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Section 1: 10-Q (10-Q)

aac-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission File Number: 001-36643

 

AAC Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

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)

Registrant’s telephone number, including area code: (615) 732-1231

 

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.

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 (do not check if a smaller reporting company)

 

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

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.

 

 

 

 

 


 

AAC HOLDINGS, INC.

Form 10-Q

March 31, 2018

TABLE OF CONTENTS

 

 

 

 

 

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

 

 

 

 

2


 

PART 1. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

AAC HOLDINGS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

Unaudited

(Dollars in thousands, except share data)

 

 

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

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

 

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

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

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

 

AAC HOLDINGS, Inc.

CONDENSED Consolidated Statement of Stockholders’ Equity

Unaudited

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

 

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(Dollars in thousands)

 

 

 

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

 

 

$

 

See accompanying notes to condensed consolidated financial statements.

6


 

 

AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1.   Description of Business

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.

2.   Basis of Presentation and Recently Issued Accounting Pronouncements

Principles of Consolidation

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.

Reclassifications

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


7


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Standards Updates 

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):

 

 

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

)

 

3.   Client Related Revenue and Non-Client Related Revenue

Client Related Revenue

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.

8


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

(1)

Inpatient treatment facility services and related professional services.

 

(2)

Outpatient facility and sober living services.

 

(3)

Client related diagnostic services, which includes point of care drug testing and client related diagnostic laboratory services.

 

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

 

 

(1)

Inpatient treatment facility services and related professional services.

 

(2)

Outpatient facility and sober living services.

 

(3)

Client related diagnostic services, which includes point of care drug testing and client related diagnostic laboratory services.

Non-Client Related Revenue

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.

9


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

4.   General and Administrative Costs

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.

5.   Earnings (Loss) Per Share

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.

6.   Acquisition

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.

10


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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):

 

 

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

 

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):

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Total revenues

 

$

86,747

 

 

$

85,348

 

Loss before income tax benefit

 

$

(4,930

)

 

$

(2,302

)

 

7.   Accounts Receivable

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.

11


AAC Holdings, Inc.

NOTES TO 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:

 

 

Current

 

31-180

Days

 

Over 180

Days

 

Total

 

March 31, 2018

 

 

39.5

%

 

38.8

%

 

21.7

%

 

100.0

%

March 31, 2017

 

 

26.2

%

 

38.6

%

 

35.2

%

 

100.0

%

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.

8.   Property and Equipment, Net

Property and equipment consisted of the following (in thousands):

 

 

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

 

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

9.   Goodwill and Intangible Assets

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):

 

Balance at December 31, 2017

 

$

134,396

 

AdCare Acquisition

 

 

62,788

 

Balance at March 31, 2018

 

$

197,184

 

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

 

12


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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):

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

 

 

(1)

Presents expected amortization from April 1, 2018 through December 31, 2018.

10.   Debt

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

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Senior secured loans

 

$

302,651

 

 

$

207,375

 

Subordinated debt

 

 

9,634

 

 

 

 

Unamortized debt issuance costs

 

 

(9,432

)

 

 

(7,233

)

Capital lease obligations

 

 

909

 

 

 

1,031

 

Total debt

 

 

303,762

 

 

 

201,173

 

Less current portion of long-term debt

 

 

(7,319

)

 

 

(4,722

)

Total long-term debt, net of current portion

 

$

296,443

 

 

$

196,451

 

2017 Credit Facility

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.

13


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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:

 

 

 

75.0% (which percentage will be reduced to 50.0% if the Company’s Senior Secured Leverage Ratio is not greater than 3.25:1.00 and to 25.0% if the Company’s Senior Secured Leverage Ratio is not greater than 2.75:1.00) of the Company’s annual excess cash flow (as defined by the 2017 Credit Facility);

 

 

 

100.0% of the net cash proceeds of certain asset sales or other dispositions of property or certain casualty events, in each case subject to certain exceptions and provided that the Company may, subject to certain conditions, reinvest within 365 days in assets to be used in its business or certain other permitted investments;

 

 

 

100.0% of the net cash proceeds of the incurrence of debt and issuance of Disqualified Stock (as defined by the 2017 Credit Facility) other than proceeds from debt permitted under the 2017 Credit Facility; and

 

 

 

100.0% of the net cash proceeds of equity issuances in the event the Senior Secured Leverage Ratio is greater than 3.00:1.00, calculated on a pro forma basis, at the time of such issuances (or such lesser percentage required for the Senior Secured Leverage Ratio to be equal to or less than 3.00:1.00), other than equity proceeds that are utilized within 270 days of issuance for Permitted Acquisitions (as defined in the 2017 Credit Facility) or material expansion of facilities.

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:

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

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.

14


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

Subordinated Note

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.

2015 Credit Facilities

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.

Interest Rate Swap Agreements

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.

11.   Financing Lease Obligation

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.

15


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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):

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017