Convalo Widens Footprint in Los Angeles and Revenue Projects Substantially with Two More Acquisitions

A lot of Americans need treatment for drug and alcohol addition, according to the website Citing information from the annual National Survey on Drug Use and Health conducted by the Substance Abuse and Mental Health Services Administration, illicit drug use by Americans aged 12 and older increased from 2002 to 2012 (the latest year that data has been analyzed).

Rates of alcohol dependence/abuse declined across that time, from 18.1 million people 12 and up (7.7% of population) to 17.7 million (6.8%). However, there remains a large "treatment gap," with an estimated 23.1 million Americans needing treatment for a drug or alcohol problem, but only about 2.5 million people getting treatment at a facility.

Either way, that’s a sizeable addressable market now with room for growth, especially given the Affordable Care Act and Parity Act that encourages treatment by allowing children to be covered longer and requiring payment by private health insurers for services in the space. It is an opportunity for companies like upstart Convalo Health International (TSX-Venture:CXV) to execute and expand a business model focused on rolling up the fragmented US outpatient addition rehabilitation market. The company became public in February through a triangular amalgamation of capital pool company Valiant Minerals and 0986282 BC Ltd, a wholly-owned subsidiary of Convalo.

Last May, Convalo made its first acquisition, buying a small rehab centre in the heart of Hollywood, California. The center, which operates under the moniker BLVD Centers, generated $62,000 in revenue the first month under Convalo control and didn’t actually become fully operational until November. In January and February, the centre was operating at about 45% capacity and generated unaudited revenue for the two months in excess of $675,000. March revenue reportedly climbed to more than $500,000.

In March 2015, Convalo acquired two companies in the referral-based addition services market and inked a lease to open a second BLVD location on the west side of L.A. near Venice Beach. Capacity at the new facility is 100 patients and revenue is expected to parallel the flagship center.

On Wednesday, Convalo was at it again, saying it executed on purchase agreements for the acquisition of Hollywood Detox Center and Accredited Rehab and Treatment Services (ARTS), two profitable behavioural health businesses around Hollywood and the central Los Angeles area. The purchases give Convalo a full service platform spanning the complete addiction treatment continuum across central L.A., with plans to expand the platform to western L.A. by the end of 2015.

Three of the companies' top level executives, Keith Fowler, Brent Ortner and Ryan Newport, will remain on after the transaction and are expected to play key roles in Convalo moving forward.

"While there is a significant positive impact on revenue and profits, this acquisition really only covers Hollywood and Central Los Angeles,” said Michael Dalsin, Chairman and CEO of Convalo in today’s statement. “The acquisition of the management team gives us the ability to create a similar business in terms of revenues and profits in West Los Angeles and in San Francisco this year."

The purchases are cash-and-stock deals, involving $7.94 million in cash and up to eight million shares of CXV stock. Post-acquisition, Convalo will still have $21.5 million in cash on the books for further acquisitions, while carrying zero debt. Convalo projects the acquisitions to be immediately accretive to earnings.

Combined with existing operations company revenue is expected in excess of $23 million annually and earnings before interest, taxes, depreciation and amortization (EBITDA, a non-GAAP measure) are forecast above $5.5 million.

Shares of CXV, which have moved from a low of 23 cents in February to as high as 82 cents in April, are trading down a penny Wednesday afternoon at 57 cents.