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

Richard Close - Canaccord Genuity Inc. John Nobile - Taglich Brothers, Inc. Jeffrey Kobylarz - Diamond Bridge Capital.

Greetings and welcome to the Catasys Third Quarter 2018 Earnings 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. I will now pass the floor over to a representative of the company.

Thank you. You may begin..

Thank you, operator, good afternoon 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 other some 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 Factors section of the Form 10-K and Forms 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, www.catasys.com, includes a 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 now like to turn the call over to Mr. Terren Peizer, Chairman and CEO of Catasys Inc. Please go ahead, Terren..

Humana, Cigna and Anthem. As of this call, six of the largest health plans in the country are now offering our OnTrak solution. Anthem is the second largest health plan and the largest Blue Cross Blue Shield provider in the country.

We also announced program expansions with HAMP and HCSC, the second largest Blue Cross Blue Shield provider and the fourth largest plan in the country. We now have contracts with three Blue Cross Blue Shields and the two largest Blues in the country. This augurs well for more Blue Cross Blue Shield contracts in the future.

All of these achievements have led to the continued increase of our outreach pool of eligible members, resulting in increased enrollment and billings. Billings increased 210% year-over-year from Q3 2017 to Q3 2018 and were up 21% from the Q2 this year.

As a result of the continued ramp up of our outreach pool, we enrolled 1,180 new members to the OnTrak program in the third quarter of 2018, up 65% from the prior year period. The outreach pool has grown to approximately 38,000, a 52% increase from the end of 2017.

In 2018, we have made several investments to improve our infrastructure and organizational efficiencies in preparation for increased business expansions as indicated by our health plan partners. And as I will explain later, this is only the beginning of our planned growth trajectory.

Q3 results were in line with our internal projections, given the record billings performance in July, which did not contain any special items. In 2018, we have had continued success in expanding relationships with existing health plan partners and launching enrollment with new customers.

As a result, we achieved $14.5 million in billings for the first nine months of 2018 and fully expect to achieve our previously provided guidance of $20 million in annual billings for 2018, notwithstanding the structural billing issues impacting our largest customer, Aetna, which represents more than 50% of our outreach pool in 2018 and has been operating at less than 50% of anticipated enrollment capacity due to these billing issues.

We have been working diligently with Aetna to address these issues and expect to have them mostly resolved by December 1 of this year. This resolution should have a significant positive impact on 2019, given the anticipated increase in the outreach pool size and associated enrollments and resulting increase in billings and revenue.

As we noted in our last call, we'll be shifting from using billings as the metric of focus in 2018 to GAAP revenue in 2019. Revenues have increased significantly year-over-year from 2017 in part due to our adoption of the new revenue recognition standard, which Christopher will expand upon during his review of the financial results.

Catasys more than doubled revenues in the 9 months ended September 30, 2018 to $9.6 million from $4.7 million in the prior-year period.

We prefer to take a conservative approach to guidance, given the large size of our health plan partners and the many divisions involved in these partnerships, data issues that may arrive, extended periods of contract execution, launch delays and other unforeseen developments.

That being said, we anticipate achieving $35 million in revenues for 2019 in light of accelerated enrollment growth during the coming year with the numerous operational successes achieved in 2018, including enrollment launches with three new health plan partners and several program expansions with existing customers.

$35 million is approximately 150% growth over this year's analyst GAAP estimate. We certainly hope to outperform this number and are taking the necessary steps now to accelerate our company's growth.

Our outreach pool of eligible numbers continues to ramp up as a result of these new launches and expansions, and we continue to invest in our healthcare solutions and support systems, to ensure, we are able to support our growing enrollment population.

We are well positioned to execute on our growth strategy as we head into 2019 and we look forward to exceeding expectations this coming year. With that, I will turn the call over to Rick to discuss our operations.

Rick?.

Thanks, Terren. Those of you who are familiar with the Catasys' business already know that our growth is primarily driven by the ongoing increase in our outreach pool of eligible members, which subsequently leads to increase enrollment and revenue.

Our current outreach pool of eligible members grew 6% to approximately $38,000 from $36,000 in August 28. As Terren mentioned, we have been working to resolve the structural outreach and billing issues with our largest customer, Aetna, and expect to do so in December.

With these matters behind us and our continued on-boarding of new customers and expanding relationships with existing partners we expect to ramp up in our outreach pool to continue as we head into 2019 and beyond.

During the third quarter of 2018, we expanded OnTrak-A into four additional states, Iowa Nebraska, Florida and Georgia making OnTrak available in a total of 13 states with Aetna. With the launch of OnTrak-A in Iowa and Nebraska, OnTrak is now available in 22 states, up from 20 states at the end of the second quarter of 2018.

During the third quarter, we also entered into an agreement with Capital BlueCross, a health insurer in Pennsylvania, eligible commercial Capital BlueCross members are anticipated to have access to Catasys' OnTrak solution starting the first quarter of 2019.

This new contract and the OnTrak-A expansions in the third quarter bring additional momentum to the outreach pool growth in 2018 and 2019, and can be tied to several successes in the first half of 2018.

We've launched OnTrak enrollment with three of the nation's leading health plan providers, Anthem commercial members in California, Cigna Medicare Advantage members in Tennessee and Humana for commercial members suffering from substance use disorders in 16 states.

In addition, we executed on program expansions with existing partners HCSE and Health Alliance Medical Plan.

As Catasys is now contracted with seven of the nation's largest health plan providers, program expansions with our existing partners are a key to our future growth and more importantly reflect the success that our OnTrak solutions have had in improving member health and lowering healthcare costs across the country.

We remain in discussions with several of our customers regarding expansions in the form of new state, new lines of business and expanding coverage to include additional population such as depression anxiety.

We look forward to announcing more launches and expansions in the coming months, driving the continued growth of our outreach pool and enrollment as we head into 2019. In past calls, we have stated it takes approximately 12 months to get a newly launched program to full enrollment rate.

We have been working to shorten this ramp time line and are seeing signs of improvement with each launch. We generally average 20% or better enrollment rates subsequent to the ramp.

We expect to see an uptick in enrollments in 2019 given all of the new launches and additional expansion in 2018, and as we fully result the structural billing issues with Aetna. 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 the 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 result in deferred revenue. In accordance with the new accounting standard, we book 2018 revenues in the same period that the services are delivered. We report revenue in 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 visits to occur.

Because of these variances in how we book revenues, we have shared another metric, billings. For the total amount we invoiced our customers on a monthly basis, as a comparison to revenues. We provided 2018 guidance using this billings metric, but as Terren stated earlier, we are shifting to providing guidance for 2019 in GAAP revenues.

As such, we will continue to share progress on billings for the remaining 2018 periods, but we'll cease doing so after reporting year end 2018 results. Billings for the third quarter increased to $6.3 million, up 210% from $2 million in the third quarter of 2017, and up 21% from $5.2 million in the second quarter of 2018.

As we noted in the Q2 call, Aetna has been operating at less than 50% capacity and represents more than 50% of our outreach pool in 2018. Structural billing issues impacting this customer have resulted in lower than expected billings and revenue.

However, as we expect these issues to be fully addressed by December 1, we expect to see a significant increase and not only our outreach pool size, but also billings and revenue. Billings for the nine months ended September 30, 2018 increased 127% to $14.5 million compared to $6.4 million in the prior year period.

Revenue for the third quarter of 2018 increased 266% to $4.4 million from $1.2 million in the prior year period. This was driven by the launch of enrollment with three new health plans and continued to enrollment growth in expansions from existing plans in the first nine months of 2018.

Revenue increased to 104% to $9.6 million for the nine months ended September 30, 2018 from $4.7 million during the same period in 2017.

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

Deferred revenue, which is recognized this revenue over the period in which each member in our program is enrolled was $5 million at September 30, 2018, a 73% increase from $2.9 million at December 31, 2017. The increase was a result of the significant increase and new billings in advance of services in the third quarter.

For the third quarter of 2018, the net loss was $4.4 million or $0.27 per diluted share compared to a net loss of $3.1 million or $0.06 per diluted share in the prior year period.

The increased loss was a result of increased operating expenses related to investments in healthcare services to support our growing number of enrolled members and incremental investments and driving technological innovation forward at our company.

For the first nine months of 2018, net loss was $12.8 million or $0.80 per diluted share compared to a net loss of $10.9 million or $0.30 per diluted share in the prior year period.

In June of this year, 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.

During the second quarter, we received $5 million from the Horizon term loan upon initial signing with the additional $2.5 million 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 both the second and third quarters.

We drew on this additional $2.5 million with Horizon during the third quarter, which is reflected on our balance sheet for the period ended September 30, 2018. To date, we have not needed to drawdown on the $2.5 million receivable facility with Heritage. With that, I'll turn it back over to Terren for closing remarks..

Thank you, Christopher. I'd like to take some time to discuss our outlook and what I see in Catasys' future. In my earlier remarks, I mentioned that we are taking steps to position our company for accelerated growth in 2019 and beyond.

We recently announced some significant changes to our board, which we expect to continue fine tuning as we look to accelerated growth. We've been quite vocal in Catasys commitment to technological innovation and introducing new products to better serve our growing health plan partners and associated member base.

Following our appointment of Jeremiah Stone to the new Chief Technology Officer role in July, we appointed three seasoned health care executives to our board as part of the strategy to remain at the forefront of healthcare technologies, while maximizing our future growth trajectory.

We were thrilled to welcome to our board, Ed Zecchini, Sharon Gabrielson, and Diane Seloff, each with decades of experience specializing in different areas of healthcare.

Ed possesses over 30 years of executive experience at various innovative healthcare and information technology businesses, and we expect that he and Jeremiah together can help Catasys expand its technology piece and further accelerate the scaling up our business.

Diane's over 25 years of experience as a proven operator will prove valuable as we look to expedite our growth trajectory, and we are excited to tap Sharon for experience of business development and creative market driven solutions to maximize our growing Administrative Services Only, or ASO, and employer self-funded businesses, and related opportunities as we start to see traction on that side of our business.

In the coming months, we expect to make other additions to our board, which we hope will include recruiting high profile C-Suite executives from national health plans. With 2018 coming to a close, we are enthusiastic about our prospects heading into 2019.

I was recently asked by many shareholders and investors alike to what do I attribute the outperformance of our company's stock this year and how do I value our company. First, I'd like to point out that our equity has been performing well since the beginning of 2016.

Our equity is up 550% since January 4, 2016, and up 300% since the beginning of this year alone, I believe, the best is yet to come.

Returning to my thoughts on our stock outperformance, we have built up an incredibly strong health plan contract base with seven of the eight largest national plans now under contract with us, three of which we signed in 2018.

I will touch on how valuable these relationships are in a moment, and while it would be an inappropriate for me to comment on our share price, I will try to provide some of my perspective as an investor in Catasys having invested over $20 million of my own personal capital into the company's equity we seem to have established an organic revenue growth rate of 100% plus based on our existing contracts, imminent new contracts and expansion plans and the one-year nature of our ramps.

I see this persisting for years to come. As previously mentioned, next year looks like 150% growth rate. Today, we traded approximately 10 times this year's revenues.

Given our annual revenue guidance of $35 million for 2019, and then approximate private market value multiple of 10 times revenues for comparable peers and our space, and the fact that we are in the very early stages of our growth, you can get a sense of where I see our value today.

Obviously, the market is beginning to discount our near future, let alone our longer-term prospects. However, I firmly believe that this is just the beginning. Whether at the end of 2019 or the first half of 2020, I can foresee exponential growth, significantly greater than the 100%-plus I mentioned occurring.

We expect to close out 2018 with approximately 50,000 eligible members in our outreach pool. I see us getting to 100,000 at some point in 2020. Given our model of taking a year to ramp-up to enrollment rate of 20% of the outreach pool, this translates into a run rate of enrolling 20,000 members at approximately $6,500 per enrolled member.

And as we continue to expand throughout 2020, you can reasonably get to a run rate of 150 million in revenues one year out from some point in 2020. The growth does not stop there. 100,000 outreach pool is miniscule when looking at approximately 4 million in eligible members in our existing product today. Again, this is only the beginning for us.

And I should add that these numbers only apply to our announced OnTrak product today. We are working in earnest to expand our product offering and are also looking to expand our footprint within the healthcare industry, within health plans and self-funded employer market.

While we look to expand within the behavioral health space, we envision being the highest value provider of an efficient delivery system of healthcare services in general. We anticipate expanding into other disease states. To say the least, I am very excited about our future.

Turning back to our contracts, with seven of the eight major health plans in the country, we are beginning to see their value beyond our immediate revenue streams. We are in a very competitive space with approximately 300 behavioral health startups and approximately 800 healthcare IT start ups out there.

It has been reported that BCs and private equity firms alike underestimated the long-timelines required to gain health plan traction. Catasys knows this all too well, experience these extreme growing pains over the years and has paid its dues.

It can take two years just to execute a contract, not to mention the years it might take to obtain a customer's attention and a program's adoption. This is not what the BC and private equity community had calculated, and not timeframes that they are quite familiar with.

As a result of our traction with the largest plans, we are increasingly becoming a possible distribution conduit for the best products and technologies out there.

We are examining and evaluating these opportunities to accelerate our revenue growth and will seek to take advantage of suitable JV and/or M&A opportunities as they become available, which will accelerate our model on a non-dilutive or anti-dilutive basis. As Catasys' largest shareholder, I am mindful of dilution.

During the 2018 second quarter, we did a favorable debt raise to support our company's accelerating growth.

Given our capital light model, strong customer base and growing revenue streams, we continue to have access to debt capital and will access it prudently as we work to capitalize on future growth opportunities with sensitivity to dilution to our partnered shareholders.

We have continued to be proactive in investor outreach and I expect to be visiting several major cities in the coming weeks and months. Here at Catasys, we are pleased with how our business pipeline has accelerated in 2018 and look forward to realizing the results of these efforts in 2019 and beyond.

With that, operator, we can now open it up for Q&A..

Thank you. [Operator Instructions] Our first question is from the line of Richard Close with Canaccord Genuity. Please proceed with your question..

Great. Thank you. Congratulations on another good quarter here. First question I have is maybe on the 50,000 outreach members or expecting to close the year with the round 50,000.

Can you walk us through that a little bit? And then, what the level was in terms of here the third quarter 38,000? You did announce Aetna, four new states, and then the Capital Blue Cross. So just walk us through maybe second quarter 36,000 to the 38,000 at the end of the third quarter and then the 50,000 for the year-end..

Sure. First of all, thank you, Richard. First of all, the numbers didn't go up much during the year, because we just downward the number for things such as data issues or coding issues, and things alike. The jump from 38,000 reported today to 50,000-ish is primarily the result of the Aetna coding problem being solved.

So as a result, we then increase our eligible lives accordingly. Hold on, Rick want to add to that..

And the one other additional thing, Richard, that we have is, as we factor in new predictive models, those also identify additional members. And we're anticipating some of those models going into effect that will also raise those numbers as we go into the end of the year..

Okay. And then, Rick, just to follow up, you talked about Capital Blue Cross, I guess, launching in first quarter of 2019.

So when do - when does that go into the outreach pool, just curious?.

We would put that in at the point that they launch in the first quarter..

Okay, so that's not in there. That's not - wouldn't be in the 50,000 and it's definitely not in the 38,000 now..

Correct..

Okay. Another question I have is with respect to the new members I think you talk about or you mentioned enrollment, new member enrollment of 1,180 I believe was the number, something along those lines. And if I think back to the second quarter, it was like 1,200, roughly 1,200 or something like that or 1,219.

Can you just talk your thoughts on new member enrollment the second quarter, and then maybe ticking down a little bit here in this quarter?.

I mean, I think it's relatively consistent. And as Terren said, a lot of that has to do with the consistency of the underlying eligible member outreach pool associated with it. We'll see - you're going to see some variation, but it's a relatively consistent manner from our perspective..

Okay..

I think we will continue to see that growing as we reflect of a larger outreach pool..

Yeah, a lot of it still relates to the Aetna-ish issue..

Okay. And then, I guess, a question for Christopher, you guys outperformed us from a gross margin perspective. And I was wondering if you could help us out as we think about gross margins going forward.

Should we continue to see it increase off of these levels? I think you reported something like 25.9% or…?.

That's right. Yeah, 26% rounded. Look, we anticipate to continue - we anticipate making continued progress on gross margins as we scale. And I can't comment too much on the future, but I would plan on us continuing to deliver margin expansion..

And I'd like to add something, because I keep alluding to emphasizing that the numbers I give are based on our product today of OnTrak. I obviously am alluding to expanding our footprint within the health plan, the healthcare industry and within the behavioral health space.

Without elaborating too much, we could foresee new product introductions under, we'll call it, Catasys - not Catasys - OnTrak 2.0 that will significantly or could significantly increase our margins from here.

Which - by the way, all new products that I am alluding to, whether they occur this coming year or the next year or whatever, or both years, they - none of them are in our numbers. When we give guidance, we give guidance to what we know, not what we expect.

So that's why even though we had 50% of our outreach pool with one customer, Aetna, operating at 50% of capacity, we still - we thought when we gave our guidance it was conservative. And even despite that, we're obviously very confident that we'll exceed our guidance. But when I talk about $35 million, it's in similar vein.

It does not - it only includes what we know, not what we expect..

Okay. And my final question would be Jeremiah has been there, I guess, a couple months now, maybe if you can just provide us an update what he's been focusing on since coming on.

And then, obviously, some pretty significant Board additions here, anything specific maybe to call out in terms of those three? I know you briefly talked about it, but where you see them adding the most value going forward?.

Sure, thank you. First off, in terms of the Board Members, you're right. For Ed Zecchini is really - and if he's listening, I hope I don't embarrass him, one of the best healthcare IT guys in the industry. He's been a partner. You may remember, Richard, a guy by name Steve Wiggins, who was basically the creator of Oxford Health Plans back in the day.

He's basically been his partner and has had created many healthcare companies with Steve Wiggins and very successful exits. And currently with Remedy Partners, a very successful healthcare, essentially a healthcare IT company. And he basically functions as the Chief Operating Officer of such.

He and Jeremiah are working very closely together and possible JV, possible product introductions and expansions. And I might as well bring in your first part of the question about Jeremiah. Jeremiah's focus - and he's only been here a short period of time, but he's had a significant impact to say the least.

And one of the things that is remarkable to me about Jeremiah is not only his command, as you can imagine as CTO of GE Digital, not only his command of IT and AI, et cetera, but tremendous understanding of product, and how and all the ramifications of introducing new technological products and the actual placement of those products.

And so what he's been focused on primarily first is as we referenced earlier, we - I don't believe the volume of business that we are anticipating now. We were technologically prepared for the scale of the business to the extent that we have in front of us.

We were set up for this year next year, but the volume of business that we can foresee, Jeremiah's been very focused with his team.

And he is making all of our operations optimal, optimizing efficiency across the company, bringing technology to our ability again to identify enroll, engage and resulting in the modification of behavior of this patient population. The primary focus has been first step, however, Jeremiah is capable of walking and chewing gum at the same time.

He is very focused on our next, we'll call for lack of a better term again OnTrak 2.0 and that is what we're very excited about. Getting to this second part of your question, then we look at Diane Seloff, very excited to have her on board. Diane is Chief Operating Officer of a company called Aspire.

Aspire was just recently purchased by Anthem, and I don't - the rumors in the market and she never mentioned it to me, I never even asked her, but interview inappropriate for the comment, it's a public information. But the rumors were they were doing about $100 million in revenue and they're purchased roughly for $500 million.

Aspire is in the palliative care space, a space I'm somewhat interested in, as you look at our patient population, we obviously are in the Medicare Advantage, which is an elderly patient population. As you age both mental behavioral health issues worsen and as you age chronic disease instances worsen.

So it's a natural extension of palliative care, as a natural extension. I'm saying, we're going to go into a palliative care, but it's a natural extension of our business. Palliative care is more HI, human interaction business than what we are today. And hence, I think a lower multiple.

We are today a hybrid technology, we sell like to say AI plus HI, as I referenced earlier and evolving into more AI more of a technology company. And that's what Jeremiah has been focused on with Ed as well.

But with that, Diane brings tremendous understanding of our customers, she aspire have had contracts with I think some again - I think, this is rumor. I think and she didn't tell me this. Something in the neighborhood of 27 health plans, including our major health plans.

So she understands a customer base, she understands the issues and operational issues of the human interaction quotient, and should be very valuable as we scale our company, and obviously we aspire well pun intended. We aspire to do much more than $100 million in revenue and not too distant future.

But she will be very helpful and bring her 25 years of experience. Sharon - and I might tell you - I must tell you, all of these board members have hit the ground running. One of the reasons, we did this was we weren't looking, if you noticed so in the earlier days we had a lot of people I knew on the board.

As we - where our company is today, and emerging as a real innovative pioneering dynamic company in the healthcare industry, we had a change our board to reflect them and be able to leverage, where we are. And we look to our board members they all have hit the ground running. They are active.

They are not here to go to quarterly meetings and to collect any type of compensation. They really believe in our mission, in our vision and they really want to contribute. Sharon has been unbelievable in that regard, she has hooked us up with some very high profile customers.

With health plans and self-funded employers, and that's been her area of emphasis at the Mayo Clinic, and it was also good about Sharon, she started as a nurse practitioner and obviously nurses are very vital part of our business that the least of which, it was in our stated goal.

We brought on the best people that we wanted to bring her, and as I said we're hope to bring on others. But it's - we are also proud to bring diversity to our board and adding two female directors, again we took the best directors that because they're female, but because they're the best directors.

But we're going to look to continue, we're predominately female company. We will look to continue to bring diversity to our board and also bring C level Suite executives that can further leverage our operations..

Great. Thank you for the questions. Congratulations..

Thank you, Richard, for your help and support..

Thank you. The next question is from the line of John Nobile with Taglich Brothers. Please proceed with your question..

Hi, good afternoon. Once again congratulations of a like, see, a definite traction in revenue and obviously guidance supports that. I just have a general question. I know that the use of artificial intelligence is in your business description.

I was hoping, you could talk a little about how it is used in regards to OnTrak and provide any details into how this could benefit enrollment of eligible members.

I'm just trying to get a better understanding the use of AI in your business?.

Hi, this is Rick Anderson.

So primarily we're using AI in a couple of ways today, one is to identify who the correct impactful members are that we can bring into the program, which includes predicting members, who have certain conditions that may not have diagnoses for those conditions, so I made reference to that earlier in terms of as we bring new models on it increases the size of the outreach pool that we're going after and our customers have had a great deal of interest in identifying these people, especially because of the fact that they're - they tend to be very under-diagnosed.

And because they want to bring this health to these members and intervene with the members improve their health and lower their costs, it makes sense to predict who has conditions may need help.

We also are using this and will continue to expand our use of it in terms of understanding the best methods for outreach in the individuals, which will increase our enrollment.

So more of the, how do we do it what modalities do we use, when do we use them and for what people in that, that's all really driven off of profiles and artificial intelligence. And as we go forward in the future that will impact a lot of the treatment pathways we use as well..

Well, thank you for that explanation. Actually, one of my questions was already addressed, but I just have another one on the last conference call. You mentioned that you were hoping to sign Kaiser Permanente.

And I know that - it's a large provider, so just curious if there was anything new to report on this any further discussions, if you could just elaborate a little bit on that, I'd appreciate it..

Sure. Thank you for the question. What we said on the last - well, for the last year to do - well, last year, we've been talking about having contracts of the seven of the eight largest health plans in the country. And we always get the question, well, who's this eighth, why do you always say seven of the eight.

And what I mentioned on the last call that's Kaiser Permanente. Kaiser Permanente is different from - well, all the other health plans we have contracts with. And that is a - it's a system and it's an internal system. And what I said on the last call is, we began prior to the last call, we had never had real concrete discussions with Kaiser.

We are now in discussion with Kaiser and on possible ways of integrating our solutions to their internal integrated system. Now, I will tell you they were very impressed with the product. I will tell you they weren't expecting to be impressed with the product, thinking that, hey, we got this. I think they realized the value of our product.

They still have internal structural issues that they have to work through. And that could take quite some time. Again it is not in any of our numbers. And hopefully one day somehow we will be able to say we have eight of the largest health plans in the country..

Okay. Well, thank you for that. And I just want to get clarification, the Aetna billing issues, you said it should be resolved by December 1 of - well, in a few weeks actually you're looking at….

Two weeks. Two weeks..

Okay.

Obviously, you feel pretty confident in that and obviously your guidance is suggesting that?.

Yeah. That's - they have indicated that date for us, it's really more of a systems issue, it's more - it's programmed in, and hopefully it happens December 1, but that's where the programming it in for..

Okay. But obviously to give that date you feel like even if it doesn't happen December 1, we're looking at a very soon resolution to this..

It's imminent. Yeah. It's actually - I don't know….

Okay. I appreciate that..

It's not a risk of whether it's not a question, if it's a question of when and we believe strongly to be December 1 based on what they have said to us and what programmed into the system..

Okay. Great. Thanks for taking my questions. That's all I have..

Thank you. The next question is from the line of [Fred Orr] [ph], a private investor. Please proceed with your question..

Hi, everybody, including hopefully the new directors on the call. Welcome aboard. Also a just a fantastic quarter and I appreciate the extra tidbits of guidance that were provided to including enrollment numbers et cetera. And, of course, Terren it's a good long-term guidance.

Can I ask Rick, I could take you out to the theoretical $50 million revenue quarter sometime in the future and ask you to look at what you think that your financial model will look like at that point? On that hypothetical revenue run rate - quarterly run rate..

I'm going to give that to Christopher as our Chief Financial Officer..

That's just fine..

And we're going to hold them responsible to it..

Damn right. I'm writing this down and I'll find out where he lives..

There you go. I'll give you the address. There you go..

So, here is my answer though, Fred, it really depends, right. And it depends on our growth trajectory if we're growing really, really rapidly. You're going to see a different financial profile right now….

Right. I understand. You have to separate out growth - gross expenses from ongoing support expenses, pretty much impossible to do. So I understand that difficulty.

And also in the business - your business mix, product offering may change?.

Right. As I said earlier, as you go and I applied this, but let it be clear. Yes, OnTrak 2.0 will expand our margins. And will offer greater value to our health plan partner as well, which is consistent with our vision.

That said, we obviously as a technology, because we go down from AI plus HI, the technology plus the human interaction as we expand OnTrak to 1.0, to 2.0, to 3.0. We're going to look more and more like a pure technological offering as such we will expect even further margin expansion.

But even at scale today just with our existing product, our margins at scale are quite significant, of course, it's commensurate with $220 million to $230 million of capital investment that it took us to get here..

Yeah. Sure..

We paid our dues, we invested our capital and shareholders are about to reap the rewards..

Well, let me let me swing back and ask hopefully a less theoretical question. Are you guys tracking internally your enrolled cost per enrollee.

Can you separate out your recruiting cost from all your other expenses? Do you have a handle on that number, and the reason I'm asking is, you have a fairly set on current product offerings revenue per enrollee, it's a 12 month revenue number; there's no recurring revenues after that 12-month treatment period is over.

So cost of acquisition given your churn rate has to be - has to move down pretty sharply over time in order to generate the kind of margins that you're talking about. And so I guess, I'm just asking that for that number still whether you're tracking contract that number internally, and if you're happy with it..

I mean, the short answer to that question is, yes, we can track that number and we know what it is and we pay attention..

Okay. Good..

The slightly longer answer to that is, as we have added in new modalities of outreach as we applied the artificial intelligence aspect I just mentioned a minute ago.

And some other things that we have planned, we anticipate that that number will continue to decrease and as we move into areas, where we're talking about populations that would be more digital and human that also would decrease. So the longer answer is over a period of time, we expect that that will decrease for a number of reasons..

Yeah.

And just a quick follow-up relating back to John's questions on Kaiser, enrollment, in a treatment abjures population is a real tricky business, it's taken you guys a while to get to a point, where in my opinion at least your enrollment is running pretty smoothly relative to your eligible life counts, as you ex-out half of the Aetna eligible lives here you had two straight quarters of really consistent enrollment relative to your model.

Can you approach Kaiser, and say, hey, let us enroll for you into your existing treatment alternatives and just do that for cost plus fee for service type business, to hear your foot in the door.

Does that make any sense?.

I think one of the things that is a competitive advantage for us is our ability to enroll and engage these populations as Terren mentioned, they're a little bit of a different animal in terms of the way they're set up in the way that those things. But let's take it away from them specifically for a moment.

I do view that that will be a competitive advantage in how we continue to expand our markets and our products with our customers on an overall basis..

Okay. Thank you. And then one last question, you put out a revenue number per treatment subject. And it looks like it's down a little bit from the last time you put a number on $6,500. My recollection is $6,800 was the last most recent pertinent comparable number.

Is there any pricing pressure going on, is that a mix issue? Is it just a normal quarterly fluctuation? How would you characterize that?.

Yeah. That number will move around and a lot of that the underlying drivers that is mix..

Okay. All right..

Thanks, Fred, for your questions..

That's all I had. Thanks a lot guys..

Thanks, Fred..

Thank you. Our next question is from the line of Jeff Kobylarz with Diamond Bridge Capital. Please proceed with your question..

one is, I think you said that you have 4 million insurers. That your - that are all part of the - all the plans you have relationships with contracts with right now.

And did I hear that right?.

Sure. Directionally correct. No. We define our total market in the U.S. defining our patient population today with, we'll call it, OnTrak 1.0 as 4 million possible eligible lives. When I talked about 100,000 and - 100,000 is relative to 4 million. Our health plan partners today are approximately 70% of the country.

So we do expect the numbers to get quite large and we expect this to go on for quite some time..

Right. Good. Okay. Got it. And then so to go from - you so to go from 38,000 at September 30 to 50,000, you said - I heard you say that there is going to be just Jeremiah's better predictive models to identify prospects. And so you have this outreach pool just….

Well, it's in part the big jump from 38,000 to 50,000 is Aetna..

Okay. All right.

And then, did I hear, you say, 100,000 would be the outreach sometime in 2020?.

That's what we're shooting for - it could be bigger, it could be smaller. But again that is not including 100,000 includes things like remember that's not in our guidance. That's - it's not what we know. But it could be what we expect and that's based on conversations of expansions with our existing health plan partners.

Now as we roll out, which we will one day, we're not going to blow a trumpet. But as we evolve into OnTrak 2.0, the member outreach can grow quite significantly, perhaps even doubling. That's not in our numbers..

Got it.

Okay, so this OnTrak, your 2.0, does that include more disease states or how is that different from 1.0?.

We don't want to - no, it's still in the behavioral health space. I don't want to elaborate too much on it. We have noticed over time that some of the people out there that aren't really competitive with us like to use our terminology, like to use products when they don't have them, and try to confuse the marketplace.

So we're just going to keep moving forward, keep expanding. And the results will show and speak for themselves..

Right, okay, all right..

And you can imagine it's going to be more technology, less human interaction..

Okay. And then, I think in the second quarter with the Aetna situation, now you have only outreached to 10% of their patient population or - I'm sorry, you averaged at 10% of their potential prospects. And this third quarter, it was near 50%..

I think what you're - sorry, I think what you're referencing is that we're enrolling at a rate that is about half of what we would have anticipated, which was….

Roughly a 10%..

…roughly a 10% rate. So it's been relatively consistent in terms of where we've been operating.

What we're talking about is the fact that, as we resolve the issues that we've had historically, we expect both to be able to enroll a greater percentage, have the rates be more consistent with their other customers, because it will then look more like our other customers.

And also what that does is open up the people that we would otherwise be able to identify. So it's both an increase in the outreach pool and an anticipated increase in the enrollment rate..

I see. Now, I get where the 10% comes from. Okay, great.

Is there any way to just say hypothetically if you could build Aetna the way you built your other - your generic other customers what your billings would have been in this third quarter?.

Sorry, Jeff. But that - we don't really break down individual customers and break down individual plans and what have you, and won't just offer any more granularity. Sorry..

All right, that's fine. Last question, just curious, you mentioned near the end of your comments, Terren, about being - the company being a conduit for some other operations out there or a joint venture or an M&A opportunity. And can you discuss that a little bit further what would that conduit look like and what would….

Well, we don't know. I mean, look, I don't want to get people too excited. But I'm excited. But the reality is if we can buy versus build quicker on a cost-effective anti-dilutive basis, it would be cheaper to buy something than build it ourselves, if it's part of our business plan.

We are also looking to partner to accelerate our revenue and growth as well. And we're evaluating a number of opportunities that are out there. But I will tell you, it is clear that our contracts are the envy in this space..

Right, okay. Do you have any probability you want to give to….

Right, that's speculatively - we can't - I think giving guidance is speculative. That would be really speculative..

Right. Okay, just had to ask that question. Thank you..

No problem. Thank you..

Thank you. The next question is from the line of [Mitch Sorgold] [ph], a private investor. Please proceed with your question..

Hi, guys. Congratulations on the terrific quarter and some really great execution. What I'm noticing among the - and I'm pretty new to the story myself - what I'm noticing amongst some of the people asking questions is that, this is not that simple to understand.

And so, I wanted to just peel apart one little part of the onion here, to see if I understand this correctly.

Regarding the - is that a forklift increase that you will see when you go from 38,000 to 50,000 with Aetna at December 1 or roughly around them in terms of the revenue that will be coming in? So, basically, 50,000 members, and then we increased [part of that] [ph]? Is that right?.

So our model - again, I would direct you to go to our website and look at our latest corporate presentation, that takes you through our business model.

Now, generally speaking, if you take 50,000, what it says that the worst case is that one year out you will be at an enrollment rate of 20%, so 20% of 50,000 would be 10,000, times whatever number you want to use, $6,500 per member enrolled. We will be at a run rate of that revenue number.

That's assuming we don't add any more outreach pool over the next year, which is not a good assumption. So that's how you generally look at those numbers. Now, some of that 50,000 has already been out some period of time, is more mature than the newer.

Certainly that the 12,000 added, you have to definitely look at that being out one year, being an enrollment rate of 20%. But again, I'd have you go - direct you to our website. And if you have any questions after that, please shoot me some questions..

Sure, if I could just make sure then that I understand this.

So if you had been at the 50,000 members into the 38,000, would it be correct to assume that at 25,000 you would have had 25% more revenue in the quarter, since it was 50%?.

No, no, no, because the new - again, the new incremental, the additional 12,000 is a ramp up to a 20% enrollment rate over the following year. It doesn't all happen day one. Not everyone volunteers to get treated for depression, anxiety and substance use disorder. It's an [iterative] [ph] process..

Sure, understood..

Okay. So, again, reference the corporate presentation that runs you through the model and please shoot me any questions you have..

Thanks a lot..

Pleasure..

Thank you. The next question is from the line of [Jack Shack,] [ph] a private investor. Please proceed with your question..

Hi. I was originally going to ask a question about how you were going to maintain consistent high standards for your far flung employees, because you're becoming a nationwide health care company. But you've made some comments that makes me think you're going to try to get away from having a large nationwide pool of employees.

What direction are you going in?.

I think you're both right. Number one, OnTrak is - we're still in the first inning of OnTrak 1.0. OnTrak 2.0 would be incorporating OnTrak 1.0 and adding, as I implied, additional, we'll call it, product offering to it. So we're going to continue to increase our nationwide penetration, our nationwide expansion.

But, over time, more of - we'll call it, OnTrak 3.0, 4.0. It's going to be utilizing more technology on an overall basis than human interaction. But that's down the way. So let's - right now, let's just focus on 1.0 and 2.0..

And you have a way then to keep your employees from being stretched too thin as you expand and keep them happy?.

One of the things that we work on, and Jeremiah Stone and his team is working on, is optimizing productivity efficiency. And we're very - we're not only very member focused, we're very outreach and care coach and community coordinator focused. And we go to great lengths to support them in all ways, obviously, financially.

But emotionally, et cetera, they have a very difficult job. And they're out in the field, doing their best to get someone who doesn't want them, someone who doesn't want our product.

And that's the real secret sauce of our company, the ability to enroll and engage and modify the behavior of a care and treatment avoidant patient population is very difficult work. They do an exceptional job. It's something they take a lot of pride in. It's something they're really passionate about.

And they're driven by our mission as a company is to help the lives and health of as many people and their family members as possible..

Okay. Thank you..

You're welcome..

Thank you. The next question is from the line of [Robert Cowen] [ph], a private investor. Please proceed with your question..

Thank you. Great quarter, guys. You guys announced capital Blue Cross on October 31 of this year. And I'm also - I heard it wrong, in the past, when you guys have announced [steels] [ph], it usually took 9 months to 12 months for them to come online.

But I think in your opening statements, you guys stated that they would be coming on in the first quarter.

Is that correct?.

That is correct. They will be coming on. And that was a planned - it's actually, historically, it's taken us 3 to 6 months to bring somebody on depending. And that's driven by a couple of different things. One of which is the integration technically with the health plan.

We've actually seen from signing of agreements to launch has decreased in most cases, to averaging about 30 to 45 days over the last several launches. This one is longer, because they had a planned launch. So they wanted longer in terms of when they actually wanted to go live, so we announced the agreement.

And we had a date and a plan in terms of when we were launching that..

Right, so but usually when you announce the deal, usually you took quite a while before you could really implement them. So that timing has come down considerably at this point then.

Is that correct?.

Yes, it has..

All right, well, that's good news. All right, then that's my only question. I think it's really fantastic to hear. Thanks a lot, guys. Great quarter..

Thanks, Rob..

Thanks, Rob..

Thank you. It appears we have no further questions at this time. So I'd like to turn the floor back over to management for any additional concluding comments..

Thank you, operator. Thank you to all of you for your time. Please feel free to reach out to us with any additional questions. We believe our achievements in 2018 has set us up for success in 2019. And we continue working in earnest to drive our long-term growth trajectory upward.

We look forward to sharing our full year 2018 results as well as our initial progress in 2019 with you on our next quarterly call. Have a great night, everyone. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time..