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Section 1: 8-K/A (8-K/A)

aac-8ka_20180301.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 17, 2018 (March 1, 2018)

 

 

AAC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

Nevada

 

001-36643

 

35-2496142

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

200 Powell Place

Brentwood, Tennessee 37207

(Address of principal executive offices) (Zip Code)

(615) 732- 1231

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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. 

 


 

 

 

Explanatory Note

This Amendment No. 1 (this “Amendment”) is being filed by AAC Holdings, Inc., a Nevada corporation (“AAC”), to provide the consolidated financial statements and pro forma financial information that was not included in the Current Report on Form 8-K filed by AAC on March 2, 2018 (the “Original Report”), relating to the acquisition of all of the outstanding capital stock of AdCare, Inc., a Massachusetts corporation (“AdCare”), pursuant to that certain Securities Purchase Agreement, dated as of September 13, 2017, by and among AAC, AAC Healthcare Network, Inc., a Delaware corporation and wholly owned subsidiary of AAC, AdCare and AdCare Holding Trust, a Massachusetts business trust.

The sole purpose of this Amendment is to provide the consolidated financial statements and pro forma financial information required by Item 9.01, which was not included in the Original Report.

Item 9.01Financial Statements and Exhibits.

(a)

Financial Statements of Business Acquired.

 

The audited financial statements of AdCare for the years ended September 30, 2017, September 30, 2016, and September 30, 2015, together with the notes thereto and the independent auditors’ reports thereon, are filed as Exhibit 99.1 and are hereby incorporated in this Amendment by reference.

The unaudited financial statements of AdCare for the three months ended December 31, 2017 and 2016, and the notes related thereto, are filed as Exhibit 99.2 and are incorporated in this Amendment by reference.

 

(b)

Pro Forma Financial Information.

AAC’s unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and the three months ended March 31, 2018, and the notes related thereto, are filed as Exhibit 99.3 and are hereby incorporated in this Amendment by reference.

 

(c)

Exhibits.

 

Exhibit No.Description

23.1

Consent of O’Connor, Maloney & Company, P.C., independent auditors.

23.2

Consent of BDO USA, LLP, independent auditor.

99.1

Audited Consolidated Financial Statements of AdCare, Inc. and Subsidiaries for the years ended September 30, 2017, September 30, 2016, and September 30, 2015, together with the notes related thereto and the independent auditors’ reports thereon.

99.2

Unaudited Condensed Consolidated Financial Statements of AdCare, Inc. and Subsidiaries for the three months ended December 31, 2017 and 2016, and the notes related thereto.

99.3

Unaudited pro forma condensed combined statements of operations of AAC Holdings, Inc. for the year ended December 31, 2017 and the three months ended March 31, 2018, and the notes related thereto.


 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

 

AAC HOLDINGS, INC.

 

 

By:

 

/s/ Michael T. Cartwright

 

 

Michael T. Cartwright

 

 

Chairman and Chief Executive Officer

Date: May 17, 2018

 

 

 

 

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Section 2: EX-23.1 (EX-23.1)

aac-ex231_57.htm

Exhibit 23.1

 

CONSENT OF INDEPENDENT AUDITOR

 

AAC Holdings, Inc.

Brentwood, Tennessee

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-199161, 333-201218, and 333-218053) of AAC Holdings, Inc. of our report dated May 17, 2018 relating to the consolidated financial statements of AdCare, Inc. and Subsidiaries, for the year ended September 30, 2015, included in this current report on Form 8-K/A.

 

/s/ O’Connor, Maloney & Company, P.C.

 

Worcester, Massachusetts

May 17, 2018

 

 

 

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Section 3: EX-23.2 (EX-23.2)

aac-ex232_29.htm

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITOR

 

AAC Holdings, Inc.

Brentwood, Tennessee

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-199161, 333-201218, and 333-218053) of AAC Holdings, Inc. of our report dated May 17, 2018 relating to the consolidated financial statements of AdCare, Inc. and Subsidiaries, included in this current report on Form 8-K/A.

 

/s/ BDO USA, LLP

 

Nashville, Tennessee

May 17, 2018

 

 

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Section 4: EX-99.1 (EX-99.1)

aac-ex991_10.htm

Exhibit 99.1

Independent Auditor’s Report

The Board of Directors

AdCare, Inc. and Subsidiaries

Worcester, Massachusetts

We have audited the accompanying consolidated financial statements of AdCare, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of September 30, 2017 and 2016, and the related consolidated statements of income and retained earnings and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AdCare, Inc. and Subsidiaries as of September 30, 2017 and 2016 and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

Nashville, Tennessee

May 17, 2018

1

 


 

Independent Auditor’s Report

The Board of Directors

AdCare, Inc. and Subsidiaries

Worcester, Massachusetts

Report on the Financial Statements

We have audited the accompanying consolidation statements of income, retained earnings and of cash flows of AdCare, Inc. and Subsidiaries for the year ended September 30, 2015 and the related notes thereto.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of AdCare, Inc. and Subsidiaries, for the year ended September 30, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ O’Connor, Maloney & Company, P.C.

Worcester, Massachusetts

May 17, 2018

2

 


 

ADCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

Assets

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,424,164

 

 

$

11,370,618

 

Accounts receivable, net

 

 

4,552,658

 

 

 

4,046,771

 

Inventories

 

 

160,882

 

 

 

162,228

 

Prepaid expenses and other current assets

 

 

671,570

 

 

 

398,339

 

Deferred income taxes, net

 

 

31,831

 

 

 

74,776

 

Total current assets

 

 

15,841,105

 

 

 

16,052,732

 

Property and equipment, net

 

 

9,103,472

 

 

 

9,695,963

 

Due from stockholders of parent, AdCare Holding Trust

 

 

320,154

 

 

 

298,075

 

Deferred tax assets, net

 

 

39,334

 

 

 

126,933

 

Deposits

 

 

26,215

 

 

 

14,395

 

Total assets

 

$

25,330,280

 

 

$

26,188,098

 

 

 

Liabilities and Stockholder's Equity

 

Current liabilities

 

 

 

 

 

 

 

 

Deferred revenue

 

$

 

 

$

3,805

 

Accounts payable

 

 

733,955

 

 

 

873,168

 

Accrued and other current liabilities

 

 

2,624,357

 

 

 

3,630,758

 

Due to third-party payors

 

 

902,852

 

 

 

978,093

 

Total current liabilities

 

 

4,261,164

 

 

 

5,485,824

 

Deferred income taxes, net

 

 

1,237

 

 

 

1,862

 

Due to third-party payors, net of current portion

 

 

1,100,000

 

 

 

4,700,000

 

Total liabilities

 

 

5,362,401

 

 

 

10,187,686

 

 

 

 

 

 

 

 

 

 

Stockholder's equity

 

 

 

 

 

 

 

 

Capital stock

 

 

28,002

 

 

 

28,002

 

Retained earnings

 

 

19,939,877

 

 

 

15,972,410

 

Total stockholder's equity

 

 

19,967,879

 

 

 

16,000,412

 

Total liabilities and stockholder's equity

 

$

25,330,280

 

 

$

26,188,098

 

See accompanying notes to consolidated financial statements.

3

 


ADCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Patient service revenue

$

53,558,462

 

 

$

50,444,269

 

 

$

49,523,272

 

Provision for bad debts

 

(1,343,355

)

 

 

(1,534,035

)

 

 

(1,073,420

)

Net patient service revenue

 

52,215,107

 

 

 

48,910,234

 

 

 

48,449,852

 

Meaningful use revenue

 

(147

)

 

 

332,329

 

 

 

727,225

 

Other operating revenue

 

615,245

 

 

 

501,094

 

 

 

1,125,477

 

Total net revenue

 

52,830,205

 

 

 

49,743,657

 

 

 

50,302,554

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Professional services

 

30,205,601

 

 

 

30,127,912

 

 

 

29,633,028

 

General services

 

5,064,178

 

 

 

4,943,636

 

 

 

4,705,378

 

Administrative services

 

6,283,082

 

 

 

5,741,067

 

 

 

6,334,196

 

Depreciation and amortization

 

946,572

 

 

 

1,057,921

 

 

 

861,570

 

Total operating expenses

 

42,499,433

 

 

 

41,870,536

 

 

 

41,534,172

 

Income from operations

 

10,330,772

 

 

 

7,873,121

 

 

 

8,768,382

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

24,820

 

 

 

68,238

 

 

 

60,370

 

Unrealized loss on investments

 

 

 

 

 

 

 

(72,814

)

Realized (loss) gain on investments

 

 

 

 

(60,990

)

 

 

12,550

 

(Loss) gain on disposal of property, plant and equipment

 

 

 

 

(9,868

)

 

 

9,582

 

Interest expense

 

(17,796

)

 

 

(22,168

)

 

 

(44,612

)

Total other income (expense)

 

7,024

 

 

 

(24,788

)

 

 

(34,924

)

Income before income taxes

 

10,337,796

 

 

 

7,848,333

 

 

 

8,733,458

 

Income tax expense

 

295,078

 

 

 

256,839

 

 

 

255,701

 

Net income

 

10,042,718

 

 

 

7,591,494

 

 

 

8,477,757

 

Retained earnings, beginning

 

15,972,410

 

 

 

14,826,601

 

 

 

11,828,882

 

Distributions to stockholder

 

(6,075,251

)

 

 

(6,445,685

)

 

 

(5,480,038

)

Retained earnings, ending

$

19,939,877

 

 

$

15,972,410

 

 

$

14,826,601

 

See accompanying notes to consolidated financial statements.

4

 


ADCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2015

 

Cash Flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

10,042,718

 

 

 

7,591,494

 

 

 

8,477,757

 

Adjustments to reconcile net income to net cash provided by

       operating activities:

 

 

 

 

 

 

 

 

 

 

 

Realized and unrealized loss on investments

 

 

 

 

60,990

 

 

 

60,264

 

Loss (gain) on disposal of property, plant and equipment

 

 

 

 

9,868

 

 

 

(9,582

)

Depreciation and amortization

 

946,572

 

 

 

1,057,921

 

 

 

861,570

 

Provision for bad debts

 

1,343,355

 

 

 

1,534,035

 

 

 

1,073,420

 

Deferred income taxes

 

129,919

 

 

 

41,242

 

 

 

30,267

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

(1,849,242

)

 

 

(245,201

)

 

 

(2,097,213

)

Decrease in receivable - affiliate

 

 

 

 

 

 

 

211,178

 

Decrease (increase) in inventories

 

1,346

 

 

 

12,011

 

 

 

(58,892

)

(Increase) decrease in prepaid expenses, deposits and other

 

(307,130

)

 

 

62,832

 

 

 

162,975

 

(Decrease) increase in deferred revenue

 

(3,805

)

 

 

(40,314

)

 

 

44,119

 

(Decrease) increase in accounts payable

 

(139,213

)

 

 

(131,646

)

 

 

230,516

 

Decrease in accrued and other liabilities

 

(1,006,401

)

 

 

(1,473,015

)

 

 

(305,088

)

(Decrease) increase in due to third-party payors

 

(3,675,241

)

 

 

(125,765

)

 

 

849,493

 

Net cash provided by operating activities

 

5,482,878

 

 

 

8,354,452

 

 

 

9,530,784

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of investments

 

 

 

 

1,266,222

 

 

 

 

Proceeds from sale of property, plant and equipment

 

 

 

 

17,000

 

 

 

20,000

 

Cash held in escrow for capital expenditures

 

 

 

 

 

 

 

2,315,747

 

Purchase of investments

 

 

 

 

 

 

 

(46,477

)

Capital expenditures

 

(354,081

)

 

 

(1,126,733

)

 

 

(4,485,603

)

Net cash (used in) provided by investing activities

 

(354,081

)

 

 

156,489

 

 

 

(2,196,333

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from bank note payable

 

 

 

 

 

 

 

2,500,000

 

Distributions

 

(6,075,251

)

 

 

(6,445,685

)

 

 

(5,480,038

)

Repayments on bank note payable

 

 

 

 

(2,225,000

)

 

 

(275,000

)

Net cash used in financing activities

 

(6,075,251

)

 

 

(8,670,685

)

 

 

(3,255,038

)

Net (decrease) increase in cash and cash equivalents

 

(946,454

)

 

 

(159,744

)

 

 

4,079,413

 

Cash and cash equivalents, beginning of year

 

11,370,618

 

 

 

11,530,362

 

 

 

7,450,949

 

Cash and cash equivalents, end of year

$

10,424,164

 

 

$

11,370,618

 

 

$

11,530,362

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flows:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

17,796

 

 

 

22,168

 

 

 

44,612

 

Cash paid for income taxes

 

155,803

 

 

 

215,995

 

 

 

224,004

 

See accompanying notes to consolidated financial statements.

5

 


 

ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Nature of Operations

AdCare, Inc. and Subsidiaries (the “Company”), headquartered in Worcester, Massachusetts, provide effective treatment, intervention, prevention and education in the specialty field of behavioral services with particular emphasis on substance abuse.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of AdCare, Inc., and its wholly-owned subsidiaries: AdCare Hospital of Worcester, Inc.; AdCare Rhode Island, Inc.; Diversified Healthcare Strategies, Inc.; AdCare Criminal Justice Services, Inc. and its wholly-owned subsidiary, American Criminal Justice Solutions of Pennsylvania, Inc.; Green Hill Realty Corporation; Lincoln Catharine Realty Corporation; and Tower Hill Realty, Inc. All material intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

Revenue is recognized as services are provided. Revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.

The Company follows accounting guidance that requires certain health care entities to present the provision for bad debts related to patient service revenue as a deduction from the patient service revenues in the statements of income and retained earnings rather than as an operating expense. The Company has evaluated the guidance and concluded that it recognizes significant amounts of patient service revenue (primarily co-payments and deductibles) at the time services are rendered that are not subject to an assessment as to the patient’s ability to pay. Accordingly, the Company presents the provision for bad debts net of revenue in the accompanying consolidated statements of income and retained earnings in accordance with accounting principles generally accepted in the United States.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and certain reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. During the year ended September 30, 2017, the Company had a material change in estimate (see Note 8).

Cash and Cash Equivalents

The Company considers cash on hand and short term investments with original maturities of three months or less to be cash and cash equivalents.

6

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

Accounts receivable primarily consists of amounts due from third-party payors (governmental and non-governmental) and private pay clients and is recorded net of contractual allowances. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accounts receivable is reported net of an allowance for doubtful accounts, which is management’s best estimate of accounts receivable that could become uncollectible in the future. Accordingly, accounts receivable reported in the Company’s consolidated financial statements is recorded at the net amount expected to be received. The Company’s allowance for doubtful accounts is based on historical experience, but management also takes into consideration the age of accounts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible. The Company’s allowance for doubtful accounts was established primarily for uncollectible amounts due from patients for co-payments and deductibles.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 15-39 years for buildings and improvements, 3-7 years for equipment and 5 years for motor vehicles. Expenditures representing additions or improvements are capitalized. Maintenance and repairs are charged to expense as incurred. Upon retirement or disposition, costs and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in income.

Inventories

Inventories, which consist of hospital related supplies, are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or net realizable value.

Income Taxes

AdCare, Inc. has elected to be treated as a Qualified Subchapter S Subsidiary of the AdCare Holding Trust, a Massachusetts Business Trust within the meaning of Section 1361 of the Internal Revenue Code and as a result, files a consolidated S Corporation Federal income tax return and certain state income tax returns with AdCare Holding Trust. Under these provisions, AdCare, Inc. does not pay Federal corporate income taxes and certain state income taxes on its taxable income. Instead, AdCare, Inc.’s taxable income or net operating loss is reported on the AdCare Holding Trust’s Federal income tax return and certain state income tax returns and flows through to its stockholders' individual Federal and certain state income tax returns. The Company has concluded it is a pass through entity and there are no uncertain tax positions that would require recognition in the Company’s consolidated financial statements. If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties in the accompanying consolidated statements of income and retained earnings. Generally, the Company’s tax returns remain subject to examination for a period of three years.

For states that do not recognize the Company’s Qualified Subchapter S Subsidiary election, deferred income taxes result from temporary differences arising from using accelerated depreciation methods for income tax purposes and the straight-line method of depreciation for financial statement purposes, and for recognizing bad debts under the direct write-off method for income tax purposes and under the allowance method for financial statement purposes. Temporary differences also arise from accruing various expenses for financial statement purposes that are not deductible until paid for income tax purposes.

Investments

Investments are stated at fair value based on quoted prices from a national securities exchange. Realized and unrealized gains or losses are recognized in the period in which the fluctuations occur. During the year ended September 30, 2016, the Company liquidated its investments resulting in a realized loss of approximately $61,000, which is recorded in realized loss on investments in the accompanying consolidated statements of income and retained earnings. During the year ended September 30, 2015, the Company had realized and unrealized losses of approximately $60,000.

7

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.

Recent Pronouncements

Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Under ASU 2015-14, Deferral of the Effective Date, the revenue recognition standard is effective for nonpublic business entities for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the provisions of this standard to determine the impact on the Company’s consolidated financial statements.

ASU 2015-17, Balance Sheet Classification of Deferred Taxes, requires that all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. However, an entity should not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions, consistent with the guidance under existing U.S. GAAP. Therefore, for many reporting entities, deferred income taxes will be presented in noncurrent assets and noncurrent liabilities. The ASU is effective for nonpublic business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of any interim or annual reporting period. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2016-02, Leases, applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. For leases with a lease term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. The ASU is effective for nonpublic business entities for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the provisions of this standard to determine the impact on the Company’s consolidated financial statements.

4.

Accounts Receivable, Net

 

September 30,

 

 

2017

 

 

2016

 

Accounts receivable consists of:

 

 

 

 

 

 

 

Accounts receivable, patients, net of allowance for doubtful accounts

of approximately $665,000 and $760,000 and contractual allowances of

approximately $4,237,000 and $3,895,000, respectively

$

4,506,514

 

 

$

4,005,702

 

Accounts receivable, other

 

46,144

 

 

 

41,069

 

Total Accounts Receivable, Net

$

4,552,658

 

 

$

4,046,771

 


8

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.

Property, Plant and Equipment

 

September 30,

 

 

2017

 

 

2016

 

Land

$

2,073,795

 

 

$

2,073,795

 

Buildings and improvements

 

11,824,344

 

 

 

11,652,846

 

Equipment

 

3,501,032

 

 

 

3,403,317

 

Custodial assets

 

499,910

 

 

 

499,910

 

Motor vehicles

 

468,493

 

 

 

383,625

 

Total property, plant and equipment

 

18,367,574

 

 

 

18,013,493

 

Less: accumulated depreciation

 

(9,264,102

)

 

 

(8,317,530

)

Property, Plant and Equipment, Net

$

9,103,472

 

 

$

9,695,963

 

Custodial assets consist of assets acquired with funds provided by the Commonwealth of Massachusetts through a capital budget. The title to these assets remains with the state.

6.

Line of Credit

The Company, and certain subsidiaries as co-borrowers, had $1,500,000 of borrowings available under a demand line of credit agreement with a bank that was secured by substantially all assets of the Company. The line of credit was closed on February 26, 2018. No amounts were outstanding under the line of credit as of September 30, 2017 and 2016.

7.

Bank Note Payable

The Company entered into a $3,000,000 term loan on September 30, 2014 with a bank that was secured by the assets of Tower Hill Realty, Inc. and guaranteed by the Parent. Principal payments of $25,000 were to be made in 120 monthly installments plus interest at a rate of 1.75% above the LIBOR rate with the final balance due on or before September 30, 2021. The balance was repaid in full in March 2016.

8.

Due to Third-Party Payors

Revenue received under reimbursement agreements is subject to audit and retroactive adjustments by third-party payors. The Company also qualifies for disproportionate share hospital (“DSH”) payments for services performed to certain Medicaid patients through the Centers for Medicare & Medicaid Services (“CMS”). During 2017, several rulings were made in favor of healthcare providers regarding the treatment of DSH days.  The Company released and recognized approximately $3,600,000 in reserves for several cost report years that were closed and determined would not likely be reopened for audit.

As of September 30, 2017 and 2016, amounts reflected in due to third party payors are as follows:

 

September 30,

 

 

2017

 

 

2016

 

Due to third party payors, current portion

$

902,852

 

 

$

978,093

 

Due to third party payors, net of current portion

 

1,100,000

 

 

 

4,700,000

 

Total Due to Third Party Payors

$

2,002,852

 

 

$

5,678,093

 

9.

Retirement Plan

AdCare, Inc. maintains a defined contribution retirement (profit sharing) plan covering substantially all employees of the Company and its subsidiaries. Contributions, which are discretionary and determined by the Board of Directors, totaled $150,000 during the years ended September 30, 2017 and 2016, and $160,000 in 2015.

10.

Income Taxes

 

September 30,

 

 

2017

 

 

2016

 

 

2015

 

State:

 

 

 

 

 

 

 

 

 

 

 

Current

$

165,159

 

 

$

215,597

 

 

$

225,278

 

Deferred

 

129,919

 

 

 

41,242

 

 

 

30,423

 

Total

$

295,078

 

 

$

256,839

 

 

$

255,701

 

9

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

Operating Leases

 

AdCare Hospital of Worcester, Inc., AdCare, Inc., AdCare Rhode Island, Inc., and AdCare Criminal Justice Services, Inc. as lessees, lease various equipment and facilities under non-cancelable operating leases that expire at various intervals through November 2022.

The following is a schedule of minimum future lease payments required under these leases, which have initial or remaining terms in excess of one year, for each of the next five years and in the aggregate, as of September 30, 2017:

Year Ending September 30,

Amount

 

2018

$

605,000

 

2019

 

375,000

 

2020

 

305,000

 

2021

 

95,000

 

2022

 

65,000

 

Total Future Minimum Lease Payments

$

1,445,000

 

Rent expense under leasing arrangements with unrelated parties having remaining terms in excess of one year was approximately $682,000, $669,000 and $878,000 for the years ended September 30, 2017, 2016, and 2015, respectively.

AdCare Rhode Island, Inc. subleased facilities to a tenant under a month to month lease agreement. The lease called for minimum monthly lease payments of $17,000 and service fees of $3,500. Rental and service fee income was approximately $246,000 for the years ended September 30, 2017, 2016 and 2015, which is presented in other operating revenue in the accompanying consolidated statements of income and retained earnings. The lease was terminated on October 31, 2017.

12.

Contingencies

Due to the nature of its operations, the Company may be exposed to various professional liability claims for which it carries insurance. At September 30, 2017, the Company is a defendant in unrelated claims by former employees and an applicant regarding employment practices. While it is not feasible to predict or determine the outcome of these matters, it is the opinion of management that the outcome will have no material adverse effect on the Company's financial position.

The American Recovery and Reinvestment Act of 2009 established incentive payments under Medicare and Medicaid programs for certain professionals and hospitals that implemented "meaningful use" of certified electronic health record technology. In accordance with the American Institute of Certified Public Accountants Healthcare Expert Panel, incentive payment income should be reported in the year in which the last contingency is resolved. The Company is eligible for the incentive payments under this program. The Company filed its final attestations related to stage two of this program on March 7, 2016. During the years ended September 30, 2016 and 2015, the Company received approximately $332,000 and $727,000, respectively, of Meaningful Use reimbursement. The Company did not receive any Meaningful Use reimbursement during the year ended September 30, 2017; however, the Company repaid $147 of overpayments of meaningful use revenue during the year ended September 30, 2017.

13.

Related Party Transactions

The Company paid amounts amounting to approximately $506,000, $765,000 and $696,000 to a company owned by a Director for professional services rendered during the years ended September 30, 2017, 2016 and 2015, respectively. The Company received rental income amounting to approximately $8,400, $12,000 and $12,500 during the years ended September 30, 2017, 2016 and 2015, respectively, from a company owned by the Director. The arrangements were terminated on June 1, 2017.  The Director is not an owner of the Company.

The Company had a receivable from a related party of approximately $389,000 as of September 30, 2015.

10

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company makes premium payments for a $2.0 million life insurance policy on behalf of certain stockholders of the Parent. Premium payments were approximately $22,000 for the years ended September 30, 2017 and 2016. The Company is not a beneficiary of the policy as proceeds will be paid directly to the trustees of the policy.  Upon death, proceeds received by the trustees will first be used to repay the Company for the premiums paid on the stockholders’ behalf which amount to approximately $320,000 and $298,000 as of September 30, 2017 and 2016, respectively.

14.

Concentrations

The Company maintains financial instruments, consisting primarily of cash and cash equivalents and accounts receivable, which potentially expose the Company to concentrations of credit risk. Cash and cash equivalents are held at local banks and the Company historically has not experienced any losses on its cash and cash equivalents. In the ordinary course of business, the Company has, at various times, had cash deposits with a bank which are in excess of federally insured limits of $250,000 for interest and non-interest bearing accounts.

The Company's accounts receivable are due from Medicare, Medicaid, commercial insurers, state government agencies and other payors. For the years ended September 30, 2017 and September 30, 2016, approximately 58% and 56% of the Company’s revenue was earned from two payors, respectively, that individually account for more than 10% of annual revenue. These two customers made up approximately 55% and 50% of accounts receivable as of September 30, 2017 and 2016, respectively.

15.

Sale of AdCare, Inc. and Subsidiaries

On March 1, 2018, the Company was acquired by a wholly-owned subsidiary of AAC Holdings, Inc. for approximately $83.9 million.

16.

Subsequent Events

AdCare, Inc. and Subsidiaries has evaluated all material subsequent events from September 30, 2017 through May 17, 2018, the date the consolidated financial statements were available to be issued, and determined that there were no additional items requiring disclosure in these consolidated financial statements.

 

 

11

 

(Back To Top)

Section 5: EX-99.2 (EX-99.2)

aac-ex992_11.htm

Exhibit 99.2

ADCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Assets

 

(unaudited)

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,420,114

 

 

$

10,424,164

 

Accounts receivable, net

 

 

4,072,035

 

 

 

4,552,658

 

Inventories

 

 

160,881

 

 

 

160,882

 

Prepaid expenses and other current assets

 

 

697,846

 

 

 

671,570

 

Deferred tax assets, net

 

 

23,978

 

 

 

31,831

 

Total current assets

 

 

14,374,854

 

 

 

15,841,105

 

Property and equipment, net

 

 

9,042,348

 

 

 

9,103,472

 

Due from stockholders of parent, AdCare Holding Trust

 

 

320,154

 

 

 

320,154

 

Deferred tax assets, net

 

 

45,950

 

 

 

39,334

 

Deposits

 

 

26,215

 

 

 

26,215

 

Total assets

 

$

23,809,521

 

 

$

25,330,280

 

 

 

Liabilities and Stockholder's Equity

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

916,670

 

 

$

733,955

 

Accrued and other current liabilities

 

 

2,523,593

 

 

 

2,624,357

 

Due to third-party payors

 

 

952,272

 

 

 

902,852

 

Total current liabilities

 

 

4,392,535

 

 

 

4,261,164

 

Deferred income taxes, net

 

 

 

 

 

1,237

 

Due to third-party payors, net of current portion

 

 

1,100,000

 

 

 

1,100,000

 

Total liabilities

 

 

5,492,535

 

 

 

5,362,401

 

 

 

 

 

 

 

 

 

 

Stockholder's equity

 

 

 

 

 

 

 

 

Capital stock

 

 

28,002

 

 

 

28,002

 

Retained earnings

 

 

18,288,984

 

 

 

19,939,877

 

Total Stockholder's equity

 

 

18,316,986

 

 

 

19,967,879

 

Total liabilities and Stockholder's equity

 

$

23,809,521

 

 

$

25,330,280

 

See accompanying notes to condensed consolidated financial statements.

 

1

 


 

ADCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

UNAUDITED

 

Three Months Ended

December 31,

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

Patient service revenue

$

12,202,155

 

 

$

12,233,151

 

Provision for bad debts

 

(337,738

)

 

 

(349,300

)

Net patient service revenue

 

11,864,417

 

 

 

11,883,851

 

Other operating revenue

 

81,293

 

 

 

152,739

 

Total net revenue

 

11,945,710

 

 

 

12,036,590

 

Operating expenses

 

 

 

 

 

 

 

Professional services

 

7,632,552

 

 

 

7,531,756

 

General services

 

1,219,251

 

 

 

1,280,734

 

Administrative services

 

1,912,382

 

 

 

1,725,541

 

Depreciation and amortization

 

204,977

 

 

 

269,220

 

Total operating expenses

 

10,969,162

 

 

 

10,807,251

 

Income from operations

 

976,548

 

 

 

1,229,339

 

Other income (expense)

 

 

 

 

 

 

 

Interest and dividend income

 

12,711

 

 

 

5,468

 

Interest expense

 

 

 

 

(14,067

)

Total other income (expense)

 

12,711

 

 

 

(8,599

)

Income before income taxes

 

989,259

 

 

 

1,220,740

 

Income tax expense

 

29,006

 

 

 

36,203

 

Net income

 

960,253

 

 

 

1,184,537

 

Retained earnings, beginning

 

19,939,877

 

 

 

15,972,410

 

Distributions to stockholder

 

(2,611,146

)

 

 

(1,677,900

)

Retained earnings, ending

$

18,288,984

 

 

$

15,479,047

 

See accompanying notes to condensed consolidated financial statements.


2

 


 

ADCARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Cash Flows provided by operating activities:

 

 

 

 

 

 

 

Net income

 

960,253

 

 

 

1,184,537

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

204,977

 

 

 

269,220

 

Provision for bad debts

 

337,738

 

 

 

349,300

 

Deferred income taxes

 

 

 

 

1

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

142,885

 

 

 

(371,440

)

Decrease in inventories

 

1

 

 

 

 

(Increase) decrease in prepaid expenses, deposits and other

 

(26,276

)

 

 

20,527

 

Decrease in deferred revenue

 

 

 

 

(3,805

)

Increase in accounts payable

 

182,715

 

 

 

136,936

 

Decrease in accrued and other liabilities

 

(100,764

)

 

 

(424,839

)

Increase in due to third-party payors

 

49,420

 

 

 

22,395

 

Net cash provided by operating activities

 

1,750,949

 

 

 

1,182,832

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(143,853

)

 

 

(101,533

)

Net cash used in investing activities

 

(143,853

)

 

 

(101,533

)

 

 

 

 

 

 

 

 

Cash flows used in financing activities:

 

 

 

 

 

 

 

Distributions

 

(2,611,146

)

 

 

(1,677,900

)

Net cash used in financing activities

 

(2,611,146

)

 

 

(1,677,900

)

Net decrease in cash and cash equivalents

 

(1,004,050

)

 

 

(596,601

)

Cash and cash equivalents, beginning of period

 

10,424,164

 

 

 

11,370,618

 

Cash and cash equivalents, end of period

$

9,420,114

 

 

$

10,774,017

 

See accompanying notes to condensed consolidated financial statements.

 

3

 


 

ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.

Nature of Operations

AdCare, Inc. and Subsidiaries (the “Company”), headquartered in Worcester, Massachusetts, provide effective treatment, intervention, prevention and education in the specialty field of behavioral services with particular emphasis on substance abuse.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of AdCare, Inc., and its wholly-owned subsidiaries: AdCare Hospital of Worcester, Inc.; AdCare Rhode Island, Inc.; Diversified Healthcare Strategies, Inc.; AdCare Criminal Justice Services, Inc. and its wholly-owned subsidiary, American Criminal Justice Solutions of Pennsylvania, Inc.; Green Hill Realty Corporation, Lincoln Catharine Realty Corporation, and Tower Hill Realty, Inc. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements are unaudited, with the exception of the September 30, 2017 balance sheet, which is consistent with the audited consolidated 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 September 30, 2017. 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 September 30, 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.

Revenue Recognition

Revenue is recognized as services are provided. Revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.

The Company follows accounting guidance that requires certain health care entities to present the provision for bad debts related to patient service revenue as a deduction from the patient service revenues in the statements of income and retained earnings rather than as an operating expense. The Company has evaluated the guidance and concluded that it recognizes significant amounts of patient service revenue (primarily co-payments and deductibles) at the time services are rendered that are not subject to an assessment as to the patient’s ability to pay. Accordingly, the Company presents the provision for bad debts net of revenue in the accompanying consolidated statements of income and retained earnings in accordance with accounting principles generally accepted in the United States.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the use of management’s estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and certain reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers cash on hand and short-term investments with original maturities of three months or less to be cash and cash equivalents.

4

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

Accounts receivable primarily consists of amounts due from third-party payors (governmental and non-governmental) and private pay clients and is recorded net of contractual allowances. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accounts receivable is reported net of an allowance for doubtful accounts, which is management’s best estimate of accounts receivable that could become uncollectible in the future. Accordingly, accounts receivable reported in the Company’s consolidated financial statements is recorded at the net amount expected to be received. The Company’s allowance for doubtful accounts is based on historical experience, but management also takes into consideration the age of accounts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible. The Company’s allowance for doubtful accounts was established primarily for uncollectible amounts due from patients for co-payments and deductibles.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Useful lives range from 15-39 years for buildings and improvements, 3-7 years for equipment and 5 years for motor vehicles. Expenditures representing additions or improvements are capitalized. Maintenance and repairs are charged to expense as incurred. Upon retirement or disposition, costs and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in income.

Inventories

Inventories, which consist of hospital related supplies, are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or net realizable value.

Income Taxes

AdCare, Inc. has elected to be treated as a Qualified Subchapter S Subsidiary of the AdCare Holding Trust, a Massachusetts Business Trust within the meaning of Section 1361 of the Internal Revenue Code and as a result, files a consolidated S Corporation Federal income tax return and certain state income tax returns with AdCare Holding Trust. Under these provisions, AdCare, Inc. does not pay Federal corporate income taxes and certain state income taxes on its taxable income. Instead, AdCare, Inc.’s taxable income or net operating loss is reported on the AdCare Holding Trust’s Federal income tax return and certain state income tax returns and flows through to its stockholders' individual Federal and certain state income tax returns. The Company has concluded it is a pass through entity and there are no uncertain tax positions that would require recognition in the Company’s consolidated financial statements. If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties in the accompanying consolidated statements of income and retained earnings. Generally, the Company’s tax returns remain subject to examination for a period of three years.

For states that do not recognize the Company’s Qualified Subchapter S Subsidiary election, deferred income taxes result from temporary differences arising from using accelerated depreciation methods for income tax purposes and the straight-line method of depreciation for financial statement purposes, and for recognizing bad debts under the direct write-off method for income tax purposes and under the allowance method for financial statement purposes. Temporary differences also arise from accruing various expenses for financial statement purposes that are not deductible until paid for income tax purposes.

Investments

Investments are stated at fair value based on quoted prices from a national securities exchange. Realized and unrealized gains or losses are recognized in the period in which the fluctuations occur.

5

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.

Recent Pronouncements

Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Under ASU 2015-14, Deferral of the Effective Date, the revenue recognition standard is effective for nonpublic business entities for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the provisions of this standard to determine the impact on the Company’s consolidated financial statements.

ASU 2015-17, Balance Sheet Classification of Deferred Taxes, requires that all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. However, an entity should not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions, consistent with the guidance under existing U.S. GAAP. Therefore, for many reporting entities, deferred income taxes will be presented in noncurrent assets and noncurrent liabilities. The ASU is effective for nonpublic business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of any interim or annual reporting period. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2016-02, Leases, applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. For leases with a lease term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. The ASU is effective for nonpublic business entities for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the provisions of this standard to determine the impact on the Company’s consolidated financial statements.

4.

Accounts Receivable, Net

 

December 31,

 

 

September 30,

 

 

2017

 

 

2017

 

Accounts receivable consists of:

 

 

 

 

 

 

 

Accounts receivable, patients, net of contractual allowances of $4,400,000 and $4,327,000, respectively, and allowance for doubtful accounts of approximately $616,000 and $665,000, respectively

$

4,044,416

 

 

$

4,506,514

 

Accounts receivable, other

 

27,619

 

 

 

46,144

 

Total Accounts Receivable, Net

$

4,072,035

 

 

$

4,552,658

 

6

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.

Property, Plant and Equipment

 

December 31,

 

 

September 30,

 

 

2017

 

 

2017

 

Land

$

2,073,795

 

 

$

2,073,795

 

Buildings and improvements

 

11,824,344

 

 

 

11,824,344

 

Equipment

 

3,644,885

 

 

 

3,501,032

 

Custodial assets

 

499,910

 

 

 

499,910

 

Motor vehicles

 

468,493

 

 

 

468,493

 

Total property, plant and equipment

 

18,511,427

 

 

 

18,367,574

 

Less: accumulated depreciation

 

(9,469,079

)

 

 

(9,264,102

)

Property, Plant and Equipment, Net

$

9,042,348

 

 

$

9,103,472

 

Custodial assets consist of assets acquired with funds provided by the Commonwealth of Massachusetts through a capital budget. The title to these assets remains with the state.

6.

Line of Credit

The Company, and certain subsidiaries as co-borrowers, had $1,500,000 of borrowings available under a demand line of credit agreement with a bank that was secured by substantially all assets of the Company. The line of credit was closed on February 26, 2018. No amounts were outstanding under the line of credit as of September 30, 2017 and 2016.

7.

Due to Third-Party Payors

Revenue received under reimbursement agreements is subject to audit and retroactive adjustments by third-party payors. The Company also qualifies for disproportionate share hospital (“DSH”) payments for services performed to certain Medicaid patients through the Centers for Medicare & Medicaid Services (“CMS”).

Amounts reflected in due to third party payors are as follows:

 

December 31,

 

 

September 30,

 

 

2017

 

 

2017

 

Due to third party payors, current portion

$

952,272

 

 

$

902,852

 

Due to third party payors, net of current portion

 

1,100,000

 

 

 

1,100,000

 

Total Due to Third Party Payors

$

2,052,272

 

 

$

2,002,852

 

8.

Retirement Plan

AdCare, Inc. maintains a defined contribution retirement (profit sharing) plan covering substantially all employees of the Company and its subsidiaries. Contributions, which are discretionary and determined by the Board of Directors, totaled $59,630 and $42,901 during the three months ended December 31, 2017 and 2016, respectively.

9.

Income Taxes

 

December 31,

 

 

2017

 

 

2016

 

State:

 

 

 

 

 

 

 

Current

$

29,006

 

 

$

36,202

 

Deferred

 

 

 

 

1

 

Total

$

29,006

 

 

$

36,203

 

10.

Operating Leases

AdCare Hospital of Worcester, Inc., AdCare, Inc., AdCare Rhode Island, Inc., and AdCare Criminal Justice Services, Inc. as lessees, lease various equipment and facilities under non-cancelable operating leases that expire at various intervals through November 2022.

7

 


ADCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Rent expense under leasing arrangements with unrelated parties having remaining terms in excess of one year was approximately $152,000 and $151,000 for the three months ended December 31, 2017 and 2016, respectively.

AdCare Rhode Island, Inc. subleased facilities to a tenant under a month to month lease agreement. The lease called for minimum monthly lease payments of $17,000 and service fees of $3,500. Rental and service fee income was approximately $21,000 and $62,000 for the three months ended December 31, 2017 and 2016, respectively and is presented in other operating revenue in the accompanying consolidated statements of income and retained earnings. The lease was terminated on October 31, 2017.

11.

Contingencies

Due to the nature of its operations, the Company may be exposed to various professional liability claims for which it carries insurance. At December 31, 2017, the Company is a defendant in unrelated claims by former employees and an applicant regarding employment practices. While it is not feasible to predict or determine the outcome of these matters, it is the opinion of management that the outcome will have no material adverse effect on the Company's financial position.

12.

Related Party Transactions

The Company makes premium payments for a $2.0 million life insurance policy on behalf of certain stockholders of the Parent. Premium payments were approximately $11,000 for the three months ended December 31, 2017 and 2016. The Company is not a beneficiary of the policy as proceeds will be paid directly to the trustees of the policy.  Upon death, proceeds received by the trustees will first be used to repay the Company for the premiums paid on the stockholders’ behalf which amount to approximately $320,000 as of December 31, 2017 and September 30, 2017.

13.

Concentrations

The Company maintains financial instruments, consisting primarily of cash and cash equivalents and accounts receivable, which potentially expose the Company to concentrations of credit risk. Cash and cash equivalents are held at local banks and the Company historically has not experienced any losses on its cash and cash equivalents. In the ordinary course of business, the Company has, at various times, had cash deposits with a bank which are in excess of federally insured limits of $250,000 for interest and non-interest bearing accounts.

The Company's accounts receivable are due from Medicare, Medicaid, commercial insurers, state government agencies and other payors. For the three months ended December 31, 2017 and December 31, 2016, approximately 61% and 64%, respectively, of the Company’s revenue was earned from two payors, respectively, that individually account for more than 10% of annual revenue. These two customers made up approximately 53% and 55% of accounts receivable as of December 31, 2017 and September 30, 2017, respectively.

14.

Sale of AdCare, Inc. and Subsidiaries

On March 1, 2018, the Company was acquired by a wholly-owned subsidiary of AAC Holdings, Inc. for approximately $83.9 million.

15.

Subsequent Events

AdCare, Inc. and Subsidiaries has evaluated all material subsequent events from December 31, 2017 through May 17, 2018, the date the condensed consolidated financial statements were available to be issued, and determined that there were no additional items requiring disclosure in these consolidated financial statements.