UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~September~~June 30,~~, 201~~7

2020

Commission File Number001-31932

~~_______________________~~

~~CATASYS~~~~, INC.~~

____________________________

Ontrak, Inc.

(Exact name of registrant as specified in its charter)

~~_______________________~~

____________________________

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

~~11601 Wilshire~~ ~~Boulevard,~~

2120 ColoradoAve., Suite ~~1100~~~~, Los~~ ~~Angeles, California 90025~~

230, Santa Monica, CA 90404

(Address of principal executive offices, including zip code)

(310) 444-4300

(Registrant's telephone number, including area code)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes~~☑ No☐~~

x No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files).

Yes~~☑ No☐~~

x No o

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

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


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes☐ ~~No☑~~

No x

As of ~~November 13, 2017,~~July 31, 2020, there were ~~15,889,171~~17,251,283 shares of the registrant's common stock, $0.0001 par value per share, outstanding.

Table of Contents

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION					3

	ITEM 1. Financial Statements			3

		Condensed Consolidated Balance Sheets as of ~~September~~June 30 ~~2017~~ , 20 20 (unaudited) and December 31, ~~2016~~ 2019	3

		Condensed Consolidated ~~Statement~~sStatements of Operations for the T~~hree~~ Three and ~~Nine~~ Six Months Ended ~~September~~June 30 ~~2017~~, 20 20 and ~~2016~~ 2019 (unaudited)	4

		Condensed Consolidated ~~Statement~~sStatements of Stockholders’ Deficit for the Three and Six Months Ended June 30 , 20 20 and 2019 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~ Six Months Ended ~~September~~June 30 ~~2017~~ , 20 20 and ~~2016~~2019 (unaudited)	5 6

		Notes to Condensed Consolidated Financial Statements	6 7

	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		15	20

	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		22	26

	ITEM 4. Controls and Procedures		22	26

PART II –- OTHER INFORMATION			23		26

	ITEM 1. Legal Proceedings		23	26

	ITEM 1A.1A. Risk Factors		23	26

	ITEM 2.2. Unregistered Sales of Equity Securities and Use of Proceeds		23	40

	ITEM 3. Defaults Upon Senior Securities		23	40

	ITEM 4.4. Mine Safety Disclosures		23	40

	ITEM 5. Other Information		23	40

	ITEM 6. Exhibits		23	41

In this Quarterly Report on Form 10-Q, ~~except as otherwise stated or the context otherwise requires, the terms~~all references to “Ontrak,” “Ontrak, Inc.,” “we,” “us,” “our” or the “Company” ~~refer to Catasys,~~mean Ontrak, Inc., its wholly-owned subsidiaries and ~~our wholly-owned subsidiaries. Our~~variable interest entities, except where it is made clear that the term means only the parent company. The Company’s common stock, par value $0.0001 per share, is referred to as “common stock.”

~~PART I - FINANCIAL INFORMATION~~

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

~~CATASYS~~,

ONTRACK, INC. ~~AND SUBSIDIARIES~~

CONDENSEDCONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except for number of shares)
September 30,

December 31,

2017

2016

ASSETS
Current assets
Cash and cash equivalents
$ 6,926 $ 851
Receivables, net of allowance for doubtful accounts of $277 and $0, respectively
709 1,052
Prepaids and other current assets
307 420
Total current assets
7,942 2,323
Long-term assets
Property and equipment, net of accumulated depreciation of $1,751 and $1,620, respectively
553 410
Deposits and other assets
371 371
Total Assets $ 8,866 $ 3,104

LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities
Accounts payable
$ 806 $ 870
Accrued compensation and benefits
901 2,089
Deferred revenue
3,180 1,525
Other accrued liabilities
579 575
Short term debt, related party, net of discount $0 and $216, respectively
- 9,796
Derivative liability
- 8,122
Total current liabilities
5,466 22,977
Long-term liabilities
Deferred rent and other long-term liabilities
49 117
Capital leases
6 31
Warrant liabilities
41 5,307
Total Liabilities 5,562 28,432

Stockholders' equity/(deficit)
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; no shares issued and outstanding - -
Common stock, $0.0001 par value; 500,000,000 shares authorized; 15,889,171 and 9,214,743 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
2 1
Additional paid-in-capital
293,945 254,390
Accumulated deficit
(290,643 ) (279,719 )
Total Stockholders' Equity/(Deficit) 3,304 (25,328 )
Total Liabilities and Stockholders' Equity/(Deficit) $ 8,866 $ 3,104

(in thousands, exceptshare andper share data)


	June 30, 2020		December 31, 2019
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	12,650	$	13,610
Receivables, net	2,685		3,615
Unbilled receivables	3,095		2,093
Deferred costs - current	1,575		341
Prepaid expenses and other current assets	858		733
Total current assets	20,863		20,392
Long-term assets:
Property and equipment, net	1,383		528
Restricted cash - long-term	408		408
Deferred costs -long-term	201		112
Operating lease right-of-use asset	2,192		2,415
Total assets	$	25,047	$	23,855

Liabilities and stockholders' deficit
Current liabilities:
Accounts payable	$	1,520	$	1,385
Accrued compensation and benefits	4,268		3,640
Deferred revenue	8,180		5,803
Current portion of operating lease liability	403		374
Other accrued liabilities	2,819		2,205
Warrant liabilities	1,070		691
Total current liabilities	18,260		14,098
Long-term liabilities:
Long-term debt, net	34,822		31,597
Long-term operating lease liability	1,629		1,836
Long-term finance lease liabilities	380		233
Total liabilities	55,091		47,764

Commitments and contingencies
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; 17,055,609 and 16,616,165 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	2		2
Additional paid-in capital	315,076		307,403
Accumulated deficit	(345,122)		(331,314)
Total stockholders' deficit	(30,044)		(23,909)
Total liabilities and stockholders' deficit	$	25,047	$	23,855

See notes to condensed consolidated financial statements.

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ONTRAK, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue	$	17,226	$	7,681	$	29,564	$	14,492
Cost of revenue	9,876		4,365		17,109		7,392
Gross profit	7,350		3,316		12,455		7,100

Operating expenses	11,437		8,223		22,546		14,522
Operating loss	(4,087)		(4,907)		(10,091)		(7,422)

Other expense, net	(443)		(112)		(379)		(196)
Interest expense, net	(1,683)		(471)		(3,338)		(793)

Net loss	$	(6,213)	$	(5,490)	$	(13,808)	$	(8,411)

Net loss per share, basic and diluted	$	(0.37)	$	(0.34)	$	(0.82)	$	(0.51)

Weighted-average shares outstanding, basic and diluted	16,994		16,315		16,844		16,398

See notes to condensed consolidated financial statements.

Table of Contents

ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OFSTOCKHOLDERS'DEFICIT

(unaudited, in thousands, exceptshare andper share data)


	Common Stock					Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Deficit
	Shares	Amount
Balance at March 31, 2020	16,876,581	$	2	$	311,454	$	(338,909)	$	(27,453)
Stock option exercised	172,379	—		1,706		—		1,706
401(k) employer match	6,649	—		140		—		140
Stock-based compensation expense	—	—		1,776		—		1,776
Net loss	—	—		—		(6,213)		(6,213)
Balance at June 30, 2020	17,055,609	$	2	$	315,076	$	(345,122)	$	(30,044)


Balance at March 31, 2019	16,205,146	$	2	$	297,898	$	(308,576)	$	(10,676)



Warrant exercised	192,461	—		928		—		928
Warrants issued for services	—	—		43		—		43
Stock option exercised	139,385	—		1,473		—		1,473


Stock-based compensation expense	—	—		1,567		—		1,567
Net loss	—	—		—		(5,490)		(5,490)
Balance at June 30, 2019	16,536,992	$	2	$	301,909	$	(314,066)	$	(12,155)


	Common Stock					Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Deficit
	Shares	Amount
Balance at December 31, 2019	16,616,165	$	2	$	307,403	$	(331,314)	$	(23,909)
Warrant exercised	11,049	—		20		—		20
Stock option exercised	396,022	—		3,465		—		3,465
401(k) employer match	6,649	—		140		—		140
Stock-based compensation expense	25,724	—		4,048		—		4,048
Net loss	—	—		—		(13,808)		(13,808)
Balance at June 30, 2020	17,055,609	$	2	$	315,076	$	(345,122)	$	(30,044)


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
Warrant exercised	212,461	—		1,028		—		1,028
Warrants issued for services	—	—		43		—		43
Stock option exercised	139,385	—		1,473		—		1,473
Stock-based compensation expense	—	—		2,591		—		2,591
Net loss	—	—		—		(8,411)		(8,411)
Balance at June 30, 2019	16,536,992	$	2	$	301,909	$	(314,066)	$	(12,155)

See notes to condensed consolidated financial statements.

Table of Contents

ONTRAK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	For the Six Months Ended June 30,
	2020		2019
Cash flows from operating activities
Net loss	$	(13,808)	$	(8,411)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	4,048		2,591

Paid-in-kind interest	2,964		—
Depreciation expense	82		72
Amortization expense	677		258
Warrants issued for investor relations	—		43
Change in fair value of warrants	379		211
401(k) employer match in common shares	170		—


Deferred rent	—		(26)
Changes in operating assets and liabilities:
Accounts payable	118		962
Leases liabilities	(178)		525
Other accrued liabilities	940		13
Prepaid expenses and other current assets	(1,247)		218
Deferred revenue	2,377		(162)
Receivables	930		(1,194)
Unbilled receivables	(1,002)		(1,055)
Net cash used in operating activities	(3,550)		(5,955)

Cash flows from investing activities
Purchase of property and equipment	(614)		—
Net cash used in investing activities	(614)		—

Cash flows from financing activities

Proceeds from revolving loan	—		7,500

Proceeds from A/R facility	—		1,938
Repayment of A/R facility	—		(1,938)

Debt issuance costs	—		(133)

Proceeds from warrant exercise	20		1,028
Proceeds from options exercise	3,265		1,473
Finance lease obligations	(81)		(16)
Net cash provided by financing activities	3,204		9,852

Net change in cash and restricted cash	(960)		3,897

Cash and restricted cash at beginning of period	14,018		3,570
Cash and restricted cash at end of period	$	13,058	$	7,467

Supplemental disclosure of cash flow information:

Interest paid	$	—	$	792
Non cash financing and investing activities:
Warrant issued in connection with A/R facility	$	—	$	21

Reclassification of warrant liability to equity upon adoption of ASU 2017-11	—		86
Warrants issued in connection with revolving loan	—		610
Stock options exercise in transit	200		—
Finance lease and accrued purchases of property and equipment	404		154

See notes to condensed consolidated financial statements.

Table of Contents

ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1.Organization

Company Overview

Ontrak, Inc. (“Ontrak” or the “Company”), formerly known as Catasys, Inc., is an AI-powered and telehealth-enabled, virtualized outpatient healthcare treatment company, whose mission is to help improve the health and save the lives of as many people as possible. The Company’s platform, PRE™(Predict-Recommend-Engage), organizes and automates healthcare data integration and analytics through the application of machine intelligence to deliver analytic insights. The Company's PRE platform predicts people whose chronic disease will improve with behavior change, recommends effective care pathways that people are willing to follow, and engages people who are not receiving the care they need. By combining predictive analytics with human engagement, the Company delivers improved member health and validated outcomes and savings to healthcare payers.

The Company’s integrated, technology-enabled Ontrak^TM solutions, a critical component of the PRE platform, are designed to identify and treat members with behavioral conditions that cause or exacerbate chronic medical conditions such as diabetes, hypertension, coronary artery disease, chronic obstructive pulmonary disease, and congestive heart failure, which result in high medical costs. Ontrak has a 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. Ontrak integrates evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, along with care coaching and in-market Community Care Coordinators who address the social and environmental determinants of health, including loneliness. The Company’s programs seek to improve member health and deliver validated cost savings of more than 50% for enrolled members to healthcare payers. Ontrak solutions are available to members of leading national and regional health plans in 30 states and in Washington, D.C.

Basis of Presentation

The accompanying condensed consolidated financial statements ~~have been retroactively restated to reflect the 1-for-6 reverse-stock split that occurred on April 25, 2017~~

~~See accompanying notes to the financial statements.~~

~~CATASYS~~~~, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENT~~S ~~OF OPERATIONS~~

~~(unaudited)~~

Three Months Ended

Nine Months Ended

(In thousands, except per share amounts)

September 30,

September 30,

2017

2016

2017

2016

Revenues

Healthcare services revenues
$ 1,195 $ 1,336 $ 4,682 $ 3,287

Operating expenses

Cost of healthcare services
1,664 1,253 4,361 3,381
General and administrative
2,575 2,195 8,144 6,518
Depreciation and amortization
47 38 131 102
Total operating expenses
4,286 3,486 12,636 10,001

Loss from operations
(3,091 ) (2,150 ) (7,954 ) (6,714 )

Other income
16 15 44 90
Interest expense
(1 ) (3,215 ) (3,408 ) (4,139 )
Loss on conversion of note
- - (1,356 ) -
Loss on issuance of common stock
- - (145 ) -
Change in fair value of derivative liability
- (3,484 ) 132 (6,328 )
Change in fair value of warrant liability
(2 ) 1,423 1,767 673
Loss from operations before provision for income taxes
(3,078 ) (7,411 ) (10,920 ) (16,418 )
Provision for income taxes
2 2 4 7
Net Loss
$ (3,080 ) $ (7,413 ) $ (10,924 ) $ (16,425 )

Basic and diluted net loss from operations per share:
$ (0.19 ) $ (0.81 ) $ (0.84 ) $ (1.79 )

Basic weighted number of shares outstanding
15,889 9,174 13,031 9,170

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

~~See accompanying notes to the financial statements.~~

~~CATASYS, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS~~

~~(unaudited)~~

Nine Months Ended

(In thousands)

September 30,

2017

2016

Operating activities:

Net loss
$ (10,924 ) $ (16,425 )
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization
131 102
Amortization of debt discount and issuance costs included in interest expense
3,335 3,673
Provision for doubtful accounts
307 46
Deferred rent
(60 ) (52 )
Share-based compensation expense
191 523
Common stock issued for services
181 -
Loss on conversion of convertible debenture
1,356 -
Loss on issuance of common stock
145 -
Fair value adjustment on warrant liability
(1,767 ) (673 )
Fair value adjustment on derivative liability
(132 ) 6,328
Changes in current assets and liabilities:

Receivables
36 (345 )
Prepaids and other current assets
113 270
Deferred revenue
1,655 1,548
Accounts payable and other accrued liabilities
85 554
Net cash used by operating activities
$ (5,348 ) $ (4,451 )

Investing activities:

Purchases of property and equipment
$ (274 ) $ (102 )
Deposits and other assets
- 16
Net cash used by investing activities
$ (274 ) $ (86 )

Financing activities:

Proceeds from the issuance of common stock and warrants
$ 16,458 $ -
Proceeds from issuance of bridge loan
1,300 -
Payments on convertible debenture
(4,363 ) -
Proceeds from issuance of senior promissory note, related party
- 5,505
Proceeds from advance from related party
- 225
Payment on advance from related party
- (225 )
Transactions costs
(1,667 ) -
Capital lease obligations
(31 ) (41 )
Net cash provided by financing activities
$ 11,697 $ 5,464

Net increase in cash and cash equivalents
$ 6,075 $ 927
Cash and cash equivalents at beginning of period
851 916
Cash and cash equivalents at end of period
$ 6,926 $ 1,843

Supplemental disclosure of cash paid

Interest
$ - $ -
Income taxes
$ 40 $ 46
Supplemental disclosure of non-cash activity

Common stock issued for services
$ 181 -
Common stock issued for conversion of debt and accrued interest
$ 7,163 -
Common stock issued upon settlement of deferred compensation to officer
$ 1,122 -
Common stock issued for exercise of warrants
$ - $ 45
Property and equipment acquired through capital leases and other financing $ - $ 34

S~~ee accompanying notes to the financial statements.~~

~~Catasys~~,include Ontrak, Inc. and ~~Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Note 1.~~ ~~Basis of Consolidation~~its wholly-owned subsidiaries and ~~Presentation~~

variable interest entities (VIE's). The accompanying ~~unaudited~~ condensed consolidated financial statements for ~~Catasys,~~Ontrak, Inc. ~~and its subsidiaries~~ have been prepared in accordance with generally accepted accounting principles in the United States of America (“~~U.S.~~ GAAP”) and instructions to Form 10-Q and ~~therefore, do not include all~~Article 10 of Regulation S-X. All intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures ~~necessary for a complete presentation~~normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed financial ~~position, results of operations, and cash flows in conformity with U.S. GAAP. In our opinion,~~statements included all adjustments ~~consisting~~(consisting of normal recurring ~~adjustments, considered~~adjustments) necessary for athe fair presentation ~~have been included.~~of the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any other interim period or for the entire fiscal year. The accompanying unaudited financial information should be read in conjunction with the audited financial statements and the notes thereto included in ~~our~~the most recent Annual Report on Form 10-K for the year-ended December 31, ~~2016,~~2019, filed with the Securities and Exchange Commission ("SEC"), from which the balance sheet as of December 31, ~~2016,~~2019 has been derived. The Company operates as 1 segment. Certain prior period amounts reported in condensed consolidated financial statements and notes have been ~~derived.~~

~~Note 2. Summary~~reclassified to conform to current period presentation.

As of June 30, 2020, cash and restricted cash was $13.1 million and working capital was approximately $2.6 million. The Company could continue to incur negative cash flows and operating losses for the next twelve months, with an average monthly cash burn rate of less than $1 million for the six months ended June 30, 2020. The Company expects its current cash resources to cover its operations through at least the next 12 months. However, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

The Company’s ability to fund ongoing operations is dependent on several factors. The Company aims to increase the number of members that are eligible for its solutions by signing new contracts and identifying more eligible members in existing contracts. Additionally, the Company’s funding is dependent upon the success of management’s plan to increase revenue and control expenses. The Company currently operates its Ontrak solutions in 30 states, as well as the nation's capital. The Company provides 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 expects to increase enrollment and fees in the near future.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 and increasing the number of enrolled members in our Ontrak program within existing health plan customers. To support this increased demand for services, we invested and will continue to invest in additional headcount needed to support the anticipated growth. Additional management plans include increasing the outreach pool as well as improving our current enrollment rate. We will continue to explore ways to increase 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.

Recently Adopted Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 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 exceptions to accounting for contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022, and may be applied prospectively to contract modifications entered through December 31, 2022. The adoption of ASU 2020-04 on March 12, 2020 did not have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 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 incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement including reasonably certain renewals, beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The adoption of ASU 2018-15 prospectively on January 1, 2020 did not have a material effect on our consolidated financial statements.

In August 2018, the FASB issued 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 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 December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes" 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 ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”), 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 SEC, ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022, including interim periods within those annual periods. The

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Company is currently evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements and related footnote disclosures.

Other Significant Accounting Policies

~~Revenue Recognition~~

~~Our Catasys contracts~~

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 ~~generally designed~~directly associated with and who devote time to ~~provide cash fees to us on a monthly basis or an upfront case rate based on enrolled members. To~~internal-use software projects. Capitalization of these costs ceases once the ~~extent our contracts may include a minimum performance guarantee; we reserve a portion of~~project is substantially complete and the ~~fees that may be at risk until the performance measurement period~~software is ~~completed. To the extent we receive case rates or other fees in advance that are not subject~~ready for its intended purpose. Costs incurred for significant upgrades and enhancements to the performance guarantees, we recognize the case rate ratably over the twelve months of our program. We recognize any fees from sharing in the savings generated from enrolled members when we receive payment.

~~Cost of Services~~

~~Cost of healthcare services consists primarily of salaries related to our care coaches, outreach specialists~~Company’s internal use software solutions are also capitalized. Costs incurred for training, maintenance and other staff directly involved in member care, healthcare provider claims payments, and fees charged by our third party administrators for processing these claims. Salaries and fees charged by our third party administrators for processing claimsminor modifications or enhancements are expensed ~~when incurred and healthcare provider claims payments~~as incurred. Capitalized software development costs are ~~recognized in~~amortized using the ~~period in which~~straight-line method over an eligible member receives services. We contract with doctors and licensed behavioral healthcare professionals, on a fee-for-service basis. We determine that a member has received services when we receive a claim or in the absence of a claim, by utilizing member data recorded in the eOn~~Trak~~^TM~~database within the contracted timeframe, with all required billing elements correctly completed by the service provider.~~

~~Cash Equivalents and Concentration of Credit Risk~~

~~We consider all highly liquid investments with an original maturity~~estimated useful life of three years.

During the three months ~~or less~~and six months ended June 30, 2020, we capitalized $0.5 million of costs relating to ~~be cash equivalents. Financial instruments that potentially subject us~~internal use software development costs and approximately $30,000 of amortization expense relating to these capitalized internal use software costs. There were 0 costs relating to development of internal use software capitalized during the three and six months ended June 30, 2019.

Note2. Accounts Receivable

The following table is a summary of concentration of credit risk ~~consist~~by customer revenues as a percentage of ~~cash~~our total revenue:


	Three Months Ended June 30,						Six Months Ended June 30,
Percentage of Revenue	2020		2019		2020		2019
Largest customer	56.9	%	27.0	%	53.3	%	26.5	%
2nd largest customer	15.1		25.2		16.4		25.8
3rd largest customer	13.0		17.9		13.7		17.1
4th largest customer	8.0		12.2		8.8		11.9
Remaining customers	7.0		17.7		7.8		18.7
	100.0	%	100.0	%	100.0	%	100.0	%

The following table is a summary of concentration of credit risk by customer accounts receivables as a percentage of our total accounts receivable:



Percentage of Accounts Receivable	June 30, 2020		December 31, 2019
Largest customer	33.2	%	54.3	%
2nd largest customer	33.0		15.7
3rd largest customer	29.6		15.2
4th largest customer	3.0		3.6
Remaining customers	1.2		11.2
	100.0	%	100.0	%

The Company applies the specific identification method for assessing provision for doubtful accounts. There was 0 bad debt expense in each of the three and ~~cash equivalents. Cash is deposited with what we believe are highly credited, quality financial institutions~~. The deposited cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. As of September 30, 2017, we had $6.8 million in cash and cash equivalents exceeding federally insured limits.

~~For the~~ ~~nine~~six months ended ~~September~~June 30, ~~2017, three customers accounted for approximately 90%~~2020 and 2019.

Table of ~~the Company’s revenues and five customers accounted for approximately 96% of accounts receivable.~~

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note3. Common Stock

Net loss per share

Basic ~~and Diluted~~ ~~Income (~~~~Loss~~) ~~per Share~~

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net loss	$	(6,213)	$	(5,490)	$	(13,808)	$	(8,411)
Weighted-average shares of common stock outstanding	16,994		16,315		16,844		16,398
Net loss per share - basic and diluted	$	(0.37)	$	(0.34)	$	(0.82)	$	(0.51)

The following common equivalent shares ~~outstanding during the period.~~

~~Common equivalent shares, consisting~~as of ~~2,255,381~~June 30, 2020 and ~~1,178,821 shares for the nine months ended September 30, 2017 and 2016, respectively,~~2019, issuable upon ~~the~~ exercise of stock options and warrants, have been excluded from the diluted earnings per share calculation as their effect is ~~anti-dilutive.~~

~~Share-Based~~anti-dilutive:


	June 30,
	2020	2019
Warrants to purchase common stock	1,539,926	1,397,720
Options to purchase common stock	3,834,777	4,206,731
Total	5,374,703	5,604,451

Note4.Stock-Based Compensation

~~Our~~

The Company's 2017 Stock Incentive Plan (the “2017 Plan”)~~, provides for the issuance of up to 2,333,334 shares of our common stock~~ and ~~an additional 243,853 shares of our common stock that are represented by awards granted under our~~ 2010 Stock Incentive Plan (the “2010 Plan”)~~. Incentive stock options (ISOs) under Section 422A~~ provide for the issuance of 4,806,513 shares of the ~~Internal Revenue Code and non-qualified options (NSOs) are authorized under the Plan. We have~~Company's common stock. The Company has granted stock options to executive officers, employees, members of ~~our~~the Company's board of directors, and certain outside consultants. The terms and conditions upon which options become exercisable vary among ~~grants, but~~grants; however, option rights expire no later than ten years from the date of grant and employee and ~~board~~Board of ~~director~~Director awards generally vest over three to five ~~years. At September~~years on a straight-line basis. As of June 30, ~~2017, we~~2020, the Company had ~~243,853~~3,834,777 vested and unvested ~~shares~~stock options outstanding and ~~2,333,334~~351,432 shares ~~available~~reserved for future ~~awards under the 2017 Plan.~~

S~~hare-based~~awards.

Stock-based compensation expense ~~attributable to continuing operations were $32,000~~was approximately $1.8 million and ~~$191,000~~$1.6 million for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017, compared with $174,000~~2020 and ~~$523,000~~2019, respectively, and $4.0 million and $2.6 million for the ~~same periods~~six months ended June 30, 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 ~~2016, respectively.~~

~~Stock Options~~ ~~– Employees and Directors~~

We ~~measure and recognize~~stock-based 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 payment awards using~~six months ended June 30, 2020.

The assumptions used in the Black-Scholes option-pricing ~~model. The value~~model were as follows:

Table 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.~~

~~Share-based compensation expense recognized~~ ~~for employees and directors for the three and nine months ended September 30, 2017 was $32,000 and $191,000, compared with $174,000 and $523,000, for the same periods in 2016, respectively.~~

For share-based awards issued to employees and directors, share-based compensation is attributed to expense using the straight-line single option method. Share-based compensation expense recognized in our consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 is based on awards ultimately expected to vest, reduced for estimated forfeitures. Accounting rules for stock options require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Contents

ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~There were no options granted to employees and directors during the~~ three and nine months ended September 30, 2017 and 2016, respectively, under the 2017 Plan. Employee and director stock option activity for the three and nine months ended September 30, 2017 are as follows:

Weighted Avg.

Shares

Exercise Price

Balance December 31, 2016
244,046 $ 39.06

Granted
- $ -
Cancelled
(193 ) $ (245.47 )

Balance March 31, 2017
243,853 $ 38.90

Granted
- $ -
Cancelled
- $ -

Balance June 30, 2017
243,853 $ 38.90

Granted
- $ -
Cancelled
- $ -

Balance September 30, 2017
243,853 $ 38.90


	Six Months Ended June 30, 2020
Volatility	78.00	%
Risk-free interest rate	0.00% - 1.55%
Expected life (in years)	2.75 - 6.08
Dividend yield	0	%

The expected volatility assumptions have been based on the historical and expected volatility of our stock and comparable companies, measured over a period generally commensurate with the expected ~~term.~~term or acceptable period to determine reasonable volatility. The weighted average expected option term for the ~~three~~ ~~and nine~~six months ended ~~September~~June 30, ~~2017 and 2016,~~2020, reflects the application of the simplified method prescribed in ~~Securities and Exchange Commission (“SEC”)~~SEC 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

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


	Number of Shares	Weighted Average Exercise Price
Outstanding as of December 31, 2019	4,006,351	$	10.92
Granted	688,563	15.39
Exercised	(396,022)	8.75
Forfeited	(464,115)	12.42
Outstanding as of June 30, 2020	3,834,777	11.76

Options vested and exercisable as of June 30, 2020	945,841	12.01

As of ~~September~~June 30, ~~2017,~~2020, there was ~~$127,500~~$18.0 million of total unrecognized compensation cost related to non-vested ~~share-based~~stock compensation arrangements granted to employees, directors and consultants under the 2017 ~~Plan. That cost~~Amended Plan, which is expected to be recognized over a weighted-average period of approximately ~~1.02~~2.5 years.

The Company did 0t issue any stock options to consultants during the three and six month ended June 30, 2020 compared to NaN and 50,000 stock options at a weighted average exercise price of $9.93 for the three and six month ended June 30, 2019, respectively. Stock ~~Options~~compensation expense related to consultants was $0.02 million and $0.05 million for the three and six months ended June 30, 2020, respectively, and $0.03 million and $0.04 million for the three and six months ended June 30, 2019, respectively. As of June 30, 2020, there was $0.2 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 1.7 years.

Warrants~~– Non-employees~~

~~We account~~

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


	Number of Warrants	Weighted Average Exercise Price
Outstanding as of December 31, 2019	1,550,975	$	6.08
Issued	—	—
Expired	—	—
Exercised	(11,049)	1.80
Outstanding as of June 30, 2020	1,539,926	6.12
Warrants exercisable as of June 30, 2020	1,539,926	6.12

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

There were 0 warrants issued in the six months ended June 30, 2020, compared with 55,352 in the six months ended June 30, 2019. Of the total outstanding warrants as of June 30, 2020, 1,249,189 warrants were held by an entity controlled by the Company's chairman and chief executive officer.

Performance-Basedand Market-BasedAwards

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

Grant Date

Performance Measures

Vesting Term

Performance Period

# of Shares

Exercise Price

December 2017

Weighted Average Price of our common stock is $15.00 for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to January 1, 2023.

Fully vest on January 1, 2023

January 1, 2023

642,307

7.50

August 2018

Weighted Average Price of our common stock is $15.00 for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to January 1, 2023.

Fully vest on January 1, 2023

January 1, 2023

397,693

7.50

April 2018

The Options will be divided into 5 equal tranches and Performance Targets to be established by Board of Directors for each tranche at the beginning of the fiscal year

Amended and vested 115,950 options based on severance agreement

115,950

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 six months ended June 30, 2020.

Note5.Leases

The 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 as either operating or financing leases. The Company leases office space for our corporate headquarters in Santa Monica, 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, which commenced in July 2019, with base annual rent of approximately $0.6 million subject to annual adjustments. The finance leases are generally for 36 month terms.

The Company’s operating lease relating to its Santa Monica Headquarters 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. 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.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Quantitative information for our leases is as follows:


Condensed Consolidated Balance Sheets (in thousands)	Balance Sheet Classification	June 30, 2020		December 31, 2019
Assets
Operating lease asset	"Operating lease right-of-use-asset"	$	2,192	$	2,415
Finance lease assets	"Property and equipment, net"	639		378
Total lease assets		$	2,831	$	2,793
Liabilities
Current
Operating lease liability	"Current portion of operating lease liability"	$	403	$	374
Finance lease liabilities	"Other accrued liabilities"	259		145
Non-current
Operating lease liability	"Long-term operating lease liability"	1,629		1,836
Finance lease liabilities	"Long-term finance lease liabilities"	380		233
Total lease liabilities		$	2,671	$	2,588


Condensed Consolidated Statements of Operations (in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Operating lease expense	$	166	$	93	$	331	$	167
Short-term lease rent expense	25		14		52		17
Variable lease expense	9		48		20		70
Total rent expense	$	200	$	155	$	403	$	254
Finance lease expense:
Amortization of leased assets	$	45	$	4	$	81	$	6
Interest on lease liabilities	4		—		6		1
Total	$	49	$	4	$	87	$	7


	Six Months Ended June 30,
Condensed Consolidated Statements of Cash Flows (in thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating lease	$	286	$	163
Financing cash flows from finance leases	81		6


Other Information	June 30, 2020		December 31, 2019
Weighted-average remaining lease term (years)
Operating lease	4		4.5
Financing leases	2.5		2.9
Weighted-average discount rate
Operating lease	10.15	%	10.15	%
Finance leases	8.41	%	7.89	%

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table sets forth maturities of our lease liabilities:


	At June 30, 2020
(In thousands)	Operating Lease		Financing Leases		Total
Remaining in 2020	$	296	$	140	$	436
2021	601		280		881
2022	623		219		842
2023	644		53		697
2024	328		—		328

Total lease payments	2,492		692		3,184
Less: imputed interest	(460)		(53)		(513)
Present value of lease liabilities	2,032		639		2,671
Less: current portion	(403)		(259)		(662)
Lease liabilities, non-current	$	1,629	$	380	$	2,009

Note6. Debt

2024 Notes

In June 2020, the Company entered into an amendment (the "First Amendment") to its Note Purchase Agreement dated September 24, 2019 (the “Note Agreement”) with Goldman Sachs Specialty Lending Holdings, Inc. and any other purchasers party thereto from time to time (collectively, the “Holders”) (the "Amended Note Agreement"). The First Amendment included redefining certain terms and covenants, including but not limited to, the Leverage Changeover Date, Fixed Charge Coverage Ratio covenants, Leverage Ratio covenants, Consolidated Adjusted EBITDA covenants, Minimum Consolidated Liquidity covenants and Minimum Revenue covenants. Under the Note Agreement, as amended, 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 with an interest rate of 15.75% for the three and six months ended June 30, 2020. The applicable margins are subject to stepdowns, in each case, following the achievement of certain financial ratios. The LIBOR index is expected to be discontinued by the end of calendar year 2021. The terms of the Amended Note Agreement allow for a replacement rate if the LIBOR index is discontinued. The Company has elected for the $35 million in aggregate principal amount of 2024 Notes issued on the date of the Note Agreement that such interest shall be payable in cash. The Holder is obligated to purchase up to an additional $10.0 million in principal amount of 2024 Notes during the period from the date of the Note Agreement until the second anniversary thereof. The entire principal amount of the 2024 Notes is due and payable on the fifth anniversary of the Note Agreement unless earlier redeemed upon the occurrence of certain mandatory prepayment events, including with the proceeds of equity or debt issuances, 50% of excess cash flow, asset sales and the amount by which total debt exceeds an applicable leverage multiple. The principal amount of the 2024 Notes increased by $1.5 million and $3.0 million in the form of payment in kind of the interest component during the three and six months ended June 30, 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 dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances, and covenants that require the Company to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain its property in good repair, maintain insurance and comply with applicable laws. The 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

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 date of the Note Agreement must be accompanied by a yield maintenance premium and on or prior to the third anniversary of the date of the Note Agreement must be accompanied by a prepayment premium. The Company was in compliance with all of its debt covenants as of June 30, 2020 and would have been in compliance prior to the First Amendment.

In accounting for the issuance of ~~options~~the 2024 Notes, the Company separated the 2024 Notes into liability and ~~warrants~~equity components. The fair value of the liability component was estimated using an interest rate for ~~services from non-employees~~debt with terms similar to the 2024 Notes. The carrying amount of the equity component was calculated by ~~estimating~~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 ~~warrants issued~~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 ~~pricing model. This model’s calculations include the option or warrant exercise price, the market price of shares on grant date, the weighted average risk-free interest rate, the expected~~option-pricing model remain unchanged and are determined as follows:


	June 30, 2020
Volatility	98.01	%
Risk-free interest rate	1.58	%
Expected life (in years)	7
Dividend yield	0 %

The net carrying amounts of the ~~option or warrant, and~~liability components consists of the ~~expected volatility of our stock and~~following (in thousands):


	June 30, 2020		December 31, 2019
Principal	$	39,466	$	36,502
Less: debt discount	(4,644)		(4,905)
Net carrying amount	$	34,822	$	31,597

2022Loan

In June 2018, the ~~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.~~

~~There were no options issued to non-employees for the three and~~ ~~nine months ended September 30, 2017 or during the same periods in 2016.~~

~~There was no share based compensation expense relating to stock options and warrants recognized for the non-employees for the three and~~ ~~nine months ended September 30, 2017 or during the same periods in 2016.~~

~~Common Stock~~

~~In April 2017,~~ weCompany entered into ~~an underwriting~~a venture loan and security agreement (the “2022 Loan”) with ~~Joseph Gunnar & Co., LLC~~Horizon Technology Finance Corporation (“~~Joseph Gunnar”~~Horizon”), ~~as underwriter~~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 ~~public offering~~$2.5 million receivables financing facility with Corporate Finance, a division of Heritage Bank of Commerce (“Heritage”). The Company borrowed and subsequently repaid $1.9 million on the ~~Company’s securities. Pursuant~~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 the underwriting agreement, we agreed to issue and sell an aggregate 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 commission was $4.464 per share. The closing of the offering occurred on April 28, 2017. We received $15.0 million in ~~gross proceeds in connection with the offering.~~

~~Pursuant~~loans to the ~~underwriting~~Company, including initial term loans in the amount of $7.5 million previously funded under the original agreement ~~with Joseph Gunnar, we~~ ~~granted the underwriters a 45 day over-allotment option to purchase~~and an additional up to ~~468,750 additional shares~~$7.5 million loan in 3 revolving tranches of common stock at the public offering price less the applicable underwriter discount. In May, the underwriter acquired an additional 303,750 shares pursuant to such over-allotment option. We received $1.5$2.5 million in ~~gross proceeds in connection~~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 ~~over-allotment option.~~

amendment and restatement of the Amended Loan Agreement. The Company met all 3 of the Billing Requirements and as a result have incurred the full $7.5 million under the Amended Loan Agreement. In connection with the ~~public offering, our~~Company's entry into the Amended Loan Agreement, the Company issued Horizon 40,279 seven-year warrants to purchase an aggregate of up to $600,000 of the Company's common stock ~~began trading~~(depending on the level of availability under the Amended Loan Agreement) at the trailing volume weighted average price (“VWAP”) on the NASDAQ Capital Market ~~(“NASDAQ”) under~~for the ~~symbol “CATS” beginning on April 26, 2017.~~

~~In April 2017, several investors, including Acuitas Group Holdings, LLC (“Acuitas”), one hundred percent (100%)~~five days preceding the relative dates of ~~which is owned~~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 ~~Terren S. Peizer, Chairman and Chief Executive Officer~~us in an equity financing during the 18 months following the agreement date.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The 2022 Loan bore interest at a floating coupon rate of the ~~Company,~~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 ~~Shamus, LLC (“Shamus”), a Company owned~~demand by ~~David E. Smith, a member~~Lender of ~~our board of directors, exercised their option to convert their~~ ~~convertible debentures and received 2,982,994 shares of common stock. There was a loss~~payment in full or (iii) on the ~~conversion~~Loan Maturity Date (September 30, 2022), as applicable, the Company was obligated pay to Lender a payment equal to the greater of $150,000 or 6% of the ~~convertible debentures~~outstanding principal balance on August 31, 2020.

Upon the issuance of ~~$1.4 million for~~ the ~~nine months ended September 30, 2017.~~

~~In April 2017, Terren S. Peizer agreed to settle his deferred salary~~2024 Notes, the balance of the 2022 Loan was repaid and terminated. As part of the termination, the Company incurred $1.1 million ~~for 233,734 shares~~ of ~~common stock.~~ ~~As a result, we~~early termination costs and wrote off deferred debt issuance costs of $1.5 million, which has been recorded in other income/(expense) in the consolidated statement of operations during the year ended December 31, 2019.

The following table presents the interest expense recognized ~~a loss on settlement of liability totaling $83,807 which is recorded to loss on issuance of common stock.~~

In April 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 our 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 were not 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.

~~All stock options and warrants to purchase common stock outstanding and our common stock reserved for issuance under our equity incentive plans immediately prior~~related to the ~~reverse stock split were appropriately adjusted by dividing the number of affected shares of common stock by six~~2024 Notes and ~~as applicable, multiplying the exercise price by six as a result of the reverse stock split.~~

~~There were~~ 0 and 28,985 shares of common stock issued in exchange for investor relations services during the three and nine months ended September 30, 2017 and no common stock issued in exchange for investor relations services during the same period in 2016. Generally, the costs associated with shares issued for services are amortized to the related expense on a straight-line basis over the related service periods.

~~Income Taxes~~

~~We have~~ recorded a full valuation allowance against our otherwise recognizable deferred tax assets as of September 30, 2017. As such, we have not recorded a provision for income tax for the period ended September 30, 2017. We utilize the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Based on management's assessment of the facts, circumstances and information available, management has determined that all of the tax benefits for the period ended September 30, 2017 should be realized.

2022 Loan (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Contractual interest expense	$	1,511	$	313	$	2,964	$	534
Accretion of debt discount	173		158		373		258
Total interest expense	$	1,684	$	471	$	3,337	$	792

Note7.Fair Value Measurements

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

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

The following ~~table summarizes~~tables summarize fair value measurements by level at ~~September~~as of June 30, ~~2017~~2020 and December 31, 2019, respectively, for assets and liabilities measured at fair ~~value:~~

Balance at September 30, 2017

(Amounts in thousands)

Level I

Level II

Level III

Total

Certificates of deposit
106 - - 106
Total assets
106 - - 106

Warrant liabilities
- - 41 41
Total liabilities
- - 41 41

value on a recurring basis (in thousands):


	Balance as of June 30, 2020
	Level I		Level II		Level III		Total
Letter of credit (1)	$	408	$	—	$	—	$	408
Total assets	$	408	$	—	$	—	$	408

Warrant liabilities	$	—	$	—	$	1,070	$	1,070
Total liabilities	$	—	$	—	$	1,070	$	1,070

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


	Balance as of December 31, 2019
	Level I		Level II		Level III		Total
Letter of credit (1)	$	408	$	—	$	—	$	408
Total assets	$	408	$	—	$	—	$	408

Warrant liabilities	$	—	$	—	$	691	$	691
Total liabilities	$	—	$	—	$	691	$	691

___________________

(1) $408,000 is included in "Restricted cash, long term" on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.

Financial instruments classified as Level III in the fair value hierarchy as of ~~September~~June 30, ~~2017,~~2020 and December 31, 2019 represent ~~our~~ liabilities measured at market value on a recurring basis which include warrant ~~liabilities resulting from recent debt financing.~~liabilities. In accordance with current accounting rules, the warrant liabilities ~~with anti-dilution protection~~ 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 ~~our~~the estimate of fair value of employee stock options. See Warrant Liabilities below.

The ~~following table summarizes our~~carrying value of the 2024 Notes is estimated to approximate their fair value as the variable interest rate of the Senior Secured 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 ~~three and nine~~six months ended ~~September~~June 30, ~~2017:~~

Level III

Level III

Warrant

Derivative

(Dollars in thousands)

Liabilities

(Dollars in thousands)

Liabilities

Balance as of December 31, 2016
$ 5,307
Balance as of December 31, 2016
$ 8,122
Issuance of warrants
2,405
Issuance of convertible debentures
-
Change in fair value
5,181
Change in fair value
10,596
Balance as of March 31, 2017
$ 12,893
Balance as of March 31, 2017
$ 18,718

Issuance (exercise) of warrants, net
269
Issuance of convertible debentures
-
Change in fair value
(6,950 )
Change in fair value
(10,728 )
Write off of warrants
(6,174 )
Write off of derivative liability
(7,990 )
Balance as of June 30, 2017
$ 38
Balance as of June 30, 2017
$ -

Issuance (exercise) of warrants, net
-
Issuance of convertible debentures
-
Expiration of warrants
-
Expiration of warrants
-
Change in fair value
2
Change in fair value
-
Balance as of September 30, 2017
$ 40
Balance as of September 30, 2017
$ -

~~Property and Equipment~~

~~Property and equipment~~2020 are ~~stated at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense~~ as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to seven years for furniture and equipment. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease term, which is typically five to seven years.

follows (in thousands):


	Level III Warrant Liabilities
Balance as of December 31, 2019	$	691

Change in fair value of warrant liability	379

Balance as of June 30, 2020	$	1,070

Warrant Liabilities

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 $5.3 million on our balance sheet as of December 31, 2016. Such amendments were 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. 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, 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~~assumptions used in the agreement 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 the anti-dilution provision resulted in the write-off of $6.2 million of the warrant liabilityBlack-Scholes option-pricing model are determined as ~~of September 30, 2017.~~

~~In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas, pursuant to which we receive~~d 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) five-year warrants to purchase shares of our common stock in an amount 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”). 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 completes a public offering, whichever came first. In April 2017, we used the net proceeds from the public offering to repay the Loan Amount including interest of $1.3 million.

follows:


	June 30, 2020		December 31, 2019
Volatility	97.96% - 98.04%		97.96% - 98.04%
Risk-free interest rate	0.49	%	1.81	%
Weighted average expected life (in years)	5.75		6.25
Dividend yield	—	%	—	%

The January 2017 Warrants include, among other things, price protection provisions pursuant to which, subject to certain exempt issuances, the then exercise price of the January 2017 Warrants will be adjusted if we issue shares of our common stock at a price that is less than the then exercise price of the January 2017 Warrants. Such price protection provisions will remain in effect until the earliest of (i) the termination date of the January 2017 Warrants, (ii) such time as the January 2017 Warrants are exercised or (iii) contemporaneously with the listing of our shares of common stock on a registered national securities exchange.

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’s common stock.

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

	~~September~~ 30, ~~201~~7
~~Expected volatility~~		~~93.56~~	%
~~Risk-free interest rate~~		~~1.62~~	%
~~Weighted average expected lives in years~~		~~2.54~~
~~Expected dividend~~		0	%

~~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 June 2017. Some 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.

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

~~Derivative Liability~~

~~In July 2015, we entered into~~liabilities, which are recorded in "Other expense, net" in the condensed consolidated statements of operations, was $(0.4) and $(0.1) million for the three months ended June 30, 2020 and 2019, respectively, and $(0.4) million and $(0.2) million for the six months ended June 30, 2020 and 2019, respectively.

Note8.VariableInterestEntities

Generally, an entity is defined as a ~~$3.55 million 12% Original Issue Discount Convertible Debenture due January 18, 2016 with Acuitas (the “July 2015 Convertible Debenture”~~Variable Interest Entity (“VIE”)~~. The conversion price~~ 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 ~~July 2015 Convertible Debenture~~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 ~~$11.40 per share, subject~~consolidated by its primary beneficiary, the party that has the power to ~~adjustments, including for issuances~~direct the activities that most significantly affect the economics of ~~common stock~~the VIE and ~~common stock equivalents~~has the

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 Agreements (“MSA”) below, the ~~then current conversion~~Company has an MSA with a Texas nonprofit health organization (“TIH”) and a California Professional Corporation (“CIH”). Under the MSA’s, the equity owners of TIH and CIH have only a nominal equity investment at risk, and the Company absorbs or ~~exercise price,~~receives a majority of the entity’s expected losses or benefits. The Company participates significantly in the design of these MSA’s. 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, including its decision making and approvals are conducted for its benefit, as evidenced by the fact 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 by TIH and CIH is subordinate to payments of the other 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 VIEs. The Company, as the ~~case may be. In October 2016, we entered into an amendment~~primary beneficiary, is required to consolidate the VIE 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 Agreements

In April 2018, the Company executed an MSA with TIH and in July ~~2015 Convertible Debenture which extended~~2018, the ~~maturity date~~Company executed an MSA with CIH. Under the MSA’s, the Company licenses to TIH and CIH the right to use its proprietary treatment programs and related trademarks, and provides all required day-to-day business management services, including, but not limited to:

•general administrative support services;

•information systems;

•recordkeeping;

•billing and collection; and

•obtaining and maintaining all federal, state and local licenses, certifications and regulatory permits.

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 ~~Convertible Debenture~~TIH and CIH Board free of any control or direction from ~~January 18, 2016~~the Company.

TIH pays the Company a monthly fee equal to ~~January 18, 2017. In addition,~~ the ~~conversion price~~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 ~~July 2015 Convertible Debenture was subsequently adjusted~~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.

CIH pays the Company a monthly fee equal to ~~$1.80 per share.~~ 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 amount, as determined by CIH at its sole discretion.

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ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The ~~July 2015 Convertible Debentures are unsecured, bear interest at a rate~~Company's condensed consolidated balance sheets include the following assets and liabilities from its TIH and CIH VIE's (in thousands):


	June 30, 2020		December 31, 2019
Cash and cash equivalents	$	126	$	379
Accounts receivable	795		564
Unbilled receivables	10		—
Prepaid and other current assets	14		26
Total assets	$	945	$	969
Accounts payable	$	16	$	9
Accrued liabilities	104		100
Deferred revenue	47		73
Intercompany payable	593		685
Total liabilities	$	760	$	867

Table of ~~12% per annum payable in cash or shares of common stock, subject~~Contents

ONTRAK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9. Commitments and Contingencies

From time to ~~certain conditions, at our option, and~~time, we are subject to ~~mandatory prepayment upon~~various legal proceedings that arise in the ~~consummation~~normal course of ~~certain future financings. Acuitas agreed to extend~~our business activities. As of the ~~maturity~~ date of this Quarterly Report on Form 10-Q, we are not party to any litigation the ~~July 2015 Convertible Debenture~~outcome of which, if determined adversely to ~~April 30, 2017~~us, would individually or ~~until we completed a public offering, whichever came first. In April 2017,~~in the ~~July 2015 Convertible Debenture was converted into 2,385,111 shares of common stock and the derivative liability was written off.~~

Fo~~r the three and nine months ended September 30, 2017, we recognized a gain of $0 and $132,000, respectively, compared with a loss of $3.5 million and $6.3 million for the same periods in 2016, related~~aggregate be reasonably expected to ~~the revaluation of our derivative 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. We are currently evaluating the potential impact of this standard on our consolidated financial statements, as well as the available transition methods. We are currently assessing whether the adoption of ASU 2016-10 will have a material adverse 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~~operations or financial ~~statements. The standard is effective beginning 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 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 receive~~d aggregate gross proceeds of $1.3 million and warrants to purchase 254,904 shares of common stock. In April 2017, we used the net proceeds from the public offering to repay the Loan Amount including interest of $1.3 million.

In January 2017, in connection with the Subscription Agreement described above, the number of Acuitas warrants issued as part of the December 2016 Convertible Debenture were increased from 75% to 100% warrant coverage, exercisable for an aggregate of 137,883 shares of our 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~~ ~~approximately $223,000 as of 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 our common stock.

~~In March 2017, Shamus converted $1.3 million of their December 2016 Convertible Debentures and accrued interest for 276,204 shares of our common stock.~~

position.

~~Note~~ 4. ~~Short-term Debt~~

In January 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with Acuitas, pursuant to which we received 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 which 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”). 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 completed a public offering, whichever came first. In April 2017, we used the net proceeds from the public offering to repay the Loan Amount including interest of $1.3 million.

N~~ote 5~~. ~~Restatement of Financial Statements~~

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

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

~~CAUTIONARY STATEMENT CONCERNING~~ 2019 filed with the Securities and Exchange Commission.

FORWARD-LOOKING ~~INFORMATION~~

STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for our stock and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements, including, without limitation, those relating to the future business prospects, our revenue and income, wherever they occur, are necessarily estimates reflecting the best judgment of our senior management as of the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, ~~2016~~2019, in Item 1A of Part II of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, 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~~forward-looking statements, except as required by law.

All references to “Ontrak,” “Ontrak, Inc.,” “we,” “us,” “our” or the “Company” mean Ontrak, Inc., its wholly-owned subsidiaries and variable interest entities, except where it is made clear that the term means only the parent company.

OVERVIEW

General

We ~~provide~~ harness proprietary big data ~~based~~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 ~~driven~~to identify members with untreated behavioral health conditions, whether diagnosed or not, and coexisting medical conditions that may be impacted through treatment in the Ontrak program. We then uniquely engage health plan members who do not typically seek behavioral healthcare ~~services to health plans through our On~~~~Trak~~ ~~solution.~~by leveraging proprietary enrollment

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capabilities built on deep insights into the drivers of care avoidance. Our On~~Trak~~technology enabled Ontrak^TM solution is ~~designed~~an integrated suite of services that includes evidence-based psychosocial and medical interventions delivered either in-person or via telehealth, along with care coaching and in-market community care coordinators who address the social and environmental determinants of health, including loneliness. We believe that the Company's programs seek to improve member health and atdeliver validated cost savings of more than 50% for enrolled members to healthcare payers.

We operate as one segment in the ~~same time lower costs~~United States and we have contracted with leading national and regional health plans to make the ~~insurer~~Ontrak program available to eligible members in 30 states, as well as the nation's capital.

Recent Developments

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.

Metrics

The following table sets forth our key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions:

•Revenue. Our revenues are mostly generated from fees charged to members in our Ontrak program. Our contracts are generally designed to provide cash fees to us on a monthly basis, an upfront case rate, or fee for ~~underserved populations where~~service based on enrolled members. The Company’s performance obligation is satisfied over the of length the Ontrak program.

•Effective Outreach Pool. Our Effective Outreach Pool represents individuals insured by our health plan customers who have been identified through our advanced data analytics and predictive modeling with untreated behavioral health conditions ~~are causing~~that may be impacted through treatment in the Ontrak program.

•Cash flow from operations. Our current business activities generally result in an outflow of cash flow from operations as we invest strategically into our business to help continue the growth of our operations.


	Three Months Ended June 30,
(In thousands, except percentages)	2020		2019		Change $		Change %
Revenue	$	17,226	$	7,681	$	9,545	124	%
Cash flow from operations	1,049		(1,596)		2,645		166


	Six Months Ended June 30,
	2020		2019		Change $		Change %
Revenue	$	29,564	$	14,492	$	15,072	104	%
Cash flow from operations	(3,550)		(5,955)		2,405		40


	At June 30,
	2020	2019	Change	Change %
Effective Outreach Pool	141,398	56,885	84,513	149	%

Key Components of Our Results of Operations

Revenue

Revenue from contracts with customers is recognized when, or ~~exacerbating co-existing medical conditions. The~~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 from customers enrolled in our program ~~utilizes proprietary analytics~~is recognized over the term of the program, which is typically twelve months.

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Cost of Revenue

Cost of healthcare services consists primarily of salaries related to our care coaches, member engagement specialists and ~~proprietary enrollment,~~other staff directly involved in member engagement and ~~behavioral modification capabilities~~care, healthcare provider claims payments, and fees charged by our third party administrators for processing these claims. Salaries and fees charged by our third-party administrators for processing claims are expensed when incurred and healthcare provider claims payments are recognized in the period in which an eligible member receives services.

Operating Expenses

Our operating expenses consists of sales and marketing, research and development, and general and administrative expenses. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation and commissions; and costs related to ~~assist~~marketing and promotional events, corporate communications, online marketing, product marketing and other brand-building activities. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses and stock-based compensation; 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 our administrative, legal, finance and human resource staff, including salaries, benefits, bonuses and stock-based compensation; third-party professional fees; insurance premiums; and various other corporate expenses.

Interest Expense, net

Interest expense consists primarily of interest expense related to our note agreements, accretion of debt discount, amortization of debt issuance costs and finance leases.

Other Income (Expense), net

Other income (expense) consists of gain (loss) associated with changes in fair value of warrant liability and, if any, debt termination costs and write-off of deferred debt issuance costs.

RESULTS OF OPERATIONS

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


(In thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue	$	17,226	$	7,681	$	29,564	$	14,492
Cost of revenue	9,876		4,365		17,109		7,392
Gross profit	7,350		3,316		12,455		7,100

Operating expenses	11,437		8,223		22,546		14,522
Operating loss	(4,087)		(4,907)		(10,091)		(7,422)

Other expense, net	(443)		(112)		(379)		(196)
Interest expense, net	(1,683)		(471)		(3,338)		(793)

Net loss	$	(6,213)	$	(5,490)	$	(13,808)	$	(8,411)

Revenue

The mix of our revenue between commercial and government insured members ~~who otherwise do not seek care~~remained consistent quarter over quarter. The following table sets forth our sources of revenue for each of the periods indicated:

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	Three Months Ended June 30,																				Six Months Ended June 30,
(In thousands, except percentages)	2020			2019			Change			Change %		2020			2019			Change			Change %
Commercial revenue	$	10,205		$	4,617		$	5,588		121	%	$	17,446		$	8,769		$	8,677		99	%
Percentage of commercial revenue to total revenue	59		%	60		%	(1)		%			59		%	61		%	(2)		%
Government revenue	$	7,021		$	3,064		$	3,957		129	%	$	12,118		$	5,723		$	6,395		112	%
Percentage of government revenue to total revenue	41		%	40		%	1		%			41		%	39		%	2		%
Total revenue	$	17,226		$	7,681		$	9,545		124	%	$	29,564		$	14,492		$	15,072		104	%

Revenue increased $9.5 million, or 124% for the three months ended June 30, 2020 compared to the same period of 2019. The increase was attributable to the continued expansion of our Ontrak program with our existing health plan customers and increase in our enrolled members from existing and new health plans.

Revenue increased $15.1 million, or 104% for the six months ended June 30, 2020 when compared to the same period of 2019. The increase was attributable to the continued expansion of our Ontrak program with our existing health plan customers and increase in our enrolled members from existing and new health plans.

Cost of Revenue, Gross Profit and Gross Margin


	Three Months Ended June 30,																				Six Months Ended June 30,
(In thousands, except percentages)	2020			2019			Change			Change %		2020			2019			Change			Change %
Cost of revenue	$	9,876		$	4,365		$	5,511		126	%	$	17,109		$	7,392		$	9,717		131	%
Gross profit	7,350			3,316			4,034			122	%	12,455			7,100			5,355			75	%
Gross profit margin	43		%	43		%	—		%			42		%	49		%	(7)		%

Cost of revenue increased $5.5 million, or 126% for the three months ended June 30, 2020 compared to the same period of 2019. The increase in cost of revenue was primarily due to a $2.9 million increase in continued investment in member facing headcount and a $2.4 million increase in provider related costs.

Cost of revenue increased $9.7 million, or 131% for the six months ended June 30, 2020 compared to the same period of 2019. The increase in cost of revenue was primarily due to a $5.2 million increase in continued investment in member facing headcount, a $3.8 million increase in provider related costs, a $0.4 million increase in costs relating to member outreach programs and a $0.3 million increase in printing and production costs for members.

We expect our cost of revenues to increase as our revenue increases, but expect our gross profit margin to increase over time as we optimize the efficiency of our operations and continue to scale our business.

OperatingExpenses


	Three Months Ended June 30,																				Six Months Ended June 30,
(In thousands, except percentages)	2020			2019			Change			Change %		2020			2019			Change			Change %
Operating expenses	$	11,437		$	8,223		$	3,214		39	%	$	22,546		$	14,522		$	8,024		55	%
Operating loss	(4,087)			(4,907)			820			17	%	(10,091)			(7,422)			(2,669)			(36)	%
Operating loss margin	(24)		%	(64)		%	40		%			(34)		%	(51)		%	17		%

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Total operating expense increased $3.2 million, or 39%, for the three months ended June 30, 2020 when compared to the same period in 2019. The increase in operating expenses was primarily due to $2.4 million of higher employee-related costs due to higher headcount and $0.9 million of higher vendor related costs to support our growing operations.

Total operating expense increased $8.0 million, or 55%, for the six months ended June 30, 2020 when compared to the same period in 2019. The increase in operating expenses was primarily due to $6.0 million of higher employee-related costs due to higher headcount and $1.8 million of higher vendor related costs to support our growing operations.

We expect our operating expenses to increase for the foreseeable future as we continue to grow our business, but 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.

Interest Expense, net


	Three Months Ended June 30,														Six Months Ended June 30,
(In thousands, except percentages)	2020		2019		Change $		Change %		2020		2019		Change $		Change %
Interest expense, net	$	(1,683)	$	(471)	$	(1,212)	(257)	%	$	(3,338)	$	(793)	$	(2,545)	(321)	%

The increase in interest expense for the three and six months ended June 30, 2020 was primarily due to the interest and debt discount amortization expense incurred for our 2024 Notes entered into during the three months ended September 30, 2019.

Other Expense, net


	Three Months Ended June 30,														Six Months Ended June 30,
(In thousands, except percentages)	2020		2019		Change $		Change %		2020		2019		Change $		Change %
Other expense, net	$	(443)	$	(112)	$	(331)	(296)	%	$	(379)	$	(196)	$	(183)	(93)	%

The increase in other expense, net for the three and six months ended June 30, 2020 was primarily due to the change in the fair value of the warrant liability.

LIQUIDITY AND CAPITAL RESOURCES

Cash and restricted cash was $13.1 million as of June 30, 2020. We had working capital of approximately $2.6 million as of June 30, 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 ~~a patient centric treatment~~at least the next 12 months. However, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

Our ability to fund our ongoing operations is dependent on increasing the number of members that ~~integrates evidence-based medical and psychosocial interventions along with care coaching~~enroll in ~~a 52-week outpatient solution. Our initial focus was members with substance use disorders, but we have expanded our solution to assist members with anxiety and depression.~~the Ontrak program. We currently operate our On~~Trak~~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.30 states, including the nation's capital. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and duel eligible (Medicare and Medicaid) populations.

~~Recent Develo~~p~~ments~~

~~Amendments~~Historically, we have seen and continue to ~~Outstanding Warrants~~see net losses, net loss from operations, negative cash flow from operating activities, and ~~Extension~~historical working capital deficits as we continue through a period of ~~Existing Debentures~~

~~In March 2017,~~rapid growth. The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if we ~~entered into amendments with the holders of certain outstanding warrants issued on April 17, 2015 and July 30, 2015~~were unable to eliminate certain anti-dilution provisions in such warrants, which caused us to reflect an associated liability of $5.3 million on our balance sheet as of December 31, 2016. Such amendments were contingent upon and did not take effect until 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 and another accredited 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 the agreement 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 the anti-dilution provision resulted in the write-off of $6.9 million of the warrant liability as of 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 6 shares of issued and outstanding common stock converted into 1 share of common stock. Proportionate voting rights and other rights of common stock holders were not affected by the reverse stock split. No fractional shares of common stock were issuedcontinue 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,~~going concern. We have alleviated substantial doubt by both entering into contracts for additional revenue-generating health plan customers and expanding 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 were not affected by the reverse stock split. The common stockOntrak program within existing health plan customers. To support this increased demand for services, we invested and will continue to ~~trade under~~invest in additional headcount needed to support the ~~symbol "CATS."~~

~~All stock options~~anticipated growth. Additional

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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 ~~warrants~~new members.

We have a growing customer base and believe we are able to ~~purchase common stock outstanding~~fully scale our operations to service the contracts and ~~our common stock reserved for issuance under our equity incentive~~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 ~~immediately prior to~~than budgeted, increase 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~~size of the ~~reverse stock split.~~

~~Public Offering~~

~~On April 25, 2017,~~effective outreach pool by more than we ~~entered into an underwriting agreement~~anticipate, decide to invest in new products or seek out additional growth opportunities, we would consider financing these additional opportunities with ~~Joseph Gunnar & Co., LLC~~ ~~(“Joseph Gunnar”), as underwriter in connection with~~either a ~~public offering~~debt or equity financing.

Cash Flows

The following table sets forth a summary of our 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.

~~Pursuant to the underwriting agreement, we issued to the underwriter a warrant~~cash flows for the ~~purchase~~periods indicated (in thousands):


	Six Months Ended June 30,
	2020		2019
Net cash used in operating activities	$	(3,550)	$	(5,955)
Net cash used in investing activities	(614)		—
Net cash provided by financing activities	3,204		9,852
Net (decrease) increase in cash and restricted cash	$	(960)	$	3,897

We used $3.6 million of ~~an aggregate of 156,250 shares of common stock for an aggregate purchase price of $100. The exercise price of~~cash from operating activities during 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 dated April 25, 2017, we~~ granted 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.

~~Operations~~

~~We currently operate our On~~~~Trak~~ 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~~six months ended ~~September~~June 30, ~~2017 compared to the three and nine months ended September 30, 2016:~~

~~Summary of Consolidated Operating Results~~

~~Loss from operations before provision for income taxes for the three and nine months ended September 30, 2017 was $3.1 million and $10.9 million,~~2020 compared with ~~a net loss of $7.4~~$6.0 million and $16.4 million for the same periods in 2016, respectively. The difference primarily relates to the change in fair value of warrant liability and derivative liability for the three and nine months ended September 30, 2017, compared to the same periods in 2016.

~~Revenues~~

~~During the~~ ~~nine months ended September 30, 2017, we have expanded On~~~~Trak~~ for one customer into two new lines of business, another customer expanded into their largest state by membership, and launched 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 primarily impact future quarters. These expansions were offset to some extent by two customers exiting certain health exchange and Medicaid markets, and one customer suspending new enrollments. Overall, there was a net increase in the number of patients enrolled in our solutions compared withduring the same period in ~~2016. Enrolled members as of September 30, 2017 was 33% greater than September 30, 2016. Recognized revenue decreased by $141,000 and increased by $1.4~~2019. The $2.4 million ~~or (11)% and 42%, for~~decrease in net cash used in operating activities during the ~~three and nine~~six months ended ~~September~~June 30, ~~2017, compared with~~2020 primarily relates to higher revenue in the same periods in 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 the2020 period ~~of enrollment. Deferred revenue increased by $1.7 million~~resulting 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 $411,000 and $979,000 for the three and nine months ended September 30, 2017, compared with the same periods in 2016, respectively, relates primarily to 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. In addition, we hire staff~~members, and increased non-cash expenses in ~~preparation for anticipated future customer contracts~~the six months ended June 30, 2020 such as payment in kind interest and ~~corresponding increases~~stock-based compensation expense as compared to the same period in ~~members eligible for On~~~~Trak~~~~. The costs for such staff are included~~2019.

Net cash used in ~~Cost of Healthcare Services during training and ramp-up periods.~~

~~General and Administrative Expenses~~

~~Total~~ ~~general and administrative expense increased by $379,000 and $1.6~~investing activities was $0.6 million for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017, compared with the same periods in 2016. The increase was due primarily to an increase in salaries to service our contracts~~2020 and ~~increasing number of enrolled members, investments in key personnel to support future growth, and investor relations services during the nine months ended September 30, 2017.~~

~~Depreciation and Amortization~~

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

~~Interest Expense~~

~~Interest expense~~ decreased by $3.2 million and $731,000 for the three and nine months ended September 30, 2017, respectively, compared with the same periods in 2016. The decrease is primarily related to the value of the warrants issued during the third quarter of 2016 for the 2016 Convertible Debentures as well as the amortization of the debt discount on the 2016 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. 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~~

~~The change in fair value for the warrants was $1.4 million and $1.1 million for the three and nine months ended September 30, 2017, respectively, compared with the same periods in 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 quarter-end until they are completely settled or expire.~~

~~Change in fair value of derivative liability~~

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

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Liquidity~~

As of November 13, 2017, we had a balance of approximately $5.9 million cash on hand. We had working capital of approximately $2.5 million 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 $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, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

~~Cash Flows~~

We ~~used $5.3 million of cash for operating activities during the nine months ended September 30, 2017 compared with $4.5 million~~none in the same period ~~in 2016.~~of 2019. The ~~increase in~~$0.6 million of net 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, 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 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 either states resolving a previous data extraction issue. Significant non-cash adjustments to operatinginvesting activities for the ~~nine~~six months ended ~~September~~June 30, 2017 included a loss on conversion of convertible debentures of $1.4 million, a fair value adjustment on warrant liability of $1.8 million, and amortization of debt discount and issuance costs of $3.3 million2020 was primarily related to ~~the January 2017 convertible debenture.~~

~~Capital expenditures for the~~ ~~nine months ended September 30, 2017 were not material.~~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, ~~upgrade~~increase equipment to support our increased number of enrolled members, and enhance the reliability and security of our systems. These future capital expenditure requirements will also depend upon many factors, including obsolescence or failure of our systems, progress with expanding the adoption of our solutions, ~~and~~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 $11.7 million for the nine months ended September 30, 2017, compared with~~ net cash provided by financing activities ~~of $5.5~~was $3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively. Cash~~2020 compared with $9.9 million for the six months ended June 30, 2019. Net cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017 consisted~~2020 was primarily related to $3.3 million of proceeds received from stock option exercises, partially offset by $0.1 million of payments on finance leases. Net cash provided by financing activities of $9.9 million for the six months ended June 30, 2019 was primarily related to $7.5 million of gross proceeds from the issuance of ~~common stock from the public offering~~debt, $1.5 million of ~~$16.5 million, the gross~~ proceeds from ~~the convertible debenture provided by Acuitas Group Holdings, LLC (“Acuitas”), one hundred percent (100%)~~stock option exercises and $1.0 million of ~~which is owned by Terren S. Peizer, Chairman and Chief Executive Officer~~proceeds from warrant exercises.

As a result 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 $6.9 million inabove, our cash and cash equivalents, ~~at September~~including restricted cash of $0.4 million, as of June 30, ~~2017.~~

2020 was $13.1 million.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

There were no material changes in our contractual obligations and commitments outside of the ordinary course of business during the six months ended June 30, 2020 from the contractual obligations and commitments reported in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 16, 2020.

~~As discussed above, we currently expend cash at a rate~~

Table of ~~approximately $~~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, however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

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OFF BALANCE SHEET ARRANGEMENTS

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of ~~September 30, 2017,~~facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had ~~no off-balance sheet arrangements.~~

engaged in those types of relationships.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

~~The~~

See Note 1 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of the 2019 Form 10-K, and “Critical Accounting Policy and Estimates” in Part II, Item 7 of the 2019 Form 10-K for a discussion of the significant accounting policies 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~~methods used 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 estimationpreparation of the ~~fair value of our derivative liabilities, and share-based compensation expense, involve our most significant judgments and estimates that are material to our~~Company’s condensed consolidated financial statements. ~~They are discussed further below.~~

~~Warrant Liabilities~~

WeThere 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 June 2017. Some 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.

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

	~~September~~ 30, ~~201~~7
~~Expected volatility~~		~~93.56~~	%
~~Risk-free interest rate~~		~~1.62~~	%
~~Weighted average expected lives in years~~		~~2.54~~
~~Expected dividend~~		0	%

For the three and nine months ended September 30, 2017, we recognized a loss of $2,000 and a gain of $1.8 million, respectively, compared with a gain of $1.4 million and $673,000 for the same periods in 2016, respectively, relatedbeen no material changes to the ~~revaluation of our warrant liabilities.~~

~~In April 2017, we removed~~Company’s critical accounting policies and estimates since 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 quarter-end until they are completely settled or expire.~~

~~Derivative Liabilities~~

~~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 2016, we entered into an amendment of the July 2015 Convertible Debenture which extended the maturity date of the 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 Debentures are unsecured, bear interest at a rate of 12% per annum payable in cash or shares of common stock, subject to certain conditions, at our option, and are 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 completed a public offering, whichever comes first. In April 2017, the July 2015 Convertible Debenture was converted into 2,385,111 shares of common stock and the derivative liability was written off.

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

~~Share-based~~ ~~compensation~~ ~~expense~~

~~We account for the issuance of stock, stock options~~, and warrants for services from non-employees based on an estimate of the fair value of options and warrants issued using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, weighted average assumptions for risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield.

~~The amounts recorded in the financial statements for share-based~~ compensation expense could vary significantly if we were to use different assumptions. For example, the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. If we were to use a different volatility than the actual volatility of our stock price, there may be a significant variance in the amounts of share-based compensation expense from the amounts reported. The weighted average expected option term for the nine months ended September 30, 2017 and 2016, reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.

~~From time to time, we retain terminated employees as part-time consultants upon their resignation 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 and are 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 three and nine months ended September 30, 2017 and 2016.

~~RECENT ACCOUNTING PRONOUNCEMENTS~~

~~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. We are currently evaluating the potential impact of this standard on our consolidated financial 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.

2019 Form 10-K.

~~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 beginning 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 position or results of operations.~~

Item 3. 3. Quantitative and Qualitative Disclosures About Market Risk

Not ~~applicable~~.

applicable.

Item 4. 4. Controls and Procedures

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 ~~September~~ June 30, ~~2017.~~2020. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of ~~September~~June 30, ~~2017,~~2020, 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 o~~ver Finan~~~~cial~~over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended ~~September~~June 30, ~~2017,~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

~~PART II~~ ~~– OTHER INFORMATION~~

Item 1. 1. Legal Proceedings

~~None~~.

None.

Item 1A. Risk Factors

In evaluating us and our common stock, we urge you to carefully consider the risks, uncertainties and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which we filed with the SEC on March 16, 2020. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

Risks related to our business

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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 June 30, 2020, cash and restricted cash was $13.1 million and accumulated deficit was $345.1 million. We expect our current cash resources to cover expenses through at least the next 12 months. 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 Ontrak program within existing health plan customers. To support this increased demand for services, we invested and will continue to invest in additional headcount needed to support the anticipated growth. Additional management plans include increasing the outreach pool as well as improving our current enrollment rate. We will continue to explore ways to increase margins on both existing and new members.

We have a growing customer base and believe we are able to fully scale our operations to service the contracts and future enrollment providing leverage in these investments that 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.

We may need 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 positive cash flows and we may never become cash flow positive.

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 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 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 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
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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.

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

Our belief in the efficacy of our Ontrak solution is based on a limited experience with a relatively small number of patients. 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 outcome 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 Ontrak 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 Ontraksolutionmay not become widely accepted, which could limit our growth.

Our ability to achieve further marketplace acceptance for our Ontrak 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 Ontrak 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 oursolutionsor failure to attain our publicly disclosedmilestonescould adversely affect market acceptance and have a material adverse effect on our stock price.

Disappointing results, later-than-expected press release announcements or termination of evaluations, pilot programs or commercial Ontrak 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), 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 outbreak of COVID-19. As a result of measures imposed by the governments in affected regions, businesses and schools have been suspended due to quarantines intended to contain this outbreak and many people have been forced to work from home in those areas. As a result of the global pandemic, trade and business activities around the world have been adversely affected, international stock and commodity markets have fluctuated widely and many regions are exhibiting signs of economic recession. Several programs have been enacted in different countries in efforts to alleviate rising levels of unemployment and economic dislocation created by significantly reduced levels of social and business activity, although their longer term effectiveness is still uncertain. We are still 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-019 or its consequences, including downturns in business sentiment generally or in our sector in 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
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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 ourrevenuesare attributable tofourlarge customers, any or all of which mayterminate our servicesat any time.

Four customers accounted for an aggregate of 93% and 82% of our total revenue for the three months ended June 30, 2020 and 2019, respectively, and four customers accounted for an aggregate of 92% and 81% of our revenue for the six months ended June 30, 2020 and 2019, respectively. Also, four customers represented an aggregate of 99% and 89% of our total accounts receivable as of June 30, 2020 and December 31, 2019, respectively. 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 reductions.

We depend on key personnel, the loss of which could impact the ability to manage our business.

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 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
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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 oursolutions, our revenue and prospects for profitability will be harmed.

Our future revenue growth will depend in part upon our ability to contract with health plans and other insurance payors for our Ontrak 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 Ontrakcontracts, which could result in pricing levels insufficient to cover our costs or ensure profitability.

Many of our Ontrak 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 may be subject to certain limitations.

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 change under Section 382 as a result of events in the past or the issuance of shares of common stock, or a combination thereof. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.

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

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
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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

Confidentiality agreements with employees,treating physiciansand 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 ourhealthcareindustry

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. 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. 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.

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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.

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.

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.
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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 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 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.

If our providers or experts are characterized as employees, we would be subject to employment and withholding liabilities.
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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 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). ~~Risk Factors~~

~~None.~~

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 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 Ontrak 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 Ontrak 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 the 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. While certain information covered by HIPAA is exempt from the applicability of the CCPA, 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.

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In 2019, New York passed a law known as the SHIELD Act, which expands data breach reporting obligations and requires companies to have robust data security programs in place. 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.

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 (including health information) established in and outside of the EEA, 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, 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 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.

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.

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 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

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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 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 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 “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 to an additional $10.0 million in principal amount of 2024 Notes during the period from the Closing Date until September 24, 2021.

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;

•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.

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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. 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 common stock

Our common stockhas limited trading volume, and it is therefore susceptible tohighpricevolatility.

Our common stock is listed on the NASDAQ Capital Market under the symbol “OTRK” 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.

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Failure to maintain effective internal controls could adversely affect our operating results and the market for our common stock.

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% of ouroutstanding commonstock isbeneficially ownedby our chairman and chief executive officer, who has the ability to substantially influence the election of directors and other matters submitted to stockholders.

10,393,094 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 approximately56% of our outstanding shares of common stock. As a result, he has and is expected to continue to have the ability to significantly 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 Ontrak solution, announcements regarding new or discontinued Ontrak 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.

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 June 30, 2020, approximately 9.2 million shares of our common stock are held by our affiliates and may be sold pursuant to an effective registration statement or in accordance 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 June 30, 2020, we had outstanding options to purchase 3,834,777 shares of our common stock and warrants to purchase 1,539,926 shares of our common stock at prices ranging from $1.80 to $105.60 per share. 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. Further, any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors, including contractual restrictions to which we may be subject, and will be at the discretion of our Board of Directors.

Afewof 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.

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The exercise of some or all of our outstanding warrants could significantly dilute the ownership interests of our existing stockholders. As of June 30, 2020, we had outstanding warrants to purchase an aggregate of 1,539,926 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. 4. Mine Safety Disclosures.

Not

Not applicable.

Item 5. Other Information

None.

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Item 6. 6. Exhibits


Exhibit No.						Description





3.1						Certificate of Amendment of Certificate of Incorporation, filed July 6, 2020 (incorporated herein by reference to Exhibit ~~31.1~~* 3.1 to the Company's Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 6, 2020).
3.2						Amended and Restated Bylaws of Ontrak, Inc., effective July 6, 2020 (incorporated herein by reference to Exhibit 3.2 to the Company's Form 8-K filed with the SEC on July 6, 2020).
10.1						First Amendment to Note Purchase Agreement, dated as of June 30,2020, by and among Catasys, Inc., the Purchaser signatory thereto and Goldman Sachs Specialty Lending Group, L.P. (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed with the SEC on July 1, 2020).
31.1*						Certification ofby the Chief Executive Officer, pursuant to Rule 13-a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002.
~~Exhibit 31.2~~* 31.2*						Certification ofby the Chief Financial Officer, pursuant to Rule 13-a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002.
~~Exhibit 32.1~~32.1***						Certification ofby the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002.
~~Exhibit 32.2~~32.2***						Certification ofby the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002.
~~101.INS~~* 101.INS*						XBRL Instance Document
~~101.SCH~~* 101.SCH*						Inline XBRL Taxonomy Extension Schema Document
~~101.CAL~~* 101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~101.DEF~~* 101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
~~101.LAB~~* 101.LAB*						Inline XBRL Taxonomy Extension ~~Labels~~ Label Linkbase Document
~~101.PRE~~* 101.PRE*						Inline 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)

_____________________

* f~~iled~~filed herewith.

** furnished herewith.

~~SIGNATURES~~

Table of Contents

SIGNATURES

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

	~~CATASYS, INC.~~
			ONTRAK, INC.

Date: ~~November 14, 2017~~ August 5, 2020			By:	/s/ TERREN S. PEIZER
				Terren S. Peizer
		Chief Executive Officer (Principal Executive Officer)

Date: August 5, 2020			By:	/s/ BRANDON H. LAVERNE
~~Date:~~ ~~November 14, 2017~~			~~By:~~	/~~s/ CHRISTOPHER SHIRLEY~~
		~~Christopher Shirley~~
		Brandon H. LaVerne Chief Financial Officer (Principal Financial and Accounting Officer)

	(unaudited)
(In thousands, except for number of shares)	September 30,			December 31,
	2017			2016
ASSETS
Current assets
Cash and cash equivalents	$	6,926		$	851
Receivables, net of allowance for doubtful accounts of $277 and $0, respectively		709			1,052
Prepaids and other current assets		307			420
Total current assets		7,942			2,323
Long-term assets
Property and equipment, net of accumulated depreciation of $1,751 and $1,620, respectively		553			410
Deposits and other assets		371			371
Total Assets	$	8,866		$	3,104

LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities
Accounts payable	$	806		$	870
Accrued compensation and benefits		901			2,089
Deferred revenue		3,180			1,525
Other accrued liabilities		579			575
Short term debt, related party, net of discount $0 and $216, respectively		-			9,796
Derivative liability		-			8,122
Total current liabilities		5,466			22,977
Long-term liabilities
Deferred rent and other long-term liabilities		49			117
Capital leases		6			31
Warrant liabilities		41			5,307
Total Liabilities		5,562			28,432

Stockholders' equity/(deficit)
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock, $0.0001 par value; 500,000,000 shares authorized; 15,889,171 and 9,214,743 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		2			1
Additional paid-in-capital		293,945			254,390
Accumulated deficit		(290,643	)		(279,719	)
Total Stockholders' Equity/(Deficit)		3,304			(25,328	)
Total Liabilities and Stockholders' Equity/(Deficit)	$	8,866		$	3,104

	Three Months Ended						Nine Months Ended
(In thousands, except per share amounts)	September 30,						September 30,
	2017			2016			2017			2016
Revenues
Healthcare services revenues	$	1,195		$	1,336		$	4,682		$	3,287

Operating expenses
Cost of healthcare services		1,664			1,253			4,361			3,381
General and administrative		2,575			2,195			8,144			6,518
Depreciation and amortization		47			38			131			102
Total operating expenses		4,286			3,486			12,636			10,001

Loss from operations		(3,091	)		(2,150	)		(7,954	)		(6,714	)

Other income		16			15			44			90
Interest expense		(1	)		(3,215	)		(3,408	)		(4,139	)
Loss on conversion of note		-			-			(1,356	)		-
Loss on issuance of common stock		-			-			(145	)		-
Change in fair value of derivative liability		-			(3,484	)		132			(6,328	)
Change in fair value of warrant liability		(2	)		1,423			1,767			673
Loss from operations before provision for income taxes		(3,078	)		(7,411	)		(10,920	)		(16,418	)
Provision for income taxes		2			2			4			7
Net Loss	$	(3,080	)	$	(7,413	)	$	(10,924	)	$	(16,425	)


Basic and diluted net loss from operations per share:	$	(0.19	)	$	(0.81	)	$	(0.84	)	$	(1.79	)

Basic weighted number of shares outstanding		15,889			9,174			13,031			9,170

				Weighted Avg.
	Shares			Exercise Price
Balance December 31, 2016		244,046		$	39.06

Granted		-		$	-
Cancelled		(193	)	$	(245.47	)

Balance March 31, 2017		243,853		$	38.90

Granted		-		$	-
Cancelled		-		$	-

Balance June 30, 2017		243,853		$	38.90

Granted		-		$	-
Cancelled		-		$	-

Balance September 30, 2017		243,853		$	38.90

	Balance at September 30, 2017


(Amounts in thousands)	Level I		Level II		Level III		Total
Certificates of deposit		106		-		-		106
Total assets		106		-		-		106

Warrant liabilities		-		-		41		41
Total liabilities		-		-		41		41

	Level III				Level III
	Warrant				Derivative
(Dollars in thousands)	Liabilities			(Dollars in thousands)	Liabilities
Balance as of December 31, 2016	$	5,307		Balance as of December 31, 2016	$	8,122
Issuance of warrants		2,405		Issuance of convertible debentures		-
Change in fair value		5,181		Change in fair value		10,596
Balance as of March 31, 2017	$	12,893		Balance as of March 31, 2017	$	18,718

Issuance (exercise) of warrants, net		269		Issuance of convertible debentures		-
Change in fair value		(6,950	)	Change in fair value		(10,728	)
Write off of warrants		(6,174	)	Write off of derivative liability		(7,990	)
Balance as of June 30, 2017	$	38		Balance as of June 30, 2017	$	-

Issuance (exercise) of warrants, net		-		Issuance of convertible debentures		-
Expiration of warrants		-		Expiration of warrants		-
Change in fair value		2		Change in fair value		-
Balance as of September 30, 2017	$	40		Balance as of September 30, 2017	$	-