Catasys, Inc.: Poor Financials, Excessive Compensation And Paid Promotions

| About: Catasys Inc. (CATS)

Summary

CATS financials show that the company is in dire need of cash.

The company has seen paid promotions from third parties.

Insiders control over 87% of the company's common stock.

Executives compensation vastly exceeds the company's means.

I have attempted to contact management via the company's website about these issues.

Background

Catasys, Inc. (OTCQB:CATS) is a Nevada-incorporated firm that is engaged in the business of healthcare management services. Recently, the company's stock has undergone a series of paid promotions from third party entities, and insiders control over 87% of the company's stock. The company's filings also show that the company's finances are in poor shape, but the top executives have consistently received very generous compensation packages.

Business and Corporate History

As mentioned before, Catasys, Inc. provides healthcare management services to health plans. From the company's latest 10-k, Catasys describes its business:

We provide specialized healthcare management services to health plans and other third party payers through our OnTrak program. Our OnTrak program is designed to improve member health and at the same time lower costs to the insurer for underserved populations where behavioral health conditions are exacerbating co-existing medical conditions. The program utilizes member engagement and patient centric treatment that integrates evidence based medical and psychosocial interventions along with care coaching in a 52-week outpatient program. Our initial focus has been members with substance use disorders, but we have plans to expand into other behavioral health conditions, including anxiety and depression. We currently operate our OnTrak for substance dependence program in Florida, Kansas, Kentucky, Louisiana, Massachusetts, New Jersey, Oklahoma, West Virginia and Wisconsin.

This description seems pretty straight forward, but there are some crucial details that the company doesn't mention in its 10-K. Prior to March 17, 2011, the company was known as Hythiam, Inc., which was also engaged in the specialized healthcare management services sector. However, the company's description is slightly different. The 10-K from March 31, 2011 reads:

We are a healthcare services company, providing specialized behavioral health services for substance abuse to health plans, employers and unions through a network of licensed healthcare providers and its employees. The Catasys substance dependence program (OnTrak) was designed to address substance dependence as a chronic disease. The program seeks to lower costs and improve member health through the delivery of integrated medical and psychosocial interventions combining elements of traditional disease management and ongoing "care coaching", including our proprietary PROMETA® Treatment Program for alcoholism and stimulant dependence. The PROMETA Treatment Program, which integrates behavioral, nutritional and medical components, is also available on a private-pay basis through licensed treatment providers and a company managed treatment center that offers the PROMETA Treatment Program, as well as other treatments for substance dependencies.

In this description, the company touts PROMETA as a flagship product. However, in subsequent filings, the mention of PROMETA seemingly disappears after the 10-K filed on April 1, 2013. There is no discussion in any of the later filings or on the company's website as to what happened to this product -- it seems to have simply been abandoned.

However, the April 1, 2013 10-k does mention this,

Our PROMETA Treatment Program is not subject to approval by the FDA, and while the drugs incorporated in the PROMETA Treatment Program have been approved for other indications, they are not FDA approved for the treatment of alcohol or substance dependency. We have not sought, and do not intend to seek, FDA approval for the drugs as they are used in the PROMETA Treatment Program. It is possible that in the future the FDA could require us to seek FDA approval for the drugs as they are used in the PROMETA Treatment Program.

This may provide an explanation why the program has disappeared from subsequent SEC filings, but I would really like to see some clarification by management as to the status of the program.

Financials

The company's latest S-1 filed on May 29, 2015 (after the most recent 10-Q, which was filed on May 15, 2015) shows that the company currently has $84k in cash and cash equivalents and total current assets of $331k compared to current liabilities of $3.6 million, and a working capital deficit of $3.1 million. The cash flow statement shows that the company's operations used $811k in cash for the three months ended March 31, 2015. Additionally, the company has an accumulated deficit of $254 million.

In light of these figures, it comes as no surprise that the company's auditors have issued a "Going Concern" notice on page 37 of the S-1, which reads:

We have been unprofitable since our inception in 2003 and expect to incur substantial additional operating losses and negative cash flow from operations for at least the next twelve months. As of March, 2015, these conditions raised substantial doubt as to our ability to continue as a going concern. As of March 31, 2015, cash and cash equivalents was approximately $84,000 and accumulated deficit was approximately $254.8 million. During the periods ended December 31, 2014 and March 31, 2015, our cash and cash equivalents used by operating activities was $5.3 million and $811,000, respectively. Although we have recently taken actions to increase revenues and raised approximately $1.8 million of net proceeds in the Bridge Note financing, we anticipate requiring additional financing, including the financing contemplated by this prospectus. We may not be successful in raising necessary funds on acceptable terms or at all, and we may not be able to offset our operating losses by sufficient reductions in expenses and increases in revenue. If this occurs, we may be unable to meet our cash obligations as they become due and we may be required to further delay or reduce operating expenses and curtail our operations, which would have a material adverse effect on us.

Looks pretty bleak, and confirms the financial concerns I pointed out earlier. Because of the S-1 filing, we already know that the company plans to raise additional funding through the sale of common stock, which will further dilute current shareholders.

Promotional History

CATS common stock has seen a series of promotional campaigns via email newsletters from Otcbb journal, and Stocks Impossible. Both of these newsletters disclosed compensation of $60,000 from a third-party entity known as Edge Media, LLC. While there is no mention of Edge Media, LLC in Catasys' SEC filings, it is always a major concern when a third party promoter is willing to pay thousands of dollars to generate interest in a stock that has over 87% of the common shares held by insiders.

Insider Ownership and Management Compensation

According to the latest S-1 filed on May 29, 2015, two named shareholders hold beneficial ownership of 87.5% of CATS outstanding stock. Such massive insider ownership, especially in the period following a paid promotional campaign is a serious red flag and a great cause for concern among potential investors.

Beyond the massive insider ownership, it is important to note that page the company's top executives are very generously compensated. The table below, from Page 53 of the most recent S-1 shows salaries of $450,000, $374,250, and $164,538 in 2014 and $450,000, $370,287, and $150,000 in 2013 for the top three executives. In light of the balance sheet and cash flow figures, this compensation seems reckless and unsustainable.

Executive Compensation

It seems strange that the top executives received no option awards -- I would think that a company that is strapped for cash would want to provide a major incentive for management to improve the company's standing in the capital markets rather than squander the company's meager cash on direct compensation.

Given that the company currently has only $84,000 in cash and claims to have a workforce of 49 full-time employees (page 48 of the most recent S-1), it seems impossible that the company to be able to continue to pay its workforce without massive external funding. CATS current cash holdings are barely enough for a few months of rent, which the company claims to be $29,000 per month on page 7 of the most recent 10-K.

Conclusion

The company has undergone two name changes, a multitude of equity issuances, and all it has to show for it is an accumulated deficit of $243 million and no clear path towards a solid foundation. Insiders have beneficial ownership of over 87% of the company's stock, and top management still receives compensation that totals an order of magnitude greater than the company's current cash holdings. Beyond the woeful financial situation, the company has undergone paid third-party promotions. If you are considering a long position in CATS common stock, think again -- the company's SEC filings tell a lot that the promotional materials do not reveal.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in CATS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a short position in CATS over the next 72 hours. I have attempted to contact management regarding the issues that I have seen and will update the article if they respond

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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