Adam Prior - The Equity Group Terren Peizer - Chairman and Chief Executive Officer Rick Anderson - President and Chief Operating Officer Christopher Shirley - Chief Financial Officer.

John Nobile - Taglich Brothers Daniel Carlson - Tailwinds Research.

Greetings, and welcome to the Catasys Inc’s Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to a representative of the company..

Thank you. Good afternoon everyone, and thank you for joining us. Before I turn the call over to management, I’d like to make the following remarks concerning forward-looking statements. All statements in this conference call, other than historical facts, are forward-looking statements.

The words anticipate, believe, estimate, expect, intent, guidance, confidence, target, project, and some other expressions are typically used to identify such forward-looking statements.

These forward-looking statements are not guarantees of future performances, but may involve and are subject to certain risks and uncertainties and other factors that may affect Catasys’ business, financial condition and other operating results, which include, but are not limited to those risk factors described in the risk factor section of the Form 10-K and Form 10-Q as filed with the SEC.

Therefore, actual outcomes and results may differ materially from those expressed or implied by these forward-looking statements. Catasys expressly disclaims any intent or obligation to update the forward-looking statements. During this call, we may also present certain non-GAAP financial measures.

Our press release with the financial tables issued today, which is located on our Web site at www.catasys.com, include the definition of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures, as well as a discussion of why we think these non-GAAP financial measures are relevant to our results.

These financial measures are included for the benefit of investors, and should be considered in addition to GAAP measures. With that, I’d now like to turn the call over to Mr. Terren Peizer, Chairman and CEO of Catasys. Please go ahead, Terren..

Thank you, Adam. Welcome everyone to the call. Joining me on the call are, Rick Anderson, President and Chief Operating Officer, as well as Christopher Shirley, our Chief Financial Officer. I’ll begin with our review. Rick and Christopher will discuss the operating and financial results for the quarter.

And then I’ll return to discuss Catasys’ outlook for 2018. After which, we’ll be happy to take any questions that you may have. Our third quarter was highlighted by a significant increase an outreach for the period. As Catasys ended the quarter currently conducting outreach to approximately 25,000 members.

This is the highest total in our Company’s history and represents a greater than fourfold increased over the approximately 5,600 members we’ve reached out to in the second quarter. The primary driver of outreach pull growth was launch with Aetna’s commercial population with substance use disorder.

Enrollment is starting to climb and now have clear visibility into our billings in the coming year, based exclusively on this 25,000 member outreach pull. October’s enrollment growth was substantial and we had a record billings month of $1.1 million. Today, our enrollment is up 40% since the end of Q2. We are certainly beginning to see derail.

In the past, we spoke about internal projections and magnitude that we indicated to be up by three to six months due to variability in customer launch dates from indicated timelines. Until we had a critical mass, we were reluctant to give actual guidance.

As all know at the end of the call, we now feel that our business model execution is at a point at which we can provide 2018 billings guidance and that is not based on timing of other potential launches, but exclusively on the current Catasys outreach pull.

At current levels, we are very confident that Catasys will reach a minimum of $20 million of billings in 2018 and end 2018 with a run rate of at least $25 million. Our GAAP revenue will see a considerable increase over 2017 and we’ll provide additional information on this as we move into the next year.

We believe that billings, what we bill our customers on a monthly basis, is a much more important metric than GAAP revenue to judge the growth of our business. If this is the theme for this call, it's that Catasys business model execution can now consistently deliver unreasonable targets.

This guidance is based exclusively on what Catasys has achieved to-date and not on any of the upside potential that we see permeating throughout our business on both a macro level and in specific relationships with some of the largest healthcare companies in the country.

Last month’s speech by President Trump about the opioid epidemic is just the most recent public example of the growing problem and multilayer challenge that behavioral health disorders, such as alcoholism and substance use disorder or SUD, depression and anxiety, are creating throughout the United States.

Unfortunately, the vast majority of those suffering from these diseases do not seek treatment or care, for other more bid chronic medical conditions. Successfully addressing this condition is the promise of Catasys. The following facts form the basis for our business model.

Over 50% of the prescriptions for opioids go to individuals who suffer from a mental health condition. Principally, depression, anxiety companion with the substance use disorder. 43 million adults in the United States have an anxiety disorder. However, only one and three seek treatment.

156 million in United States suffer from dispersion, but only two out of 10 seek treatment. These numbers are somewhat gated and we believe understate the prevalence of mental behavioral health disorders. They support the business case for Catasys, moving forward. At Catasys, we have worked relentlessly to be a thought leader in this effort.

Our Chief Medical Officer, Dr. Omar Manejwala has served as one of the preeminent speakers on the topic of behavioral health and the opioid crisis and I applaud his efforts in explaining the need for a thorough comprehensive solution. Another layer of the overarching problem is the high cost that these conditions present for health plans.

The insurer has to combat the problem of a huge underserved population where behavioral health conditions cause or exacerbate co-existing medical conditions. Over the last several years, we have developed our proprietary approaches to engage a population that naturally avoids care.

Our ability to successfully identify, engage, and treat these care avoided members to improve their health and reduce cost for their health insurance plan is what is driving our momentum. The nationwide need, in light of the opioid crisis, only serves to prove our value to all parties.

This is where Catasys OnTrack solution provides a considerable value proposition OnTrack delivers a financial benefit to the health plan while providing a comprehensive and integrated care program that improves each individual’s health.

This delivers on average 50% reduction of cost per member enrolled, savings that goes straight to the plans bottom line. We believe our ability to engage these expenses care avoided members and deliver these cost savings are what really separate us from others in the space.

Catasys is the only company that has signed up such a strong base of health plan customers, Aetna, Sentient, Coventry, HCSE, the second largest used plan in the country, Health Alliance Medical plan, Humana, United Healthcare. These represent five of the eight largest plans in the country.

As we said previously, we anticipate signing another two national plans, making it seven of the eight largest plans in the country. This is unprecedented and points to value proposition that we provide to the plan and their members. Let's discuss these contracts.

I have heard from many how do we know that these contracts have any value until we see the revenue from them. Number one, these are signed contracts. Please understand that these contracts take many months and in some cases, years to plan and execute.

The Launch Logistics are extremely detailed and complex due to the highly sensitive nature of treating the membership base. Trust that these Blue chip health plan companies wouldn’t waste the time spent on this if it was not important to them.

The common element across these health plans is a perpetual focus on improving member health and medical cost savings. More importantly, please understand that these plans are turning over. There are two most important assets to us; their claims data and their membership.

Every contract and subsequent launch represents the plans trust and confidence and of course our value preposition. The Catasys team excels at the extreme complexity of working through the prelaunch phase and dealing with the different planned vagaries.

This is a large part of the Catasys value preposition when compared to other companies in our space. The end result, coupled with our outreach and OnTrack system is where the value of Catasys lies. Our patient population represents up to one third of the total medical spend in the Managed Care industry, i.e.

their medical loss ratio of the various health plans. Moreover, our visible pipeline keeps building. We are seeing as the three main drivers to our future revenue growth; number one, new contracts and subsequent launches; number two, initial launches of existing contracts; and number three, expansions within existing contracts.

We have such strong momentum in all three phases and none of it is reflected in our guidance and certainly, isn’t based into the valuation of our stock. It's with this in mind that we have worked to align our interest with that of our shareholders. Let me share with you.

Over the past 10 years, the Company uniquely has not issued two its employees and you raises, bonuses or equity grants.

Throughout the growth of our operations in advance of enrollment and revenue growth, we have continued reinvesting in our business, attracting and retaining quality employees throughout our organization as an important element of Catasys’ ability to leverage future growth.

As shareholders, we are keenly aware that our interest must be aligned with every Catasys investor. With that being said, we have decided to implement a performance based option plan that I believe to be unprecedented with companies in a similar phase of development as with Catasys.

While we filed our employee and Board’s stock option plan earlier this year, we have yet to grant under the plant. Going forward, all Catasys employees granted under the plan, as well as our Board members, will be given options grants with an exercise price of $7.50 per share.

You heard me correctly, which represents 110% premium to today's closing price of $3.64 per share. This shows that the confidence that each of us has in the long-term success of the company, but we’re going up step further.

Our President and Chief Operating Officer, Rick Anderson’s option grant with us over the next five years tie to meeting billings expectations for 2018 and beyond, and potentially other metrics through 2022. Our Board will set the annual metrics commensurate with our future growth prospects.

As far as my option grant is concerned, it will that only if the common stock trades of above a BVAP of $15 a share, you heard that correctly over an extended period of time. We believe this represents both our belief and the long-term prospect of Catasys and will position the company to attract retain employees that share our vision for the future.

Our Home Management Team and Board are quite excited about these grants, even at the premiums to market today. Hopefully, you’ll appreciate that between my personal investment in excess of $20 million and significant premium of these option grants, the management of this company is putting its money where its mouth is in an unprecedented way.

With that, I will turn the call over to Rick to discuss our operations and then Christopher to review our financial results. I’ll then return for a few closing remarks.

Rick?.

Thanks, Terren. During the third quarter, Catasys continued to increase its outreach pool of eligible members and may progress with existing customers to expand OnTrack into new states. Outreach totals increased to approximately 25,000 individuals during the third quarter of 2017.

This is a record for Catasys and is primarily due to the resolution of a data extraction issue with a leading national health plan. Once we launch a new program, it typically takes approximately 12 months to get to full enrollment rate.

We continue to work diligently to shorten that ramp and we are seeing signs in our more recent launches that we are making progress against that goal. We also continuously strive to improve the 20% enrollment rate that we use in our model.

While we’re leaving this rate at 20% for the time being, I would like to mention that this rate has average closer to 25% this year, which has positively affected the number of enrolled members. During the third quarter of 2017, we expanded our OnTrack-A solution to Connecticut for both commercial and Medicare plan members.

This represents another important step that we have taken in strengthening relationship with this one health insurance company as it is the ninth state that OnTrack-A program have expanded to. I would also like to note that this increases the number of the states that we are currently providing OnTrack program to 19.

In addition, we anticipate by the end of the year whereas latest the first quarter of 2018, we will have signed contracts with seven of the eight largest health insurance companies in the country, and we’ll launch additional customers in the first quarter of 2018.

We have created the kind of scalable platform with top-line growth that can truly be translated into sizeable margins and ultimately profits for shareholders.

All of us have worked for years to create a unique identification and healthcare service delivery model that whilst focused on behavioral health disorders, can be leveraged to offer new products and modalities to facilitate further expansion. With that, I will turn it over to Christopher to go through our financial results..

Thank you, Rick. I encourage everyone to review our press release from this afternoon, if you have not done so already.

In addition, as stated earlier, we intent to file our third quarter 2017 Form 10-Q this afternoon, which will include details regarding our consolidated financial position and results of operations within the MD&A section of that filing.

While we begin with the review of the financials, I would like to take some time to explain some key differentiations and the terms that we use for all those listening on the call to fully understand our financials. The way that healthcare insures pay us can defer quite a bit. Some of them pay per month for each member enrolled.

Some pay out fee over a limited number of visits to one of our network providers. And others pay in advance for the program. Payments in advance, as well as any fees subject to performance guarantees, results in deferred revenue. It is important to note that historically nearly every deferred revenue dollar has become GAAP revenue with time.

As Terren mentioned, we also believe that billings, which we define as what we bill our customers on a monthly basis, is a much more important metric than GAAP revenue to judge the growth of our business. We've seen significant growth in billings year-to-date and expect this to continue for the foreseeable future.

Billings for the third quarter increased 16% to $2 million from the same period in the prior year. Revenue for the third quarter of 2017 was $1.2 million compared to $1.3 million in the third quarter of the prior year period due to an increase in billings subject to deferred revenue.

Let me provide some additional detail surrounding the process by which our largest customer during the period Aetna defers from some others. The short answer is that it's typically a longer process to bill and report revenues than our other customers. But it serves primarily as a delay and not an impediment to long-term growth.

With all our other customers as soon as a member enrolled, we either begin billing them a monthly fee or build them in upfront case rate. This results in a very short amount of time from enrollment to cash. With Aetna, instead of billing upon enrollment, we bill our fee based on a limited number of visits to our network providers.

Due to the time it takes for the provide visits to happen and rebuild, we essentially see a three month delay from enrollment to the commencement of billing when compared to our other customers. Our model assume no delay. Hence, we didn’t grow quarter-on-quarter even with a much higher number of enrolled members compared to Q2.

However, this is a very positive statement when you consider the billings ramp we are starting to see in the fourth quarter. As we have discussed in the past, we also pay close attention to deferred revenues, which had favorable gains for the quarter.

Deferred revenue, which is recognized as revenue over that period in which each member in our program is enrolled or as savings are realized, was $3.2 million at September 30, 2017, an increase of 108.5% from $1.5 million at December 31, 2016.

While we can’t control the timing of health plan launches nor have enough critical mass to provide quarterly GAAP financial guidance, we have made a concerted effort to provide as much transparency as possible for investors to properly evaluate our growth. Overall, we continue to see favorable progression in this regard.

I wanted to briefly mention the Company's income statement for the period. For the third quarter of 2017, the net loss was $3.1 million or $0.19 per basic and diluted share compared to a net loss of $7.4 million or $0.81 per basic and diluted share in the prior year period.

While we continue to invest in AI and our technology platform to support large scale growth and efficiency, the primary driver of this decline was a negative change in fair value of warrant liability in the prior year period. As I was pleased to report last quarter, our income statement is now clear of many of these unusual items.

Before I turn it over to Terren, our balance sheet has greatly improves compared to December 2016. At September 30th, total cash and cash equivalents on hand were $6.9 million and shareholders' equity was $3.3 million. We feel comfortable with our capital position and our ability to carry out our strategic objectives..

Thank you, Christopher. To summarize, we were pleased with the progress in terms of outreach in the third quarter and have the Company poised for accelerated enrollments and billings in the coming quarters.

In our last call, one of the challenges that we presented was balancing our need to be proactive and transparent, as you our shareholders and the variability and the timing of launches and expansions of our OnTrack program.

We have begun to increase ourreach considerably and knew 2018 was rounding into a terrific year, but providing a tangible metric with something we all struggled with. Now, we feel we can provide actual guidance that we believe we can consistently deliver while showing a very meaningful growth trend.

Based on enrollment ramp up and the expanded outreach pool during the third quarter, we project at least $20 million in billings in 2018. We expect to end 2018 with a run rate north of $25 million. Again, that is based exclusively on what is in hand today, what we know today.

In reality, as we reach this guidance, we fully expect to have added eligible lives, resulting in potential upside beyond that number. We have scheduled launches early next year with three national plans, which will all be incremental, expansions with Aetna and HCSE, all incremental.

We believe that Catasys’ current valuations does not reflect the opportunities set currently before us. We recognize that we must successfully execute our current opportunity set to meet this potential. Our $20 million guidance is meant to be fully achievable.

I understand that we need to build credibility with investors by consistently delivering on our stated goals. But the reality is that no company in our space provides long-term value proposition of Catasys. All of us are excited about the opportunity ahead of us. We truly believe we have a compelling value proposition.

I have also made it a priority to get out on the road to tell our story, both at individual meetings with investors and at various conferences. I am also in conversation with many, what I would call, top-tier analysts on the street industry.

I think our undervalued stock is a very compelling investment at current levels with significant growth prospects. Those are views that I have had the pleasure of meeting lately have likely heard me talk about my personal investment in the company. Like you, I am a shareholders and a 100% committed to the success of the company.

Operator, would you please open the call to questions..

[Operator Instructions] Our first question comes from John Nobile with Taglich Brothers. Please proceed with your question..

I have just a couple of questions. My first one, looking at the press release and your comments about how billings were impacted during the quarter with the largest customer looking at fees over a limited number of visits, I wanted to get a fill for if this wasn’t impacted by this customer.

Do you believe that your revenue would have actually increased in the quarter?.

Yes, it would have. As Christopher said, it pushed back the billings we’re seeing about a three month delay in that. So the timing had been similar to our other customers we would have seen an increase in billing..

And speaking also….

We’re also hopeful that that’s continue going to contract in time here..

But billings, only because I have the October presentation and previously 2018 $57 million in billings, internal billings projection. So just wanted to get a handle on what your new guidance is on the $20 million or ending with $25 million from that October presentation.

Understanding that your pool of eligible members, if I’m correct, is up over fourfold so far in 2017. So from $57 million previously, we’re looking at $20 million to $25 million currently.

Is this really because it doesn’t include any upside potential as you mentioned this is more of what you currently see but there could be -- maybe significant upside potential to this number?.

To be clear, you might not have been on prior calls, which sounds like you weren’t. We, back in the summer, we had put out something we were very clear not guidance. And what we had projected based on what health plans were telling us at that time.

And we principally pointed to two UnitedHealth launch, which is the largest plan in the country and Humana coming back on screen, both occurring in September. Both would have dramatically increased our number this year. And of course, as you go out with each launch, the expansions come in the subsequent year.

So where we are today is because of -- again, we can’t control these very large companies launches. They’re going to happen but we can’t control the timing, because so many variables that are incorporated in that launch. Now that said, what we decided to do because now we have this core base of Aetna customers and others.

But Aetna, the 25,000, Aetna is roughly 17,000, 18,000 of the 25,000.

And because that we have a core base now that we’re outreaching to today and because we know what our business model calls in terms of a ramp of a commercial substance use disorder patient population, we know or have a very good idea of what today's numbers project out to next year.

And we're using this as our -- as we’ve never did before as our first guidance that we’re providing to shareholders. That said, we do not count any of the five other major, whether it’d be three new contracts and two major expansions, we are not incorporating those numbers into that $20 million guidance.

As those events occur, we can extrapolate that our numbers are going to incrementally improve on what we provided in guidance. And obviously, as we project out to the next year in 2019, we expect those numbers to accelerate even at a greater rate.

The $20 million number today still represents a greater than a 100% increase over the 2017 numbers, and we actually project that growth rate to accelerate into 2019..

So my take on this is, there still is very significant upside potential as it could come in from these insurers?.

Again, it's unprecedented that anyone -- what you want to call a vendor, whether you want to call product offering provider, it's unprecedented that someone has come in and entered into contracts with seven of the eight largest health plans.

It takes a long time to get through the contract Phase and as we explained, the statement of work incorporates all the various details with similar contracts includes all the various details of the launch, how we interact with their members, how the health team interacts with us, how we report outcomes, how we -- it's very complex and intricate.

And once that’s all, we work the launch and the statement of work contracts together. Once we press the button of launch, it's then all on our ability to execute. But until they press the button of launch, we have no control. That said, we expect a very robust business, going forward..

And obviously, there should be a very robust increase in your revenue in 2018 with the increase in billings that we’ve seen to-date and also what you anticipate in 2018, which leads me to a question about your cost at revenue or if I could get into the gross margin potential.

When I look back at last year, the 2016 fourth quarter and I factor out the deferred revenue, you were close to 40% gross margin, I think it was 38% to 39% gross margin, when I factor out the additional benefit of 100% gross margin on deferred revenue.

So looking forward with a significant ramp in revenue, what could we expect on the cost of revenue? And I know you have to basically plan ahead of time, the manpower needed for an increase in revenue. But what could we anticipate say margin wise going into 2018 gross margins wise..

Well, we do front end load as we prepare for launch. The cost of our -- we hire care coaches and outreach personnel in advance of the launch, so we're prepared to launch when the help hand presses the button.

Obviously, when impacted us over the summer was we were hiring the care coaches and outreach personnel in anticipation of United Healthcare launch, as well as the Humana launch. And obviously, that didn’t happen.

The negative working capital associated with our growth is simply or predominantly the six weeks that we take to hire and train the care coaches before they’re out in the field associated with enrollment in revenue. We embed the cost of our care coaches and our outreach personnel in our cost of services provided.

So it's overtime the numbers that you’re seeing, the margins that you’re expecting will cause 50% plus or minus, will be a normalized grade at scale..

50% is what your internal projections really are….

It would be a pretax margin contribution. But again, we’ll be growing for quite a while….

I understand the needing to higher the manpower ahead of time, which obviously will impact it. But when all the sudden done, we're looking at the potential 450%. I'm not saying next year you’re going to have 50% margins. But when you get the manpower ahead of time and you can absorb that, we can look at that potential going forward.

I don’t know if it's into 2019 or beyond?.

Again, we're going to be growing for a long time. But overtime, our margins will approximate that. And if we can move -- let someone else ask some questions. Is that possible? Thank you..

Our next question comes from Daniel Carlson with Tailwinds Research. Please proceed with your question..

Just quickly here, it appears that you've reached an inflection point with your October billings having increased, so congrats on that. Just wanted to look at you've talked about unprecedented and what you’re doing instead of really high number obviously on where your options best.

So looking at $20 million in billings next year with some upside from launches, how do we look at that as valuation metric? And are their comps we should be measuring you against?.

That’s an interesting question. So broadly speaking, we’d be a classified in the healthcare IT industry. The healthcare IT industry is very hot, number one. There typically for companies at our stage of development is roughly 20 multiple placed on revenues. Now, depends we are in a growth phase.

We're just at the beginning of our growth phase and we have high pretax margins, and we have a tremendous free cash flow business model that scales pretty easily. In fact, there is a private company. I'll give you two examples.

There is a private company that is in our space, not directly competitive to us that has less revenue than we do today that's projecting 20 million of revenue roughly ironically 20 million in revenue next year. And it's going out in a race at $400 million pre-money valuation, which would be 20 times what they expect for revenue next year.

Now, again less than we have today, and probably projecting less revenue than we will achieve next year. Then you can look at, there was an IPO of a company four years ago that also pointed out off of $20 million of revenue, a company that we’re often mentioned in the same light or while we have different product offerings.

But they went public and the prospect of signing up a lot of health plans and delivering cost savings to them. And they went public, had $1.6 billion. Needless to say that was a pretty -- and I think it goes off of $80 million of losses.

That said, I still think if you look at 20 multiple, that’s why -- if everyone just focus and us achieving $20 million next year. If we look at our 20 multiple of this year, which is being valued somewhere around $200 million, that’s $55 million, $60 million that we’re at today. If you look at next year, obviously, it would be closer to $400 million.

But our growth rate really, really takes off in 2019. And of course, if you did a discounted cash flow or net present value, the numbers get even bigger. We believe obviously, and evidenced by the $15 threshold we believe the company’s stock is way undervalued. And I suspect you will see my interest increase..

Our next question comes from [Ben Rubenstein] with [indiscernible]. One moment please proceed with your question..

So I guess, I mean, do you guys here raise more capital?.

There is a fake news story a month or two ago that caused dislocation in our share price. That was fake news. I do not expect to raise any equity capital, going forward. I certainly -- there is so many different scenarios. If we don’t grow, we certainly don’t need any more capital.

I mean if we stick and focus on the next year’s 25,000 outreach of today translated to the $20 million, we don’t need any more capital. If we, as Christopher mentioned, we are investing in the digitization and artificial intelligent and natural language processing.

And you have new product development that we’re excited about that health plans have asked us for. There is some marginal additional investment. When I say marginal, I’m talking about $1 million, $2 million, that kind of thing.

If we need capital, again, if we’re blessed with the prospect of all these launches that I told you about and even more that we’re not even mentioning right now because they’re not close to closure, if you will. It’s is possible we can need some more capital but we’re talking about very small amounts.

And in the context of that, we are in discussions with banks in terms of we will be to get or we hope to be able to get things like a working capital line. But I look to finance the company in -- again $1 million, $2 million, $3 million range with debt not equity. I am a large shareholders and load to issue equity, I do not lead there more dilution.

I'm excited about where we are. We don’t need a lot of capital. And again, I would think about, I'm pretty sure to think about a bank line of some sort to bridge us for that six week period of time that we're hiring care coaches and training them where they’re not out in the field associated with enrollment and revenue..

So you would expect to generate cash next year based on the….

We go to cash neutral under any scenario pretty quickly. And again, it's function of how much we're investing and a lot of other opportunities that we're seeing. But under any scenario, we won’t have to doing an equity offering, I should say ever, ever. But under any scenario that we anticipate today, we do not see an equity offering.

And contrary to the fake news, we are not in the market with an equity offering nor we’ll be anytime soon..

And then it sounds like you have some really big aspirations for the company.

I mean, could you talk a little bit about what hurdles do you think there are to achieving what you want to accomplish? I mean, it sounds like you want this to be a really -- basically a huge company in terms of revenue and profitability over -- and I don’t if its three years, if it's five years.

I mean could you talk about [multiple speakers] it there?.

I’ll give you my answer and I’ll turn it over to Rick, because he is going to be directly responsible to ramping up the operations. But yes, we do see a very big opportunity here, and it's not based and our dreams. It's not based on our projections. It's based on what the health plans are telling and it's always been.

It's just there’s been a tremendous variability in their actual timelines and what the reality has been in their timelines. Again, it's not by accident we sign seven of the eight largest health plans in the country. It is so hard to sign one or two. As that company that did the IPO four years ago, they ended up that timing in it.

They have a joint venture with one, a marketing agreement. Yes, we expect very large business. It's not difficult to scale. We do have to execute. We do have to build credibility by over, or if you will, under promising and over delivering at our guidance and we're highly confident we’ll be able to do that.

And Rick?.

I would say that we definitely are excited about what we're seeing from the health plans out there, what they are looking for. I think we have better momentum than we ever had.

And I think that’s partly because of our other customers, partly because of results that we're seeing, partly because of the environment that we're in, but there is a definitely a lot of interest in growing interest in what we're doing.

In terms of hurdles, the primary thing that we work with on a day-in and day-out basis are the health plans, especially the large ones are slow, large, complex, we're working across multiple elements of those health plans and the larger they get the more elements there are with siloed expertise, lots of people that that need to weighing in on different kinds of things.

So they generally do not move very quickly even when they’re excited about something and with the regulatory environment their internal issues. And lately one of the themes we've also seen of course is all the data breaches and security issues that healthcare companies in general have faced.

So as one would expect, there has been even more increase around looking at those f issues and security et cetera. And all of those things take time and working through the intricacies. So I would say that's the biggest challenge that we have in terms of timing of growth and growth as we go forward..

And so I guess so the cost of hiring more care coaches, I guess that’s relatively small when you ramp-up in advance of….

Yes, in terms of -- I would tell you what's exciting to us is the free cash flow generation once we scale. Because most businesses when you grow so dramatically you have to reinvest so much capital into your growth. That's not our model. I mean, it took us a lot of capital to get here. It took us a lot of years to get here.

But now, going forward, we have -- that's why it's in the cost of services provided and that in the SG&A section, and that in capital improvements and equipment.

It's just the six weeks, most of the growth associated costs, are those six weeks of hiring and training the outreach and care coach personnel where they’re net out in the field associated with enrollment revenue. It's a very scalable free cash flow model..

And do think we’ll see that free cash flow, is at 2019, 2020?.

I don’t I get into taking our guidance or anything.

But I would say 2019 should be -- I personally would be disappointed it had a quantum increase from 2018?.

Our next question comes from Fred Ore, who is a Private Investor. Please proceed with your question..

I want to ask Rick, if you could give us a head count on care coach is on the payroll at the end of the third quarter?.

In terms of the care coach and outreach staff that we currently have, it's about right around mid-40..

And I just want to make one comment, but I need to ask a question as a process.

Are you guys set up to handle substance abuse in New Jersey?.

Yes..

And in Pennsylvania?.

Yes..

There is a -- my daughter is an EER nurse over New Jersey. And there is a new program being funded by the state that's the referring of addicts that comes through emergency rooms and get subject to Narcan treatment to refer them out to treatment rehabilitation programs.

And if you guys had a premarketing hand, you might want to contact some of those hospital ERs and do your literature your program in front of those officials and they might be able to provide some enrollment leads for you under that program.

I don’t know how permanent or [patients] government funded as you sign about eight hospitals emergency rooms that are involved in the program and the referral service. So I know you guys have a direct outreach program through your insurance company data basis.

But this might be another avenue, maybe even a little easier one to pursue [multiple speakers] give that the floor?.

I appreciate that.

I mean, the one thing that I would point out is that because our customers or the health plans and one of the aspects of what we do and part of our value proposition is the ability to impact members who are not otherwise seeking treatment is that we’re using our analytics to understand who had impactable costs and which of those costs we can impact by enrolling the member of the program..

Yes, you need to screen it at a time, that’s a good point. Thank you..

[Operator Instructions] Our next question comes from [indiscernible] with First New York. Please proceed with your question..

Couple of months have passed, and could you just talk to us in terms of the progress have been made with UNH? And secondly, obviously recently, there has been some press report from CVS tying up with Aetna.

Like how, is that to consume, like how is that impact you guys, both near-term and longer term?.

I’ve been asked CVS Aetna question quite a bit from a lot of people. First off, let’s state the obvious, there has been no announced deal. There’s been a lot of discussions and consolidation potential within the industry that never materializes.

But if it does, I don’t think it will have a material impact on what we’re doing with Aetna; number one, it would be a vertical integration, which shouldn’t distract our company and our counterparts at Aetna; two, based on our own experience, where there was a very large merger between Humana and Aetna contemplated, that subsequently broke off.costs.

Why we did encounter distraction at the Humana level, they were the ones being acquired. At the Aetna level, we did not experience much distraction at all. So again, we would not anticipate any impact on our business.

Longer term, it should -- it would help us to the extent that the combined CVS Aetna offering is more attractive to employers, their customers and perhaps Aetna would build up their customer base. And of course, we would benefit indirectly from that. Rick, do you want to address the UnitedHealth..

Sure.

So over the last several months, we’ve continued to work through the implementation and Optum and united and were trying to agree internally on how they would split savings from our program; for a couple of reasons and with united and Optum unable to come to a conclusion on how they would split that savings between the two of them, we transitioned to working directly with United.

So we’re in the process of transition, which makes it little bit more challenging to have absolute visibility to timing of launch..

We were prepared for launch. Most of the preparation for the launch is behind us. So once we got the visibility and a launch date, we should be able to move very quickly..

Thank you, and also appreciate obviously the high strikes on the employee and the CEO options.

Are there any operational metrics that tie to those rewards?.

As I’ve mentioned earlier, for example, if you -- and that is personalize, Rick, and that to bring Rick’s competition out to public. But it will be public information. So Rick, for example, he is best over a five year period of time. The first 20% will be a function of achieving our guidance for next year. If we don’t achieve it, he’d invested it.

The metrics that the board will set will constantly change to be commensurate with where we are in the business at that time, and commensurate with the growth of our business.

And I would say, it's high unusual and we pulled -- our Board, our independent committee our comp committee, which as now they run NASDAQ, we have a truly independent comp committee, governance committee, audit committee.

But the comp committee did an extensive analysis of companies in both under the $300 million market value and then looked in the healthcare industry and looked into comparable companies. It's unprecedented what we've done.

And the reason we’ve done it is because, for whatever reason, we believe that the Company stock price is way undervalued what our private market value would be, and what our IPO value would be.

And we believe it we would be fair to, based on our industry knowledge and our specific company knowledge, it wouldn’t be fair to strike the options at this what we believe to be although it’s the market price and artificially low market value. And we're quite confident that even the numbers.

$7.50 a share and $15 a share, we are quite confident that he will still truly be quite valuable..

Our next question comes from Robert Cohen who is a Private Investor. Please proceed with your question..

I got on the call late, but there is obviously been an enormous amount of noise about -- epidemic and all of this.

Have you -- are you guys hearing a lot more from these insurance companies at this point as far as trying to get more aggressive on this, or have they -- or you haven't been hearing much?.

Well, I think it's fair to say that the health plan -- with the amount of media coverage that there is and the politics around DOP and epidemic and how it's evolved that there is a fair bit of interest on what the health plans are doing to help address that issue.

And that certainly brings -- although, they've always been able to see the opioid cost, because it flows through their pharmaceutical data.

I think, it's definitely put more pressure on them to do things and we certainly are part of the solution, especially on the treatment side and have been used by the health plans as examples of things that they’re doing to address the opioid crises.

But one thing I will point out though is that, especially in the context of depression, anxiety and substance use disorder, the opioid portion of the problem of the individuals that we see is a relatively small portion. It's grown slightly over the last few years. But in terms of SUD, alcohol remains the largest issue.

And then when you combine that with depression and anxiety, it's obviously shrinks in that context. But definitely, there is pressure on the health plans to derive at solution or demonstrate what we’re doing and we have been sided as a solution for that for some..

I would add to that is that while -- and I don’t want to be little or should realize the opioid epidemic. But I think it's become more political and more -- while it's a tragedy, I think what it is it's affecting a lot of the kids and teenagers and people in their 20s. And it becomes very tragic when you see a death in that nature.

But as a population ages, you see an increase in alcoholism rates. And what the fact is, is that actually surprisingly or maybe not surprisingly, there’s been a lot of media reports that three times as many people die a year from alcoholism than from opioid use. But again, with the opioid with Dr.

Omar Manejwala emphasizes is and its fact that 50% of all those opioid prescriptions, painkiller prescriptions are to those also suffering from anxiety and depression. And by definition, you have to be able to treat and address all three behavioral health issues if you’re going to provide an effective solution.

And we believe we’re the only one effectively providing all three -- treating all three and providing a real opioid solution. And that does resonate with the health plans..

I got one other question. I've been in this thing for an awful long time, and you guys have been for a lot of different scenarios and it seems that this is one that you guys have really been on track with for quite some time now. Has this been the catalyst, the moment you guys been waiting for to go to from basically 5,600 to 25,000.

Is this the one metric you guys been waiting for something like this to happen.

And now everything should really start fall in the place with hopefully institutional investors and things like that?.

I would say, well, it’s the first time we had a core mass where we actually identify what our revenue should be of that as we keep reiterating. It is still, in my opinion, a drop in the bucket of where we’re going.

And again, I have been -- what’s interesting to me is that there are lot of analysts, both on the Managed Care side and on the healthcare IT side that are -- and by the way, I am getting unsolicited calls. They’re hearing from the health plan themselves that this is something that they should look at.

So that’s exciting to me that it's getting recognized. We know it’s getting recognized in the industry. It just hasn’t been recognized on Wall Street.

And if we were a technology company or we were [VC Back] we see that company, everyone be talking about how we’re going to -- how we signed up the industry and how we’re going to be the leader in a very, not only topical industry but we’re going to be a leader in something very economically significant.

As again, it represents one-third of the total medical -- or patient population, represents one-third of the medical spend in the country and Managed Care because they have these chronic co-morbid conditions of cardiovascular disease, diabetes and pulmonary disease.

And if we can address the behavioral health issue and focus them on getting proper care for the chronic disease, we significantly lower the costs to the health plan, improve member health and it’s a win for the health plan, a win for the patient and member and it’s a win for our shareholders..

Our next question comes from [Rick Nolan with Nolan LLC]. Please proceed with your question..

My question is with [indiscernible] and opioids through the Trump language.

What’s our chances of getting some state or federal help with all these Vietnam veterans such on the street where a lot of these problems are literally lying?.

Again, I would -- so what we just had said is that alcoholism is better than opioids, but opioids are a still problem and it’s topical and it’s political. We also have said that depression anxiety is even bigger.

And again they cost the same amount -- roughly the same amount of money to the health plan because they have these other chronic co-morbid medical conditions. What you’re speaking to in terms of veterans and the military, there is a program called TRICARE, which it's still in the process are being finalized.

But it appears that Humana was awarded the Eastern region and Sentient HealthNET was awarded the Western region, both are customers of ours. We’ve worked with Humana on their bid for the TRICARE program. The TRICARE is roughly 10 million people, 10 million members, which is quite large. We’ll make it one of the larger health plans in the country.

But obviously, the prevalence rate of the depression, anxiety, PTSD and substance use disorder is higher than the other Medicare, Medicaid it's more like a Medicare population, and partly like a Medicare population and probably worse than all of them. So it represents a higher yield audience for us. And we are very focused on that population.

Of course, we see it again in the Medicare and Medicaid as well..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks..

Well, thank you to all of you for your time. We really appreciate it. We're excited for the fourth quarter and we look forward to speaking with each of you in the weeks ahead and hopefully sharing with you some new developments. Thank you guys have a great night..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..