Greetings, and welcome to Catasys 2019 Third Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like the conference over to -- I will now pass the floor over to a representative of the company. Thank you. You may begin..

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, intend, guidance, confidence, target, project and some other expressions typically are used to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance 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. Management expressly disclaims any intent or obligation to update the forward-looking statements. With that, I'd like to turn the call over to Terren Peizer, Chairman and CEO of Catasys, Inc. Please go ahead, Terren..

the care coaches, outreach personnel and community care coordinators who are key to our enrollee successfully completing the OnTrak program. With the necessary operational foundation in place and ample financing secured, we are well positioned to execute our growth strategy heading into next year.

As one of the premier pioneers in health care technologies, we could not be more thrilled with the customer validation we've received since launching our groundbreaking platform, Catasys PRE, P as in predict, R as in recommend and E as in engaged, in July.

This new platform utilizes Catasys' predictive analytics and engagement and AI capabilities to proactively deliver interventions to address care-avoidant members with chronic diseases such as cardiovascular disease, diabetes and pulmonary disease, which expands our engagement beyond our legacy behavioral health capabilities.

By automating this process, we are able to achieve in minutes what otherwise would take months of manual work by highly trained health care data scientists.

We've received extremely positive feedback from our health plan partners who have shown great interest in the applications of PRE beyond OnTrak 1.0 and 2.0 as they look for more ways to advocate for their members.

As we have mentioned in the past, the social determinant of health called loneliness is both a health care crisis in the country and a priority for Catasys.

Our customers have encouraged us to integrate additional multi-condition applications on the Catasys PRE platform, and we will continue to build strategic partnerships, add functionality that improves the lives of a much larger member population with effective, lasting treatment while driving significant cost savings and offering an industry-leading value proposition for our health plan partners.

We continue to invest in deepening and broadening our clinical value across multiple conditions, proving how Catasys programs lower costs for holders of medical risk by harnessing our deep insights and experience at the intersection of behavioral health and chronic disease.

With that, I will turn the call over to Rick to discuss our operations and will return later to speak on the continued expansion of Catasys' leadership team and expand our outlook for the year.

Rick?.

Thanks, Terren. In the first nine months of 2019, we announced new health plan partners and several program expansions, both geographic and modality. We believe these continued expansions with our existing partners reflect the effectiveness of our capabilities and technologies, but ultimately, that we achieve results for members and our customers.

As Terren touched on earlier, our OnTrak-A solution with Aetna expanded into 6 states, serving eligible members in Ohio, Tennessee, North Carolina, South Carolina, Maryland and Delaware. We launched enrollment in Maryland and Delaware during the third quarter, and eligible members are now able to enroll in OnTrak in all of these states.

We remain in discussions with several customers regarding expansions in the form of new states, new lines of business or expanding coverage to include additional populations such as depression and anxiety. We are also emerging from the pilot phase with a number of health plans and anticipate announcing new launches in the coming months.

Additionally, we recently added a new national commercial team, which we expect will prove instrumental in strengthening and accelerating our pipeline of business even further.

Net new enrolled members, defined as the total new enrollments less graduated and disenrolled members, was 1,473 in the third quarter of 2019, up 366% from the prior year period and anticipate an upward trend in the coming quarters given the significant increase in our outreach pool of eligible members in 2019 and beyond, particularly with our introduction of Catasys PRE.

As Terren mentioned, our outreach pool of eligible lives was 140,000 at the end of Q3. The active outreach pool, consisting of those members whom we are currently actively working to engage, is at about 113,000 eligible members. We anticipate outreaching to the larger pool in January 2020 when Medicare regulations allow for telehealth provider visits.

We have historically discussed a 20% enrollment rate at scale. However, we are seeing some populations at a higher enrollment rate and others at a lower enrollment rate depending on customer, product and disease mix. As we dramatically grow our engagement team, the time to optimal enrollment efficiency increases.

We continue to grow our care teams and the underlying infrastructure to support our rapidly growing eligible member pool and enrolled members. So far this year, we have added 230 employees and now have a total of approximately 400 teammates and growing.

With improvements to our processes and systems, we have significantly reduced the time it takes to train new staff, enabling them to engage with members more quickly than before. I now turn it over to Christopher for an overview of our financial results..

Thank you, Rick. Our revenues for the third quarter of 2019 increased to $8.8 million compared to $4.4 million during the same period in 2018, resulting in a year-over-year increase of 102%.

The revenue increase was driven by an increase in the number of members enrolled in our OnTrak solution during the third quarter of 2019 compared with the same period in 2018. Revenues for the first nine months of 2019 totaled $23.3 million compared to $9.6 million in the prior year period, resulting in a year-over-year increase of 144%.

Gross margin for the third quarter of 2019 increased to 30.8% from 25.9% in the prior year period. Sequentially, gross margin did come down from the 43.2% in Q2 as a result of the continued build-out of our engagement team, that is Catasys care coaches and outreach specialists needed to support the significant enrollment growth expected in 2020.

Gross margin was 42.1% for the 9 months ended September 30, 2019, compared to 11.4% in the prior year period. Our operating expenses increased in the third quarter of 2019 to $8.3 million compared to $5.2 million in the prior year period.

As in the first two quarters of the year, we incurred higher expenses during the period due to investments in new technology, key personnel to support future growth and servicing contracts compared to the prior year period. Operating expenses in the first nine months of 2019 were $22.8 million compared to $13.5 million in the prior year period.

On the bottom line, our net loss was $8.6 million or $0.52 per diluted share compared to a net loss of $4.4 million or $0.27 per diluted share in the prior year period.

In addition to the increased OpEx, we also incurred onetime debt termination costs and related fees of $1.1 million and write-off of debt issuance costs of $1.5 million resulting from our new financing. Excluding these onetime items, net loss would have been $6 million or $0.36 per diluted share for Q3 2019.

For the first nine months of 2019, net loss was $17 million or $1.04 per diluted share compared to $12.8 million or $0.80 per diluted share in the prior year period. Adjusting for the onetime items I noted for Q3, net loss would have been $14.4 million or $0.88 per diluted share.

Having secured the debt financing commitment from Goldman Sachs in September, we are well positioned financially to execute on our growth strategy into 2020. Cash was $15.9 million on September 30, 2019, with working capital of $11.5 million. With that, I'll turn it back over to Terren for closing remarks..

Thank you, Christopher. We have made significant strides forward in positioning Catasys for explosive growth this year.

We have sufficient capital following the debt financing completed in September with Goldman Sachs, and we have continued building out our operational infrastructure, enhancing our technological capabilities and strengthening our management team and Board.

Throughout 2019, we have added new management and Board members, all industry thought leaders and experts who bring something different to the table. We will constantly endeavor to strengthen our leadership team and Board of Directors.

We have continued to develop OnTrak 2.0, which features increased use of artificial intelligence so that human resources can focus on the important personal interactions that make OnTrak so effective.

With the ability to address a larger population through the insightful integration of technology, we are increasing our clinical value proposition, delivering improved member health and validated outcomes and savings to health plans, all at a lower cost to Catasys. We are close to launching OnTrak 2.0 with a national plan.

And as 2.0 becomes the prevailing program, we expect to, at minimum, double our eligible lives outreach pool and vastly improve our operating margins. Our current outreach pool of 140,000 eligible lives does not include OnTrak 2.0 populations.

We are also exploring a Catasys PRE Platform as a Service, or PaaS model, with one of the largest health care companies in the industry.

With our continued investment and analytics, continued expansions and launches and increased efficiency and efficacy with the recently introduced PRE platform, we have been consistently told that our capabilities combine best-in-class analytics with best-in-class engagement surpassing anything else available in the industry.

With all this in mind, we are poised to achieve $90 million in revenue in 2020. As I said earlier on in the call, this is a conservative view of telling you only what we know based on the current business and not indicative of what we can accomplish with Catasys' developing relationships, products and technologies.

Everyone in the Catasys organization has had a hand in our numerous successes thus far in 2019. But 2019 is just the beginning. As we head into 2020, you can expect that we will deliver upon the things we know will come to pass, which will result in the $90 million revenues that we have guided.

With a solid leadership team in place and the growing engagement team on the front lines of our operations, I am confident that we will continue to see rising enrollments commensurate with the growth of our eligible outreach pool this year and beyond as it continues to grow.

We are ready to support this incredible growth across the country and are working to capitalize on the positive momentum of 2019 heading into next year.

At this time, I want to personally thank our frontline of care coaches, member engagement specialists and community care coordinators that are responsible for our industry-leading engagement capability.

It is their tremendous grit and selfless, compassionate work that enables us to achieve our mission daily to improve the health and save the lives of as many people as possible. Thank you, frontline, I'm extremely grateful. With that, operator, we can now open it up to Q&A..

[Operator Instructions]. Our first question comes from Brian Hoffman with Canaccord Genuity..

Congrats on the strong 2020 guide. You came in a little bit below our expectations for 3Q on revenue. I'm just curious if 3Q was weaker than your internal expectations.

And if so, is that because of the freeze at the national health plan that issued RFP?.

In part, yes. And another part is the concentration of Medicare lives in Texas that we intentionally slowed down outreaching to pending the January institution of telehealth regulation..

Got it. Okay. And then another one on the RFP. Congrats on winning that with the national plan.

Had you been enrolling members from this health plan prior to them issuing the RFP and putting on a freeze? And also, what is the outreach pull associated with this plan? And what exactly is the scope of work for that RFP?.

Let me try to answer that question as much as I can say. So yes, we were currently enrolling members in January, February and March, and we were about to launch 4 to 6 additional states that would have significantly increased our outreach pool and our results. We were frozen pending this RFP. The RFP was very lengthy.

We were told in the last few months that we were the winner. I guess a deal is not a deal until it's signed. We are still waiting the signed statement of work. It's significant enough that it even requires the signature of the CEO of the health plan.

How much additional outreach pool lives it means, we don't know yet specifically until we get the statement of work. But we do have a good idea that it will add significantly to our revenue. Brian, did I miss any question in there that....

No, no, no. And then you reiterated guidance for the year. So that implies a pretty sizable step-up relative to what we've seen in the past few quarters from 3Q into 4Q.

So what gives you the confidence in that step-up in the fourth quarter?.

We had a very strong October, and we were right on forecast. It's still early in November. We're tracking. I mean it's -- as I keep saying, this is a transitional year.

We -- while we're pleased that despite all these headwinds -- again, like I think I had certainly mentioned, had we not been frozen by that national plan, we would have easily and significantly beat the $35 million guidance.

And as you noticed from that point forward when we got frozen, we did not increase our guidance at all, which was upsetting in a sense, but it's just the things we expect from these very big, complex organizations.

So that said, we're really hyper-focused -- this whole year have been hyper-focused on trying new systems, transitioning systems, trying and transitioning new training means to basically expand and be able to handle the volumes we see not only next year, but continuing for years to come.

We believe that we have a tremendous opportunity with our new products. We have -- as I said in the call, we have received a lot of validation on where we are as a company and where we are in our product platform. So long-winded way of saying we're tracking. There's still things we're working on. We're going to be around the number.

I can't tell you one way or the other, but I'm really more focused on next year and the year beyond..

Our next question comes from Mike Ott with Oppenheimer & Co..

It's great to hear that you guys have won that behavioral RFP with the national plan.

I know you've said maybe as much as you can, Terren, but do you know when that approval process might conclude and work? Again, is that something you expect maybe here by the end of calendar '19?.

That is a phenomenal question. It has been -- we thought first that we'd be able to launch in the fall. We were gearing up to launch in the fall. This health plan partner, without saying too much, is also changing its internal structure, which has added to the complexity I referred to in my prose.

We were targeting and are still targeting a January launch. We are in contact daily with the plan. The plan is sympathetic that they have frozen us all year. The markets that we were going to launch in are frustrated because they want the product for their markets.

When I say we encounter complexities all the time, we just learned -- and again, it's due to, I think, the health plan converting more from a market structure to a national structure, which bodes extremely well for us.

And I should mention, as we graduate from the pilot phase of our development to the national phase, it is extremely positive for us, although it does add to short-term complications. For example, this one plan that is switching its internal structure to a more nationally centralized operating model, adding the CEO signature was a recent phenomenon.

That said, I'm glad the CEO is going to know us quite well and he'll be able to see the impact that we have on his membership as we look to expand upon the initial application of the RFP into all products across company, across the country..

That's great to hear.

And then with the change in the Medicare regulations for the telehealth engagement, could that even allow -- that sounds like it could maybe even allow some additional upside to the outreach pool, if that's the right way to think about it?.

We have a lot of upsides to the outreach pool. We -- as you know, as we've said and it's quite important to note that our outreach pool's 140,000, but we're only actively outreaching to 13.

And as we said earlier, that's related to the Medicare lives in Texas pending the January launch of outreach to the additional members we're not outreaching to today. When we give our guidance and when we talk about our outreach pool, we don't include fluff.

We include things -- for example, the national RFP, we include it in our numbers, but we're conservative on its rollout and launch.

But sometimes we learn, as we've learned this year, it's almost impossible with these large, complex, largest companies in America to be too conservative as they have a propensity to even outpace our most conservative assumptions.

So there's a lot about -- we have a lot -- a tremendous amount of upside in our outreach pool numbers all across the company, not just one plan..

Our next question comes from Daniel Carlson with Tailwinds Research..

First off, I just want to talk big picture here. There's been a lot of talk about Google in the news and how they're now getting into getting health care data. I was wondering if you could talk to us about the competitive landscape out there and how you fit in it.

And in particular, you've mentioned some strategic potential in the past, so where you could see yourselves expanding in other areas?.

Okay. So a two part question. I'll try to answer it. And if I forget the second part, please remind me. Well, as we were coming online, the Department of Human Health Services has launched an investigation into Google. This is not surprising. I suspect that Ascension is going to have a lot of pressure on itself.

I think Congress is a little tied up right now, but I'm sure Congress is going to get around to this, too, as Congress continues to probe technology company's use of data. While there's nothing technically -- legally wrong with what Ascension has done or what Google is doing, there's not a violation of HIPAA law.

However, this whole area is -- Pandora's box is being opened. States are now looking into it. States are going to restrict heavily what companies can do with patient data. There are a lot of companies that are tied into Ascension.

And I do believe that as this gets publicized and gets into the news media, I do believe people will start pressuring the Ascensions of the world to not be doing this.

The difference is some companies that are already piped into Ascension, the difference between them and Google is they -- well, the other companies are actually using the data and analytics, just like us, to provide a service to directly impact the member. And in our case, the member opts in.

So there's no using of a member's data and also using it other than to benefit the individual member.

That said, I do believe that we -- that there's a long, long road from going from what Google is doing to creating actual products that impact outcomes as the shield that the industry uses is we're doing this to help improve outcomes, improve health and lower the cost of health care.

I believe and what we know, let me -- to be clear, for your concern, can Google do, for example, what we do? The answer is categorically no.

Can they duplicate our analytics? Right now, I'm sure they are not probing behavioral health patients with multiple behavioral health conditions, with multiple chronic diseases that are care and treatment-avoidant.

And how do we know which ones we can engage because there's one element here that gives us a leg up on the whole industry, and that's our ability to combine the analytics with the intervention. There are a lot of health care IT companies out there, the Teladoc, the Livongos et al.

that have great technology, but they lack the ability to engage and use that technology. There's been so many -- so much VC money, private equity money flooding into the space. So there's a lot of great technology companies out there.

But what we've been focused on throughout our lives, yes, our life, is the ability to combine big data analytics and going to the next level now with the Catasys PRE platform and the intervention.

I will tell you, just this past week, one of our large health plan partners said to us point blank, we are very much ahead of the industry in analytics and our ability to do what Catasys PRE can do. That person said, you might have a 1- to 2-year lead, and that lead will -- that gap will close. And we know this.

The task we have is to create greater, robust nature of Catasys PRE and stay continually ahead. But what that person also said that no one combines the analytics with the intervention to create the value for the health plan. So we're very comfortable with where we are today relative to technology companies, relative to Google et al.

And I'm sure as time goes on, they're going to be very -- a lot of people in the industry will be very focused on what our capability is. Now the second part of your question, I believe, is strategic partnerships or joint ventures or the like. Think of Catasys PRE, so OnTrak 1.0, 2.0 are applications on the Catasys PRE platform.

Loneliness will soon be an application on the Catasys platform. But let's look a little bigger than that.

Let's think on the early days of iTunes, let's think of the early days of Amazon when all of sudden other people -- we can aggregate the different capabilities throughout all these technology companies, which, oh, by the way, they don't have the relationships with health plans. It's very -- we have talked about this in the past. It's very difficult.

It takes many, many years to get to where we were to even begin a pilot. It takes 5 -- we worked 5 to 10 years with our national health plan partners before we got to a pilot. And then you got to do a pilot for a couple of years. And then you got to then -- the runup of the data and then the planning of what you do with the data.

We're talking about a very long lead time. So what do we have? We have preeminent platform in Catasys PRE that all these technology companies can plug onto a platform and we can -- we'll increase their reach, increase their customers, their customer capability. They can increase our outreach significantly as well as they're in areas where we're not.

So think of this as the beginning of an iTunes or an Amazon-type offering where we'll be offering a lot of slicing and dicing of different applications to create a larger footprint in the U.S. health care system..

Great. That's helpful. That's great answer. Just a couple of questions about guidance.

So as you guys bring Texas Medicare online, how do you expect to ramp that with telehealth? And how are you accounting for that in your guidance?.

Well, I'm tired of hogging the mic, so I'm going to turn it over to my team here. Since Rick is intimately involved with that, I'll let Rick answer that question.

Rick?.

So in terms of when the telehealth regulations come online in January, the CMS is, for the first time, going to be willing to let Medicare members go to provider visits via telehealth.

And the -- we've kept the population out of the outreach pool because of the fact that it's largely transportation and accessibility questions for that population, and that is one of the initiatives that we're running in terms of launching the telehealth with that population, allow us to bring it into the outreach pool.

And so it's included in what we're looking at for 2020..

Got you. Okay, that's helpful. And then I guess this is probably for Christopher.

But looking out a few years from now, when your revenues start going up possibly $300 million, $400 million, what should we be looking at as we try to model this for sort of operating margins and cash flow, et cetera? So how do we look at -- what your margins are going to be looking like at that level at full run rate, I guess?.

Yes. Thanks, Dan. So as we've said in the past, it's really going to be dependent on the size of the outreach pool and our growth rate. But assuming just the $90 million that we're talking about right now, we're looking at gross margins getting back up to the north of 50%.

We're looking at cash flow positive by the end of next year, and you're looking at positive operating margins into 2021 and beyond..

I want to circle back -- thanks, Christopher. I want to circle back to Rick.

And since the telehealth in Texas with the Medicare population, which incidentally, the frustration with not being able to use telehealth in Texas as it pertains to a Medicare population, we get -- as you may recall, there's been a lot of questions about the 20% enrollment rate.

And as I said, there are some -- depending on the customer, depending on the product, meaning commercial, Medicare, Medicaid, depending on the disease, depression, anxiety versus substance use disorder, one is easier to enroll than the other, Medicare is significantly easier to enroll, which is why the -- missing that RFP was also -- we were concentrated in a Medicare population on that national RFP.

So that dramatically, we're -- let's put it this way, we're dramatically above 20% with Medicare. Commercial, we're less than 20%. And depending on how that mix improves, and I expect it will improve with Medicare because there's 2 truths in life -- well, there's more, there's deaths and taxes. But there are 2 truths in life.

One, as you age, your chronic disease worsens and you'll pick up other comorbid chronic disease. And number two, as you age, your behavioral health condition worsens and you'll pick up other comorbid behavioral health conditions.

And as you see throughout the country, what's happening is that people are now self-medicating more and more with SUD with their chronic behavioral health conditions. And those who don't know, it's substance use disorder, SUD, alcoholism, addiction, et cetera. But I think -- so we're excited by being able to bring back those Medicare lives in January.

But I think since it's a new population, new state using telehealth, I want Rick to explain how we're going to do that and accomplish that and be successful at it..

So as it relates to -- from a telehealth perspective, we actually are bringing -- we provide telehealth visits through our provider partners at the moment.

But one of the things that we are doing starting next year is we're actually going to provide the telehealth visits through our own provider portal, through our own portal, which includes some of the other technologies that Terren has made reference to and we've talked about in the past.

And that's going to be part of what we're going to be offering to all of our membership, but especially our Medicare members -- our Medicare membership as we go forward. And we've already launched this on a test basis and are working through bringing more and more of the members on board.

And we have targeted fairly high rates to provide telehealth to those members. And it really is an understanding of what the benefits are to the various different lines of business, Medicare, especially, as I said, accessibility, distance, timing, convenience, all of those things make a big difference in terms of being able to do that.

So we've been positioning that internally in our test phases with our members and are getting a good response to that. We're planning on rolling that out at the beginning of the year.

And then on top of that, we've been working with our existing providers that provide telehealth through technology solutions that we're partnering with them on for our member portal and also with some third parties that can bring significant amounts of capacity to deliver telehealth immediately starting in -- well, really starting in December and then January as we roll this out.

So we have the -- we're very focused on the benefits that we're providing, how we put that in front of the membership and then also delivering that on the backside. And there's other elements to that, that we're partnering with to do that.

We're already doing ride-sharing for transportation purposes with our Medicare partners, and that aligns with what we're doing from a telehealth perspective as well as looking at other innovative ways to deliver those services, including in home, which we've gotten the approval from one of our partners to move forward with that as well.

So it's really a focus on membership, what's in it for them, providing the technology solutions that are easy to access for them to do so in one unified place, and then the back end provider piece that goes with that to provide the capacity..

Yes. And also, I'd add that we have a very conservative numbers for that Medicare population in Texas that does not match what we experienced everywhere else in the country, and that's important.

But look, as we try to highlight the different conservative assumptions we're making, believe me, there will be some more headwinds -- there'll be headwinds we may have not experienced yet. So I don't want to make it seem like our number is really 200 million and we're gearing towards 90 million.

There's a lot of -- we'll continue to experience a lot of crosscurrents, but it is a conservative number..

Great. If I could just circle back to Christopher real quick, though.

I'm trying to pin you down, Christopher, like when you get to $0.5 billion in revenue, what are the long-term margins we should be looking at for the business? Do you have anything in mind there? Is it changing too much as you bring on new programs?.

So as we -- again, we're experimenting with new products, et cetera. So this is just kind of our long-term assumption. But we expect gross margins to grow to about 60% at scale -- at the scale you described..

Our next question comes from Mitch Swergold [ph]..

And congratulations on doing a great job managing this significant growth phase.

Can you guys hear me?.

Yes..

Okay, great. So I just wanted to follow up on each of the prior questions. I'm going to go in reverse order, if that's all right.

The first one is just regarding the long-term -- well, actually, not necessarily the long-term margins, but I noticed that while your COGS went up pretty meaningfully sequentially the last couple of quarters because of the new adds, do the -- just to make sure I have this correctly, do those then drop into OpEx as they become productive and so we should see a shift there? And to the extent that you're not hiring as aggressively in the future, which I don't know if you have a sense for when you'll start slowing that growth, but that the cost of goods in absolute terms should begin to level off and the OpEx should begin to -- or actually go down while the OpEx increases -- I mean, yes, OpEx increases?.

Mitch, this is Christopher. No, we fully burdened the cost of revenues with the ramp-up time of our care coaches and outreach specialists. So we hire them. We train them. Their entire expense hits the cost of revenue line item.

And so over time, what happens is you see the margin expansion as their productivity increases and the care coaches, for instance, fill up their caseloads as we enroll new members. And so what you've seen is we've really ramped up our capacity to enroll. And if you do the math, the number of net enrolled is growing at a much faster rate than revenue.

And so you'll start to see those margins expand again. But every time we have a significant increase to the outreach pool, you're going to see the margins contract as we have to invest ahead of revenue.

Now moving down to operating expenses, we've really invested heavily this year in infrastructure, in technology and systems that we're going to leverage in the coming years. We're going to continue to invest appropriately. But we see a significant opportunity in the PRE platform that we've described.

In addition to that, we had to do that anyway just to support the OnTrak growth. So those investments, you'll see us leverage in the coming years. We don't expect those expenses to grow as a percentage of revenue at the same rate. So you're definitely going to start to see the operating margin improve next year.

Does that answer your question?.

Yes.

Just are we talking about earlier in the year? Later? Like are we close to a point where those start to swing more towards the positive, we hit at the end the year? Or are we still going to be going through a period of more spend relative to revenue?.

Yes. So given the dynamic I described about the net enrollment growth from Q2 to Q3 growing at a faster rate than revenues, you can expect some modest improvement in margins in the fourth quarter and then obviously improving throughout 2020. But that's assuming that there's not a significant increase in the outreach pool. I just want to caveat that..

Okay, got it. And then you've talked a little about the -- and mentioned in the press release the pilots and then the knife, as Terren talked about yesterday, of the revenue beginning to ramp. And I'm wondering if you could give us a feel for how far along are we in terms of the pilot phases.

How many of the clients are still in pilot phase versus those who are beginning to expand beyond that? And then to the extent that they're still in pilot phase, are there many that are close to the end of pilot phase? Or are there plenty that are still early on? How should we think about that?.

Well, that's a complex question that has a varied answer. Frankly, I would say 2 of the national health plans, we're categorically at the national level. I would say 5 or 6 have validated our pilot as successful. I think also, how we move forward and do national expansions, there's more -- there's a perception of us being validated out there.

And our conversations are -- in the early days, it was small pilots. Our conversations now are about much wider application. And then when you get into the Catasys PRE platform, it's -- and you're talking about a Platform-as-a-Service model, you're, of course, talking about a wider application.

And again, Catasys PRE is going to be about providing a better product, a more efficient product. You just heard Rick described, we're using different partnerships to become more efficient, more productive, increased capacity, et cetera. But also, this platform where all these applications from companies around will be on it. So we could expand.

We don't know -- as I was saying back, we don't know how big this is going to get. We just don't know. We just know we have something the industry wants and needs.

Again, if you believe that we're effective in identifying, engaging and modifying the behavior of treatment and care-avoidant patient populations that have complex, multi-behavioral health issues and complex chronic disease and we can now do it for all chronic disease, that's quite special. And we do it in minutes, not months.

And then having -- doing -- to be able to do it in minutes gives health plans real-time data to act upon..

Last question for you. Can you talk a little about -- yesterday, Terren, you were talking about the pricing for PRE, I think it was, versus the -- oh, no, sorry, OnTrak 2.0 versus 2.1 and saying that the enrollment pool will be something on the order of double, pricing down a little bit, and therefore, margins should expand.

I'm wondering if you can help us to understand how you would anticipate existing customers on 2.1 behaving with respect to 2 -- yes, sorry, 1.0 behaving with respect to 2.0.

Would they be expected to transition towards 2.0? And how do we think about that rollout?.

Okay. I'm going to try to answer as quickly as possible because I want to give other people a chance to answer the questions here. 2.0, and it's in our slide deck, you could reference it there as well. 2.0 -- as I like to say, 1.0 is -- sells for the behavioral health equation by using AI plus HI.

In AI, you can use it for technology; HI, human interaction. As we go down with 2.0, we're going to increase the use of technology, the AI portion and lessen the use of HI. That, by definition, will improve margin.

The increase in the outreach pool is because we're going from just the high utilizers of medical services, those that costs the health plan, say, $7,000 minimally and on average $32,000, $33,000 a year. We're going to pick up those that cost between $2,000 and $7,000.

Now the opportunity for us is, once again, we know these patient populations better than anyone in the country. The industry thinks very linearly. They believe that if you're a higher utilizer of medical services, you need greater intensity of care. Similarly, if you're a lower utilizer, you need lesser intensity of care.

We know that this linear viewpoint is categorically wrong. It's a treatment matrix. And the beauty of what we're able to do, there's a population within both that -- there's a population in the high utilizers that needs less or different types of intensity of care.

And similarly, in the lower utilization population, they need -- there's some subsets that need greater intensity of care. And of course, anyone in the low utilizer section today could easily graduate to the high utilizer section tomorrow.

So what we're categorically able to do is take a fingerprint, a phenotype of a member and match up with -- first of all, identify who's care-avoidant. Remember, 90% of those with behavioral health disease never submit a claim for this disease. Their care-avoidant and treatment-avoidant. So -- and they're invisible to the health plans.

That's our ability to know who have a problem, know who will do well in our program, know who we can engage and who we can modify the behavior of and match them with the appropriate treatment program.

The effect of 2.0 is doubling the size of the outreach pool; our sales price -- net sales price per member goes from $6,500 down to $4,850; our margins will go up about, we'll call it, 10% to 20%; and -- but more importantly, we're going to have a bigger footprint in the health plan and be more important to the health plan and improve the health and save the lives of more people as possible.

Now as far as the grid, ultimately, everyone is going to be on 2.0. It's just that we have legacy companies. As we mentioned, the RFP that we won is 2.0. We have legacy companies that we only started with SUD and 1.0, and they're happy with that. But all of our new conversations are only 2.0.

And I'm going to ask for someone else to come up with questions, please?.

Our next question comes from Gene Mannheimer with Dougherty & Company..

Congrats on the quarter. The 2020 guidance of $90 million, Terren or Christopher, assuming that's somewhat back-end loaded, right, and that if much of the outreach pool doesn't go online until Q1, we'll see more of a back half conversion to revenue.

Is that the right way to think about it?.

I would assume that all significantly grow -- look, so if we approximately grew 130% this year, you saw the progression going up every quarter and if we're going to grow 160% next year, you're going to progressively see the growth every quarter by the nature of the growth of our company..

Right. No. Okay. Makes sense. And just this year is also back-end loaded, maybe a similar cadence next year in terms of how the revenue lands. And let me ask....

There's a lot of variables involved, like Catasys PRE has the ability to change the dynamic quite dramatically, quite significantly and can do it soon. On the other hand, it might take longer. But we have definitely captivated our health plan partners with Catasys PRE and potential Partners with Catasys PRE..

And with respect -- just so I'm clear on the outreach pool of 140,000 in total.

That does include the national RFP that you won, but you're making conservative assumptions about how many of those convert next year? Or asked differently, how much of the $90 million revenue guidance is that national rollout?.

It's definitely in there. We try to be conservative in the ramp of it. We tried -- we were definitely conservative in the enrollment rate of it. Once it launches, it's a significant number. If it requires the signature of the CEO, it must be pretty damn significant..

Our next question comes from Robert Cohen..

Wait, I want to point out -- I want to do a follow-up to Gene's question. It's important to understand. When it launches -- and believe me, we're still focused on January. But if it slips 1 or 2 months, we're comfortable that we can make up that ground over the course of the year.

So just if it doesn't launch then, don't feel that, oh, no, there goes next year's number. No. It's -- there are a lot of -- the assumptions we built in on that population, we will outperform. We just got to get to launch already.

It's -- as you can imagine, it's quite frustrating that it's been close to, well, it's been 7, 8 months that we couldn't launch in the 4 to 6 markets we were poised to launch in March..

Our next question comes from Robert Cohen. ..

Just a couple of quick questions.

With the ramp-up you've done on your head count of care coaches, is that number of 400-plus now significant enough to where it will be able to handle your $90 million in revenue?.

First of all, let me be clear. The over 400 employees in the company are not all the frontline of care coaches, member engagement specialists and community care coordinators.

Now the second part of your question -- or the first part, whatever, is we are always going to be -- as long as that outreach pool keeps expanding, and I expect it to continue to expand for -- hopefully for many years to come, it's -- we're always going to be hiring and training. It just becomes we get better at it.

We got a lot -- I will tell you, we got a lot better to -- again, a headwind, having to grow your frontline so quickly. And again, it takes a while before they achieve peak performance.

So the quicker you grow -- again, getting -- looking at the enrollment rate, I should point out, like I said, a lot are above 20%, a lot are below 20% in our number because no one asked this question, but I think it's important to point out if you're wanting to know the mix. I'm going to tell you what our forecast assumes.

Our forecast assumes 19.8% enrollment rate. So we think that is a very good guide. Again, depending on the mix, the more Medicare, the higher it's going to be; the less Medicare, the lower it's going to be; the higher SUD and lower depression and anxiety, the lower it's going to be..

Okay. My second question, and I'm kind of scratching my head on this one, I don't understand it, but I find it exciting. There are roughly 16.6 million shares outstanding.

How many shares are actually in the float considering how many shares do insiders own in regard to you, Terren, and Rick and just the insiders?.

Well, factually speaking, you're right, there's 16.6 million shares in the float -- outstanding. There's about 7.6 million shares in the float.

And what's your question?.

My question is I keep noticing -- maybe a lot of people don't look at it. I look at also the short position, and the short position is roughly 2.5 million shares, so roughly 40% of the float. I'm just curious how you feel about that..

Well, let me explain -- well, not to get too technical about this. But first of all, there's 7.4 million shares in the float. Understand when someone -- drawing back on my Wall Street background, when someone shorts a share, it actually expands the float because they shorted something that doesn't exist.

So the 2.5 million shares increased the float to 9.9 million shares. Now similarly, if and when they ever cover, it contracts the float 2:1. Just the nature of the dynamic. So I don't think about shorts. I don't lose any sleep over it. I'm sure they're very nice people. They're a stakeholder, like everyone is a stakeholder.

If they ever wanted to call and ask any question about the company, I'd be more than happy to engage in a conversation with them. But we don't think of -- I don't think about it at all. And in terms of why they're short, they obviously don't think that we're going to have the growth that we think we will. Well, see, I guess. We don't care..

There are no further questions at this time. I'll turn the floor back to management for closing remarks..

Okay. Thanks to all of you for your time. I know it's very valuable. Please feel free to reach out to us with any additional questions. I continue to be proactive in speaking with existing and potential investors.

I expect to present at several investor conferences in 2020 and look forward to visiting with more of you during my travels to various cities across the United States. As most of you know, I'm always on the move and make a point of being as accessible to and is open with as many investors as possible.

We look forward to speaking with you again during our year-end financial results call in March. Everyone, have a great night. Thank you..

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening..