Convalo Health International, Corp.
TSX VENTURE : CXV

Convalo Health International, Corp.

March 30, 2017 09:00 ET

Convalo's New Management Announces Shift to Higher Growth, Lower Cost Business Model; Reduces Overhead by 80%; Confirms Enterprise Profitability for the Current Quarter

LOS ANGELES, CALIFORNIA--(Marketwired - March 30, 2017) -

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Convalo Health International, Corp. ("Convalo" or the "Company") (TSX VENTURE:CXV), a leading company in the United States addiction recovery industry, today unveiled a retooled revenue growth model designed to increase revenues rapidly with significantly reduced corporate overhead.

The plan starts with an increased intensity and a more responsive culture within the management team and Board, both in regard to improved communications to the capital markets as well as within the addiction services market itself.

Increased Revenue Growth Potential and Leaner Operational Model

After a strategic review of the past fiscal year, the new leadership of the Board and new management team has identified key challenges that it believes contributed to the disappointing growth and cash flow from the previous 6 quarters. These issues are addressed in the new model.

The new model builds upon the existing strengths and advantages the Company has developed, and reduces the effects of the obstacles faced in the last 6 quarters.

In summary, Convalo is shifting to a strategy where it will decentralize major operations, including sales and marketing. All pod management and staffing decisions, including sales and marketing, will now reside with the local leadership at each individual center through a management services agreement ("MSA"). As a result, starting in March 2017, Convalo has already cut corporate overhead from US$1,400,000 per month in March 2016, to US$300,000, by reducing headcount, corporate office rent and eliminating consulting contracts, all while patient census has moved to levels slightly higher than March 2016, swinging the Company to a net profit before stock-based compensation.

"This model is all about quickly increasing annual cash flow with a focus on return on equity for each center we currently own and for new centers we plan to open", said Chris Heath, CEO of Convalo. "I believe we have made changes that will help occupancy figures to grow at a fraction of the cost with a much quicker timeline. I am looking forward to reporting the financial impact of this new model to the markets in our first fiscal quarter in 2017. In taking out US$900,000 a month in costs and shifting operational responsibilities to local managers, we have actually seen our census increase, which makes me believe we have the right model."

Details of the Analysis

Challenges of the Old "Centralized" Model

  • High Middle Management Costs: To succeed in a centralized model, there was a need for significant staff to manage the difficult patients suffering from severe addiction. In a centralized model, this required an expensive layer of middle management to manage local staff members, raising the break-even rate for each center significantly, and also requiring substantial back office staff. This middle management cost ate up virtually all of the annual cash flow from operations in the past quarters, and in some months, swung the overall operations to a loss. It also restricted the focus on the management team to operations rather than new center openings and growth.
  • High per Patient Acquisition Costs (Sales and Marketing Costs): A centralized, corporate and nationwide approach to sales and marketing was very expensive on a per patient basis, particularly in competing with local competitors that relied upon the local "recovery" community and clinician referrals at a fraction of the cost as compared to Convalo's online ad purchases and other large scale efforts.
  • Long Payback Period, High Occupancy Breakeven: Heavy capital expenses, sales and marketing expenses and operational (significant staffing) expenses opening new centers, requiring a payback period for the initial investment of over 24 months once full ramp was achieved, assuming nearly 70% occupancy to absorb the labor costs involved in managing seven centers as one centralized company. The corporate office at one point during the last fiscal year had over 50 staff. Using the new model, management has already adjusted to conducting operations today with a staff of less than 15.

Strengths of the Convalo Enterprise

The new model is designed to capitalize upon Convalo's competitive advantages, while avoiding unneeded costs and challenges. The advantages Convalo plans to leverage include:

  • A well developed and successful BLVD brand that significantly differentiates it from local centers that lack branding expertise or capital to hire professionals to create the "vibe" of a center. This advantage is a crucial factor in attracting and retaining patients.
  • Facility (real estate) development, design and protocols. Organizing a residential property or retail property for use as an addiction rehabilitation center is an expertise that Convalo has developed.
  • The Convalo call center, which fields intake calls 24 hours a day is essential for a treatment center. Many local centers outsource this important facet of the business to low quality call centers that lack Convalo's experience and expertise. The BLVD branded call center has years of procedures and technological advantages that yield a high close rate.
  • Convalo's clinical protocols, documentation training and treatment model has been honed over several years and produces a high rate of reimbursement and advances success rates in moving clients from detox to residential to outpatient treatment, holding patients in treatment for the full time needed for proper care.
  • Convalo has already achieved operational profitability at six of the seven centers when corporate overhead and sales and marketing costs are backed out (as in the new strategy).

Details of New Model

The Board and management has adopted this new model to take advantage of Convalo's competitive advantages, while reducing costs and shrinking implementation periods.

Convalo is shifting the clinical and operational staff management and hiring at each individual center, as well as the majority of the sales and marketing responsibilities of the clinics, to the local general managers and outreach leaders through an MSA, enabling these leaders to make cost decisions independently. The model allows local operators to keep some of the annual cash flow generated from their operations and aligns incentives between shareholders and operators. These leaders have been established at the current seven sites, in some cases for as long as two years. Because of the previous "centralized" management model, they were restricted from hiring local staff and managing the center as a "stand alone" or decentralized model. Further, they did not have an incentive to use local marketing techniques, which are often a fraction of the cost of national advertising. The previous management team attempted to centralize all aspects of the centers, from staffing and back office to sales and marketing, resulting in a tremendous amount of time, energy and money with no real revenue growth.

Under the new model, Convalo will continue to own or lease the current facilities (depending on the market) and provide branding support, facilities (real estate, furniture, fixtures and equipment) management and upkeep, call center services, clinical protocols, and documentation support to all existing centers. Convalo with continue to maintain control of these facilities in the event a change in local management is someday needed. For new facilities, Convalo will have the flexibility to decide whether to own or lease, and management will focus upon speed to profitability and return on equity in deciding upon the proper structure.

Convalo will shift corporate ownership costs to the local operational and outreach leaders, incentivizing them like partners instead of employees.

When Chris Heath and Jason Monroe were appointed operational leaders of the Company in December 2016, they initiated this strategy through a pilot in Portland, Oregon. Reducing all sales and marketing support from the corporate office, as well as any back office support, and asking the leaders to fill the center with patients using a low cost local model. The leaders were also responsible for managing local operating costs, as well as hiring, staffing, finance and operational decisions. As a result, the facility doubled its patient census, and the local leaders, perhaps understanding they could keep a portion of the savings for themselves, cut costs significantly. The result was an improvement in revenues and a reduction of direct costs.

Current Status of the New Model

As of this month, four of the seven Convalo centers have been transitioned to this model, resulting in a significant improvement in profitability in March. A target of May 2017 has been set to transition the other three centers. Corporate overhead has been reduced by 80%, staff costs are projected to be reduced 90% as local staff shift to local operator's payroll. In July 2017, corporate overhead is expected to be reduced further by moving to a smaller corporate office about a fifth the size of the current office space.

Expected Impact on Revenue Growth and Profit

As a result of cutting middle management and back office costs to support the seven centers, as well as cutting the significant national sales and marketing spend, profitability is expected to improve markedly for our first fiscal quarter in 2017, with a potential for an increase in revenue from last quarter. The remaining staff at the Company will focus on finding new operators and opening new centers under this new model.

"This new model has already seen a significant decrease in costs with no decrease in revenue, and holds a significant amount of promise for revenue growth with limited or no additional investment," said Mr. Heath, CEO of Convalo. "It also allows us to focus our time and resources on finding and developing new centers with local operators around the country to grow revenues rather than spending our time managing and controlling middle management layers of staff. We have a strong offering in the areas that are difficult for a single, local operator to succeed. By licensing our brand, providing access to our call center, facilities expertise and clinical protocols, we can deliver a turnkey center to a local operator quickly and for much less than we used to under the old model, all while collecting a healthy percentage of revenues from these centers with very little risk, improving our return on equity significantly."

"Going forward, I am committed to improved shareholder communications. In the past few months, and I expect in the next few months, I will be focused intensely upon implementing the new model," said Mr. Heath. "But I look forward to greater direct discussions with the investment community after this transition."

About Convalo

Convalo, operating under the brand name BLVD Centers (www.blvdcenters.com), is a leader in the highly fragmented addiction rehabilitation market. Led by a seasoned executive management team, Convalo is well positioned for continued national expansion by launching pods in cities across the United States. A pod consists of a residential, detox, and mental health facility (detox facility) and an intensive outpatient (IOP) facility. Convalo, under the BLVD brand, is focused upon becoming the largest national provider of a range of mental health services, including addictive and co-occurring disorders. In conjunction with the long standing 12-Step approach, BLVD also offers supplemental insurance-reimbursed services catering to a variety of communities: gender specific, creatively-oriented, meditation/mindfulness, trauma and LGBT affirmative.

Forward-Looking Statements

Certain statements contained in this press release constitute "forward-looking information" as such term is defined in applicable Canadian securities legislation. The words "may", "would", "could", "should", "potential", "will", "seek", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions as they relate to the Company, the new business model increasing revenues and annual cash flow rapidly with significantly reduced corporate overhead, the Company generating annual cash flow in its fiscal quarter ended May 30, 2017, the Company transiting its remaining three centers to the new model by May 2017, staff costs being reduced by 90% as employees shift to local operator's payroll, profitability improving markedly for the quarter ended May 30, 2017, and corporate overhead being reduced further in July 2017 by moving to a smaller corporate office, are intended to identify forward-looking information. All statements other than statements of historical fact may be forward-looking information. Such statements reflect the Company's current views and intentions with respect to future events, and current information available to the Company, and are subject to certain risks, uncertainties and assumptions. Material factors or assumptions were applied in providing forward-looking information, including: census remains at current levels, operators execute MSAs, perform at acceptable levels and in accordance with the agreement, are able to pay any debt incurred by the Company as part of the MSA, collections are above 20% of total billed charges on average, operators do not have to be substituted frequently, among other assumptions about the market continuing to have a profile similar to today and the Company being able to operate the business with a reduced staff. Many factors could cause the actual results, performance or achievements that may be expressed or implied by such forward-looking information to vary from those described herein should one or more of these risks or uncertainties materialize. These factors include, without limitation, changes in law, the ability to implement business strategies and pursue business opportunities, state of the capital markets, the availability of funds and resources to pursue operations, decline of reimbursement rates, dependence on few payors, possible new drug discoveries, a novel business model, dependence on key suppliers and local partners, granting of permits and licenses in a highly regulated business, competition, difficulty integrating newly acquired businesses, the outcome and cost of any litigation with insurance providers, low profit market segments, as well as general economic, market and business conditions, as well as those risk factors discussed or referred to in Convalo's annual Management's Discussion and Analysis for the year ended February 29, 2016, filed with the securities regulatory authorities in certain provinces of Canada and available at www.sedar.com. Should any factor affect Convalo in an unexpected manner, or should assumptions underlying the forward looking information prove incorrect, the actual results or events may differ materially from the results or events predicted. Any such forward-looking information is expressly qualified in its entirety by this cautionary statement. Moreover, Convalo does not assume responsibility for the accuracy or completeness of such forward-looking information. The forward -looking information included in this press release is made as of the date of this press release and Convalo undertakes no obligation to publicly update or revise any forward-looking information, other than as required by applicable law. Convalo's results and forward-looking information and calculations may be affected by fluctuations in exchange rates. All figures are in Canadian dollars unless otherwise indicated.

Contact Information