Catasys, Inc (NASDAQ:CATS)

• Increasing Utilization and Expansions From Health Plans to Increase Equivalent Lives Under Contract in 2017 to More Than 20 Million
• Such Adoption Portends to a Cash Receipts Run Rate of approximately $126 million 12 months from Launch

Dear Catasys Shareholder,

We are pleased to update you, our valued shareholder, on the exciting events occurring throughout our business and will be taking steps to provide additional visibility into our progress going forward. The rapid pace at which we are expanding our engagements with the major U.S. health plans has dramatically increased the total number of equivalent lives we are reporting at the end of 2016.  This growth is expected to have a significant impact on our financial performance for 2017.

The healthcare industry, in particular, health insurance companies and plans, typically take many years to allow a new entrant such as us to gain significant traction. It has taken the Company several years to prove out our business model, as it is currently accepted by many national health plan providers. During this time, we have found it virtually impossible to have enough visibility in our business to publicly provide accurate financial guidance and direction. Through this letter, we hope that you will sense something must be changing given our newly communicative posture.

Further, we will briefly discuss our vision; the healthcare industry issues that we are addressing; the proprietary nature of our products; the scalable nature of our business, and our near term expectations.

Company Vision and Solution

The Company's vision is to improve the behavioral health industry by providing an innovative proactive treatment solution with cost saving opportunities for health plan customers, and ultimately be able to scale its availability on a national and perhaps one day, international basis.

Today, we are focused on substance use disorder (SUD), depression and anxiety which comprises approximately 75% of behavioral health disorders. The U.S. currently has a passive system whereby treatment avoidant patients (cost, denial, stigma, access) need to seek out treatment, gain access to treatment, afford said treatment, and then receive the appropriate care that addresses both the physiological and psych-social aspects ("integrative care") of these complex diseases.

Unfortunately, the more severe patients we serve have these diseases as co-morbid conditions of each other, and have other co-morbidities, such as cardiovascular, diabetes, renal, liver disease etc. The average amount of costs associated with these patients directly related to the behavioral diseases alone is $30,000. These costs are predominantly from emergency room visits and in-patient hospital stays.

Catasys provides an integrated outpatient solution with proprietary analytics and predictive modeling, proprietary enrollment, engagement and modification of behavior techniques. Our solution effectively turns the passive system, treatment avoidant, minimal access to care, unidentified patient population to a proactive, replicable, scalable, national solution where we focus on the complete care of the patients.

The results from our solution have shown that patients are getting better, and the health insurance companies are consistently saving 50% of the medical costs for each patient enrolled. Hence, there is a health plan incentive to pay for all the associated treatment costs. Through OnTrak, behavioral health patients now have full treatment program coverage, increased access to treatment and effective care.

First Quarter and Full Year 2017

Catasys has emerged as a leading healthcare analytics company providing proprietary value-added care for health plan members. We are like "Amazon and Uber" to the  standard facilities-based behavioral health industry model, as we are virtual and scalable throughout the country, utilizing provider networks of independent contracted medical doctors and psychologists, companioned with our own care coaches, in an outpatient setting.

All of our existing health plan customers, including, Humana, Aetna, Centene, and HAMP, have expanded OnTrak to their other products and expanded geographically. We are now operating in 18 states, with more to come. This week we have seen for the first time that one of our customers expanded from our SUD OnTrak program to the OnTrak treatment of SUD, depression and anxiety.

While we have been growing revenues significantly year-over-year and sequentially, the numbers are quite small relative to what we expect in the coming year and beyond. We have worked through much of the customer specific logistical issues in 2016 that limited our revenues, and it appears that the "perfect storm" is beginning to culminate in the first quarter of 2017.

"Perfect Storm"

We anticipate shortly that all of our existing customers will be operating at or near full capacity for the lives under contract by the end of the first quarter of 2017, with additional opportunities to expand. We expect this growth to come throughout their eligible members, including Medicare, Medicaid, commercial, individual, and, hopefully, TRICARE (military and veterans), as well as, expansion throughout our depression and anxiety offerings.

It's important to note that when a health plan contracts OnTrak for depression, anxiety and SUD, it represents an approximately 4.4X increase of the eligible population from which we enroll. We began the year with at or under 20% enrollment rates of eligible lives. We are constantly trying to improve our techniques and we are beginning to see the results. While we are only one quarter in, we are currently seeing a 20-25% enrollment rate which exceeds our expectations.

Another input to the "storm" is additional health insurance contracts. We expect to add more national and super-regional health plans. This will be a major impetus to revenue growth. Excitingly, we expect many of the new contracts to include the treatment of depression and anxiety. These will be the first instances of new customers contracting for all three disease states. We are hopeful that in 2017 we will have contracts in place with health plans that represent in excess of 75% of the commercially covered lives in the USA.  We are hopeful that we will have contracts with 7 of the 8 largest health plans in the country. Importantly, all of our existing and future customers will continue to benefit from the trend in place, and expected to accelerate with the next administration, of more of the Medicare and Medicaid populations moving to managed care. These populations have an approximately 2.5X the eligible patients from which we enroll than a commercial population.

Unfortunately, another "tailwind" is the increasing rates of mental illness in the U.S. In a survey released this week, one out of six adults take psychiatric medications. Alarmingly, 85% of them are prescribed multiple refills. This is indicative of rising dependencies and associated medical costs. The government increasingly recognizes the U.S. mental health problem and has instituted the Mental Health Parity Act, and this week, the 21st Century Cures Act became law thereby improving U.S. mental health efforts.

The Result: Large Projected Revenue Streams

We believe that in 2017 we will nearly triple our Equivalent Lives (ELs) under contract from the current 7.5 million we have in place. Each 10 million ELs is anticipated to equate to a cash receipts run rate 12 months from launch of $63 million.  Hence, 20 million ELs could translate to a cash receipts run rate of approximately $126 million 12 months from launch. Excitingly, this is only the beginning and would expect significant revenue and cash flow growth rates for years to come.

We are extremely excited for Catasys' future growth.  I certainly hope that you can sense my excitement for the coming year(s). Perhaps now you can understand why I personally invested in excess of $22 million into Catasys, Inc. Thank you for remaining dedicated to our Company's vision which will hopefully transform the behavioral health industry.

I wish you a happy and healthy Holiday season, and a tremendous New Year for all Catasys shareholders.

Respectfully,

Terren Peizer
Chairman & CEO
Catasys, Inc.

LOS ANGELES--(BUSINESS WIRE)--Catasys, Inc. (OTCQB: CATS), provider of proprietary health management services to health insurers and employers, today announced a reverse stock split of its shares of common stock at a ratio of 1-for-10 for stockholders of record April 19, 2013. The stock split is effective today and the shares will trade on a post-split basis under the temporary symbol “CATSD” with a “D” added for 20 trading days to signify that the reverse stock split has occurred. The reverse stock split, which was unanimously approved by the Company’s board of directors, was previously approved by written consent by the majority of its stockholders.

As of May 3rd there were 142,739,844 shares of Catasys common stock issued and outstanding. After giving effect to the reverse stock split at a ratio of 1-for-10, the number of shares issued and outstanding will be reduced to approximately 14,273,984.

The reverse stock split was executed as part of the Company’s program to improve its capital markets appeal to investors and pursue its objective to ‘up list’ from the bulletin board to a national exchange. The timing for this event is now supported by Catasys’ strong expectation that it will continue to grow (a) organically (as existing insurers continue to expand into new territories and/or increase the number of enrolled members into Catasys’ OnTrak™ program) and (b) by signing new insurers. In addition to the recently signed national insurer, the Company currently has a sales pipeline of 13 million lives. Management’s goal is to become cash flow positive by the end of this year.

Catasys’ OnTrak program – contracted with a growing number of health insurers – was designed to improve member health and at the same time lower costs to the insurer by utilizing patient centric treatment that integrates evidence based medical and psychosocial interventions along with care coaching in a 52 week outpatient program. OnTrak is currently improving member health and is demonstrating with several health insurers impressive results – as evidenced by reduced inpatient and emergency department utilization driving a reduction in total health care costs of more than 50% for enrolled members.

LOS ANGELES--(BUSINESS WIRE)--Catasys, Inc. (OTCBB: CATS) announced today that it has expanded its OnTrak™ program to Reliant Medical Group’s members in Massachusetts. Reliant Medical Group, formerly known as Fallon Clinic, is a multi-specialty medical group practice with over 20 locations throughout Central Massachusetts. The program will be implemented in conjunction with Reliant Medical Group and Fallon Community Health Plan, with enrollment to commence in January 2012.

Eligible members of Reliant Medical Group affected by substance dependence will be covered under the OnTrak program, which includes medical and psychosocial interventions, as well as care coaching over a 52 week period. The Company will enroll eligible members directly and also in conjunction with Reliant Medical Group’s programs and staff. Catasys will receive a case rate for members enrolled in the OnTrak program, as well as a portion of the savings generated by the OnTrak program.

The new relationship with Reliant was not included in Catasys’ pipeline. Accordingly, subsequent to this expansion in Massachusetts, Catasys’ pipeline remains at 26 health plans covering 22 states and approximately 12 million covered lives, with approximately 4 million of those lives with health plans that have moved to the last stage of the pipeline. Prospective health plans are considered to have moved into the last stage of the pipeline once they have provided their claims data for analysis, or are in the later stages of discussions or negotiations. The provision of claims data represents a significant step in the contracting process, allowing the Company to provide health plans with a specific estimate of their potential savings from the Company’s OnTrak™ program. While contractual arrangements vary by plan, once achieving anticipated enrollment and expected cost reductions for the enrolled members, annual fees are expected to equate to approximately $8,500 per enrolled member.