Adam Prior - Investor Relations, The Equity Group Terren Peizer - Founder, Chairman of the Board and Chief Executive Officer Richard Anderson - President and Chief Operating Officer Christopher Shirley - Chief Financial Officer.

Richard Close - Canaccord Genuity Inc. Daniel Carlson - Tailwinds Research Group John Nobile - Taglich Brothers William Sutherland - The Benchmark Company, LLC Jeffrey Kobylarz - Diamond Bridge Capital.

Greetings, and welcome to the Catasys Incorporated 2018 Second Quarter 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..

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 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 typically are used to identify these 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 Factors 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 these 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 website at www.catasys.com, includes 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 Chief Executive Officer of Catasys. Please go ahead, Terren..

a win for the member patient; a win for the health-plan partner; and a win for you, our shareholder. During the second quarter, we continued to capitalize on our recent positive momentum by signing a contract and launching OnTrak for Anthem, the nation's second largest health-plan.

As of this call, six of the largest health-plans in the country are now utilizing our OnTrak solution, entrusting Catasys with their most valuable assets, their members and their claims data.

We have continued to successfully deliver on treating and improving the health of patients, saving both members and insurers on healthcare costs, through our OnTrak program.

As a result, we expect existing programs will continue to expand eligibility to additional member populations and geographies, while we continue working to establish new relationships with potential customers. At this time, there is no one else effectively addressing the behavioral health issues facing this country.

We provide our health-plan partners a tremendous value proposition and return on investment through cost savings. These savings go straight to the bottom line of medical loss ratios. Now, to support our company's accelerating growth, we were pleased to announce in June the closing of a $10 million debt financing which does not dilute our shareholders.

With this vote of confidence from our lending partners, we are using the proceeds as additional working capital to scale new contracts and expansions, and invest in new technology platforms to broaden our footprint with health-plan partners.

We believe this financing will enable us to generate free cash flow after funding internal growth and put us, pun intended, on track toward profitability. Given our capital light model, we are optimistic that future growth opportunities can be funded in a similar manner without dilution to shareholders if additional capital is needed.

In the first half of 2018, we announced program expansions with HAMP, Health Alliance Medical Plan, and HCSC, the second largest Blue Cross Blue Shield and the fourth largest health-plan in the country, as well as enrollment launches with three new national health-plan partners Humana, Cigna and Anthem.

Anthem is the second largest health-plan, and importantly, the largest Blue Cross Blue Shield in the country. We now have the two largest Blue Cross Blue Shields in the country. And that should augur very well for further Blue Cross Blue Shield adoption.

These led to the continued increase of our outreach pool of eligible members, resulting in increased enrollments and billings. Billings increased 152% year-over-year from Q2 2017 to Q2 2018, and we're up 75% sequentially from Q1 of 2018.

As a result of the continued ramp-up of our outreach pool, we enrolled 1,219 new members to the OnTrak program in the second quarter of 2018, up 289% from the prior year period. The outreach pool has grown to approximately 36,000, a 44% increase from the end of 2017, with additional 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 into next. Q2 results were in line with our internal projections given the record billings performance in April, which included a saving share with one of our health plan partners.

Q3 got off to a strong start, when we once again surpassed our internal projection for July, setting a new record of $2.4 million in new billings in a single month. Importantly, this month didn't contain any special items as April had. This was due primarily to the ramp, we have foretold to the many followers of Catasys over the past year.

The ramp is obviously here. As a result, we are reiterating our previously provided guidance of $20 million in billings for the year and year-end run rate of at least $25 million.

It's important to note that we are maintaining guidance, despite Aetna representing more than 50% of this year's outreach pool only operating at 50% of anticipated enrollment capacity due to structural billing issues.

This has resulted in not only lower than anticipated billings and revenues, but also a smaller underlying outreach pool than we would expect in a similarly sized customer.

As we work through the billing structure issues, we anticipate not only the average pool size and associated enrollments to increase, but also a significant increase in billings and revenue.

We made significant progress in the quarter working closely with Aetna through these issues and we expect the majority of the issue to be result in Q4 positively impacting 2019 results. Implicit in our results to date is that our other health plan partners are outperforming our financial model.

To the first six months of 2018, we recorded billings of $8.2 million, and expect that to accelerate in the third and fourth quarters.

While we expect GAAP revenue to increase significantly from 2017 in part due to our adoption of the new revenue recognition standard, we continue to emphasize billings as a metric of focus for 2018, but we will shift to GAAP revenue guidance for 2019, when we hold our Q3 conference call.

As we approach year-end, we expect to have greater visibility into our full-year financial performance and intend to update or revise our guidance upward as appropriate at that time.

For the moment, we are remaining conservative, we believe our strengthened financial position and positive operational developments in the first half of 2018 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 in primarily driven by the continued growth of our outreach pool of eligible members, which subsequently leads to increased enrollments and billings. Our current outreach pool of eligible members has grown 15% to approximately 36,000 from 31,000 in March 2018.

We expect the outreach pool to continue to grow in the second half of 2018, as we correct the structural outreach and billings issues with Aetna, add additional customers and expand in existing customers.

During the second quarter of 2018, we signed an agreement with and launch the OnTrak program for Anthem Blue Cross, the second largest health plan in the United States. As Terren mentioned with this agreement Catasys is now contracted with seven of the top eight insurers nationwide.

With the launch of OnTrak-AN program in California, OnTrak is now available in 20 states, a number we also expect to increase during the remainder of 2018.

With these launch of OnTrak-AN in June, eligible commercial members in California are now able to take advantage of OnTrak-AN, and integrated 52-week program that identifies, engages, and treat members with untreated or undertreated behavioral health conditions that impact co-morbid medical conditions such as diabetes, hypertension, coronary artery disease, COPD and congestive heart failure, resulting in higher medical costs.

In the first half of 2018, we launched enrollment for OnTrak solution with three of the nation's leading health plan providers, Anthem which I just mentioned in California, Cigna for eligible Medicare Advantage members in Tennessee, and Humana for eligible commercial members suffering from substance use disorders in 16 states.

We also executed on program expansions with existing partners HCSE and HAMP, all of these have contributed to the ongoing growth of our outreach pool and subsequently enrollment.

In January 2018, we expanded OnTrak with HCSE, the nation's second largest Blue Cross Blue Shield Health Plan for the treatment of anxiety, depression and substance use disorders into Illinois. This is the second state, where we have launched programs with his partner following the successful OnTrak-HC Launched in Oklahoma in August of 2017.

We continue to be in discussions regarding further expansion with HCSE validating that our partners see the value of our OnTrak solution in identifying and gauging and treating members.

Similarly in March 2018, we expanded our OnTrak solution with HAMP, a leading regional health insurer in Illinois to include eligible commercial 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 marketplace plan members with anxiety, depression and substance use disorders.

We believe program expansions with our existing partners are reflection of the success of our OnTrak solution has had in improving member health and lowering healthcare costs across the country.

We expect to announce additional launches and expansions in the remainder of 2018, which will continue to drive the ramp up of our outreach pool and subsequently enrollment into 2019.

As we've stated in the past, it typically takes approximately 12 months to get a newly launched program to full enrollment rate, and we continue to work diligently to shorten that ramp. You're seeing signs of improvement on this goal and we generally average 20% or better enrollment rate subsequent to the ramp.

As Terren mentioned, we are diligently working to resolve the structural billing issues with Aetna, and we expect to see improvement in the size of the average pool and the enrollment rate throughout the balance of the year. 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 quarterly report on Form 10- Q prior to this call, which will include details regarding our consolidated financial position and results of operations within and MD&A section of that filing.

As a reminder, the way Catasys' books revenues, 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're 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 over time to ensure revenue accurately reflects our expected outcome. Additionally, visit related revenue may be delayed up to three months from initial enrollment due to the on boarding and ramp up time it takes for the provider visit to occur.

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

Billings for the second quarter increased to $5.2 million, up 152% from $2.1 million in the second quarter of 2017, and up 75% from $3 million in the first quarter of 2018. In July, we achieved billings of $2.4 million, beating the recent record for billings in a single month set in April.

As Terren mentioned, Aetna's operating at 50% capacity and makes up more than 50% of our outreach pool. This has resulted in not only lower than anticipated billings and revenue, but also a smaller underlying outreach pool then we would expect in a similarly sized customer.

As we work through the billing structure issues, we anticipate not only the outreach pool size to increase, but also a significant increase in billings and revenue. Billings for the six months ended June 30, 2018 increased 90% to $8.2 million compared to $4.3 million in the prior year period.

Given this strong performance in the first half of the year, at this time, we are tracking ahead of our internal projections. Revenue for the second quarter of 2018 increased 97% to $3.3 million from $1.7 million in the prior year period.

This was driven by the launch of enrollment with three new health plans and continued enrollment growth from existing plans in the first half of the year, which resulted in a 289% year-over-year increase in the number of newly enrolled numbers as of June 30, 2018.

Revenue increased 49% to €5.2 million for the first six months ended June 30, 2018 from $3.5 million during the same period in 2017.

As I mentioned earlier, the way we book revenues depends on the customer and for our largest customer revenue growth lags enrollment growth, because they pay our fee over a limited number of visits to one of our network providers, and it takes time for the member provider visit to occur.

Deferred revenue, which is recognized this revenue over the period in which each member in our program is enrolled or a savings are realized was $3.4 million at June 30, 2018, a 17% increase from $2.9 million at December 31, 2017. The increase was a result of new billings in advance of services in the second quarter.

For the second quarter of 2018, the net loss was $4.2 million or $0.26 per diluted share compared to net income of $13.9 million or $0.97 per diluted share in the prior year period.

The prior year period was positively impacted by $7 million change in the fair value of warrant liability as well as $10.7 million change in the fair value of derivative liability resulting from the issuance of convertible debentures in July 2015, which converted into common stock in April 2017.

For the first half of 2018, the net loss was $8.4 million or $0.53 per diluted share compared to $7.8 million or $0.68 per diluted share in the prior year period, including the non-cash expense related to the issuance of management and directors stock options late last year.

As Terren mentioned earlier, we entered into a $10 million debt financing comprised of a receivable facility agreement of $2.5 million with Heritage Bank of Commerce and a four year term loan of up to $7.5 million with Horizon Technology Finance Corporation.

You will notice that our balance sheet as of June 30, 2018 reflects the impact of this financing. You received $5 million from the Horizon term loan upon initial signing.

The additional $2.5 million is subject to the company's achievement of billings of at least $5 million during any three months prior to November 30, 2018, which we achieved in the second quarter. But as of yet, we have not drawn in that facility. To date, we have not needed to drawdown on the $2.5 million receivable facility with Heritage.

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

Thank you, Christopher. At Catasys, we are constantly striving to better serve our growing health plan partner and associated member base. And in that regard, we are committed to continue developing and improving our capabilities in data analytics and platform technologies.

Just a few weeks ago we appointed industry veteran Jeremiah Stone to Catasys' newly created position of Chief Technology Officer.

With over 20 of industry experience at leading firms such as GE and SAP, Jeremiah's leadership will play an invaluable part in our plan to leverage data analytics and new technologies to improve and evolve the overall OnTrak program, while establishing new avenues for growth that require more technology and digitized engagement.

In doing so, we expect to enhance our ability to identify, enroll, engage, and modify the behavior and improve the health of our health plan partners' eligible members, while accelerating the growth of our business.

Our goal is to enhance our ability to identify, enroll, engage and modify the behavior and improve the health of our health plan partners' eligible members. We are not satisfied with the status quo and will continue investing in our technologies as appropriate. In doing so, we will be better equipped to serve the needs of our growing customer base.

We remain optimistic about our future, given our achievements in the first half of 2018. As our $20 million annual billings guidance does not include any additional new customer launches, expansions with existing customers and enhanced product offerings, we will continue to anticipate a minimum of $20 million in billings for the year.

We intend to revise our guidance for 2018 and announce guidance for 2019 during our next earnings report, which will reflect our anticipated expanding revenue base and accelerated growth rate. For further transparency, we also intend to provide guidance for a base GAAP revenues case, and we'll work in earnest to meet or beat it.

It's important to note how conservative our $20 million dollars billing guidance was for this year. While we anticipate beating that number, it is truly remarkable that we may do so with the challenges of nearly half of outreach pool operating at 50% of capacity, and the outreach pool itself smaller than otherwise would be expected.

With this inefficiency addressed in the Q4 and our health plan partners outperforming our business model, early in their launches and expansions, 2019 should be a very good year. We have continued to be proactive in investor outreach. And we are pleased to meet with investors at the Canaccord Growth Conference in Boston last week.

I expect to be visiting several major cities in the coming weeks and months. And look forward to sitting down with existing and potential shareholders soon. Here at Catasys we are pleased with how our business pipeline has accelerated over the past few months and are working in earnest to execute to our fullest potential.

At this point in time, we believe Catasys is well positioned financially and operationally to execute on its strategic growth initiatives.

With 7 of the 8 largest health plans in the country signed on as our customers, we are confident that we will be able to drive enrollment billings and revenues towards a positive bottom line as we continue ramping up our outreach pool through program expansions and launches.

As we look to this next stage in Catasys' evolution, we are exploring new areas where we can drive future growth. The financing that closed in June will allow our company to self-fund new product innovations that can broaden our reach with OnTrak, leveraging technology to reach a wider population.

Importantly, we should be able to achieve this without dilution to our shareholders. As you have heard me say that we have created a win-win-win scenario, and that is truly at the heart of our business model. We deliver savings to our health plan partners.

We identify, engage and treat and improve the health of a patient populace that is in need of help. Finally, we do all this cost effectively for the benefit of our shareholders. We are looking forward to executing on our plans in the remainder of 2018. With that, operator, we can now open it up for Q&A..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Richard Close with Canaccord Genuity Inc. Please state your question..

Great. Thank you. Congratulations on the quarter. Christopher, I was curious first if you could talk a little bit about the deferred revenue. What was - and obviously, a nice increase from the end of the year, but more so from the first quarter level.

Can - any additional granularity there that you could provide? Is that mostly Aetna in that?.

Sure. No, actually, it's a higher mix of case rate billings. So in the instance where we bill customers in advance for the services, we're seeing a higher mix than we anticipated..

Okay. And then, Terren, I was wondering if you could just clarify some of the comments and in around Aetna. It seem like your comments were that you hope to get it wrapped up or fix the billing issues. I guess, that's the code by the end of the fourth quarter.

But in Rick's comments, he had mentioned seeing expanding outreach and enrollment during the second half. So I just want to better understand the timing of that, if you can..

Okay. I'll start off and then I'll turn it over to Rick. But to clarify, some people might wonder if most of the issue with Aetna, and Rick can elaborate more on the issues - but most of the issue with Aetna being resolved.

But in being resolved and implemented in the fourth quarter versus now in the third quarter, I guess, we could only sum that up to the inertia within a health plan, changing a code, getting it run through their system and getting it implemented. We're counting on it, taking as much as three months.

We wish it would be quicker, but we have no control over that. I'll let Rick comment further in terms of - if he wants to, in terms of what the issues were, and then, on what you are quoting him. Hold on one second..

Thanks, Terren. So, Richard, what I was referring to in my comments would largely relate - in the balance of 2018 was largely related to other customers and other expansions that we're anticipating will increase the outreach pool. And of course, we're expecting increases in enrollment as well throughout the course of 2018 verses Aetna specifically..

Okay..

Terren referred to the Aetna question, which primarily revolves around the code, which we - having that resolved, we have agreement. But getting the mechanics put in place as Terren said, could take a little bit of time.

But we expect once that's in place, it will definitely impact the billings, and then also hopefully significantly impact some of the other structural issues as well, which will increase the outreach pool back to where we would expect it for a customer like this of this size..

Okay. I just must have misheard that. I was curious whether you could talk a little bit with respect to investments and your thought process there. Obviously, you brought on a new CIO tech guy.

And maybe if you could lay out what the deliverables might be or how you're thinking about that going forward?.

Sure. I think what sets us apart, as you know Richard, the healthcare IT space is booming in terms of [BC land] [ph], investment in health care IT startups and emerging companies.

What separates us from everyone, besides us having contracts with all the major players and no one else having them, and performing efficiently except when it's on the customer's behalf like Aetna. What separates us is again getting back to that behavioral health formula of AI plus HI, human interaction.

Which, again, that's the harder part, we're dealing with a population that is severely hampered. Not only do they have a behavioral health issue, but they have a co-morbid chronic disease of cardiovascular, pulmonary, diabetes et cetera. And what we are doing is that, basically, arresting the mental behavioral health quotient.

And then getting them care either initially or getting them to prescribe, comply with a previously prescribed protocol for their chronic disease. And they rack up the cost due to their constant entering - either the emergency room or in-patient stay at hospitals, costing their health plans roughly $30,000 a year.

And on that, due to 54% savings, we give the health plan up to a 5 to 1 return on investment, which is why we have contracts with the 7 of the 8 largest plans. We are now at the - there are several things, one, our first deliverable is improving - even though we're functioning at an - from an industry perspective, a truly unbelievably high level.

But we believe through technology, we can enhance our all aspects of the identification, the foot printing that we - we have fingerprinting that we describe in our press releases, the enrollment engagement, and then the follow-up analytics. Through that, we can improve our performance even more. So that's the first deliverable.

The longer term goal is to be able to expand into and increase our footprint within our health plan partners.

Today, when we look at our opportunity of what we can identify today in claims data, it represents close to 1/3 of the total medical spend, that's our patient population, 1/3 of the total medical spend in managed care, which is a 1.3 trillion number or translating into 400 billion, that's why this company, Catasys is so important to the industry.

But as we - right now, we're functioning at the high utilizers of medical services. those costing $30,000 or more. We think through increased digitization, taking our - truly our secret sauce, which is the ability to enroll, engage and modify the behavior of a treatment and care avoidant population.

Taking our key learnings that we learned at this population, we believe we can translate that digitally to, using more technology, less human interaction, to go into a broader population, which would expand our economic opportunity that much greater. And by doing so, we might be targeting someone who only costs $10,000 a year, for example.

But we would need to get our cost of delivery down to a point, which we can consistently offer our health plan partner that tremendous return on investment to get them to really expand the footprint. So through technology, more technology, less human interaction, we think we will be able to achieve that.

And maybe one day, hopefully in the next one or two years, we can actually get to a fully digitized platform, to go to. If you want to think about it, right now we're dealing with the treatment and care avoidant, maybe with the next level of technology we could get to more the treatment neutral category.

And then with full technology digitization, we can maybe expand the population to even cover treatment seeking individuals. And that would be the whole behavioral health industry, at least substance use disorder, depression and anxiety, which comprises roughly three quarters of behavioral health conditions.

We will never deal with the seriously mentally impaired patient..

Okay. Thanks. I'll jump back in the queue..

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

Hey, guys. Congrats on a great quarter..

Thank you..

So I have a question here. Just looking at the big picture, you guys have great customers and a huge opportunity of only starting to really penetrate the customer base. So from my perspective, growth seems for multi-years at a large rate almost inevitable.

So I'm just wondering, what could happen that stops this from occurring? What could possibly keep you from growing rapidly over the next 5, 10 years, to just kind of understand the big risks that might lie out there?.

Well, I constantly get asked this, a similar question of what keeps you up at night. And I reply consistently, what keeps me up at night now, I didn't sleep for the first 14 years. But I think, now, as you point out, I think we're on this upward trajectory. And I see us growing at a - I don't want to give guidance now.

But I see us growing at a very significant growth rate for many years to come.

For example, when I pointed out that right now our patient population is 1/3 of the total medical spend, the managed care, which is very significant That represents what our target is today and but when you look at that that number translates to a little under 4 million patients.

Well, if this year we treat - I'm just putting number - throwing numbers out there. If this year we're treating, I don't know, 3,000, 4,000 patients next year. I'm just throwing numbers out there isn't guidance 7,000 to 10,000 or more. We have a long way to get to 4 million patients. So I do see there is - we have the contracts with the health plans.

We are proving ourselves and health plans are trusting us, having confidence in us, to deliver the results that we convey to them. I don't see this stopping, I see it growing for many, many, many years, just as you say. I don't know right now, what can derail it. But I do know this, there is no one out there, if attempting to do what we're doing.

There is no one out there, they can do what we're doing. Again it was - it took a long-time to get here 14 years and $207 million, but we're finally here. And if a new entrant not only to get it - number one, they have to get contracts with the seven of the eight largest health plans, which we see takes forever.

It took 10 years for Cigna, Aetna, Humana, and it takes about two years even got a contract time more or less. I don't see and then when they do get to where our level of proficiency, they will have to be able to do better than we do and cheaper, which we are one as I pointed out in the past, we are one big machine learning company.

Every patient enrolled and treated and recorded we get better at all levels of our company from enrollment - well, from identification, enrollment, engagement and then savings rate. So I just - usually got worry about competition that is not my concern right now..

Hey, it's kind of what I thought, it's great. So congrats. I'll hop back in the queue. I appreciate it..

I would point out to follow on that. Obviously, when I mentioned, 3,000, 7,000 to 10,000, I do believe we will be able to scale this over - obviously as I mentioned with the use of technology, and with Jeremiah Stone's leadership and direction.

I do believe, we will start getting very quickly into tens of thousands of treatments per year, and 100,000 treatments per year. Enrollments and billings would have you. So I don't want to leave you with we're just talking about fives and tens, we are talking about tens to hundreds, and that's where we're going..

Thank you. [Operator Instructions] Our next question comes from Fred Orr [ph]. Please state your question..

Hi, gentleman. Those billings numbers are sensational. Congratulations. You're already at a $20 million plus run rate here at midyear, so thank you. I have one just technical question related - and then another unrelated follow-up about size of market. And I hope it won't be [retired as versatile] [ph] in research analysts.

You said some of your in enrollees are being paid for a limited number of treatments.

Does that mean, they are in treatment for less than a 12-month period in some instances?.

Hi. This is Ricky Anderson. No. I mean we do have -.

Hello..

Hello. We have members obviously that have the program on an overall basis is a 52-week program, not every member stays in the room for the entire 52-week..

I understand that..

Yeah. So there's nothing different with the population were referring to what we're talking about is in Aetna's case, because of the billing constraints that they had in terms of from a structure point of view.

They paid us over a certain number of provider visits versus most of our customers either pay in a case rate upfront, when a member enrolled or they pay us for the month - every month when a member is enrolled. So it's really just a - it's a billion construct, it doesn't impact….

Okay.

So any patient stays in the program, for math, and it does stay for this whole 52-weeks, there's something we don't run or…?.

Yeah. They receive the normal prep..

Okay.

And my second question is, what is your current patient now? How many ensure its, are you currently covering as a percent of the total insurers at your customers asked under contract?.

You mean, insurers like….

Well, it looks to me like you're currently have agreements covering about 4 million insurers. And I believe, the six or seven insurance companies you have contracts with cover of a much, much higher numbers than that.

And I just want to know with that penetration rate was 2%, 5%, 10%, 22% with your existing agreements, because certainly your existing agreements don't cover all the insurance customers as your insurance company customers?.

Yeah. That's correct. The customers that we're referring to cover probably make up 70% of the insured market depending on what you're looking at. And.

And what would that overall number be? Would that be about $100 million roughly?.

Well, if you include managed Medicare and Medicaid, it's actually bigger than that. But….

Yeah, okay..

We're in a single digit of penetration of our existing customer. We have a lot….

Yeah. I just want to clarify that, that's what I saw. So even if you - theoretically if you never sign another agreement with a new insurance company, you have the opportunities to increase your current business with them by 20 or 30 times as you move forward. Yeah. Okay. Good. Thank you..

Yeah, more than that yet..

More than that, right. Yeah..

Yeah. It's a very large if we never signed - I mean to your point, if we never signed another agreement we have a very large opportunity in front of us..

Yeah, okay. Thank you. That's I was just trying to get that my head in terms of market size for a long-term thought process. I appreciate it. And I'm finished. Thanks so much..

Thank you..

Our next question comes from John Nobile with Taglich Brothers. Please stat with your question..

Hello, good afternoon, thanks for taking my questions. Actually a lot of my questions were brought up, but the previous question about the market penetration, I kind of have a similar question to get an idea.

Would you say that during enrollment growth is driven primarily from signing with new health plans or from existing plans? I'm trying to get an idea of the growth from existing plans at this rate?.

Well, let's put it in perspective. So right now, our health plan customers represent 60% to 70% of the country. So as Rick just pointed out, if we don't sign any more health plans, which we will sign more health plans, I assure you. But if we don't we have a huge runway in front of us and why is that.

Well, each health plan starts out in a specific either product area, Medicare, Medicaid, commercial, exchange business and a specific geography. Then after proving the savings rate and the efficacy within their population, their membership then they expand.

So our biggest - the biggest growth catalyst going forward is and what we're hopeful you will see right now, even if we didn't have major expansions just the ramp that we're seeing if you recall from our business model it takes 12-months of the ramp to get to a 20% enrollment rate, and then in your two, it kicks up even higher.

So even, you're just what you're seeing now and what you'll see next year at minimum is that going along the time curve of getting to that 20% enrollment rate.

But some of the wildcards for next year, which we're hopeful we will see is very significant expansions, because all of our customers have expanded - all of our customers have been satisfied with the product. All of our customers have expanded into other product areas that they started in just one.

If they start to Medicare, they went into Medicaid and commercial and vice versa, vice versa.

All of them have expanded in geography product, and now you're also going to see an expansion among our product lines, we started in substance use and now we're expanding into depression and anxiety, which kicks up the numbers quite significantly anywhere from four- to five- fold increase over substance use alone.

And to remind you more or less, a lot of our customers are just substance use today like Aetna, Humana, Sentient, they're just substance use. All of them have expressed an interest to go into depression anxiety as well. Anywhere that they can say improve member health and save money that goes straight to their bottom line.

They want expand into, but their charter was first, we didn't have depression anxiety, when we signed this health plan initially for substance use. So to summarize, we expect major expansions to occur in these health plans beyond their initial implementation and our initial expansions, and those numbers can start scaling nationwide launches..

Okay. And I know that you have with a six or seven - I forgot, if it's six or seven currently ahead of eight health plans. Do you note this anything that's stopping you from getting into the final market here even though your existing plans obviously from your comments.

You have tremendous growth, how do you just as we speak, but is there anything that you see right now that would stop you from getting into this last provider?.

Yeah, I was wondering when somebody's going to ask me that one day. Meaning the 8th - we keep referencing seven of the eight largest. The eighth largest that I keep referring to the elephant in the room I guess is Kaiser Permanente. And we are engaged with them, as we speak.

So we're hopeful we might be able to even get there is construct, there are a fully integrated health plan flash provider. So structurally they're not set up like the rest of the industry, which they end up to recently, they really never even use outside vendors.

But we're looking forward to continuing engaging with them, and we're hopeful that one day soon we can say eight of the largest health plan providers..

I mean, I think that should be relatively easy sell judging from what you've done already, just from my opinion here from what I see why would you not entertain the business model such as yours?.

We agree..

Okay. Well. That's all I had. Thank you very much..

Thank you..

Thanks. Your next question comes from Bill Sutherland with The Benchmark Company. Please state your question..

Hey, thanks. I come down to one question. I was curious on the care coach front. How that - how you're managing to keep up with that growth, with the natural turnover and so forth? And just provide a little color there in terms of how you're managing that. Thanks..

Sure. This is Rick Anderson. We've been able to hire and train or care coaches. We scale it up as we bring members on. So when we bring on a new customer, we're primarily upping the number of outreach folks that we have to bring members in.

And then we bring the care coaches on to meet the demand for those members, as they come on and become enrolled in the program. So we're able to forecast that and hire in advance of that. And we've been able to find the care coaches that we're looking for. We're bringing them on about a month before that we would put them into a form of production.

And then it takes another 60 days or so for them to get to full efficiency associated with that..

And are they full time and working remotely or structured or how they're structured?.

Yes, they are full-time. They are Catasys employees, and most of them are working remotely, yeah..

Medical backgrounds?.

Care coaches are all nurses..

Nice thing, okay. And one last one, just on the 52-week protocol.

Is that hard and fast or is that just something that you arrived at, because it's very efficacious?.

You mean in terms of the length, why would we pick 52 weeks?.

Uh-huh..

The 52 weeks really came out of understanding behavior change and at what point behavior change tend to stick. Obviously, there's variability in the membership in terms of - we often talk about, it's a heterogeneous population, they didn't get where they are the same way and they're not going to get better the same way.

So you have to finger print the treatment and we look to identify the profile of the members when they come in. And then we fingerprint that treatment to those members throughout that process.

But generally speaking, 52 weeks is a long enough period of time for people to deal with whatever the things are in that fingerprint and treatment approach that they need to and practice and learn, and sometimes stumble and re-learn the behavior change aspects of what they're needing to learn in order to be able to change the behavioral health pieces.

And then, also that gives us the ability to work with them around the medical conditions that they have and make sure that they're adhering to the protocols associated with that. And it's the combination of those pieces and having that care integrated over that period of time that enables us to be able to produce the results that were producing..

I'll add a little bit of that. There's a debate - we're an outpatient model, and typically there's a debate in the industry in-patient versus out-patient. People are more familiar with it, in the case of substance use disorder, with the rehab facilities versus an outpatient setting.

What we knew early on and believe to this day that what's really important is not the debate - and of course, the NHS has come out and reinforced this. It's not the debate in-patient/out-patient, what's important is duration of care. And it seems intuitive, but no one could really afford a long duration of care with an expensive in-patient facility..

That's interesting. Yeah, it makes sense. Thanks, everybody. I appreciate the color..

Thank you..

Our next question comes from Jeff Kobylarz with Diamond Bridge Capital. Please state your question..

Hey, guys. Congrats on the good numbers. I was curious about how you said, it was stated sometime I think in the prepared comments about that you're sticking with your 20 million billings for this year despite Aetna difficulties. And it was due to the outperformance by the other insurance companies.

And so, do that positive then - you also said that you're still at a 20% enrollment rate after a year. So I'm curious - if you're outperforming with your other insurance companies, so outperforming sounds to me like you're achieving a better enrollment rate than 20% in the first year. So I'm just trying to understand what sounds a little contrary..

Let me help you out there. You're right - well, we are outperforming with our other health plan partners, doing greater than our financial model called for. That said, recall, that most of our new health plan partners are new launches this year. So we're still in the early stages of that ramp to get to 20%.

Humana, Cigna and Anthem, and some extent HAMP and Blue Cross Blue Shield, HMO of Illinois, those were all launched this year. So we're not yet even close to the 12 month marker. In some cases, we're only at a one to two month market yet. But that outperformance has helped us still stay on track, pun intended, stay on track to what we guided for.

Clearly, when we guided, we did not anticipate the Aetna issues and nor could we have. That said, without going into specifics, if Aetna was just operationally - well, operating at our normal efficiency, we would be smashing the numbers we guided. We'd be having a completely different type of phone call today.

But the good news is we are very conservative with our guidance, and because we didn't know what we didn't know. And similarly, when we give guidance next year, I think it should be a significant uptick from this year that everyone should be happy with. But nonetheless, we're still going to exercise the same conservative nature.

And I'm hopeful that we never ever miss our guidance and we always outperform our guidance..

Okay. Thanks. That helps.

And then about Aetna, have you said like how long are you not marketing, outreaching to the Aetna population? Or - how many months you - or weeks that you were not able to outreach to those that patient population?.

We are outreaching to that patient population. It's just with the structural issues associated with it, we're at about 50% of where we would expect to be in a normal situation. So our enrollment is about half of what we would expect..

Right, okay. All right, fine. And then April - back in the first quarter call, you said April billings were $2.3 million and your second quarter billings are $5.2 million, and then July billings were $2.4 million.

Is there some seasonality to why the first month of the quarter has such a bigger amount of revenue or billing?.

Hi, Jeff. This is Christopher. No, we're just - like I said what we're seeing right now is we're seeing a higher mix of the case rate billings, which is boosting the numbers a bit. In April, we had a savings share hit in that month, which boosted us to $2.3 million. If you excluded that, we would have been around $1.9 million..

Okay..

Now, that happens biannually, where we have a savings share true-up..

Okay, all right. And then just lastly, you stated that 54% savings for your customers.

And I'm curious now that you have a bigger number of insurance companies that are your customers, I'm curious if there is much of a range, the dispersion around that 54% and for whatever reason that might be, do you have any comment about that?.

We see relatively consistent savings numbers across our lines of business and across our customers, in that range give or take a couple of percentage points is what we've been seeing over the last six months..

Okay. Great. Thanks very much for your help..

Sure..

Thanks. Our next question comes from Richard Close with Canaccord Genuity. Please state your question..

Yeah, I just had a follow up on that April/July question with respect to billings. Previously, you said not to extrapolate or annualize the April, I guess, because of that shared savings. savings share. Was there anything like that in the July billings number..

No, actually as I stated there wasn't any extraordinary item in that. That was pure business model enrollment and billings..

Okay. So obviously, if we did extrapolate that or run that forward, you'd be coming in well ahead of the expectations.

So that's where you're essentially inferring, correct? How conservative it is?.

Well, I'm still not going to say you can analyze it. However, the reason - like I said in the call, it is truly remarkable that we're still in our view, as of today, we don't know what could happen the rest of the year. But as of today, we are outperforming our guidance.

That said, it shows how conservative that guidance was, because Aetna base - I mean, many millions of dollars Aetna is a differential and a delta of. So, yes, we'd be really doing - like I said, we'll be having a different position. We will be raising guidance at this point probably..

Okay. And then my final question is, I think you said Anthem, California started in June.

Any context that you can provide in terms of how much - obviously, you're not going to give the numbers, but like did it contribute at all to June or are we seeing that more so in the July billings number that you just provided?.

It would not have contributed to - since we launched in June, it would not have contributed to the second quarter billings..

Okay.

But it could be - it definitely could be in the $2.4 million?.

There is a little bit in the $2.4 million. I mean, if you think about the ramp, you're going to have relatively small portion in that number, because that's really going to be your first month of billings, because members come into treatment and then the billings go the next month..

Okay. Great. Thank you..

Now, if we start reviewing the - yeah..

Appreciate it..

No problem..

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn the conference back to management for closing remarks..

Okay. Thanks all of you for your time. And particularly, I heard there is a bad thunderstorm on the East Coast. Please feel free to reach out to us with any additional questions. We're pleased with the results we have achieved thus far in 2018 and look forward to sharing more on our progress with you on the next results call. Good night everyone..

Thank you. This concludes today's conference. All participants disconnect. Have a great day..