Adam Prior - The Equity Group, IR Terren Peizer - Chairman and CEO Rick Anderson - President and COO Christopher Shirley - CFO.

Steve Emerson - Emerson Investment Group.

Greetings, and welcome to the Catasys First Quarter 2018 Conference 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.

It is now my pleasure to turn the call over to your host Adam Prior, The Equity Group. Adam, please go ahead..

Thank you, good afternoon everyone, and thank you for joining us. Before I turn the call over to management, I would like to make the following remarks regarding 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 typically are used to identify 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 the risk factors described in the risk factor section of 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 these forward-looking statements. During this call, we may also present certain non-GAAP financial measures.

The press release along with the financial tables issued today, which is located on our website 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 Inc. Please go ahead, Terren..

Thank you, Adam, and welcome everyone. Also with me on today's call is Rick Anderson, President and Chief Operating Officer; and Christopher Shirley, our Chief Financial Officer.

As is our usual format, I'll begin with an overview, Rick and Christopher will discuss the operating and financial results and I'll return to discuss Catasys outlook for the remainder of 2018. We will then take any questions you may have.

We continue to make headway on our strategic initiatives in the first quarter of 2018, with a program expansion with HCSE, the second largest Blue Cross Blue Shield and the fourth largest health plan in the country and in enrollment launches with two new national health plan partners Cigna and Humana.

These led to the continued increase of our outreach pool of eligible members, resulting in increased enrollments and billings, billings increased 33% year-over-year from Q1 2017 to Q1 2018 and were up 20% from Q4 of 2017, excluding the buying annual HAMP saving share billings.

We enrolled 933 new members to the OnTrak program in the first quarter of 2018, up 65% from the fourth quarter of 2017. This is a direct result of the continued expansion of our outreach pool, which we anticipate will reach approximately 36,000 members by the beginning of June, a 44% increase from the end of the 2017.

With the digital program expansions and launches expected in 2018, we believe the continued expansion of our outreach pool will set the foundation for increased enrollment and billings, this year and into next year. As most of you know Catasys operates in a specific niche, within the healthcare industry.

Through our integrated 52 week OnTrak program, which is designed to identify, engage and treat behavioral health and resulting co-morbid medical conditions, our goal is to improve the health of individuals, based with behavioral health disorders, including alcoholism and other types of substance use disorders as well as depression and anxiety.

Many individuals dealing with these diseases and or conditions, do not seek treatment. Catasys, is a proven leader in improving the health and reducing the costs of this population, given our understanding of and subsequent ability and success at identifying, targeting and engaging these expensive care avoidant members.

We uniquely combine analytics, machine learning, AI, and an effective integrated outpatient treatment model. Improving member health and lowering the costs of healthcare are the biggest value drivers for our health plan partners and our continued program expansions and enrollment launches with these plans are a testament to our success.

In January of this year, Catasys signed an agreement with Cigna, making us the only company in our space to be contracted with six of the eight largest health plans in the country. In addition to Cigna, those would be Aetna, Sentient, HCSE, Humana, and United Health Care.

We launched the Cigna program in Tennessee and expanded OnTrak program with HCSE to Blue Cross Blue Shield at Illinois in January of 2018. The HCSE expansion followed our successful launch of Blue Cross Blue Shield of Oklahoma in August.

In March, we announced the program expansion with HAMP, Health Alliance Medical Plan, adding anxiety and depressions for eligible commercial and Medicare members in Illinois. In the same month we launched enrollment of the OnTrak solution for member suffering from substance use disorders with Humana in 16 states.

Finally, we see considerable room for programmatic expansion and enrollment enhancements to our relationship with Aetna. Thus far, we have encountered an overcome challenges relating to correctly receiving proper data, unique billing characteristics and the typical extended timeframe that comes with dealing with major health plans.

As we have repeatedly noted, these companies provide Catasys with their two most valuable assets, access to their members and their patient data. As a result program launches can take time, with Aetna, we initially had some data disruptions, which impacted our outreach pool of eligible members and enrollment.

We have worked through these disruptions, which resulted in a substantial increase in our outreach pool and is translating into more enrolled members. We are still working closer with Aetna and aligning our treatment model and coding, but anticipate a successful outcome there as well, which will further improve our revenues beyond forecast.

We expect to announce additional program expansions and launches with a number of health plan partners as we enter the second half of 2018.

Q1 results were in line with our internal projections and Q2 got off to a very strong start, with April achieving a record $2.3 million in new billings in a single month, compared to our internal projection of $1.4 million. This was due primarily to higher than expected billings from Cigna and the expansion with HAMP.

For both Cigna and HAMP we build them upfront for the entire 52 week program when a member enrolls and we generally see a larger increase in enrollment after the initial launch or expansion and then adjusting to historical run-rate, but directionally this is exciting progress.

We are reiterating our previously provided guidance of $20 million in billings for the year and the year-end run rate of at least $25 million.

While we expect GAAP revenue to increase significantly from 2017 in part to our adoption of the new revenue recognition standards we will continue to emphasize billings as a metric of focus in 2018, as it provide a better indication of how our business is growing.

This guidance was initially set based exclusively, what Catasys' outreach pool was mid-November 2017 and not on any of the upside potential that we have discussed since setting that guidance. As the year-end approaches we hope to have greater visibility and will update our guidance as appropriate at that time.

We continue to see positive developments in our operations, which will drive GAAP revenues and billings over the long-term as our outreach pool ramp up continues. With that, I will turn the call over to Rick to discuss our operations.

Rick?.

Thanks, Terren. As Terren just noted Catasys' business growth is primarily driven by the continued ramp-up of our outreach pool of eligible members, which subsequently leads to increased enrollments and billings.

Our outreach pool of eligible members grew 24% to approximately 31,000 in March 2018 from 25,000 in January 2018, and we anticipate it will continue to grow to approximately 36,000 by June, which is a 44% growth from the end of 2017.

During the first quarter of 2018, we continue to expand programs with existing customers and launch programs with new health insurance plan partners. All of which are now contributing to the ongoing growth of our outreach pool and increased enrollment.

On our last quarterly call, we discussed a couple of expansions and launches that occurred in January and February of 2018. We expanded our OnTrak solution for the treatment of anxiety, depression and substance use disorders with HCSE, the nation's second largest Blue Cross Blue Shield plan in Illinois.

This is the second state following Oklahoma where we have launch program with this partner and we continued to be in discussions regarding further expansion. We also signed and launched our OnTrak solution with Cigna for eligible Medicare advantage members in Tennessee in February.

In March 2018, we expanded OnTrak with HAMP, a leading regional health insurer in Illinois to include eligible commercial and Medicare members with anxiety and depression.

Prior to this expansion the program covered eligible commercial and Medicare members with substance use disorders only, as well as eligible individual and public market place plan members with anxiety, depression and substance use disorders.

We believe this expansion reflects the success the OnTrak program has had in improving member heath and lowering healthcare costs for this partner since its initial launch in 2016. Also in March 2018, we launched the enrollment of the OnTrak solution with Humana for eligible commercial members suffering from substance use disorders in 16 states.

We expect to announce additional launched and expansions in the coming months, which will continue to drive the ramp up of our total outreach pool and subsequently enrolment throughout 2018 and beyond. As we have stated in the past, it typically takes approximately 12 months to get a newly launched program to full enrolment rate.

And we continue to work diligently to shorten that ramp. We are seeing signs of improvement on this call with each launch and we generally average 20% or better enrollment rate subsequent to the ramp. I will now turn it over to Christopher for an overview of 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 filed our quarter report on Form 10-Q prior to this call, which will include details regarding our consolidated financial position and results of operations within the MD&A section of that filing.

I would like to begin with a brief recap of the way Catasys' books revenue, which depends on how our health insurance partners pay us. Some of our partners pay per month for each member enrolled, some pay our fee over a limited number of visits to one of our network providers and others pay in advance for the program.

Payments made in advance of service delivery results in deferred revenue. In accordance with the new accounting standard, we are booking 2018 revenues in the same period that the services are delivered. We report revenue net of claims adjustments to accurately reflect the amount we expect to collect.

Member revenues subject to performance guarantees are monitored overtime to ensure revenue accurately reflects our expected outcome. Additionally, visit related revenue maybe delayed up to three months from initial enrollment due to the on boarding and ramp up time it takes for the provider visits to occur.

Because of these variances and how we book revenues, we share another metric, billings, for the total amount we invoice our customers on a monthly basis, which we believe has historically been a better measure of the growth of our business.

Billings for the first quarter increased to $3 million, up 33% from $2.3 million in the first quarter of 2017 and up 7% from $2.8 million in the fourth quarter of 2017. Excluding the HAMP by annual saving share performance payment we were up 20% from the fourth quarter of 2017.

In April, we achieved billings of $2.3 million the most recorded thus far in a single month, and for the first four months of the year we are tracking ahead of our internal projections. Revenue for the first quarter of 2018 increased 5% to $1.9 million from $1.8 million in the prior year period.

This was driven by the launch of enrolment with new health plans and continued enrollment from existing plans, which resulted in a 74% year-over-year increase in the number of enrolled members as of March 31, 2018.

It is important to note that for our largest customer revenue growth lags enrollment growth due to the time it takes for the member of provider visits to occur.

Deferred revenue, which is recognized as revenue over the period in which each member in our program is enrolled was $1.7 million at March 31, 2018, a 42% decrease from $2.9 million at December 31, 2017.

This decrease resulted from a $1.9 million onetime catch up entry due to the adoption of a new revenue accounting standard effective January 1, 2018. The onetime entry effectively re-classed prior year deferred revenues to retained earnings at the beginning of 2018 and was partially offset by new billings in advance of services in the first quarter.

For the first quarter of 2018, the net loss was $4.2 million or $0.27 per basic and diluted share compared to a net loss of $21.8 million or $2.35 per basic and diluted share in the prior year period.

The improvement in net loss was a result of the prior year period being impacted by a $5.2 million change in the fair value of warrant liability, as well as a $10.6 million change in fair value of derivative liability, resulting from the issuance of convertible debentures in July 2015, which converted into common stock in April of 2017.

With that, I'll turn it back over to Terren for closing remarks..

The Forgotten Killer, was certainly well received. Catasys is a big data, analytics, AI, technology healthcare company, that offers a comprehensive outpatient treatment solution.

Six of the eight largest health plans in the country having trusted Catasys with their members and claims data and we have continued to successfully deliver on treating these patients and saving both members and insurers on healthcare costs through our OnTrak program.

At this time, we see no competition to our unique ability to identify, enroll, engage, and modify the behavior of a very treatment and care avoidant patient population thereby providing our partners a tremendous value preposition and return on investment.

That said, we continue to improve upon all of our capabilities, you may have heard me describe Catasys as one big machine learning company, with each member enrolled and treated and with the outcome registered, we gain even greater key learnings, which we can incorporate to continually improve our OnTrak product offering.

Historically we have treated in excess of 6,000 patients. We expect to see this number grow significantly now and well into the future. As you may recall, when we first guided to our $20 million billings for 2018, as well as a year-end run rate of $25 million, we based the figures only on the outreach pool in hand at that time.

We also stated that if we didn't expand that pool, we had enough capital to get to profitability. Subsequently, we have added new contracts with Cigna and Humana. I also stated, that we anticipated contracts with seven of the eight largest plans in the country. Currently we have announced six. We anticipate the seventh soon.

The previously discussed expansions with HAMP and HCSE have also come to pass and we expect expansions with other existing partners. These new launches and expansions, which are above and beyond our base case will require approximately $2 million in additional working capital.

We also expect to seize upon new opportunities to cater to other member populations and expand our footprint within our health plan partners. This requires further investment in our analytics, artificial intelligence and member engagement capabilities.

We anticipate that this technology investment will be approximately $3 million, thus we will need a total of approximately $5 million in additional working capital to drive dramatic expansion in our business. As we have said in the past, we do not anticipate raising any equity capital to satisfy these capital requirements.

We hope to share more details on our plans for financing with you in the not too distant future. With a strong start to 2018, with all the above base case launches and expansions, we are increasingly optimistic about the road ahead.

As our $20 million annual billings guidance does not include any additional customer launches and expansions with existing customers and enhanced product offerings, we anticipate achieving at minimum $20 million in billings for the year.

Come mid-November, when we plan to announce guidance for 2019 that reflects our anticipated expanding revenue base and accelerated revenue growth rate, we will similarly endeavor to guide a base GAAP revenue case and further endeavor to surpass it.

In addition to being a thought leader in our industry, I intent to remain proactive in investor outreach, I generally visit major cities on a regular basis as part of our operations and make timely visit with existing and potential shareholders during these trips.

It's an exciting time at Catasys with investors and stakeholders awaiting the ramp and we getting to see it come to provision. With that operator we can now open it up for Q&A..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Ashok Kumar [ph] from Thinkequity. Your line is now live..

Thank you, Terren, Rick and Christopher.

Terren given in 2017 you saw 30% or greater enrolled member growth and you had revenue increase of 9% and since then you have continued to expand OnTrak into new lines of businesses and you have launched enrollment with new health plans and I was wondering as we look into 2019 will these two growth rates converge or come close to conversion? Thank you..

I am not sure, if I understood the question, is the question or GAAP and billings converge or I am not sure what….

Just the enrolled members right, so I think you had very strong double-digit growth in 2017, 30% plus and you had 9% recognized revenue growth and given that you have reach critical mass in terms of new lines of businesses and launch of health plans, I was wondering will those two growth rates converge as we look into 2019 and beyond?.

Actually, as you know our model is - when we launch we have a - we called a hockey stick type ramp that occurs over the 12 month period. So when we gave our outreach numbers and guidance mid-November it was based on the outreach and the subsequent enrollment and growth rate in billings and revenues over the coming 12 months.

As we add all these additional two national plans that we have announced hopefully one more soon and one or two expansion and we expect a lot more expansions and more contracts, though as we bring those on we create further hockey sticks going out to 2019.

So we actually without letting getting people too excited we see substantial increase in growth rates next year significant increase in growth rates..

Great.

And Terren also in terms of the unique positioning on the analytics and machine learning, historically we have modeled in terms of takeout rate on the depression, anxiety and substance use disorders and the 12 month ramp for enrollment rate the 20% and the second year steady state rate at 25% are you seeing any improvement in those numbers as you forecast the next six to eight quarters?.

As I said we are always trying and always are improving, but right now from model we are going to leave it where it is. But hopefully as a company we keep improving in every aspect of our business..

Great, thank you very much..

Thank you. Our next question today is coming from Steve Emerson from Emerson Investment Group. Your line is now live..

Congratulations on a tremendous growth outlook and achievement.

I don't quite understand your April numbers, on an annualized run rate what revenue does it represent and I believe you said that there was a good chunk of prepaid healthcare due to enrollments with one provider, so what run rate would this April $2.4 million represent?.

Well we are not annualizing it, all we can say about that number is it was ahead of our internal number $2.3 million versus $1.4 million that's significantly ahead of our number. Our number did contemplate what you were referring to is the upfront payment that we received from Cigna and HAMP.

But again obviously the number was so great, as we anticipated the enrolment was greater. At the start, we also referenced that when we tend to launch in a new territory we get a bump up greater than what the enrollment would be for example the next month and it comes down to this historical again ramping up to that 20% run rate in the first year.

So we're not annualizing it, but it does point to augment very well, I mean, if you look at the first four months of the year, when we gave our guidance, it's based on an internal forecast.

And again it's a base case because we never know with these health plans, we've encountered problems in the past with that now, we encountered consolidations within the industry, distractions with Aetna, Humana, vender freezes with Humana in the past. You never know what could come up and surprise us.

As we move on in the year and gain greater visibility in that there are no surprises. And then also and we factoring all these upsides, you are going to start seeing a hockey stick in these numbers. And in our guidance should go up commensurately. The bottom line is we're not going take April and annualize it.

We do expect numbers to increase quarter-by-quarter-by-quarter and like I said next year should be significant increases. Based on these hockey sticks and all the launches and expansions that we're having this year. So, we have a lot of things there is a huge operating leverage in these contracts, launches and expansions..

Maybe a way to cut through the various contractors is to give us how many enrolled patients you have at a given point in time as well as thank you for giving us the outreach pool.

So, year-end 2017, how many enrolled patents quarter end and end of April, how many enrolled patients do we have?.

We actually - we say this almost every quarter. We actually believe giving the enrollment numbers is misleading in terms of the revenues. Outreach is - our outreach number is most indicative leading indicator of our business. Now as I also said, as the year goes out and we get to mid-November which not too far away time will reflect.

When we get to mid-November we are going to putting out there won't be billings any more. It will be a GAAP guidance. Remember obviously this is - we first gave guidance mid-November of last year because for the first time we had a stable outreach pool that we can actually guide off of.

As we get our experience this year with - and the change in GAAP laws and obviously we want to look more have a little clearer understanding to the analyst that are covering us and are contemplating covering us and the institutional investment community, we want to conform more to GAAP guidance.

And I think between outreach pool and GAAP guidance, those are the best things that we could possibly do. Enrollment are misleading because of the different models within each health plan..

Okay. Again excellent progress. Thank you..

Thanks, Steve..

Thank you. [Operator Instructions] Our next question today is coming from Robert Cohen, a Private Investor. Your line is now live..

Hi guys, great job.

Terren, a question about - you talked a little bit about where you are on money and moving forward and I think a lot of people are nervous about going in buying stock and knowing that you guys eventually are going to need some money here soon and based off what happened last time where you guys brought - did a deal at 50% discount, which made no sense to me, but I understand why you had to do it.

But based off the contracts you guys are getting now, I am assuming you have a much better chance of getting conventional bank loans versus going to Wall Street at this point.

Can you elaborate on that a little bit, because I would think if people are more assured that you guys wouldn't have to go to Wall Street and do one of these crazy deals, I think you know where I am going, can you comment on that?.

Yes, as I said, we do not anticipate issuing any equity. Obviously I am - the majority shareholder, large shareholder in the company, I obviously do not want excessive dilution. If I felt equity was the right way of financing the company at this point in time, we would issue equity, it is not.

We are capable of borrowing from banks and lenders and actually excess to capital is far exceeds what our capital needs are. So I do not anticipate - I do anticipate being able to share in the not too distant future, what our actual financing is and I believe that our investors and shareholders alike will be extraordinarily happy with it..

Okay, wonderful. Can you go in a little further about - I am sure you got enough levers out there with the insurance companies you are doing business with.

Are you seeing any other avenues of revenues that could be promising that could lead to another viable model of income for the company, are they asking for anything that looks promising?.

Well, as I said during our presentation that we are investing to again to ramp up the existing new contracts launches expansions. It about takes to all of that additional revenue that we anticipate it only takes $2 million in additional working capital.

As you know we have the higher care coaches and outreach personnel and the time that they are training with us and not out on the field associated with enrollment in revenue. It's a six weeks roughly negative working capital and then it takes some time to get up to full efficiency.

So, we need $2 million in working capital for that and then I discussed that we are - we need $3 million to invest into what I termed our analytics, AI, machine learning and engagement capability. That's another way of saying, we're going to more digitize our product and enter - cater to different patient populations than what we are targeting today.

Today, we're targeting the very high utilizes of medical services those that costs an average $30,000 a year.

Through our investment in these capabilities, we believe that we can access the less severe or today less severe, it could be tomorrow's high utilizers or a less severe population that needs less human engagement and more technology and digitized engagement.

And that's where we can expand our footprint quite significantly in the health plans, and yes our health plans are very interested in those expansions..

Okay. Just one other question, Rick, can you talk a little bit about, once you get a contract and to get to launch a year ago, year and a half ago, how long did it take to out things ruled out versus where you think it could be six months from now from the time you get a contract to when you can actually launch.

So we have an idea of how much - how you guys are getting more efficient from the beginning to say the next six months to a year from now..

So, I think there is a number of things that factor into that and one of the things I think we're going to see going forward is right now we're in 19 states in which we have network and we anticipate that will continue to expand throughout the year.

What we've historically said is it takes us roughly 90 days in our timeline to be able to launch and the two main factors that are built into that are one data sharing with our health plan partners and the other is building the network.

So the more networks we have built in broader states then that shortens that timeframe because we don't have to spend as much time building a network there is still some investments there, but not as much. And so that should reduce the amount of time going forward.

The other factor that plays into that of course is the health plan themselves and what their data sharing process is and how long that takes to go through that process. But those are typically the two things that takes the longest period of time. So we will see some shrinkage as it relates to where we are, but will always be subject to that.

So internally we still plan on kind of a 60 to 90 day timeframe depending on what kind of state we are talking about and what our operations are in the state..

Alright. Thank you very much..

Thank you. Our next question today is coming from Andy Mai [ph], a Private Investor. You line is now live. Hello Mr. Mai, perhaps your phone is on mute please pickup your handset..

Hi, can you hear me?.

Yes..

Hi, appreciate the work through on the capital requirement for investments.

Just so I understand like the cash at the end of the quarter was like $1.5 million and a month and half has passed and we still haven't heard any deal yet, which I believe you say going to come soon, but like describe to us what the current cash situation and sort of your expectation if any when you could be turning cash flow positive?.

Actually I believe the number reported today was $1.35 million in cash, our cash today is higher than what it was then we obviously had a strong April. The company is not going to run out of cash, we do anticipate to share something with everyone very shortly.

And if we ever run out of cash I would more than happy lent money to the company personally, but that's not going to happen. So we hope to share with you soon as in very soon, we are working to be a little bit more transparent, we are working with two lenders and they are not exactly I think about a week apart from closing.

So we'll just see how we share the news with you, but it is eminent..

Perfect, thank you..

I mean something could always go wrong, but we don't anticipate anything going wrong..

Thank you. Ladies and gentlemen we have reached in our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments..

Thanks to all of you for your time, please feel free to reach out to us with any additional questions. We are pleased with the positive start to 2018, and look forward to sharing more on our progress with you on the next results call.

As another comment, I will be in the New York next week doing investor meetings Monday through half of Thursday and if you have anyone you like me to meet with that represent a significant investor I would be more than happy to try to accommodate them. Alright thanks everyone..

Thank you. Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..