Document Contents

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 27, 2018, the registrant had 24,604,653 shares of common stock, $0.001 par value per share, outstanding.

	Three Months Ended March 31,
	2018			2017
Revenues
Client related revenue	$	75,923		$	71,219
Non-client related revenue		2,550			1,820
Total revenues		78,473			73,039

Operating expenses
Salaries, wages and benefits		40,084			36,772
Client related services		7,747			6,378
Provision for doubtful accounts		—			6,587
Advertising and marketing		2,599			3,775
Professional fees		3,650			2,642
Other operating expenses		10,588			8,630
Rentals and leases		2,116			1,885
Litigation settlement		2,791			159
Depreciation and amortization		5,464			5,469
Acquisition-related expenses		305			183
Total operating expenses		75,344			72,480
Income from operations		3,129			559
Interest expense, net (change in fair value of interest rate swaps of $0 and ($83), respectively)		6,709			2,734
Other expense, net		9			34
Loss before income tax benefit		(3,589	)		(2,209	)
Income tax benefit		(1,494	)		(565	)
Net loss		(2,095	)		(1,644	)
Less: net loss attributable to noncontrolling interest		1,893			1,041
Net loss attributable to AAC Holdings, Inc. common stockholders	$	(202	)	$	(603	)
Basic loss per common share	$	(0.01	)	$	(0.03	)
Diluted loss per common share	$	(0.01	)	$	(0.03	)
Weighted-average common shares outstanding:
Basic		23,744,208			23,163,626
Diluted		23,744,208			23,163,626

	March 31,			December 31,
	2018			2017
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	14,341		$	13,818
Accounts receivable, net of allowances		99,581			94,096
Prepaid expenses and other current assets		3,354			4,022
Total current assets		117,276			111,936
Property and equipment, net		169,744			152,548
Goodwill		197,184			134,396
Intangible assets, net		13,712			8,829
Deferred tax assets, net		9,030			8,010
Other assets		12,468			12,556
Total assets	$	519,414		$	428,275

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	3,338		$	4,579
Accrued and other current liabilities		34,039			27,661
Accrued litigation		1,000			23,607
Current portion of long-term debt		7,319			4,722
Total current liabilities		45,696			60,569
Long-term debt, net of current portion and debt issuance costs		296,443			196,451
Financing lease obligation, net of current portion		24,515			24,541
Other long-term liabilities		12,277			10,546
Total liabilities		378,931			292,107

Stockholders’ equity
Common stock, $0.001 par value: 70,000,000 shares authorized, 24,438,739 and 23,872,436 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		24			24
Additional paid-in capital		158,840			152,430
Retained deficit		(1,662	)		(1,460	)
Total stockholders’ equity		157,202			150,994
Noncontrolling interest		(16,719	)		(14,826	)
Total stockholders’ equity including noncontrolling interest		140,483			136,168
Total liabilities and stockholders’ equity	$	519,414		$	428,275



	Common Stock –											Total
	AAC Holdings, Inc.					Additional						Stockholders’			Non-			Total
	Shares					Paid-in			Retained			Equity of			Controlling			Stockholders’
	Outstanding			Amount		Capital			Deficit			AAC Holdings, Inc.			Interest			Equity
Balance at December 31, 2017		23,872,436		$	24	$	152,430		$	(1,460	)	$	150,994		$	(14,826	)	$	136,168
Common stock granted and issued under stock incentive plan, net of forfeitures		(19,503	)		—		798			—			798			—			798
Common stock withheld for minimum statutory taxes		(4,145	)		—		(48	)		—			(48	)		—			(48	)
Effect of employee stock purchase plan		27,900			—		221			—			221			—			221
Common stock issued upon acquisition of AdCare, Inc.		562,051			—		5,439			—			5,439			—			5,439
Net loss		—			—		—			(202	)		(202	)		(1,893	)		(2,095	)
Balance at March 31, 2018		24,438,739		$	24	$	158,840		$	(1,662	)	$	157,202		$	(16,719	)	$	140,483

	Three Months Ended March 31,
	2018			2017
Cash flows (used in) provided by operating activities:
Net loss	$	(2,095	)	$	(1,644	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Provision for doubtful accounts		—			6,587
Depreciation and amortization		5,464			5,469
Equity compensation		798			2,137
Loss on disposal of property and equipment		34			—
Amortization of debt issuance costs		637			173
Deferred income taxes		(1,020	)		(718	)
Changes in operating assets and liabilities:
Accounts receivable		(1,129	)		(13,397	)
Prepaid expenses and other assets		1,485			406
Accounts payable		(4,739	)		4,556
Accrued and other current liabilities		4,141			759
Accrued litigation		(22,300	)		—
Other long-term liabilities		(275	)		28
Net cash (used in) provided by operating activities		(18,999	)		4,356
Cash flows used in investing activities:
Purchase of property and equipment		(7,305	)		(10,687	)
Acquisition of AdCare, Inc.		(65,185	)		—
Net cash used in investing activities		(72,490	)		(10,687	)
Cash flows provided by financing activities:
Payments on 2015 Credit Facility and Deerfield Facility		—			(2,344	)
Proceeds from 2015 Credit Facility and Deerfield Facility, net of deferred financing costs		—			11,679
Payments on 2017 Credit Facility		(1,724	)		—
Proceeds from 2017 Credit Facility, net of deferred financing costs		94,432			—
Payments on capital leases and other		(221	)		(193	)
Payment of employee taxes for net share settlement		(475	)		(895	)
Net cash provided by financing activities		92,012			8,247
Net change in cash and cash equivalents		523			1,916
Cash and cash equivalents, beginning of period		13,818			3,964
Cash and cash equivalents, end of period	$	14,341		$	5,880

Supplemental information on non-cash investing and financing transactions:
Accrued purchase of property and equipment	$	—		$	1,132
Accrued employee taxes for net share settlement	$	48		$	109

2018 Acquisition:
Purchase price, including contingent consideration	$	83,905		$	—
Buyer common stock issued		(5,439	)		—
Contingent consideration		(945	)		—
Promissory note issued		(9,636	)		—
Cash acquired		(2,700	)
Cash paid for acquisition	$	65,185		$	—

AAC Holdings, Inc. (collectively with its subsidiaries, the “Company” or “AAC Holdings”) was incorporated on February 12, 2014. The Company is headquartered in Brentwood, Tennessee, and provides inpatient and outpatient substance use treatment services for individuals with drug addiction, alcohol addiction and co-occurring mental/behavioral health issues. In connection with the Company’s substance use treatment services, the Company performs drug testing, diagnostic laboratory services and provides physician services to clients. The Company operates numerous facilities located throughout the United States, including residential substance abuse treatment facilities, standalone outpatient centers and sober living facilities, that focus on delivering effective clinical care and treatment solutions.

The Company is also an internet marketer in the addiction treatment industry operating a broad portfolio of internet assets. Through the Company’s portfolio of websites, it serves families and individuals struggling with addiction and seeking treatment options through comprehensive online directories of treatment providers, treatment provider reviews, forums and professional communities. The Company also provides online marketing solutions to other treatment providers such as enhanced facility profiles, audience targeting, lead generation and tools for digital reputation management.

The Company conducts its business through limited liability companies and C-corporations, each of which is a direct or indirect wholly owned subsidiary of the Company. The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and the accounts of variable interest entities (“VIEs”) in which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

The Company consolidated seven professional groups (“Professional Groups”) that constituted VIEs as of March 31, 2018 and 2017. The Professional Groups are responsible for the supervision and delivery of medical services to the Company’s clients. The Company provides management services to the Professional Groups. Based on the Company’s ability to direct the activities that most significantly impact the economic performance of the Professional Groups, provide necessary funding and the obligation and likelihood of absorbing all expected gains and losses, the Company has determined that it is the primary beneficiary of these Professional Groups.

The accompanying condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 include assets of $1.7 million and $2.1 million, respectively, and liabilities of $0.8 million and $0.4 million, respectively related to the VIEs. The accompanying condensed consolidated statements of operations include net loss attributable to noncontrolling interest of $1.9 million and $1.0 million related to the VIEs for the three months ended March 31, 2018 and 2017, respectively.

The accompanying condensed consolidated financial statements are unaudited, with the exception of the December 31, 2017 balance sheet, which is consistent with the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for a complete set of financial statements. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 23, 2018. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2018 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the current year presentation.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of operations. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company anticipates that the adoption of ASU 2016-02 will result in an increase in both total assets and total liabilities. The Company is continuing to evaluate the impact that adoption of this standard will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), which outlines a five-step model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method and the modified retrospective approach. The guidance was effective January 1, 2018, and was applied to all contracts on a modified retrospective basis.

The Company has analyzed the impact of the standard based on a review of its accounting policies and practices in relation to the five-step model to ensure proper assessment of operating results under Topic 606.

The analysis of the Company’s processes under the new revenue standard is complete and supports the recognition of revenue over time as clients simultaneously receive and consume the benefits of the services provided. However, the adoption of the standard has an impact on the presentation of revenue recognized and the provision for doubtful accounts due to additional requirements within Topic 606. As a result of these new requirements, substantially all of the Company’s adjustments related to bad debt will now be recorded as a direct reduction to revenue as opposed to the provision for doubtful accounts included within operating expenses. In adopting Topic 606, the Company elected the practical expedients related to immaterial contract acquisition costs and insignificant financing components of the transaction price.

The initial application of Topic 606 caused no impact to the beginning balances of the Company's consolidated financial statements as of January 1, 2018.

The impact on the Company's Condensed Consolidated Statements of Operations was as follows (in thousands):

Client related revenue primarily consists of service charges related to providing addiction treatment and related services, including diagnostic laboratory services. As it relates to recognizing revenue, the Company’s contracts are with the individuals for whom the Company provides care. The majority of the Company’s contracts with clients have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company’s performance obligations are satisfied over time as clients simultaneously receive and consume the benefits provided as the Company performs. Therefore, the Company recognizes revenue in the same period the services are performed, and typically, there are no remaining performance obligations at period-end.

Due to the nature of the industry, there are multiple parties to the service transactions (including customers, providers and payors), and the estimation of revenue is complex and requires significant judgment. Management estimates variable consideration using the expected value method. The expected value method is used when an entity has a large number of contracts with similar characteristics as is the case with the Company’s contracts. The transaction price is recorded based on the estimated ultimate value remaining after all uncertainty is resolved. The estimates of variable consideration are based largely on an assessment of the Company’s anticipated performance as well as historical, current, and forecasted information that is reasonably available. The Company updates its estimate of the transaction price at the end of each reporting period, and any amounts allocated to a satisfied performance obligation are recognized as revenue or a reduction of revenue in the period in which the transaction price changes.

On an as reported basis, the following table summarizes the composition of our client related revenue for inpatient treatment facility services, outpatient facility and sober living services, and client related diagnostic services, which includes point-of-care drug testing and clinical diagnostic laboratory services, for the periods presented (in thousands):

	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017				Increase (Decrease)
	Amount		%		Amount		%		Amount			%
Inpatient treatment facility services¹	$	64,895		85.5	$	49,495		69.5	$	15,400			31.1
Outpatient facility and sober living services²		8,412		11.1		5,715		8.0		2,697			47.2
Client related diagnostic services³		2,616		3.4		16,009		22.5		(13,393	)		(83.7	)
Total client related revenue	$	75,923		100.0	$	71,219		100.0	$	4,704			6.6

On a comparable accounting basis, the following table summarizes the composition of our client related revenue for inpatient treatment facility services, outpatient facility and sober living services, and client related diagnostic services, which includes point-of-care drug testing and clinical diagnostic laboratory services, for the periods presented, as if the Company had not adopted Topic 606 (in thousands):

	Previous Accounting Guidance				As Reported
	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017				Increase (Decrease)
	Amount		%		Amount		%		Amount			%
Inpatient treatment facility services¹	$	68,223		82.7	$	49,495		69.5	$	18,728			37.8
Outpatient facility and sober living services²		7,511		9.1		5,715		8.0		1,796			31.4
Client related diagnostic services³		6,746		8.2		16,009		22.5		(9,263	)		(57.9	)
Total client related revenue	$	82,480		100.0	$	71,219		100.0	$	11,261			15.8

Non-client related revenue consists of service charges from the delivery of quality targeted leads to behavioral and mental health service businesses, diagnostic laboratory services provided to clients of third-party addiction treatment providers and addiction care treatment services for individuals in the criminal justice system.

Revenue from the delivery of quality targeted leads to behavioral and mental health service businesses is recognized over time as customers simultaneously receive and consume the benefits of the services provided. The Company’s marketing contracts typically have one performance obligation. There are no significant judgements in determining the transaction price as the price is listed in the contract and not subject to change.

Revenue from diagnostic laboratory services provided to clients of third-party addiction treatment providers is recognized at a point in time when an order for lab services is completed. These contracts also have a single performance obligation, and there are no significant judgments in determining the transaction price as the price is agreed upon between AAC Holdings and the third-party lab prior to services being rendered.

Revenue for criminal justice education services is recognized as services are provided in accordance with contracts with certain Massachusetts state agencies.

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative expenses include the Company’s corporate overhead costs, which were $22.0 million and $19.1 million for the three months ended March 31, 2018 and 2017, respectively.

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

For the calculation of diluted EPS, net income (loss) attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities, including awards under stock-based payment arrangements, and outstanding convertible debt securities. Diluted EPS attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of fully diluted common shares outstanding during the period.

The following table reconciles the numerator and denominator used in the calculation of basic and diluted EPS for the three months ended March 31, 2018 and 2017 (in thousands, except share data):

	Three Months Ended March 31,
	2018			2017
Numerator
Net loss attributable to AAC Holdings, Inc. common stockholders	$	(202	)	$	(603	)
Denominator
Weighted-average common shares outstanding – basic		23,744,208			23,163,626
Dilutive securities		—			—
Weighted-average common shares outstanding – diluted		23,744,208			23,163,626

Basic loss per common share	$	(0.01	)	$	(0.03	)
Diluted loss per common share	$	(0.01	)	$	(0.03	)

For the three months ended March 31, 2018 and 2017, the Company had 37,396 and 11,273 potentially dilutive shares, respectively. These shares are not included in the EPS calculation above because to do so would be anti-dilutive for the periods presented.

On March 1, 2018, the Company acquired all of the outstanding shares of AdCare, Inc., a Massachusetts corporation (“AdCare”), and wholly owned subsidiary of AdCare Holding Trust a Massachusetts business trust (the “Seller”), which we refer to as the “AdCare Acquisition.” AdCare and its subsidiaries offer treatment of drug and alcohol addiction and own, among other things, a 114-bed hospital, five outpatient centers in Massachusetts, a 59-bed residential inpatient treatment center and two outpatient centers in Rhode Island. AdCare was purchased for total consideration of $83.9 million, subject to adjustments as set forth in the Securities Purchase Agreement (the “Purchase Agreement”), by and among AAC Healthcare Network, Inc., AAC Holdings, AdCare, and the Seller. The consideration was comprised of (i) approximately $65.2 million in cash, excluding expenses and other adjustments, (ii) approximately $5.4 million in shares of AAC Holdings’ common stock (or 562,051 shares at $9.68 per share), (iii) a promissory note in the aggregate principal amount of approximately $9.6 million (the “AdCare Note”), and (iv) contingent consideration valued at $0.9 million recorded in accrued and other current liabilities. The Company acquired $2.7 million of cash on hand at AdCare, which was returned to the Seller within 60 days of the acquisition as required by the Purchase Agreement. The contingent consideration that can be earned by the seller ranges from zero to $3.1 million, subject to achievement of a certain adjusted EBITDA target over the 12 months following the transaction date.

The AdCare Acquisition was accounted for as a business combination in accordance with FASB ASC 805, Business Combinations. For U.S. federal income tax purposes, the Purchase Agreement contemplates that the AdCare Acquisition shall be treated as an “applicable asset acquisition” as defined in Section 1060 of the Code. The Company recorded the transaction based upon the fair value of the consideration paid. This consideration was preliminarily allocated to the assets acquired and liabilities assumed on the acquisition date, based on the fair value of AdCare. The Company is further assessing the valuation of receivables, assumed liabilities, real property, intangible assets, and contingent consideration, some of which are dependent on the completion of valuation being performed by independent valuation specialists.

The preliminary allocation of assets acquired and liabilities assumed on the acquisition date, based on the fair value of AdCare, is as follows (in thousands):

Acquisition-related costs for the transaction were recorded as an acquisition-related expense in the consolidated statements of operations.

Total AdCare revenue and income before income tax benefit from the date of acquisition through March 31, 2018 was approximately $4.3 million and $0.7 million, respectively. The following pro forma results of operations of the Company for the three months ended March 31, 2018 and March 31, 2017, assume that the AdCare Acquisition occurred on January 1, 2017.

The pro forma loss before income tax benefit for the three months ended March 31, 2018 was adjusted to exclude approximately $0.4 million of nonrecurring acquisition costs and to include additional interest expense of $0.4 million and depreciation and amortization of $0.2 million. The pro forma loss before income tax benefit for the three months ended March 31, 2017 was adjusted to include additional interest expense of $1.5 million and depreciation and amortization of $0.2 million.

The following table presents pro forma results as discussed above, which are not indicative of the actual results of operations (in thousands):

For the three months ended March 31, 2018, approximately 13.1% of the Company’s revenues were reimbursed by Anthem Blue-Cross Blue-Shield of Texas. No other payor accounted for more than 10.0% of revenue reimbursements for the three months ended March 31, 2018.

For the three months ended March 31, 2017, approximately 10.8% of the Company’s revenues were reimbursed by Anthem Blue-Cross Blue-Shield of Nevada; 10.7% by Blue-Cross Blue-Shield of Florida; and 10.1% by Blue-Cross Blue-Shield of Texas. No other payor accounted for more than 10.0% of revenue reimbursements for the three months ended March 31, 2017.

As of March 31, 2018, substantially all accounts receivable aged greater than 360 days were fully reserved in our condensed consolidated financial statements.

The following table presents a summary of our aging of accounts receivable, net of the allowance for doubtful accounts if applicable, as of March 31, 2018 and 2017:

Approximately $14.3 million and $14.6 million of accounts receivable, at March 31, 2018 and December 31, 2017, respectively, includes accounts where the Company has received a partial payment from a commercial insurance company and the Company is continuing to pursue additional collections for the balance that the Company estimates remains outstanding. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible.

Depreciation expense was $5.1 million for both the three months ended March 31, 2018 and 2017.

The Company has only one operating segment, substance use and behavioral healthcare treatment services, for segment reporting purposes. The substance abuse and behavioral healthcare treatment services operating segment represents one reporting unit for purposes of the Company’s goodwill impairment test. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized but instead are tested for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is recorded. The Company has no intangible assets with indefinite useful lives other than goodwill. The Company performed its most recent goodwill impairment testing as of December 31, 2017 and did not incur an impairment charge.

The Company’s goodwill balance as of March 31, 2018 and December 31, 2017 was $197.2 and $134.4 million, respectively. The increase in goodwill is due to the AdCare Acquisition as shown below and discussed in Note 6 (Acquisitions) (in thousands):

Other identifiable intangible assets and related accumulated amortization consisted of the following as of March 31, 2018 and December 31, 2017 (in thousands):

	Gross Carrying Value				Accumulated Amortization
	March 31,		December 31,		March 31,		December 31,
	2018		2017		2018		2017
Trademarks and trade names	$	8,422	$	5,322	$	2,145	$	1,986
Non-compete agreements		2,267		1,587		1,408		1,372
Marketing intangibles		5,651		5,651		1,626		1,485
Leasehold interests		1,498		1,498		444		397
Service contracts		950		—		8		—
Other		601		51		46		40
	$	19,389	$	14,109	$	5,677	$	5,280

Amortization expense for both the three months ended March 31, 2018 and 2017 was $0.4 million.

All intangible assets are amortized using the straight-line method. The following table presents amortization expense expected to be recognized during fiscal years subsequent to March 31, 2018 (in thousands):

A summary of the Company’s debt obligations, net of debt issuance costs, is as follows (in thousands):

On June 30, 2017, the Company entered into a senior secured credit agreement with Credit Suisse AG, as administrative agent and collateral agent and the lenders party thereto (the “2017 Credit Facility”). The 2017 Credit Facility initially made available to the Company a $40.0 million revolving line of credit (the “2017 Revolver”) and a term loan in an aggregate original principal amount of $210.0 million (the “2017 Term Loan”). As discussed further below, on September 25, 2017 the 2017 Revolver was increased to $55.0 million. The 2017 Credit Facility also provides for standby letters of credit in an aggregate undrawn amount not to exceed $7.0 million.

The 2017 Term Loan matures on June 30, 2023 and requires scheduled quarterly principal repayments in an amount equal to $1.3 million for September 30, 2017 through June 30, 2019, $2.6 million for September 30, 2019 through March 31, 2023, with the remaining principal balance of the term loan due on the maturity date of June 30, 2023. The 2017 Term Loan was fully drawn on June 30, 2017.

The 2017 Revolver matures on June 30, 2022. As of March 31, 2018, there was an outstanding balance of $32.0 million under the 2017 Revolver.

The 2017 Credit Facility also includes an incremental facility allowing the Company to incur Additional Term Loans in an aggregate principal amount of up to $25.0 million (plus such additional amounts, so long as, after giving pro forma effect to the incurrence of such additional borrowings, the Company’s Senior Secured Leverage Ratio (as defined in the 2017 Credit Facility) would be less than 3.90:1.00) (each, an “Incremental Term Loan”) and/or Additional Revolving Commitments in an aggregate principal amount of up to $15.0 million (the “Incremental Revolver”), each subject to the satisfaction of certain conditions contained in the 2017 Credit Facility, including obtaining additional commitments from existing or additional lenders.

On September 25, 2017, the Company obtained its Incremental Revolver from certain incremental revolving credit lenders thereby increasing the 2017 Revolver pursuant to the 2017 Credit Facility from $40.0 million to $55.0 million. The lenders under the 2017 Credit Facility are not under any obligation to provide any Incremental Term Loans.

On March 1, 2018, in conjunction with the AdCare Acquisition, the Company borrowed $65.0 million of Incremental Term Loans under the 2017 Credit Facility. The Company incurred approximately $2.6 million in debt issuance costs related to underwriting and other professional fees as a result of the $65.0 million Incremental Term loan borrowing.

Borrowings under the 2017 Credit Facility bear interest at a rate tied to the Alternative Base Rate (as defined in the 2017 Credit Facility) or the Adjusted London Interbank Offered Rate (“LIBOR”) (at the Company’s option). ABR Loans (as defined in the 2017 Credit Facility) made under the 2017 Revolver bear interest at a rate per annum equal to the Alternative Base Rate plus 5.0% per annum. ABR Loans made under the 2017 Term Loan bear interest at a rate per annum equal to the Alternate Base Rate plus 5.75% per annum. Eurodollar Loans (as defined in the 2017 Credit Facility) made under the 2017 Revolver bear interest at the applicable Adjusted LIBOR plus 6.0%. Eurodollar Loans made under the 2017 Term Loan bear interest at the applicable Adjusted LIBOR plus 6.75% (with a 1.0% floor). In addition, under the 2017 Credit Facility, the Company will pay a commitment fee for the undrawn portion of the 2017 Revolver of 0.5% per annum, payable on a quarterly basis.

Borrowings under the 2017 Credit Facility are guaranteed by the Company’s wholly owned subsidiary, American Addiction Centers, Inc., and certain of its other subsidiaries pursuant to that certain Guarantee and Collateral Agreement, dated as of June 30, 2017, by and among the Company, each of the subsidiary guarantors party thereto and Credit Suisse AG, as collateral agent (the “Guarantee and Collateral Agreement”). The obligations under the 2017 Credit Facility and the Guarantee and Collateral Agreement are secured by a lien on substantially all of the Company’s and each subsidiary guarantor’s assets.

The Company is permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the 2017 Credit Facility at any time without premium or penalty, other than customary “breakage” costs with respect to Eurodollar Loans and, with respect to the 2017 Term Loan, if certain repricing transactions are consummated or certain mandatory repayments are made, (i) a yield maintenance premium within one year after the closing as set forth in the 2017 Credit Facility, (ii) a 2.0% premium if paid after the first anniversary of the closing but before the second anniversary of the closing and (iii) a 1.0% premium if paid after the second anniversary of the closing but before the third anniversary of the closing.

In addition, the 2017 Credit Facility requires the Company to prepay the outstanding 2017 Term Loan, subject to certain exceptions, with:

The 2017 Credit Facility requires the Company to not permit its Senior Secured Leverage Ratio (as defined in the 2017 Credit Agreement) to exceed the following ratios on or after each quarter end:

In addition, the 2017 Credit Facility places certain restrictions on the ability of the Company and its subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; pay dividends and make other restricted payments; undertake transactions with affiliates; enter into restrictive agreements on dividends and other distributions; make negative pledges; enter into certain sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements.

The 2017 Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, invalidity of loan documents and certain changes in control.

The Company incurred approximately $12.9 million in debt issuance costs related to the initial underwriting and other professional fees, of which $7.6 million related to the 2017 Term Loan and $5.3 million related to the 2017 Revolver.

As of March 31, 2018, $302.7 million was outstanding under the 2017 Credit Facility, including $32.0 million related to the 2017 Revolver and $270.7 million related to the 2017 Term Loan. The Company’s availability under the 2017 Revolver was $23.0 million, less $3.5 million of outstanding letters of credit.

As of March 31, 2018, the Company was in compliance with all applicable covenants under the 2017 Credit Facility.

On March 1, 2018, in conjunction with the AdCare Acquisition, in consideration for covenants and agreements set forth in the Purchase Agreement, the Company issued the AdCare Note to the Seller, in the original principal amount of $9.6 million, which matures on September 29, 2023 and accrues interest at a fixed rate per annum equal to 5.0%, compounded annually. Payments of principal and interest pursuant to the AdCare Note commenced on April 30, 2018 and will continue until the maturity date.

On March 9, 2015, the Company entered into a five-year senior secured credit facility (the “2015 Credit Facility”) with Bank of America, N.A., as administrative agent for the lenders party thereto. The 2015 Credit Facility initially consisted of a $50.0 million revolving credit facility and a $75.0 million term loan. In connection with entering into the 2017 Credit Facility on June 30, 2017, all amounts outstanding under the 2015 Credit Facility were fully repaid.

On October 2, 2015, the Company entered into two financing facilities with affiliates of Deerfield Management Company, L.P. (“Deerfield”). The financing facilities consisted of $25.0 million of subordinated convertible debt and up to $25.0 million of unsecured subordinated debt (the “Deerfield Facility”). In connection with entering into the 2017 Credit Facility on June 30, 2017, all amounts outstanding under the Deerfield Facility were fully repaid.

During the quarter ended June 30, 2017, the Company incurred approximately $5.4 million in debt extinguishment costs related to the repayment of the 2015 Credit Facility and the Deerfield Facility, which consisted of a $3.0 million consent fee related to calling the Deerfield Facility (the “Deerfield Facility Consent Fee”), as well as a write-off of $2.3 million of previously deferred debt issuance costs.

In July 2014, the Company entered into two interest rate swap agreements to mitigate its exposure to fluctuations in interest rates. On June 29, 2017, the Company terminated the interest rate swap agreements. As of December 31, 2017, there was no remaining liability related to the interest rate swap agreements. Refer to Note 14 (Fair Value of Financial Instruments) for further discussion of fair value of the interest rate swap agreements.

Prior to terminating the interest rate swap agreements on June 29, 2017, the interest rate swap agreements had notional amounts of $7.2 million and $10.5 million which fixed the interest rates over the life of the respective swap agreement at 4.21% and 4.73%, and were set to mature in May 2018 and August 2019, respectively. The notional amounts of the swap agreements represented amounts used to calculate the exchange of cash flows and were not the Company’s assets or liabilities. The interest payments under these agreements were to be settled on a net basis. The Company did not designate the interest rate swaps as cash flow hedges, and therefore, the changes in the fair value of the interest rate swaps are included within interest expense in the condensed consolidated statements of operations.

On August 9, 2017, the Company closed on a sale-leaseback transaction with MedEquities Realty Operating Partnership, LP, a subsidiary of MedEquities Realty Trust, Inc. (“MedEquities”), for $25.0 million (the “2017 Sale-Leaseback”), in which MedEquities purchased from subsidiaries of the Company two drug and alcohol rehabilitation outpatient facilities and two sober living facilities: the Desert Hope Facility and Resolutions Las Vegas, each located in Las Vegas, Nevada, and the Greenhouse Facility and Resolutions Arlington, each located in Arlington, Texas (collectively, the “Sale-Leaseback Facilities”).

Simultaneously with the sale of the Sale-Leaseback Facilities, the Company, through its subsidiaries and MedEquities entered into an operating lease, dated August 9, 2017, in which the Company will continue to operate the Sale-Leaseback Facilities. The operating lease provides for a 15-year term for each facility with two separate renewal terms of five years each if the Company chooses to exercise its right to extend the lease term.

The initial annual minimum rent payable from the Company to MedEquities is $2.2 million due in equal monthly installments of $0.2 million. On the first, second and third anniversary of the lease date, the annual rent will increase 1.5% from the annual rent in effect for the immediately preceding year. On the fourth anniversary of the lease date and thereafter during the lease term, the annual rent will increase to the amount equal to the CPI Factor (as defined in the Lease) multiplied by the annual rent in effect for the immediately preceding year; provided, however, that the adjusted annual rent increase will always be between 1.5% or and 3.0%.

Due to the nature of the agreement between MedEquities and the Company, the transaction does not qualify for sale-leaseback accounting under GAAP. Therefore, the Sale-Leaseback Facilities will remain on the Company’s balance sheet and will continue to be depreciated over the remaining life of the asset. The Company accounted for the $25.0 million of proceeds, less $0.4 million of transaction costs, as a financing obligation, of which $0.1 million was classified as a short-term liability. On a monthly basis, a portion of the payment is allocated to principal, which reduces the obligation balance, and interest, computed based on the Company’s incremental borrowing rate. The lease with MedEquities is accounted for as an operating lease under GAAP.

A summary of the Company’s financing lease obligation is as follows (in thousands):

Nevada		35-2496142
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 Powell Place Brentwood, TN		37027
(Address of principal executive offices)		(Zip code)

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐ (do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☒

			Page
	PART I
FINANCIAL INFORMATION
Item 1:		Condensed Consolidated Financial Statements
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited)	3
		Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	4
		Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2018 (unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited)	6
		Notes to Condensed Consolidated Financial Statements	7
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3:		Quantitative and Qualitative Disclosures About Market Risk	33
Item 4:		Controls and Procedures	33
		PART II
OTHER INFORMATION
Item 1:		Legal Proceedings	34
Item 1A:		Risk Factors	34
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3:		Defaults Upon Senior Securities	36
Item 4:		Mine Safety Disclosures	36
Item 5:		Other Information	36
Item 6:		Exhibits	37
Signatures

	March 31,			December 31,
	2018			2017
Land	$	19,597		$	15,766
Buildings and improvements		143,873			130,710
Equipment and software		35,966			32,968
Construction in progress		24,388			22,310
Total property and equipment		223,824			201,754
Less accumulated depreciation		(54,080	)		(49,206	)
Property and equipment, net	$	169,744		$	152,548

Fiscal Year Ended	Expected Amortization Expense
2018⁽¹⁾	$	1,534
2019		2,008
2020		2,005
2021		1,765
2022		1,619
Thereafter		4,781
Total	$	13,712

	As Reported		Previous Accounting Guidance		Impact of Adopting Topic 606
Client related revenue	$	75,923	$	82,480	$	(6,557	)
Non-client related revenue	$	2,550	$	2,798	$	(248	)
Provision for doubtful accounts	$	—	$	6,805	$	(6,805	)

	AdCare
Cash and cash equivalents	$	2,700
Accounts receivable		4,357
Prepaid expenses and other assets		996
Property and equipment		15,719
Goodwill		62,788
Intangible assets		5,280
Total assets acquired		91,840
Current liabilities		5,931
Long-term liabilities		2,004
Net assets acquired	$	83,905

Balance at December 31, 2017	$	134,396
AdCare Acquisition		62,788
Balance at March 31, 2018	$	197,184

Each Fiscal Quarter Ending During the Period		Maximum Senior Secured Leverage Ratio
Ending before March 31, 2019		5.25:1.00
Ending on or after March 31, 2019 but before March 31, 2020		4.75:1.00
Ending on or after March 31, 2020		4.25:1.00

Section 1: 10-Q (10-Q)