10-Q

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 March 31, 2018

Commission File Number 001-31932     

_______________________

CATASYS, INC.

(Exact name of registrant as specified in its charter)

_______________________

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

11601 Wilshire Boulevard, Suite 1100, Los Angeles, California 90025

(Address of principal executive offices, including zip code)

(310) 444-4300

(Registrant's telephone number, including area code)

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

Yes   ☑          No   ☐

Indicate by check mark whether the registrant has submitted electronically 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   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “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  ☐

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   ☑

As of May 14, 2018, there were 15,913,171 shares of the registrant's common stock, $0.0001 par value, outstanding.

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			3
	ITEM 1. Financial Statements		3
		Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	3
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)	5
		Condensed Consolidated Statements of Stockholders Equity (Deficit) for the Three Months Ended March 31, 2018 (unaudited)	6
		Notes to Condensed Consolidated Financial Statements	7
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		15
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		22
	ITEM 4. Controls and Procedures		22
PART II – OTHER INFORMATION			23
	ITEM 1. Legal Proceedings		23
	ITEM 1A. Risk Factors		23
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
	ITEM 3. Defaults Upon Senior Securities		23
	ITEM 4. Mine Safety Disclosures		23
	ITEM 5. Other Information		23
	ITEM 6. Exhibits		23

In this Quarterly Report on Form 10-Q, except as otherwise stated or the context otherwise requires, the terms “the Company,” “our Company,” “we,” “us” or “our” refer to Catasys, Inc., and our wholly owned subsidiaries. Our common stock, par value $0.0001 per share, is referred to as “common stock.” 

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PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

CATASYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	(unaudited)
(In thousands, except for number of shares)	March 31,			December 31,
	2018			2017
ASSETS
Current assets
Cash and cash equivalents	$	1,354		$	4,779
Receivables, net of allowance for doubtful accounts of $0 and $476, respectively		1,211			511
Prepaids and other current assets		354			366
Total current assets		2,919			5,656
Long-term assets
Property and equipment, net of accumulated depreciation of $1,627 and $1,542, respectively		527			612
Deposits and other assets		336			336
Total Assets	$	3,782		$	6,604
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities
Accounts payable	$	734		$	980
Accrued compensation and benefits		1,036			1,177
Deferred revenue		1,689			2,914
Other accrued liabilities		1,200			578
Total current liabilities		4,659			5,649
Long-term liabilities
Deferred rent and other long-term liabilities		-			25
Capital leases		-			2
Warrant liabilities		40			30
Total Liabilities		4,699			5,706
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; 15,913,171 and 15,889,171 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		2			2
Additional paid-in-capital		294,746			294,220
Accumulated deficit		(295,665	)		(293,324	)
Total Stockholders' Equity/(Deficit)		(917	)		898
Total Liabilities and Stockholders' Equity/(Deficit)	$	3,782		$	6,604

See accompanying notes to the condensed consolidated financial statements.

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CATASYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended
(In thousands, except per share amounts)	March 31,
	2018			2017
Revenues
Healthcare services revenues	$	1,911		$	1,822
Operating expenses
Cost of healthcare services		2,287			1,365
General and administrative		3,786			2,629
Depreciation and amortization		85			39
Total operating expenses		6,158			4,033
Loss from operations		(4,247	)		(2,211	)
Other income		40			14
Interest expense		(1	)		(2,867	)
Loss on conversion of note		-			(926	)
Change in fair value of warrant liability		(10	)		(5,181	)
Change in fair value of derivative liability		-			(10,596	)
Loss from operations before provision for income taxes		(4,218	)		(21,767	)
Provision for income taxes		-			1
Net Loss	$	(4,218	)	$	(21,768	)
Basic and diluted net loss from operations per share:	$	(0.27	)	$	(2.35	)
Basic and diluted weighted number of shares outstanding		15,898			9,246

*The 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 condensed consolidated financial statements.

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CATASYS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

	Three Months Ended
(In thousands)	March 31,
	2018			2017
Operating activities:
Net loss	$	(4,218	)	$	(21,768	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		85			39
Issuance costs included in interest expense		-			2,622
Warrants issued for services		86			-
Provision for doubtful accounts		-			149
Deferred rent		(22	)		(20	)
Share-based compensation expense		328			127
Fair value adjustment on derivative liability		-			10,596
Fair value adjustment on warrant liability		10			5,181
Shares issued for services		112			117
Loss on conversion of note		-			926
Changes in current assets and liabilities:
Receivables		(700	)		(360	)
Prepaids and other current assets		12			(176	)
Deferred revenue		652			418
Accounts payable and other accrued liabilities		239			534
Net cash used in operating activities	$	(3,416	)	$	(1,615	)
Investing activities:
Purchases of property and equipment	$	-		$	(49	)
Net cash used in investing activities	$	-		$	(49	)
Financing activities:
Proceeds from bridge loan	$	-		$	1,115
Capital lease obligations		(9	)		(11	)
Net cash (used in)/provided by financing activities	$	(9	)	$	1,104
Net decrease in cash and cash equivalents	$	(3,425	)	$	(560	)
Cash and cash equivalents at beginning of period		4,779			851
Cash and cash equivalents at end of period	$	1,354		$	291
Supplemental disclosure of cash paid
Income taxes	$	-		$	39
Supplemental disclosure of non-cash activity
Common stock issued for investor relations services	$	112		$	117
Warrants issued for investor relations services	$	85		$	-

See accompanying notes to the condensed consolidated financial statements.

5

CATASYS, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(unaudited)

					Additional
(Amounts in thousands, except for number of shares)	Common Stock				Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance at December 31, 2017		15,889,171	$	2	$	294,220	$	(293,324	)	$	898
Adoption of accounting standard		-	$	-	$	-	$	1,877		$	1,877
Balance at January 1, 2018		15,889,171		2		294,220		(291,447	)		2,775
Common stock issued for outside services		24,000		-		112		-			112
Warrants issued for services		-		-		86		-			86
Share-based Compensation Expense		-		-		328		-			328
Net loss		-		-		-		(4,218	)		(4,218	)
Balance at March 31, 2018		15,913,171		2		294,746		(295,665	)		(917	)

See accompanying notes to the condensed consolidated financial statements.

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Catasys, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. Basis of Consolidation, Presentation and Liquidity

We harness proprietary big data predictive analytics, artificial intelligence and telehealth, combined with human intervention, to deliver improved member health and cost savings to health plans through integrated technology enabled treatment solutions. It is our mission to provide access to affordable and effective care, thereby improving health and reducing cost of care for people who suffer from the medical consequences of behavioral health conditions; helping these people and their families achieve and maintain better lives.

The accompanying unaudited condensed consolidated financial statements for Catasys, 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 disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto included in our most recent Annual Report on Form 10-K for the year-ended December 31, 2017, from which the balance sheet, as of December 31, 2017, has been derived.

Our ability to fund our ongoing operations is dependent on increasing the number of members that are eligible for our solutions by signing new contracts, identifying more eligible members in existing contracts, and generating fees from existing and new contracts and the success of management’s plan to increase revenue and continue to control expenses. We currently operate our OnTrak solutions in nineteen states. 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 increase enrollment and fees throughout 2018.

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. These conditions raise substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do not reflect any adjustments that might result if we were unable to continue as a going concern. We entered 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 in the additional headcount needed to support these customers launching during the first quarter of 2018.  We have had a growing customer base and are able to fully scale our operations to service the contracts and future enrollment providing leverage in these investments that is expected to result in positive cash flow by the end of 2018. Based upon this expected positive cash flow, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully and in the event we do not have enough capital to cover expense we will make the necessary and appropriate reductions in spending to remain cash flow positive.  However, if we were to 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 need to finance these options via a debt financing rather than an equity financing.

All inter-company transactions have been eliminated in consolidation.

Note 2. Summary of Significant Accounting Policies

Revenue Recognition

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties.

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The following table disaggregates our revenue by contract (in thousands):

	For the period ended March 31, 2018
	Revenue		Percentage
Commercial	$	1,100		58	%
Government		811		42	%
	$	1,911		100	%

Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.

Our Catasys contracts are generally designed to provide cash fees to us on a monthly basis, an upfront case rate, or fee for service based on enrolled members. The Company’s performance obligation is satisfied over time as the OnTrak service is provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing a continuous service to the customer. Contracts with minimum performance guarantees or price concessions include variable consideration and are subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees and price concessions. The Company has constrained revenue for expected price concessions during the period ending March 31, 2018.

 Cost of Services

Cost of healthcare services consists primarily of salaries related to our care coaches, outreach specialists 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 claims are expensed when incurred and healthcare provider claims payments are recognized in the period in which 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 OnTrak^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 of three months or less to be cash equivalents. Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents. Cash is deposited with what we believe are highly credited, quality financial institutions. The deposited cash may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. As of March 31, 2018, cash and cash equivalents exceeding federally insured limits totaled $1.2 million.

For the three months ended March 31, 2018, five customers accounted for approximately 89% of revenues (22%, 20%, 18%, 15%, 14%) and four customers accounted for approximately 83% of accounts receivable (37%, 18%, 15%, 13%).

8

Basic and Diluted Loss per Share

Basic loss per share is computed by dividing the net loss to common stockholders for the period by the weighted average number of common stock outstanding during the period. Diluted loss per share is computed by dividing the net loss for the period by the weighted average number of common stock and dilutive common equivalent shares outstanding during the period.

Common equivalent shares, consisting of 3,920,531 and 1,928,431 common shares for the three months ended March 31, 2018 and 2017, respectively, 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 Compensation

Our 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 of the Internal Revenue Code and non-qualified options (NSOs) are authorized under the 2017 Plan. We have granted stock options to executive officers, employees, members of our board of directors, and certain outside consultants. The terms and conditions upon which options become exercisable vary among grants, but option rights expire no later than ten years from the date of grant and employee and board of director awards generally vest over three to five years. As of March 31, 2018, we had 1,885,003 shares outstanding, of which 338,178 shares are vested and 692,184 shares are available for future awards under the 2017 Plan.

Share-based compensation expense attributable to operations were $328,000 and $127,000 for the three months ended March 31, 2018 and 2017, respectively.

Stock Options – Employees and Directors

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the date of grant. We estimate the fair value of share-based payment awards using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the consolidated statements of operations.

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 months ended March 31, 2018 and 2017, 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.

There were no options granted to employees and directors during the three months ended March 31, 2018 and 2017, respectively, under the 2017 Plan. Employee and director stock option activity for the three months ended March 31, 2018 are as follows:

				Weighted Avg.
	Shares			Exercise Price
Balance December 31, 2017		1,885,383		$	11.46
Granted		-			-
Cancelled		(380	)		683.91
Balance March 31, 2018		1,885,003		$	11.32

The expected volatility assumptions have been based on the historical and expected volatility of our stock, measured over a period generally commensurate with the expected term. The weighted average expected option term for the three months ended March 31, 2018 and 2017, reflects the application of the simplified method prescribed in 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.

9

As of March 31, 2018, there was $4.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2017 Plan. That cost is expected to be recognized over a weighted-average period of approximately 3.26 years.          

Stock Options and Warrants – Non-employees

We account for the issuance of options and warrants for services from non-employees by estimating the fair value of warrants issued using 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 life of the option or warrant, and the expected volatility of our stock and 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 months ended March 31, 2018 and 2017, respectively. There was no share-based compensation expense relating to stock options and warrants recognized for the non-employees for the three months ended March 31, 2018 and 2017, respectively.

There were 24,000 and 0 warrants issued in exchange for investor relations services during the three months ended March 31, 2018 and 2017, respectively. Generally, the costs associated with warrants issued for services are amortized to the related expense on a straight-line basis over the related service periods.

There were 2,035,528 and 1,684,578 warrants outstanding as of March 31, 2018 and 2017, respectively.

Common Stock

There were 24,000 and 14,492 shares of common stock issued in exchange for investor relations services during the three months ended March 31, 2018 and 2017, respectively. 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 March 31, 2018.  As such, we have not recorded a provision for income tax for the period ended March 31, 2018.  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 March 31, 2018 should be realized.   

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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’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 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’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at March 31, 2018 for assets and liabilities measured at fair value:

	Balance at March 31, 2018
(Amounts in thousands)	Level I		Level II		Level III		Total
Certificates of deposit		71		-		-		71
Total assets		71		-		-		71
Warrant liabilities		-		-		40		40
Total liabilities		-		-		40		40

Carrying amounts reported in the condensed consolidated balance sheet of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their relatively short maturity. The fair value of borrowings is not considered to be significantly different from its carrying amount because stated rates for such debt reflect current market rates and conditions.

Financial instruments classified as Level III in the fair value hierarchy as of March 31, 2018, represent our liabilities measured at market value on a recurring basis which include warrant liabilities and derivative liabilities resulting from recent debt and equity financings. In accordance with current accounting rules, the warrant liabilities and derivative liabilities are being marked-to-market each quarter-end until they are completely settled or expire. The warrants and derivative liabilities are valued using the Black-Scholes option-pricing model, using both observable and unobservable inputs and assumptions consistent with those used in our estimate of fair value of employee stock options. See Warrant Liabilities below.  

The following table summarizes our fair value measurements using significant Level III inputs, and changes therein, for the three months ended March 31, 2018:

	Level III
	Warrant
(Dollars in thousands)	Liabilities
Balance as of December 31, 2017	$	30
Issuance of warrants		-
Change in fair value		10
Balance as of March 31, 2018	$	40

Property and Equipment

Property and equipment 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.

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Warrant Liabilities

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

	March 31, 2018
Expected volatility		102.90%
Risk-free interest rate		2.27%
Weighted average expected lives in years		2.04
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, June 2017, and February 2018. 11,049 of our warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in the 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 months ended March 31, 2018 and 2017, we recognized a loss of $10,000 and $5.2 million, respectively, related to the revaluation of our warrant liabilities.

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), 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 have selected the modified retrospective approach as our transition method under ASU 2016-10 and the financial impact to the financial statements was to decrease retained earnings and deferred revenue by $1.9 million effective January 1, 2018 (Please see footnote 3).

In February 2016, FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the expected impact that the standard could have on our condensed consolidated financial statements and related disclosures.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements and related disclosures.

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in this update are intended to simplify the accounting for certain equity linked financial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the new guidance, a down round feature will no longer need to be considered when determining whether certain financial instruments or embedded features should be classified as liabilities or equity instruments. That is, a down round feature will no longer preclude equity classification when assessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosure requirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU should not have a material impact on our condensed consolidated financial statements.

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

Note 3. ASC 606

        In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

We adopted ASC 606 effective January 1, 2018 using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows (in thousands): 

	Balance at December 31, 2017		Adjustments Due to Adoption of ASC606	Balance at January 1, 2018
Balance Sheet
Liabilities
Deferred revenue	(2,914	)	1,877	(1,037	)
Equity
Retained earnings	(293,324	)	1,877	(291,447	)

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In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows (in thousands): 

	For the period ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
Income Statement
Revenues
Healthcare services revenues	$	1,911		$	1,152		$	759
Net loss		(4,218	)		(4,977	)		759

Note 4. Restatement of Financial Statements 

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

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements, including the related notes, and the other financial information included elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report and our annual report filed on Form 10-K for the year ended December 31, 2017.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for our stock and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the 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, 2017 and other reports we filed with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We assume no obligation and do not intend to update these forward looking statements, except as required by law.

OVERVIEW

General

We harness proprietary big data predictive analytics, artificial intelligence and telehealth, combined with human intervention, to deliver improved member health and cost savings to health plans through integrated technology enabled treatment solutions. It is our mission to provide access to affordable and effective care, thereby improving health and reducing cost of care for people who suffer from the medical consequences of behavioral health conditions; helping these people and their families achieve and maintain better lives.

Our OnTrak solution--contracted with a growing number of national and regional health plans--is designed to treat members with behavioral conditions that cause or exacerbate co-existing medical conditions. We have 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 matched with data driven motivational and consumer engagement technologies.

OnTrak integrates evidence-based medical and psychosocial interventions along with care coaching in a 52-week outpatient solution. The program is currently improving member health and, at the same time, is demonstrating reduced inpatient and emergency room utilization, driving a more than 54 percent reduction in total health insurers' costs for enrolled members. OnTrak is available to members of several leading health plans 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.

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Operations

We currently operate our OnTrak solutions in Connecticut, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Missouri, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We provide services to commercial (employer funded), managed Medicare Advantage, and managed Medicaid and dual 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 2018. 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 months ended March 31, 2018 compared to the three months ended March 31, 2017:

	Three Months Ended
(In thousands, except per share amounts)	March 31,
	2018			2017
Revenues
Healthcare services revenues	$	1,911		$	1,822
Operating expenses
Cost of healthcare services		2,287			1,365
General and administrative		3,786			2,629
Depreciation and amortization		85			39
Total operating expenses		6,158			4,033
Loss from operations		(4,247	)		(2,211	)
Other income		40			14
Interest expense		(1	)		(2,867	)
Loss on conversion of note		-			(926	)
Change in fair value of warrant liability		(10	)		(5,181	)
Change in fair value of derivative liability		-			(10,596	)
Loss from operations before provision for income taxes		(4,218	)		(21,767	)
Provision for income taxes		-			1
Net Loss	$	(4,218	)	$	(21,768	)

Summary of Consolidated Operating Results

Loss from operations before provision for income taxes for the three months ended March 31, 2018 was $4.2 million, compared with a net loss of $21.8 million for the same period in 2017. The difference primarily relates to the decrease in interest expense, the decrease in the loss on conversion of note, the decrease in the loss from change in fair value of warrant liability, and the decrease in the loss from change in fair value of the derivative liability for the three months ended March 31, 2018, compared to the same period in 2017.

Revenues

During the three months ended March 31, 2018, we have launched enrollment with two new health plans in Illinois and Tennessee, expanded with two of our current health plans, and have continued to increase enrollment, which has resulted in a net increase in the number of patients enrolled in our solutions compared with the same period in 2017, this was offset by the timing of billing for certain members who we bill on a per claim basis. For the three months ended March 31, 2018, net enrollment increased by approximately 74% over the same period in 2017. Recognized revenue increased by $89,000, or 5%, for the three months ended March 31, 2018, compared with the same period in 2017.

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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 $922,000 for the three months ended March 31, 2018, compared with the same periods in 2017, 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 in preparation for anticipated future customer contracts and corresponding increases in members eligible for OnTrak. The costs for such staff are included in cost of healthcare services during training and ramp-up periods. 

General and Administrative Expenses

Total general and administrative expense increased by $1.2 million for the three months ended March 31, 2018, compared with the same period in 2017. The increase in general and administrative expenses was primarily related to investments in data science, IT and software development to support growth and drive efficiency. In addition, there was an increase of approximately $200,000 in non-cash share based compensation expense during the first quarter of 2018 related to the issuance of stock options in the fourth quarter of 2017 which are being amortized over the related vesting periods.

Interest Expense

Interest expense decreased by $2.9 million for the three months ended March 31, 2018, compared with the same period in 2017. The decrease relates to the issuance of our convertible debentures and warrants issued in connection with those convertible debentures in the 2017 period. The majority of these instruments were either converted to equity or paid in full in April 2017 and as a result there was no significant expense for the three months ended March 31, 2018.

Loss of conversion of note

Loss on conversion of note relates to the conversion of a portion of the December 2016 Convertible Debentures for the three months ended March 31, 2017. No such conversion occurred for the same period during 2018.

Change in fair value of warrant liability

We have issued warrants to purchase common stock in February 2012, April 2015, July 2015, August 2016, December 2016, January 2017, February 2017, March 2017, April 2017, and February 2018. 11,049 warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in the warrants that protect the holders from declines in our stock price and a requirement to deliver registered shares upon exercise of the warrants, which is considered outside our control.  The warrants are marked-to-market each reporting period, using the Black-Scholes pricing model, until they are completely settled or expire.

The decrease in the loss from change in fair value for the warrants was $5.2 million for the three months ended March 31, 2018 compared with the same period in 2017.

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 $10.6 million for the three months ended March 31, 2018, compared with the same periods in 2017. 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.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As of May 14, 2018, we had a balance of approximately $1.5 million cash on hand. We had a working capital deficit of approximately $1.5 million as of March 31, 2018. 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 $1.1 million per month.  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.

Our ability to fund our ongoing operations is dependent on increasing the number of members that are eligible for our solutions by signing new contracts, identifying more eligible members in existing contracts, and generating fees from existing and new contracts and the success of management’s plan to increase revenue and continue to control expenses. We currently operate our OnTrak solutions in nineteen states. 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 increase enrollment and fees throughout 2018.

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. These conditions raise substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do not reflect any adjustments that might result if we were unable to continue as a going concern. We entered 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 in the additional headcount needed to support these customers launching during the first quarter of 2018.  We have had a growing customer base and are able to fully scale our operations to service the contracts and future enrollment providing leverage in these investments that is expected to result in positive cash flow by the end of 2018. Based upon this expected positive cash flow, we believe we will have enough capital to cover expenses through at least the next twelve months. We will continue to monitor liquidity carefully and in the event we do not have enough capital to cover expense we will make the necessary and appropriate reductions in spending to remain cash flow positive.  However, if we were to 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 need to finance these options via a debt financing rather than an equity financing.

Cash Flows

We used $3.4 million of cash from operating activities during the three months ended March 31, 2018 compared with $1.6 million in the same period in 2017. The increase in cash used in operating activities reflects the increase in the number of enrolled members and the addition of staff in preparation for anticipated future increases in members eligible for OnTrak.

There were no capitalized capital expenditures for the three months ended March 31, 2018. We anticipate that capital expenditures will increase in the future as we replace our computer systems that are reaching the end of their useful lives, upgrade equipment to support our increased number of enrolled members and enhance the reliability and security of our systems. These future capital expenditure requirements will depend upon many factors, including obsolescence or failure of our systems, progress with expanding the adoption of our solutions, 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.

There was $9,000 net cash used by financing activities for the three months ended March 31, 2018, compared with net cash provided by financing activities of $1.1 million for the three months ended March 31, 2017. Cash provided by financing activities for the three months ended March 31, 2018 consisted of the reduction of capital leases by $9,000, leaving a balance of $1.4 million in cash and cash equivalents as of March 31, 2018.

As discussed above, we currently expend cash at a rate of approximately $1.1 million per month. We also anticipate cash inflow to increase during 2018 as we continue to service our executed contracts and sign new contracts. We expect our current cash resources to cover our operations through at least the next twelve months; however, delays in cash collections, revenue, or unforeseen expenditures could impact this estimate.

OFF BALANCE SHEET ARRANGEMENTS

As of March 31, 2018, we had no off-balance sheet arrangements.

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CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. Our actual results may differ from these estimates.

We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein, with the audit committee of our Board of Directors. We believe our accounting policies related to the fair value of warrants, revenue recognition, and share-based compensation expense, involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.

Warrant Liabilities

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

	March 31, 2018
Expected volatility		102.90%
Risk-free interest rate		2.27%
Weighted average expected lives in years		2.04
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, June 2017, and February 2018. 11,049 of our warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in the 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 months ended March 31, 2018 and 2017, we recognized a loss of $10,000 and $5.2 million, respectively, related to the revaluation of our warrant liabilities.

Revenue Recognition

        In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

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We adopted ASC 606 effective January 1, 2018 using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows (in thousands): 

	Balance at December 31, 2017		Adjustments Due to Adoption of ASC606	Balance at January 1, 2018
Balance Sheet
Liabilities
Deferred revenue	(2,914	)	1,877	(1,037	)
Equity
Retained earnings	(293,324	)	1,877	(291,447	)

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows (in thousands):

	For the period ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
Income Statement
Revenues
Healthcare services revenues	$	1,911		$	1,152		$	759
Net loss		(4,218	)		(4,977	)		759

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 three months ended March 31, 2018 and 2017, respectively, 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 months ended March 31, 2018 and 2017, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-10, Revenue from Contracts with Customers (Topic 606), 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 have selected the modified retrospective approach as our transition method under ASU 2016-10 and the financial impact to the financial statements was to decrease retained earnings and deferred revenue by $1.9 million effective January 1, 2018.

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In February 2016, FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the expected impact that the standard could have on our condensed consolidated financial statements and related disclosures.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements and related disclosures.

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in this update are intended to simplify the accounting for certain equity linked financial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the new guidance, a down round feature will no longer need to be considered when determining whether certain financial instruments or embedded features should be classified as liabilities or equity instruments. That is, a down round feature will no longer preclude equity classification when assessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosure requirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU should not have a material impact on our condensed consolidated financial statements.

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

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.     Controls and Procedures

Disclosure Controls 

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 March 31, 2018. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of March 31, 2018, 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 over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22

PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

None.

Item 1A.     Risk Factors

 None.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

In February 2018, we issued 24,000 restricted shares of common stock to a consultant for investor relations services to be performed beginning in October 2017 and ending April 2018. These securities were issued without registration pursuant to the exemption afforded by Section 4(2) of the Securities Act of 1933, as a transaction by us not involving a public offering.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information

None.

Item 6.     Exhibits

Exhibit 10.1#	Amended Employment Agreement, by and between the Company and Mr. Richard A. Anderson dated April 10, 2018, incorporated by reference to Exhibit 10.1 of Catasys Inc.’s Form 8-K filed with the Securities and Exchange Commission on April 16, 2018.
Exhibit 31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation
101.DEF*	XBRL Taxonomy Extension Definition
101.LAB*	XBRL Taxonomy Extension Labels
101.PRE*	XBRL Taxonomy Extension Presentation

* filed herewith.

# Management contract or compensatory plan or arrangement.

23

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.
Date:   May 15, 2018	By:	/s/ TERREN S. PEIZER
		Terren S. Peizer
		Chief Executive Officer (Principal Executive Officer)
Date:   May 15, 2018	By:	/s/ CHRISTOPHER SHIRLEY
		Christopher Shirley
		Chief Financial Officer (Principal Financial and Accounting Officer)

24

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Terren S. Peizer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Catasys, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 15, 2018	/s/ TERREN S. PEIZER
	Terren S. Peizer
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Christopher Shirley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Catasys, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 15, 2018	/s/ CHRISTOPHER SHIRLEY
	Christopher Shirley
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Catasys, Inc. (the “Company) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Terren S. Peizer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ TERREN S. PEIZER	May 15, 2018
Terren S. Peizer	Date
Chief Executive Officer
(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Catasys, Inc. (the “Company) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Christopher Shirley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ CHRISTOPHER SHIRLEY	May 15, 2018
Christopher Shirley	Date
Chief Financial Officer
(Principal Financial and Accounting Officer)

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2018	May 14, 2018
Document Information [Line Items]
Entity Registrant Name	CATASYS, INC.
Entity Central Index Key	0001136174
Trading Symbol	cats
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		15,913,171
Document Type	10-Q
Document Period End Date	Mar. 31, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Current assets
Cash and cash equivalents	$ 1,354	$ 4,779
Receivables, net of allowance for doubtful accounts of $0 and $476, respectively	1,211	511
Prepaids and other current assets	354	366
Total current assets	2,919	5,656
Long-term assets
Property and equipment, net of accumulated depreciation of $1,627 and $1,542, respectively	527	612
Deposits and other assets	336	336
Total Assets	3,782	6,604
Current liabilities
Accounts payable	734	980
Accrued compensation and benefits	1,036	1,177
Deferred revenue	1,689	2,914
Other accrued liabilities	1,200	578
Total current liabilities	4,659	5,649
Long-term liabilities
Deferred rent and other long-term liabilities		25
Capital leases		2
Warrant liabilities	40	30
Total Liabilities	4,699	5,706
Stockholders' equity/(deficit)
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; no shares issued and outstanding	0	0
Common stock, $0.0001 par value; 500,000,000 shares authorized; 15,913,171 and 15,889,171 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	2	2
Additional paid-in-capital	294,746	294,220
Retained earnings	(295,665)	(293,324)
Total Stockholders' Equity/(Deficit)	(917)	898
Total Liabilities and Stockholders' Equity/(Deficit)	$ 3,782	$ 6,604

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Receivables, allowance for doubtful accounts	$ 0	$ 476
Property and equipment, accumulated dereciation	$ 1,627	$ 1,542
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	50,000,000	50,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized (in shares)	500,000,000	500,000,000
Common stock, shares issued (in shares)	15,913,171	15,889,171
Common stock, shares outstanding (in shares)	15,913,171	15,889,171

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands		3 Months Ended
		Mar. 31, 2018	Mar. 31, 2017
Revenues:
Healthcare services revenues		$ 1,911,000	$ 1,822,000
Operating expenses
Cost of healthcare services		2,287,000	1,365,000
General and administrative		3,786,000	2,629,000
Depreciation and amortization		85,000	39,000
Total operating expenses		6,158,000	4,033,000
Loss from operations		(4,247,000)	(2,211,000)
Other income		40,000	14,000
Interest expense		(1,000)	(2,867,000)
Loss on conversion of note			(926,000)
Change in fair value of warrant liability		(10,000)	(5,181,000)
Change in fair value of derivative liability			(10,596,000)
Loss from operations before provision for income taxes		(4,218,000)	(21,767,000)
Provision for income taxes		0	1,000
Net Loss		$ (4,218,000)	$ (21,768,000)
Basic and diluted net loss from operations per share: (in dollars per share)		$ (0.27)	$ (2.35)
Basic and diluted weighted number of shares outstanding (in shares)	[1]	15,898	9,246

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

XML

Condensed Consolidated Statements of Operations (Unaudited) (Parentheticals)		3 Months Ended
	Apr. 25, 2017	Mar. 31, 2017
Reverse Stock Split [Member]
Reverse stock split	6	6

XML

Condensed Consolidated Statement of Cash Flows (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Operating activities:
Net loss	$ (4,218,000)	$ (21,768,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	85,000	39,000
Issuance costs included in interest expense		2,622,000
Issuance of stock and warrants	112,000	117,000
Provision for doubtful accounts		149,000
Deferred rent	(22,000)	(20,000)
Share-based compensation expense	328,000	127,000
Fair value adjustment on derivative liability		10,596,000
Fair value adjustment on warrant liability	10,000	5,181,000
Loss on conversion of note		926,000
Changes in current assets and liabilities:
Receivables	(700,000)	(360,000)
Prepaids and other current assets	12,000	(176,000)
Deferred revenue	652,000	418,000
Accounts payable and other accrued liabilities	239,000	534,000
Net cash used in operating activities	(3,416,000)	(1,615,000)
Investing activities:
Purchases of property and equipment		(49,000)
Net cash used in investing activities		(49,000)
Financing activities:
Proceeds from bridge loan		1,115,000
Capital lease obligations	(9,000)	(11,000)
Net cash (used in)/provided by financing activities	(9,000)	1,104,000
Net decrease in cash and cash equivalents	(3,425,000)	(560,000)
Cash and cash equivalents at beginning of period	4,779,000	851,000
Cash and cash equivalents at end of period	1,354,000	291,000
Supplemental disclosure of cash paid
Income taxes		39,000
Supplemental disclosure of non-cash activity
Common stock issued for investor relations services	112,000	117,000
Warrants issued for investor relations services	85,000
Warrants Issued for Services [Member]
Adjustments to reconcile net loss to net cash used in operating activities:
Issuance of stock and warrants	$ 86,000

XML

Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) - 3 months ended Mar. 31, 2018 - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Dec. 31, 2017	15,889,171			15,889,171
Balance at Dec. 31, 2017	$ 2	$ 294,220	$ (293,324)	$ 898
Adoption of accounting standard at Dec. 31, 2017			1,877	1,877
Balance at Dec. 31, 2017	$ 2	294,220	(291,447)	$ 2,775
Common stock issued for outside services (in shares)	24,000			24,000
Common stock issued for outside services		112		$ 112
Warrants issued for services		86		86
Share-based Compensation Expense		328		328
Net loss			(4,218)	$ (4,218)
Balance (in shares) at Mar. 31, 2018	15,913,171			15,913,171
Balance at Mar. 31, 2018	$ 2	$ 294,746	$ (295,665)	$ (917)

XML

Note 1 - Basis of Consolidation, Presentation and Liquidity

3 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note

1.

Basis of Consolidation, Presentation and

Liquidity

We harness proprietary big data predictive analytics, artificial intelligence and telehealth, combined with human intervention, to deliver improved member health and cost savings to health plans through integrated technology enabled treatment solutions. It is our mission to provide access to affordable and effective care, thereby improving health and reducing cost of care for people who suffer from the medical consequences of behavioral health conditions; helping these people and their families achieve and maintain better lives.

The accompanying unaudited condensed consolidated financial statements for Catasys, 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 disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. GAAP. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  Interim results are

not

necessarily indicative of the results that

may

be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto included in our most recent Annual Report on Form

10

-K for the year-ended

December 31, 2017,

from which the balance sheet, as of

December 31, 2017,

has been derived.

Our ability to fund our ongoing operations is dependent on increasing the number of members that are eligible for our solutions by signing new contracts, identifying more eligible members in existing contracts, and generating fees from existing and new contracts and the success of management’s plan to increase revenue and continue to control expenses. We currently operate our On

Trak

solutions in

nineteen

states. 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 increase enrollment and fees throughout

2018.

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. These conditions raise substantial doubt about our ability to continue as a going concern.  The accompanying financial statements do

not

reflect any adjustments that might result if we were unable to continue as a going concern. We entered into contracts for additional revenue-generating health plan customers and expanding our On

Trak

program within existing health plan customers.  To support this increased demand for services, we invested in the additional headcount needed to support these customers launching during the

first

quarter of

2018.

  We have had a growing customer base and are able to fully scale our operations to service the contracts and future enrollment providing leverage in these investments that is expected to result in positive cash flow by the end of

2018.

Based upon this expected positive cash flow, we believe we will have enough capital to cover expenses through at least the next

twelve

months. We will continue to monitor liquidity carefully and in the event we do

not

have enough capital to cover expense we will make the necessary and appropriate reductions in spending to remain cash flow positive.  However, if we were to 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 need to finance these options via a debt financing rather than an equity financing.

All inter-company transactions have been eliminated in consolidation.

XML

Note 2 - Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Significant Accounting Policies [Text Block]

Note

2.

Summary of Significant Accounting Policies

Revenue Recognition

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation

may

be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (

i.e.

, the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will

not

occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of

third

parties.

The following table disaggregates our revenue by contract (in thousands):

	For the period ended March 31, 2018
	Revenue		Percentage
Commercial	$	1,100		58	%
Government		811		42	%
	$	1,911		100	%

Because the Company’s contracts have an expected duration of

one

year or less, the Company has elected the practical expedient in ASC

606

-

10

-

50

-

14

(a) to

not

disclose information about its remaining performance obligations.

Our Catasys contracts are generally designed to provide cash fees to us on a monthly basis, an upfront case rate, or fee for service based on enrolled members. The Company’s performance obligation is satisfied over time as the On

Trak

service is provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing a continuous service to the customer. Contracts with minimum performance guarantees or price concessions include variable consideration and are subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees and price concessions. The Company has constrained revenue for expected price concessions during the period ending

March 31, 2018.

 Cost of Services

Cost of healthcare services consists primarily of salaries related to our care coaches, outreach specialists 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 claims are expensed when incurred and healthcare provider claims payments are recognized in the period in which 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 On

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 of

three

months or less to be cash equivalents. Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents. Cash is deposited with what we believe are highly credited, quality financial institutions. The deposited cash

may

exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. As of

March 31, 2018,

cash and cash equivalents exceeding federally insured limits totaled

$1.2

million.

For the

three

months ended

March 31, 2018,

five

customers accounted for approximately

89%

of revenues (

22%,

20%,

18%,

15%,

14%

) and

four

customers accounted for approximately

83%

of accounts receivable (

37%,

18%,

15%,

13%

).

Basic and Diluted Loss per Share

Basic loss per share is computed by dividing the net loss to common stockholders for the period by the weighted average number of common stock outstanding during the period. Diluted loss per share is computed by dividing the net loss for the period by the weighted average number of common stock and dilutive common equivalent shares outstanding during the period.

Common equivalent shares, consisting of

3,920,531

and

1,928,431

common shares for the

three

months ended

March 31, 2018

and

2017,

respectively, 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 Compensation

Our

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

of the Internal Revenue Code and non-qualified options (NSOs) are authorized under the

2017

Plan. We have granted stock options to executive officers, employees, members of our board of directors, and certain outside consultants. The terms and conditions upon which options become exercisable vary among grants, but option rights expire

no

later than

ten

years from the date of grant and employee and board of director awards generally vest over

three

to

five

years. As of

March 31, 2018,

we had

1,885,003

shares outstanding, of which

338,178

shares are vested and

692,184

shares are available for future awards under the

2017

Plan.

Share-based compensation expense attributable to operations were

$328,000

and

$127,000

for the

three

months ended

March 31, 2018

and

2017,

respectively.

Stock Options – Employees and Directors

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the date of grant. We estimate the fair value of share-based payment awards using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the consolidated statements of operations.

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

months ended

March 31, 2018

and

2017,

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.

There were

no

options granted to employees and directors during the

three

months ended

March 31, 2018

and

2017,

respectively, under the

2017

Plan. Employee and director stock option activity for the

three

months ended

March 31, 2018

are as follows:

				Weighted Avg.
	Shares			Exercise Price
Balance December 31, 2017		1,885,383		$	11.46
Granted		-			-
Cancelled		(380	)		683.91
Balance March 31, 2018		1,885,003		$	11.32

The expected volatility assumptions have been based on the historical and expected volatility of our stock, measured over a period generally commensurate with the expected term. The weighted average expected option term for the

three

months ended

March 31, 2018

and

2017,

reflects the application of the simplified method prescribed in 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.

As of

March 31, 2018,

there was

$4.4

million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the

2017

Plan. That cost is expected to be recognized over a weighted-average period of approximately

3.26

years.          

Stock Options and Warrants – Non-employees

We account for the issuance of options and warrants for services from non-employees by estimating the fair value of warrants issued using 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 life of the option or warrant, and the expected volatility of our stock and 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

months ended

March 31, 2018

and

2017,

respectively. There was

no

share-based compensation expense relating to stock options and warrants recognized for the non-employees for the

three

months ended

March 31, 2018

and

2017,

respectively.

There were

24,000

and

0

warrants issued in exchange for investor relations services during the

three

months ended

March 31, 2018

and

2017,

respectively. Generally, the costs associated with warrants issued for services are amortized to the related expense on a straight-line basis over the related service periods.

There were

2,035,528

and

1,684,578

warrants outstanding as of

March 31, 2018

and

2017,

respectively.

Common Stock

There were

24,000

and

14,492

shares of common stock issued in exchange for investor relations services during the

three

months ended

March 31, 2018

and

2017,

respectively. 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

March 31, 2018. 

As such, we have

not

recorded a provision for income tax for the period ended

March 31, 2018. 

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

March 31, 2018

should be realized.   

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’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 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’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at

March 31, 2018

for assets and liabilities measured at fair value:

	Balance at March 31, 2018
(Amounts in thousands)	Level I		Level II		Level III		Total
Certificates of deposit		71		-		-		71
Total assets		71		-		-		71
Warrant liabilities		-		-		40		40
Total liabilities		-		-		40		40

Carrying amounts reported in the condensed consolidated balance sheet of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their relatively short maturity. The fair value of borrowings is

not

considered to be significantly different from its carrying amount because stated rates for such debt reflect current market rates and conditions.

Financial instruments classified as Level III in the fair value hierarchy as of

March 31, 2018,

represent our liabilities measured at market value on a recurring basis which include warrant liabilities and derivative liabilities resulting from recent debt and equity financings. In accordance with current accounting rules, the warrant liabilities and derivative liabilities are being marked-to-market each quarter-end until they are completely settled or expire. The warrants and derivative liabilities are valued using the Black-Scholes option-pricing model, using both observable and unobservable inputs and assumptions consistent with those used in our estimate of fair value of employee stock options. See

Warrant Liabilities

below.  

The following table summarizes our fair value measurements using significant Level III inputs, and changes therein, for the

three

months ended

March 31, 2018:

	Level III
	Warrant
(Dollars in thousands)	Liabilities
Balance as of December 31, 2017	$	30
Issuance of warrants		-
Change in fair value		10
Balance as of March 31, 2018	$	40

Property and Equipment

Property and equipment 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.

Warrant Liabilities

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

	March 31, 201 8
Expected volatility		102.90%
Risk-free interest rate		2.27%
Weighted average expected lives in years		2.04
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,

June 2017,

and

February 2018.

11,049

of our warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in the 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

months ended

March 31, 2018

and

2017,

we recognized a loss of

$10,000

and

$5.2

million, respectively, related to the revaluation of our warrant liabilities.

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

)

, 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 have selected the modified retrospective approach as our transition method under ASU

2016

-

10

and the financial impact to the financial statements was to decrease retained earnings and deferred revenue by

$1.9

million effective

January 1, 2018 (

Please see footnote

3

).

In

February 2016,

FASB issued Accounting Standards Update (ASU)

No.

2016

-

02,

 

Leases (Topic

842

)

(“ASU

2016

-

02”

)

.

Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic

606,

Revenue from Contracts with Customers

. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will

no

longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU

2016

-

02

for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years (i.e.,

January 1, 2019,

for a calendar year entity). Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would

not

require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors

may

not

apply a full retrospective transition approach. We are currently evaluating the expected impact that the standard could have on our condensed consolidated financial statements and related disclosures.

In

June 2016,

FASB issued ASU

2016

-

13,

Financial Instruments - Credit Losses

. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but

not

limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the

first

quarter of fiscal year

2021.

Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements and related disclosures.

In

July 2017,

the Financial Accounting Standards Board (“FASB”) issued ASU

2017

-

11,

Earnings Per Share (Topic

260

); Distinguishing Liabilities from Equity (Topic

480

); Derivatives and Hedging (Topic

815

): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

. The amendments in this update are intended to simplify the accounting for certain equity linkedfinancial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of futureequity offerings. Under the new guidance, a down round feature will

no

longer need to be considered when determining whether certain financial instrumentsor embedded features should be classified as liabilities or equity instruments. That is, a down round feature will

no

longer preclude equity classification whenassessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosurerequirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The adoption of this ASU should

not

have a material impact on our condensed consolidated financial statements.

In

August 2014,

the FASB issued FASB ASU

2014

-

15,

Presentation of Financial Statements—Going Concern (Subtopic

205

-

40

): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

(“ASU

2014

-

15”

)

.

ASU

2014

-

15

changes the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Even if an entity’s liquidation is

not

imminent, there

may

be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. Because there is

no

guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related note disclosures, there is diversity in practice whether, when, and how an entity discloses the relevant conditions and events in its financial statements. As a result, these changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within

one

year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within

one

year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was

not

alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. ASU

2014

-

15

is effective for periods beginning after

December 15, 2016.

The adoption of ASU

2014

-

15

did

not

have a material effect on our consolidated financial position or results of operations.

XML

Note 3 - ASC 606

3 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

Note

3.

ASC

606

        In

May 2014,

the FASB issued Accounting Standards Update (“ASU”)

No.

2014

-

09,

“Revenue from Contracts with Customers (Topic

606

),” (“ASU

2014

-

09”

). ASU

2014

-

09

supersedes the revenue recognition requirements in ASC

605

- Revenue Recognition (“ASC

605”

) and most industry-specific guidance throughout ASC

605.

The FASB has issued numerous updates that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC

606

requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

We adopted ASC

606

effective

January 1, 2018

using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has

not

been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect of the changes made to our consolidated

January 1, 2018

balance sheet for the adoption of

ASU

2014

-

09,

Revenue - Revenue from Contracts with Customers

were as follows (in thousands): 

	Balance at December 31, 2017		Adjustments Due to Adoption of ASC606	Balance at January 1, 2018
Balance Sheet
Liabilities
Deferred revenue	(2,914	)	1,877	(1,037	)
Equity
Retained earnings	(293,324	)	1,877	(291,447	)

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows (in thousands):

	For the period ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
Income Statement
Revenues
Healthcare services revenues	$	1,911		$	1,152		$	759
Net loss		(4,218	)		(4,977	)		759

XML

Note 4 - Restatement of Financial Statements

3 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Accounting Changes and Error Corrections [Text Block]

Note

4

. Restatement of Financial Statements 

The financial statements have been retroactively restated to reflect the

1

-for-

6

reverse stock split that occurred on

April 25, 2017.

XML

Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2018

Accounting Policies [Abstract]

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation

may

be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (

i.e.

, the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will

not

occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of

third

parties.

The following table disaggregates our revenue by contract (in thousands):

	For the period ended March 31, 2018
	Revenue		Percentage
Commercial	$	1,100		58	%
Government		811		42	%
	$	1,911		100	%

Because the Company’s contracts have an expected duration of

one

year or less, the Company has elected the practical expedient in ASC

606

-

10

-

50

-

14

(a) to

not

disclose information about its remaining performance obligations.

Our Catasys contracts are generally designed to provide cash fees to us on a monthly basis, an upfront case rate, or fee for service based on enrolled members. The Company’s performance obligation is satisfied over time as the On

Trak

service is provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing a continuous service to the customer. Contracts with minimum performance guarantees or price concessions include variable consideration and are subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees and price concessions. The Company has constrained revenue for expected price concessions during the period ending

March 31, 2018.

Cost of Sales, Policy [Policy Text Block]

Cost of Services

Cost of healthcare services consists primarily of salaries related to our care coaches, outreach specialists 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 claims are expensed when incurred and healthcare provider claims payments are recognized in the period in which 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 On

Trak

TM

database within the contracted timeframe, with all required billing elements correctly completed by the service provider. 

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash Equivalents and Concentration of Credit Risk 

We consider all highly liquid investments with an original maturity of

three

months or less to be cash equivalents. Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents. Cash is deposited with what we believe are highly credited, quality financial institutions. The deposited cash

may

exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. As of

March 31, 2018,

cash and cash equivalents exceeding federally insured limits totaled

$1.2

million.

For the

three

months ended

March 31, 2018,

five

customers accounted for approximately

89%

of revenues (

22%,

20%,

18%,

15%,

14%

) and

four

customers accounted for approximately

83%

of accounts receivable (

37%,

18%,

15%,

13%

).

Earnings Per Share, Policy [Policy Text Block]

Basic and Diluted Loss per Share

Basic loss per share is computed by dividing the net loss to common stockholders for the period by the weighted average number of common stock outstanding during the period. Diluted loss per share is computed by dividing the net loss for the period by the weighted average number of common stock and dilutive common equivalent shares outstanding during the period.

Common equivalent shares, consisting of

3,920,531

and

1,928,431

common shares for the

three

months ended

March 31, 2018

and

2017,

respectively, 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 Compensation, Option and Incentive Plans Policy [Policy Text Block]

Share-Based Compensation

Our

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

of the Internal Revenue Code and non-qualified options (NSOs) are authorized under the

2017

Plan. We have granted stock options to executive officers, employees, members of our board of directors, and certain outside consultants. The terms and conditions upon which options become exercisable vary among grants, but option rights expire

no

later than

ten

years from the date of grant and employee and board of director awards generally vest over

three

to

five

years. As of

March 31, 2018,

we had

1,885,003

shares outstanding, of which

338,178

shares are vested and

692,184

shares are available for future awards under the

2017

Plan.

Share-based compensation expense attributable to operations were

$328,000

and

$127,000

for the

three

months ended

March 31, 2018

and

2017,

respectively.

Stock Options – Employees and Directors

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the date of grant. We estimate the fair value of share-based payment awards using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the consolidated statements of operations.

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

months ended

March 31, 2018

and

2017,

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.

There were

no

options granted to employees and directors during the

three

months ended

March 31, 2018

and

2017,

respectively, under the

2017

Plan. Employee and director stock option activity for the

three

months ended

March 31, 2018

are as follows:

				Weighted Avg.
	Shares			Exercise Price
Balance December 31, 2017		1,885,383		$	11.46
Granted		-			-
Cancelled		(380	)		683.91
Balance March 31, 2018		1,885,003		$	11.32

The expected volatility assumptions have been based on the historical and expected volatility of our stock, measured over a period generally commensurate with the expected term. The weighted average expected option term for the

three

months ended

March 31, 2018

and

2017,

reflects the application of the simplified method prescribed in 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.

As of

March 31, 2018,

there was

$4.4

million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the

2017

Plan. That cost is expected to be recognized over a weighted-average period of approximately

3.26

years.          

Stock Options and Warrants – Non-employees

We account for the issuance of options and warrants for services from non-employees by estimating the fair value of warrants issued using 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 life of the option or warrant, and the expected volatility of our stock and 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

months ended

March 31, 2018

and

2017,

respectively. There was

no

share-based compensation expense relating to stock options and warrants recognized for the non-employees for the

three

months ended

March 31, 2018

and

2017,

respectively.

There were

24,000

and

0

warrants issued in exchange for investor relations services during the

three

months ended

March 31, 2018

and

2017,

respectively. Generally, the costs associated with warrants issued for services are amortized to the related expense on a straight-line basis over the related service periods.

There were

2,035,528

and

1,684,578

warrants outstanding as of

March 31, 2018

and

2017,

respectively.

Stockholders' Equity, Policy [Policy Text Block]

Common Stock

There were

24,000

and

14,492

shares of common stock issued in exchange for investor relations services during the

three

months ended

March 31, 2018

and

2017,

respectively. 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 Tax, Policy [Policy Text Block]

Income Taxes

We have recorded a full valuation allowance against our otherwise recognizable deferred tax assets as of

March 31, 2018. 

As such, we have

not

recorded a provision for income tax for the period ended

March 31, 2018. 

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

March 31, 2018

should be realized.  

Fair Value of Financial Instruments, Policy [Policy Text Block]

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’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 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’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at

March 31, 2018

for assets and liabilities measured at fair value:

	Balance at March 31, 2018
(Amounts in thousands)	Level I		Level II		Level III		Total
Certificates of deposit		71		-		-		71
Total assets		71		-		-		71
Warrant liabilities		-		-		40		40
Total liabilities		-		-		40		40

Carrying amounts reported in the condensed consolidated balance sheet of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their relatively short maturity. The fair value of borrowings is

not

considered to be significantly different from its carrying amount because stated rates for such debt reflect current market rates and conditions.

Financial instruments classified as Level III in the fair value hierarchy as of

March 31, 2018,

represent our liabilities measured at market value on a recurring basis which include warrant liabilities and derivative liabilities resulting from recent debt and equity financings. In accordance with current accounting rules, the warrant liabilities and derivative liabilities are being marked-to-market each quarter-end until they are completely settled or expire. The warrants and derivative liabilities are valued using the Black-Scholes option-pricing model, using both observable and unobservable inputs and assumptions consistent with those used in our estimate of fair value of employee stock options. See

Warrant Liabilities

below.  

The following table summarizes our fair value measurements using significant Level III inputs, and changes therein, for the

three

months ended

March 31, 2018:

	Level III
	Warrant
(Dollars in thousands)	Liabilities
Balance as of December 31, 2017	$	30
Issuance of warrants		-
Change in fair value		10
Balance as of March 31, 2018	$	40

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment 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.

Derivatives, Policy [Policy Text Block]

Warrant Liabilities

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

	March 31, 201 8
Expected volatility		102.90%
Risk-free interest rate		2.27%
Weighted average expected lives in years		2.04
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,

June 2017,

and

February 2018.

11,049

of our warrants are being accounted for as liabilities in accordance with FASB accounting rules, due to anti-dilution provisions in the 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

months ended

March 31, 2018

and

2017,

we recognized a loss of

$10,000

and

$5.2

million, respectively, related to the revaluation of our warrant liabilities.

New Accounting Pronouncements, Policy [Policy Text Block]

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

)

, 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 have selected the modified retrospective approach as our transition method under ASU

2016

-

10

and the financial impact to the financial statements was to decrease retained earnings and deferred revenue by

$1.9

million effective

January 1, 2018 (

Please see footnote

3

).

In

February 2016,

FASB issued Accounting Standards Update (ASU)

No.

2016

-

02,

 

Leases (Topic

842

)

(“ASU

2016

-

02”

)

.

Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic

606,

Revenue from Contracts with Customers

. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will

no

longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU

2016

-

02

for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years (i.e.,

January 1, 2019,

for a calendar year entity). Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would

not

require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors

may

not

apply a full retrospective transition approach. We are currently evaluating the expected impact that the standard could have on our condensed consolidated financial statements and related disclosures.

In

June 2016,

FASB issued ASU

2016

-

13,

Financial Instruments - Credit Losses

. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but

not

limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the

first

quarter of fiscal year

2021.

Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our condensed consolidated financial statements and related disclosures.

In

July 2017,

the Financial Accounting Standards Board (“FASB”) issued ASU

2017

-

11,

Earnings Per Share (Topic

260

); Distinguishing Liabilities from Equity (Topic

480

); Derivatives and Hedging (Topic

815

): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

. The amendments in this update are intended to simplify the accounting for certain equity linkedfinancial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of futureequity offerings. Under the new guidance, a down round feature will

no

longer need to be considered when determining whether certain financial instrumentsor embedded features should be classified as liabilities or equity instruments. That is, a down round feature will

no

longer preclude equity classification whenassessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosurerequirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The adoption of this ASU should

not

have a material impact on our condensed consolidated financial statements.

In

August 2014,

the FASB issued FASB ASU

2014

-

15,

Presentation of Financial Statements—Going Concern (Subtopic

205

-

40

): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

(“ASU

2014

-

15”

)

.

ASU

2014

-

15

changes the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Even if an entity’s liquidation is

not

imminent, there

may

be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. Because there is

no

guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related note disclosures, there is diversity in practice whether, when, and how an entity discloses the relevant conditions and events in its financial statements. As a result, these changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within

one

year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within

one

year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was

not

alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. ASU

2014

-

15

is effective for periods beginning after

December 15, 2016.

The adoption of ASU

2014

-

15

did

not

have a material effect on our consolidated financial position or results of operations.

XML

Note 2 - Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2018

Notes Tables

Disaggregation of Revenue [Table Text Block]

	For the period ended March 31, 2018
	Revenue		Percentage
Commercial	$	1,100		58	%
Government		811		42	%
	$	1,911		100	%

Share-based Compensation, Stock Options, Activity [Table Text Block]

				Weighted Avg.
	Shares			Exercise Price
Balance December 31, 2017		1,885,383		$	11.46
Granted		-			-
Cancelled		(380	)		683.91
Balance March 31, 2018		1,885,003		$	11.32

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

	Balance at March 31, 2018
(Amounts in thousands)	Level I		Level II		Level III		Total
Certificates of deposit		71		-		-		71
Total assets		71		-		-		71
Warrant liabilities		-		-		40		40
Total liabilities		-		-		40		40

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

	Level III
	Warrant
(Dollars in thousands)	Liabilities
Balance as of December 31, 2017	$	30
Issuance of warrants		-
Change in fair value		10
Balance as of March 31, 2018	$	40

Fair Value Measurement Inputs and Valuation Techniques [Table Text Block]

	March 31, 201 8
Expected volatility		102.90%
Risk-free interest rate		2.27%
Weighted average expected lives in years		2.04
Expected dividend		0%

XML

Note 3 - ASC 606 (Tables)

3 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]

	Balance at December 31, 2017		Adjustments Due to Adoption of ASC606	Balance at January 1, 2018
Balance Sheet
Liabilities
Deferred revenue	(2,914	)	1,877	(1,037	)
Equity
Retained earnings	(293,324	)	1,877	(291,447	)

	For the period ended March 31, 2018
	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
Income Statement
Revenues
Healthcare services revenues	$	1,911		$	1,152		$	759
Net loss		(4,218	)		(4,977	)		759

XML

Note 2 - Summary of Significant Accounting Policies (Details Textual)	3 Months Ended
	Mar. 31, 2018 USD ($) shares	Mar. 31, 2017 USD ($) shares	Jan. 01, 2018 USD ($)	Dec. 31, 2017 USD ($)
Cash, Uninsured Amount | $	$ 1,200,000
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3,920,531	1,928,431
Share-based Compensation, Total | $	$ 328,000	$ 127,000
Class of Warrant or Right, Outstanding	2,035,528	1,684,578
Stock Issued During Period, Shares, Issued for Services	24,000	14,492
Income Tax Expense (Benefit), Total | $	$ 0	$ 1,000
Fair Value Adjustment of Warrants | $	10,000	$ 5,181,000
Retained Earnings (Accumulated Deficit), Ending Balance | $	(295,665,000)		$ (291,447,000)	$ (293,324,000)
Contract with Customer, Liability, Current | $	$ 1,689,000		1,037,000	$ 2,914,000
Accounting Standards Update 2014-09 [Member]
Retained Earnings (Accumulated Deficit), Ending Balance | $			1,877,000
Contract with Customer, Liability, Current | $			$ (1,877,000)
Warrants Related to Investor Relations Services [Member]
Class of Warrant or Right, Issued During Period	24,000	0
Warrants Not Subject to Amendment [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	11,049
Minimum [Member] | Furniture and Equipment [Member]
Property, Plant and Equipment, Useful Life	2 years
Minimum [Member] | Leasehold Improvements [Member]
Property, Plant and Equipment, Useful Life	5 years
Maximum [Member] | Furniture and Equipment [Member]
Property, Plant and Equipment, Useful Life	7 years
Maximum [Member] | Leasehold Improvements [Member]
Property, Plant and Equipment, Useful Life	7 years
The 2017 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	2,333,334
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	1,885,003
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested, Number of Shares	338,178
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	692,184
Share-based Compensation, Total | $	$ 328,000	$ 127,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0	0
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total | $	$ 4,400,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	3 years 94 days
The 2017 Stock Incentive Plan [Member] | Nonemployees [Member]
Share-based Compensation, Total | $	$ 0	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0	0
The 2017 Stock Incentive Plan [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
The 2017 Stock Incentive Plan [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	5 years
The 2010 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	243,853
Sales Revenue, Net [Member] | Customer Concentration Risk [Member]
Number of Major Customers	5
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Five Customers [Member]
Concentration Risk, Percentage	89.00%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Customer One [Member]
Concentration Risk, Percentage	22.00%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Customer Two [Member]
Concentration Risk, Percentage	20.00%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Customer Three [Member]
Concentration Risk, Percentage	18.00%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Customer Four [Member]
Concentration Risk, Percentage	15.00%
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Customer Five [Member]
Concentration Risk, Percentage	14.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member]
Number of Major Customers	4
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer One [Member]
Concentration Risk, Percentage	37.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer Two [Member]
Concentration Risk, Percentage	18.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer Three [Member]
Concentration Risk, Percentage	15.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer Four [Member]
Concentration Risk, Percentage	13.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Four Customers [Member]
Concentration Risk, Percentage	83.00%

XML

Note 2 - Summary of Significant Accounting Policies - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Revenues	$ 1,911	$ 1,822
Revenues, percentage	100.00%
Commercial [Member]
Revenues	$ 1,100
Revenues, percentage	58.00%
Government Contract [Member]
Revenues	$ 811
Revenues, percentage	42.00%

XML

Note 2 - Summary of Significant Accounting Policies - Employee and Director Stock Option Activity (Details) - Employees and Directors [Member]	3 Months Ended
	Mar. 31, 2018 $ / shares shares
Balance, shares (in shares) | shares	1,885,383
Balance, weighted average exercise price (in dollars per share) | $ / shares	$ 11.46
Granted, shares (in shares) | shares
Granted, weighted average exercise price (in dollars per share) | $ / shares
Cancelled, shares (in shares) | shares	(380)
Cancelled, weighted average exercise price (i (in dollars per share) | $ / shares	$ 683.91
Balance, shares (in shares) | shares	1,885,003
Balance, weighted average exercise price (in dollars per share) | $ / shares	$ 11.32

XML

Note 2 - Summary of Significant Accounting Policies - Fair Value, Assets and Liabilities Measured on a Recurring Basis (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Total assets	$ 71
Warrant liabilities	40	$ 30
Total liabilities	40
Certificates of Deposit [Member]
Certificates of deposit	71
Fair Value, Inputs, Level 1 [Member]
Total assets	71
Warrant liabilities
Total liabilities
Fair Value, Inputs, Level 1 [Member] | Certificates of Deposit [Member]
Certificates of deposit	71
Fair Value, Inputs, Level 2 [Member]
Total assets
Warrant liabilities
Total liabilities
Fair Value, Inputs, Level 2 [Member] | Certificates of Deposit [Member]
Certificates of deposit
Fair Value, Inputs, Level 3 [Member]
Total assets
Warrant liabilities	40
Total liabilities	40
Fair Value, Inputs, Level 3 [Member] | Certificates of Deposit [Member]
Certificates of deposit

XML

Note 2 - Summary of Significant Accounting Policies - Fair Value Measurements Using Significant Level III Inputs (Details) - Warrants [Member] - Fair Value, Inputs, Level 3 [Member] $ in Thousands	3 Months Ended
	Mar. 31, 2018 USD ($)
Balance	$ 30
Issuance (exercise) of warrants, net
Change in fair value	10
Balance	$ 40

XML

Note 2 - Summary of Significant Accounting Policies - Fair Value Assumptions, Warrant Liabilities (Details)	Mar. 31, 2018
Measurement Input, Price Volatility [Member]
Warrant liability assumptions	102.9
Measurement Input, Risk Free Interest Rate [Member]
Warrant liability assumptions	2.27
Measurement Input, Expected Term [Member]
Warrant liability assumptions	2.04
Measurement Input, Expected Dividend Rate [Member]
Warrant liability assumptions	0

XML

Note 3 - ASC 606 - Adoption of ASC 606 (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Jan. 01, 2018	Dec. 31, 2017
Deferred revenue	$ (1,689)		$ (1,037)	$ (2,914)
Retained earnings	(295,665)		(291,447)	$ (293,324)
Healthcare services revenues	1,911	$ 1,822
Net loss	(4,218)	$ (21,768)
Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Healthcare services revenues	1,152
Net loss	(4,977)
Difference between Revenue Guidance in Effect before and after Topic 606 [Member]
Healthcare services revenues	759
Net loss	$ 759
Accounting Standards Update 2014-09 [Member]
Deferred revenue			1,877
Retained earnings			$ 1,877

XML

Note 4 - Restatement of Financial Statements (Details Textual)		3 Months Ended
	Apr. 25, 2017	Mar. 31, 2017
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	6	6