What is the difference between Gross Revenue, Revenue and Income for the addiction treatment industry?
Medical facilities in general have a list of Billing Rates we refer to as the Gross Billing rate or the Rack Rate. This amount is prescribed to every billing code for the services that the provider offers. In the addiction treatment industry we have billing codes that are an all-in-one service code that covers a day rate for the various levels of treatment provided to individuals by the facility. The general levels of care are Medical Detoxification, Residential Treatment Care, Partial Hospitalization Treatment Care, Intensive Outpatient Treatment Care and Outpatient Treatment Care. There are various other services that can be billed in addition to an all-in-one service but these would be insignificant amounts. The amount billed for these services is called the gross Billing Rate which is the amount claimed for any service provided. There are many insurance companies and types of payors and there are different types of insurance. Some of the types of insurance include in-network, out-of-network, Medicaid, Medicare and private company plans. The different types of insurance and the different insurance providers all differ in what they pay on claims made by the provider. The payment could be anywhere from 5% to 100% of the amount claimed. The payments are further affected by deductibles, co-pays, and coinsurance. The provider must collect these amounts separately from the amount they get from the insurance company. The total of the payments collected is called the Net Revenue or Revenue. The final amount collected from the insureds and the Insurance companies is sometimes not known a year or more after the submission of a claim. Income is the amount leftover after payment of all expenses related to the provision of the services. Many private operators of facilities run a cash accounting system which would reflect the amount collected in the period as the revenue number. As a public company we must use an accrual accounting system which starts with stating the Gross Revenue or Billing number and applying an estimated factor of expected collection of those Gross Revenues which would reduce the Gross Revenue to the Revenue number. The accountants and auditors are very careful to continually update this discount factor based on actual collections, and historical data which allows them to predict the typical collection rate based on the breakdown of the Gross Revenue billed by Insurance company. Over the last 15 years this factor has been a moving target and we can only do our best to keep on top of current trends to predict what that number is.
In November and December the Company reported that the ARIA treatment center had Gross billing numbers of $602,000.00. What did that mean?
This was the Gross Billing number billed and at the time it was not possible to predict what the collection rate would be on the billing number. The first payment from the November December billings was received by ARIA in early January 2021. We have a lot more experience since then and we know more about what our collection rate is typically going to be and have a better prediction on what to use as the collection factor. The various Gross Billing amount for a single day of treatment in Detox is $4,500.00, Residential $3,950.00, PHP $3,200.00, IOP $2800.00 and OP$2,200.00. In-network contracts would pay anywhere from 5% to 15% of those rates. Out-of-Network claims could pay around 25% to 35% of amount claimed. In addition there are deductibles, co-pays, and co-insurance that affect the actual net on the claims.
In July the Company reported that it expects to produce $1.8 million in Revenue in the Second half of 2021. What does this mean?
The Revenue number is the net amount expected to be collected from the provision of services. ARIA has 10 beds for the detox level of care, 12 for the residential level of care and 20 beds available to partial hospitalization care. The beds are also further split into male and female beds. Even though we have 40 beds it is almost impossible to match each client with an available bed at the proper level of care and the gender of that bed availability. For example, when we agree to move a client form Residential care to Partial hospitalization care and plan that for Friday, we need to keep an open bed for a few days just to accommodate the move. For all these reasons, it is considered a “full house” when we reach 35 or 36 occupants in total for any given night.
What can the total bed count be?
The ARIA lease includes approximately 4,000 square feet on the first floor of the building which is currently being built out for staff offices and treatment group rooms. This finished space will allow us to free up space on the second and third floor presently being used for offices and treatment and add 2 more detox beds, and 10 more partial hospitalization beds for a total of 54 beds. This is expected to be completed by September so that these extra beds should reflect in the fourth quarter numbers.
What is the Income number?
The net income is something the Company has never predicted ahead of time nor will it. These numbers are reported quarterly and that is the proper way to do it. The first public reporting of income for the treatment center will be for the third quarter. Ethema reports a consolidated number for all of its entities and for all of the cost associated with running a public company. Many accounting rules affect an income statement and it is just best practice to wait until all of that work is done and reported in the quarterly filing.
When will the debt be brought under control and when will the dilution stop?
In 2017 and 2018 the Company went into debt as part of a plan to buy an 18 million dollar treatment facility. This plan fell through at the end of 2019 when the Company failed to get financing for this purchase and at the same time had to find a new facility to operate out of. Around the same time the Company had multiple variable rate convertible notes coming due and we were just beginning to hear about Covid-19. The lenders all started converting notes and selling the stock price quickly fell to .0001 by the end of February 2020. This was a huge dilution and the Company was in deep distress with a lot of unconverted debt still on the books and a low stock price and no operating business other than it’s Canadian real estate. After most of the world went into shut down the Company made agreements with all of its convertible note holders to forbear while the Company planned to reopen in a new facility. This all came together in June 2020 and yet the Company still needed more money to get the new facility open. The Company borrowed more money from principally the same lenders that it had previously dealt with and whom had agreed to the debt restructurings. The plan was to get the facility up and operating before any of the debt came due. The opening took longer than expected and the Company would have been facing a similar situation with its convertible note holders starting at the end of March 2021 but this was avoided by replacing most of the variable rate debt with fixed price convertible debt and a longer maturity allowing some of the convertible debt to be converted by the lenders that had stuck with the Company and had lent the Company the most money. The subsequent conversions were a lot less dilutive than they could have been, which allowed the Company to reduce overall debt and eliminate most of the convertible rate debt. While the situation with the debt is far better than it could have been it is still a work in progress. We cannot tell yet how much more conversion there will be but the rate and amount are in a dramatic decline. We do see an end coming soon since that has been the direction for much of the past three months.
Why don’t you use cash flow from the new treatment center to pay down debt or buy back stock?
The company is still investing in the facilities and growing the business. There isn’t enough cash flow to do more.
Will you do a stock consolidation?
The current Board and management does not support a stock consolidation. There are only two reasons the board would consider it. The first would be if the stock halts trading because it has reached 0.0001. The Company has already been through a situation where the stock hit .0001 and essentially stopped trading. The Company resisted doing a consolidation then and would resist doing it in the future if anything near to that happened. The Company does not foresee how that can happen now that it has a valuable asset in the treatment center and still has a well performing real estate asset in Canada. The second would be to up-list to an exchange that requires a minimum stock price. The Company could seek an up-listing at some point in the future but there would have to be some sort of financing tied to that. Neither of these situations are in the foreseeable future.
What is the Company doing to better communicate with shareholders?
The Company hopes to be able to increase the communications with shareholders while remaining fiscally prudent. With less expensive methods of communication such as this FAQ section on the Company website and using Twitter the Company can afford to disseminate less significant news more affordably. Significant news will always be shared via press release. The Company has engaged a new firm to update and revamp its website and to make better use of social media.
How can I ask further questions that can be added to this FAQ section?
The Company will add a chat-type feature to the website so that shareholders can submit questions. In the meantime, shareholders can continue to contact Shawn Leon via email or text to submit questions. We will do our best to summarize questions once a week and update the FAQ section on the website.