingconverted into 2,385,111 shares of common stock and the Black-Scholes model based upon the following assumptions:derivative liability was written off.

ForFor the three and nine months ended March 31,September 30, 2017, and 2016, we recognized a gain of $0 and $132,000, respectively, compared with a loss of $10.6$3.5 million and $1.3$6.3 million for the same periods in 2016, related to the revaluation of our derivative liability, respectively.liability.

Recently Issued or Newly Adopted Accounting Standards

In April 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-10,Revenue from Contracts with Customers (Topic 606)(“ASU 2016-10”), which amends certain aspects of the Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company has not yet selected a transition method nor has it determinedWe are currently evaluating the effectpotential impact of thethis standard on its ongoingour consolidated financial reporting.statements, as well as the available transition methods. We are currently assessing whether the adoption of ASU 2016-10 will have a material effect on our consolidated financial position or results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting(“ASU 2016-09”), which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The standard is effective for the Company for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The adoption of ASU 2016-09 did not have a material effect on our consolidated financial positon or results of operations.

In February 2015, the FASB issued ASU,Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoptions. The adoption of ASU 2015-02 did not have a material effect on our consolidated financial position or results of operations.

Note In August 2014, the FASB issued FASB ASU 2014-15,Presentation of Financial Statements—Going Concern (Subtopic 205-40):3. Related Party Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern(“ASU 2014-15”).ASU 2014-15 changes the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. Because there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related note disclosures, there is diversity in practice whether, when, and how an entity discloses the relevant conditions and events in its financial statements. As a result, these changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for periods beginning after December 15, 2016. The adoption of ASU 2014-15 did not have a material effect on our consolidated position or results of operations.

Note 3. Related Party Disclosure

In January 2017, we entered into the Subscription Agreement with Acuitas pursuant to which we will received aggregate gross proceeds of $1,300,000 (the “Loan Amount”) in consideration$1.3 million and warrants to purchase 254,904 shares of common stock. In April 2017, we used the issuancenet proceeds from the public offering to repay the Loan Amount including interest of the$1.3 million. 

In January 2017, Convertible Debenture andin connection with the January 2017 Warrants The Loan Amount is payable in tranches through March 31, 2017, and asSubscription Agreement described above, the number of March 31, 2017 we have received $1,115,000. In addition, anyAcuitas warrants issued in conjunction withas part of the December 2016 Convertible Debenture currently outstanding with Acuitas have beenwere increased by an additional 25%from 75% to 100% warrant coverage, exercisable for an aggregate of 137,883 shares of the Company’sour common stock.

In March 2017, we entered into an amendment with Acuitas of certain outstanding warrants issued in July 2015 to eliminate certain anti-dilution provisions in such warrants. Such amendment was contingent upon and did not take effect until the closing of the public offering. For each warrant share underlying the warrants so amended, the holder received the right to purchase an additional .2 shares of common stock. Acuitas received additional warrants to purchase 31,167 shares of our common stock in April 2017.

In April 2017, Acuitas purchased 181,154 shares of common stock for $869,539 in proceeds in connection with the public offering.

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

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

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

In addition, we have accounts payable outstanding with Mr. Peizer for travel and expenses of $204,000approximately $223,000 as of March 31, 2017 and deferred salary of $1.1 million as of March 31,September 30, 2017.

       In January 2017, in connection with the Subscription Agreement described above, the number of Shamus warrants issued as part of the December 2016 Convertible Debenture were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 14,706 shares of the Company’sour common stock.

In March 2017, Shamus converted $1.3 million of their December 2016 Convertible Debentures and accrued interest for 214,514276,204 shares of our common stock.

NoteNote 4. 4. Short-term Debt

       In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas,, pursuant to which we will receivereceived aggregate gross proceeds of $1,300,000 (the “Loan Amount”) in consideration of the issuance of (i) an 8% Series B Convertible Debenture due March 31, 2017 (the “January 2017 Convertible Debenture”) and (ii) 254,904 five-year warrants to purchase shares of the Company’s common stock in an amountwhich is equal to one hundred percent (100%) of the initial number of shares of common stock issuable upon the conversion of the January 2017 Convertible Debenture, at an exercise price of $5.10 per share (the “January 2017 Warrants”). The Loan Amount is payable in tranches through March 31, 2017, and as of March 31, 2017 we have received $1,115,000. In addition, any warrants issued in conjunction with the December 2016 Convertible Debenture currently outstanding with Acuitas have been increased by an additional 25% warrant coverage, exercisable for an aggregate of 137,883 shares of the Company’s common stock. Acuitas agreed to extend the maturity date of the January 2017 Convertible Debenture to April 30, 2017 or until we completecompleted a public offering, whichever comescame first. In April 2017, we used the net proceeds from the public offering to repay the Loan Amount including interest of $1.3 million.

NNote 5.ote 5. Restatement of Financial Statements

TheThe prior year financial statements have been retroactively restated to reflect the 1-for-6 reverse-stock split that occurred on April 25, 2017.

Note 6. Subsequent Event

Amendments to Outstanding Warrants and Extension of Existing Debentures

In March 2017, we entered into amendments with the holders of certain outstanding warrants issued on April 17, 2015 and July 30, 2015 to eliminate certain anti-dilution provisions in such warrants, which caused us to reflect an associated liability of $12.8 million on our balance sheet as of March 31, 2017. Such amendments did not take effect until April 28, 2017.  For each warrant share underlying the warrants so amended, the holder received the right to purchase an additional .2 shares of common stock. Two of the holders of such warrants, which owners hold warrants to purchase an aggregate of 11,049 shares of common stock, did not agree to the amendment. The warrant holders agreeing to the amendment include Acuitas and another accredited investor.

Additionally, in March 2017, we and the holders of an aggregate of approximately $10 million of our existing convertible debentures agreed to extend the maturity dates of such debentures until April 28, 2017.

Reverse Stock Split

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

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

Public Offering

On April 25, 2017, we entered into an underwriting agreement with Joseph Gunnar & Co., LLC, as underwriter in connection with a public offering of the Company’s securities. Pursuant to the underwriting agreement, we agreed to issue and sell an aggregate of 3,125,000 shares of Common Stock at a public offering price of $4.80 per share, and the purchase price to the underwriter after discounts and commissions was $4.464 per share. The closing of the offering occurred on April 28, 2017. The Company received $14.8 million in net proceeds in connection with this offering.

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

NASDAQ Uplisting

In connection with the public offering, our Common Stock began trading on the NASDAQ Capital Market under the symbol “CATS” beginning on April 26, 2017.

Exercise of Over-Allotment Option

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

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements,, including the related notes, and the other financial information includedelsewherein this report.In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report and our annual report filed on Form 10-K for the year ended December 31, 2016.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for our stock and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements, including, without limitation, those relating to the future business prospects, our revenue and income, wherever they occur, are necessarily estimates reflecting the best judgment of our senior management as of the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2016 and other reports we filed with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We assume no obligation and do not intend to update these forward looking statements, except as required by law.

OVERVIEW

GeneralOVERVIEW

General

We provide big data based analytics based specializedand predictive modeling driven behavioral health management and integrated treatmenthealthcare services to health plans through our OnTrak solution. Our OnTrak solution is designed to improve member health and at the same time lower costs to the insurer for underserved populations where behavioral health conditions are causing or exacerbating co-existing medical conditions. The program utilizes proprietary analytics memberand proprietary enrollment, engagement and behavioral modification capabilities to assist members who otherwise do not seek care through a patient centric treatment that integrates evidence-based medical and psychosocial interventions along with care coaching in a 52-week outpatient program.solution. Our initial focus was members with substance use disorders, but we have expanded our solution to assist members with anxiety and depression. We currently operate our OnTrak solutions in Connecticut, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and duel eligible (Medicare and Medicaid) populations.

Recent DevelopmentsDevelopments

New Directors

On March 11, 2017, our Board of Directors appointed Marc Cummins and Richard J. Berman to serve on our Board of Directors and our Audit Committee, effective immediately. There are no arrangements or understandings between Messrs. Cummins or Berman and any other person pursuant to which they were appointed as our directors. There are no transactions to which we are a party and in which Messrs. Cummins or Berman have a material interest that are required to be disclosed under Item 404(a) of Regulation S-K. Mr. Cummins previously served on our Board of Directors until his resignation on December 15, 2010, and Mr. Berman has not previously held any position at the Company. Neither individual has family relations with any of our directors or executive officers.

Amendments to Outstanding Warrants and Extension of Existing Debentures

In March 2017, we entered into amendments with the holders of certain outstanding warrants issued on April 17, 2015 and July 30, 2015 to eliminate certain anti-dilution provisions in such warrants, which caused us to reflect an associated liability of $12.8$5.3 million on our balance sheet as of MarchDecember 31, 2017.2016. Such amendments were contingent upon and did not take effect until April 28, 2017.the closing of the public offering described below. For each warrant share underlying the warrants so amended, the holder received the right to purchase an additional .2 shares of common stock. Two of the holders of such warrants, which owners hold warrants to purchase an aggregate of 11,049 shares of common stock, did not agree to the amendment. The warrant holders agreeing to the amendment include Acuitas Group Holdings, LLC (“Acuitas”), one hundred percent (100%) of which is owned by Terren S. Peizer, Chairman and Chief Executive Officer of the Company, and another accredited investor.

Additionally,investor, who received additional warrants to purchase 31,167 and 13,258 shares of our common stock. In addition, several warrant agreements that had anti-dilution protection had a provision in March 2017, we and the holdersagreement that upon an up-listing to NASDAQ, the anti-dilution protection would be removed. The up-listing to NASDAQ occurred on April 26, 2017. The elimination of an aggregatethe anti-dilution provision resulted in the write-off of approximately $10$6.9 million of our existing convertible debentures agreed to extend the maturity dateswarrant liability as of such debentures until April 28,September 30, 2017.

Reverse Stock Split

On April 21, 2017, we filed a certificate of amendment to our Certificate of Incorporation, as amended and in effect, with the Secretary of State of the State of Delaware implementing a 1-for-6 reverse stock split of the Company's common stock, pursuant to which each six6 shares of issued and outstanding common stock converted into one1 share of common stock. Proportionate voting rights and other rights of common stock holders willwere not be affected by the reverse stock split.  No fractional shares of common stock were issued as a result of the reverse stock split; stockholders were paid cash in lieu of any such fractional shares. The 1-for-6 reverse stock split became effective at 5:00 p.m., Eastern Time, on April 24, 2017, and our common stock began trading on the OTCQB Marketplace on a post-split basis at the open of trading on April 25, 2017. Our post-reverse split common stock has a new CUSIP number: 149049 504. Other terms of the common stock arewere not affected by the reverse stock split.  The common stock will continue to trade under the symbol "CATS." 

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

Public Offering

On April 25, 2017, we entered into an underwriting agreement with Joseph Gunnar & Co., LLC (“Joseph Gunnar”), as underwriter in connection with a public offering of the Company’sour securities. Pursuant to the underwriting agreement, we agreed to issue and sell an aggregate of 3,125,000 shares of Common Stockcommon stock at a public offering price of $4.80 per share, and the purchase price to the underwriter after discounts and commissions was $4.464 per share. The closing of the offering occurred on April 28, 2017. The Company received $14.8 million in net proceeds in connection with this offering.

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

NASDAQ Uplisting

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

Exercise of Over-Allotment Option

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

Operations

        We currently operate our OnTrak solutions in Connecticut, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and duel eligible (Medicare and Medicaid) populations. We have generated fees from our launched programs and expect to launch additional customers and increase enrollment and fees throughout 2017. However, there can be no assurance that we will generate such fees or that new programs will launch as we expect.

RESULTS OF OPERATIONS

Table of Summary Consolidated Financial Information

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

Summary of Consolidated Operating Results

Loss from operations before provision for income taxes for the three and nine months ended March 31, 2017September 30, 2017 was $21.8$3.1 million and $10.9 million, compared with a net loss of $4.3$7.4 million and $16.4 million for the same periodperiods in 2016.2016, respectively. The difference primarily relates to the increase in the loss from change in fair value of warrant liability the increase in the loss from change in fair value of theand derivative liability and the increase in interest expense for the three and nine months ended March 31,September 30, 2017, compared to the same periodperiods in 2016.

Revenues

During the threenine months ended March 31,September 30, 2017, we have expanded OnTrak for one customer into two new lines of business, another customer expanded into their largest state by membership, and have continuedlaunched enrollment with a new health plan in Oklahoma. In addition, at the end of the second quarter 2017 we saw a significant increase in our eligible member population as a result of another customer with programs in eight states resolving a previous data extraction issue. That increase in eligible membership is expected to increase enrollment, which wasprimarily impact future quarters. These expansions were offset to some extent by two customers exiting certain health exchange and Medicaid markets, which has resulted inand one customer suspending new enrollments. Overall, there was a net increase in the number of patients enrolled in our solutions compared with the same period in 2016. For the three months ended March 31,Enrolled members as of September 30, 2017 enrollment increased by morewas 33% greater than 13% over the same period inSeptember 30, 2016. Recognized revenue decreased by $141,000 and increased by $1.1$1.4 million, or 150%(11)% and 42%, for the three and nine months ended March 31,September 30, 2017, compared with the same periodperiods in 2016.2016, respectively. We reserve a portion, and in some cases all, of the fees we receive related to enrolled members, as the fees are subject to performance guarantees or are received as case rates in advance at the time of enrollment. Fees deferred for performance guarantees are recognized when those guarantees are satisfied and fees received in advance are recognized ratably over the period of enrollment. Deferred revenue increased by $418,000 since$1.7 million from December 31, 2016.

Cost of Healthcare Services

Cost of healthcare services consists primarily of salaries related to our care coaches,outreach specialists, healthcare provider claims payments to our network of physicians and psychologists, and fees charged by our third party administrators for processing these claims.  The increase of $399,000$411,000 and $979,000 for the three and nine months ended March 31,September 30, 2017, compared with the same periodperiods in 2016, respectively, relates primarily to the increase in members being treated, the addition of care coaches, outreach staff,specialists, community care coordinators and other staff to manage the increasing number of enrolled members. In addition, we hire staff in preparation for anticipated future customer contracts and corresponding increases in members eligible for OnTrak. The costs for such staff are included in Cost of Healthcare Services during training and ramp-up periods.

General and Administrative Expenses

Total general and administrative expense increased by $443,000$379,000 and $1.6 million for the three and nine months ended March 31,September 30, 2017, compared with the same periodperiods in 2016. The increase was due primarily to an increase in legalsalaries to service our contracts and increasing number of enrolled members, investments in key personnel to support future growth, and investor relations services during the first quarter ofnine months ended September 30, 2017.

Depreciation and Amortization

Depreciation and amortization was immaterial for the three and nine months ended March 31,September 30, 2017 and 2016, respectively.

Interest Expense

Interest expense increased decreased by $2.5$3.2 million and $731,000 for the three and nine months ended March 31,September 30, 2017, respectively, compared with the same periodperiods in 2016. The increasedecrease is primarily related to the issuancevalue of the warrants as partissued during the third quarter of our January 2017 financings2016 for the 2016 Convertible Debentures as well as interest related to the Decemberamortization of the debt discount on the 2016 and January 2017 Convertible Debentures. No such issuance occurred during the third quarter of 2017.

Loss of conversion of note

      Loss on conversion of note during the three and nine months ended September 30, 2017 relates to the conversion of the July 2015 convertible debenture and a portion of the December 2016 Convertible Debentures.convertible debentures. No such conversion occurred during 2016.

Loss on issuance of common stock

      Loss on the issuance of common stock relates to the issuance of common stock to Acuitas in the public offering and to pay Terren Peizer’s deferred salary.

Change in fair value of warrant liability

We have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, December 2016, January 2017, February 2017, March 2017, April 2017, and MarchJune 2017. TheSome of the warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in thesome warrants that protect the holders from declines in our stock price, and a requirement to deliver registered shares upon exercise of the warrants, which is considered outside our control.  The warrants are marked-to-market each reporting period, using the Black-Scholes pricing model, until they are completely settled or expire.

The increase in the loss from change in fair value forfor the warrants was $5.0$1.4 million and $1.1 million for the three and nine months ended March 31,September 30, 2017, respectively, compared with the same periodperiods in 2016.2016, respectively.

In April 2017, we removed the anti-dilution protection in most of our warrants. We will continue to mark-to-market the remaining warrants with anti-dilution protection to market value each quarterquarter-end until they are completely settled or expire.

Change in fair value of derivative liability

The increase in the loss from change in fair value of derivative liabilities was $9.3$3.5 million and $6.2 million for the three and nine months ended March 31,September 30, 2017, respectively, compared with the same periodperiods in 2016. The derivative liability was the result of the issuance of the July 2015 Convertible Debenture.Debenture, which was converted into 2,385,111 shares of common stock in April 2017.

We will continue to mark-to-market the derivative liability each quarter until they are completely settled.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As of May 12,November 13, 2017, we had a balance of approximately $10.1$5.9 million cash on hand. We had a working capital deficit of approximately $32.4$2.5 million at March 31,as of September 30, 2017. We have incurred significant operating losses and negative operating cash flows since our inception. We could continue to incur negative cash flows and operating losses for the next twelve months. Our current cash burn rate is approximately $488,000$588,000 per month, excluding non-current accrued liability payments. In April 2017, we closed on a public offering for aggregate gross proceeds of $16.5 million prior to deducting underwriter discounts, commission and other estimated offering expenses. We expect our current cash resources to cover expenses through at least the next twelve months.months, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

Cash Flows

We used $1.6$5.3 million of cash fromfor operating activities during the threenine months ended March 31,September 30, 2017 compared with $1.5$4.5 million in the same period in 2016. The increase in cash used in operating activities reflects the increase in the number of members being treated, the addition of care coaches and clinical care coordinators to our staff to manage the increasing number of enrolled members, and the expansion of our program for one customer into two new lines of business, another customer expanding into their largest state by membership, and the launch of a new health plan in Kansas to cover high cost membersOklahoma. In addition, at the end of the second quarter 2017 we saw a significant increase in our eligible member population as a result of another customer with anxiety disorders.programs in either states resolving a previous data extraction issue. Significant non-cash adjustments to operating activities for the threenine months ended March 31,September 30, 2017 included a fair value adjustmentloss on derivative liabilityconversion of $10.6convertible debentures of $1.4 million, a fair value adjustment on warrant liability of $5.2$1.8 million, a loss on conversionand amortization of note of $926,000,debt discount and issuance costs of $2.6$3.3 million related to the January 2017 Convertible Debenture.convertible debenture.

Capital expenditures for the threenine months ended March 31,September 30, 2017 were not material. We anticipate that capital expenditures will increase in the future as we replace our computer systems that are reaching their useful lives, upgrade equipment to support our increased number of enrolled members, and enhance the reliability and security of our systems. These future capital expenditure requirements will depend upon many factors, including obsolescence or failure of our systems, progress with expanding the adoption of our solutions, and 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 financingfinancing activities was $1.1$11.7 million for the threenine months ended March 31,September 30, 2017, compared with net cash provided by financing activities of $858,000$5.5 million for the threenine months ended March 31, 2016.September 30, 2016, respectively. Cash provided by financing activities for the threenine months ended March 31,September 30, 2017 consisted of the netgross proceeds from the issuance of common stock from the public offering of $16.5 million, the gross proceeds from the convertible debenture provided by Acuitas Group Holdings, LLC (“Acuitas”), one hundred percent (100%) of which is owned by Terren S. Peizer, Chairman and Chief Executive Officer of the Company, in January 2017 of $1.3 million, offset by transaction costs of $1.7 million for the public offering and the payment of convertible debentures of $4.4 million leaving a balance of $291,000$6.9 million in cash and cash equivalents as of March 31,at September 30, 2017.

As discussed above, we currently expend cash at a rate of approximately $488,000$588,000 per month. We also anticipate cash inflow to increase during 2017 as we continue to service our executed contracts and sign new contracts. We expect our current cash resources to cover our operations through at least the next twelve months;months, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

OFF BALANCE SHEET ARRANGEMENTS

As of March 31,September 30, 2017, we had no off-balance sheet arrangements.

CRITICAL ACCOUNTING 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 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 the fair value of warrants, the estimation of the fair value of our derivative liability,liabilities, 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.

Warrant Liabilities

We have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, SeptemberDecember 2016, January 2017, February 2017, March 2017, April 2017, and MarchJune 2017. TheSome of the warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in some warrants that protect the holders from declines in our stock price, and a requirement to deliver registered shares upon exercise of the warrants, which is considered outside our control.  The warrants are marked-to-market each reporting period, using the Black-Scholes pricing model, until they are completely settled or expire.

The warrant liabilities were calculated using the Black-Scholes model based upon the following assumptions:assumptions: