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Section 1: 10-Q (10-Q)

aac-10q_20180930.htm

E a

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 September 30, 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 every Interactive Data File required to be submitted 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 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

 

 

 

 

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 November 2, 2018, the registrant had 24,602,355 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 


AAC HOLDINGS, INC.

Form 10-Q

September 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

PART I

 

 

 

FINANCIAL INFORMATION

 

 

 

Item 1:

 

 

Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

4

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2018 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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

 

21

 

Item 3:

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

Item 4:

 

 

Controls and Procedures

 

41

 

 

 

PART II

 

 

 

OTHER INFORMATION

 

 

 

Item 1:

 

 

Legal Proceedings

 

42

 

Item 1A:

 

 

Risk Factors

 

42

 

Item 2:

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

Item 3:

 

 

Defaults Upon Senior Securities

 

43

 

Item 4:

 

 

Mine Safety Disclosures

 

43

 

Item 5:

 

 

Other Information

 

43

 

Item 6:

 

 

Exhibits

 

44

 

Signatures

 

 

 

 

2


PART 1. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

AAC HOLDINGS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

Unaudited

(Dollars in thousands, except share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client related revenue

$

74,477

 

 

$

77,948

 

 

$

233,693

 

 

$

224,859

 

Non-client related revenue

 

2,996

 

 

 

2,476

 

 

 

9,014

 

 

 

6,646

 

Total revenues

 

77,473

 

 

 

80,424

 

 

 

242,707

 

 

 

231,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

44,831

 

 

 

36,709

 

 

 

131,765

 

 

 

107,989

 

Client related services

 

8,594

 

 

 

6,598

 

 

 

24,734

 

 

 

19,622

 

Provision for doubtful accounts

 

 

 

 

9,682

 

 

 

366

 

 

 

25,765

 

Advertising and marketing

 

3,037

 

 

 

3,074

 

 

 

8,220

 

 

 

10,115

 

Professional fees

 

5,697

 

 

 

3,641

 

 

 

14,297

 

 

 

9,322

 

Other operating expenses

 

12,833

 

 

 

8,306

 

 

 

35,615

 

 

 

25,294

 

Rentals and leases

 

2,760

 

 

 

2,105

 

 

 

7,439

 

 

 

5,839

 

Litigation settlement

 

100

 

 

 

 

 

 

3,135

 

 

 

 

Depreciation and amortization

 

5,573

 

 

 

5,218

 

 

 

16,946

 

 

 

15,745

 

Acquisition-related expenses

 

1,058

 

 

 

370

 

 

 

1,363

 

 

 

595

 

Total operating expenses

 

84,483

 

 

 

75,703

 

 

 

243,880

 

 

 

220,286

 

(Loss) income from operations

 

(7,010

)

 

 

4,721

 

 

 

(1,173

)

 

 

11,219

 

Interest expense, net (change in fair value of interest rate

      swaps of $0, $0, $0 and ($108), respectively)

 

8,738

 

 

 

5,492

 

 

 

23,340

 

 

 

11,072

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

5,435

 

Other expense, net

 

732

 

 

 

49

 

 

 

643

 

 

 

77

 

Loss before income tax benefit

 

(16,480

)

 

 

(820

)

 

 

(25,156

)

 

 

(5,365

)

Income tax benefit

 

(3,324

)

 

 

(456

)

 

 

(4,902

)

 

 

(459

)

Net loss

 

(13,156

)

 

 

(364

)

 

 

(20,254

)

 

 

(4,906

)

Less: net loss attributable to noncontrolling interest

 

1,663

 

 

 

1,126

 

 

 

5,546

 

 

 

3,149

 

Net (loss) income attributable to AAC Holdings, Inc.

       common stockholders

$

(11,493

)

 

$

762

 

 

$

(14,708

)

 

$

(1,757

)

Basic (loss) earnings per common share

$

(0.47

)

 

$

0.03

 

 

$

(0.61

)

 

$

(0.08

)

Diluted (loss) earnings per common share

$

(0.47

)

 

$

0.03

 

 

$

(0.61

)

 

$

(0.08

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

24,205,159

 

 

 

23,331,414

 

 

 

24,039,550

 

 

 

23,246,353

 

Diluted

 

24,205,159

 

 

 

23,469,985

 

 

 

24,039,550

 

 

 

23,246,353

 

See accompanying notes to condensed consolidated financial statements.

3


 

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,259

 

 

$

13,818

 

Accounts receivable, net of allowances

 

 

94,583

 

 

 

94,096

 

Prepaid expenses and other current assets

 

 

5,547

 

 

 

4,022

 

Total current assets

 

 

105,389

 

 

 

111,936

 

Property and equipment, net

 

 

166,345

 

 

 

152,548

 

Goodwill

 

 

198,952

 

 

 

134,396

 

Intangible assets, net

 

 

12,561

 

 

 

8,829

 

Deferred tax assets, net

 

 

13,042

 

 

 

8,010

 

Other assets

 

 

10,679

 

 

 

12,556

 

Total assets

 

$

506,968

 

 

$

428,275

 

 

 

Liabilities and Stockholders’ Equity

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,722

 

 

$

4,579

 

Accrued and other current liabilities

 

 

31,607

 

 

 

27,661

 

Accrued litigation

 

 

 

 

 

23,607

 

Current portion of long-term debt

 

 

8,350

 

 

 

4,722

 

Total current liabilities

 

 

48,679

 

 

 

60,569

 

Long-term debt, net of current portion and deferred financing costs

 

 

297,143

 

 

 

196,451

 

Financing lease obligation, net of current portion

 

 

24,459

 

 

 

24,541

 

Other long-term liabilities

 

 

11,993

 

 

 

10,546

 

Total liabilities

 

 

382,274

 

 

 

292,107

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value:

   70,000,000 shares authorized, 24,621,653 and 23,872,436 shares issued

   and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

25

 

 

 

24

 

Additional paid-in capital

 

 

161,209

 

 

 

152,430

 

Retained deficit

 

 

(16,168

)

 

 

(1,460

)

Total stockholders’ equity

 

 

145,066

 

 

 

150,994

 

Noncontrolling interest

 

 

(20,372

)

 

 

(14,826

)

Total stockholders’ equity including noncontrolling interest

 

 

124,694

 

 

 

136,168

 

Total liabilities and stockholders’ equity

 

$

506,968

 

 

$

428,275

 

See accompanying notes to condensed consolidated financial statements.

4


 

AAC HOLDINGS, Inc.

CONDENSED Consolidated Statement of Stockholders’ Equity

Unaudited

(Dollars in thousands)

 

 

Nine Months Ended September 30, 2018

 

 

 

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

 

 

149,895

 

 

 

 

 

 

3,104

 

 

 

 

 

 

3,104

 

 

 

 

 

 

3,104

 

Common stock withheld for minimum statutory taxes

 

 

(11,125

)

 

 

 

 

 

(146

)

 

 

 

 

 

(146

)

 

 

 

 

 

(146

)

Effect of employee stock purchase plan

 

 

48,396

 

 

 

 

 

 

383

 

 

 

 

 

 

383

 

 

 

 

 

 

383

 

Common stock issued upon acquisition of AdCare, Inc.

 

 

562,051

 

 

 

1

 

 

 

5,438

 

 

 

 

 

 

5,439

 

 

 

 

 

 

5,439

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(14,708

)

 

 

(14,708

)

 

 

(5,546

)

 

 

(20,254

)

Balance at September 30, 2018

 

 

24,621,653

 

 

$

25

 

 

$

161,209

 

 

$

(16,168

)

 

$

145,066

 

 

$

(20,372

)

 

$

124,694

 

See accompanying notes to condensed consolidated financial statements.

5


 

 

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(Dollars in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(20,254

)

 

$

(4,906

)

Adjustments to reconcile net loss to net cash (used in) provided by

      operating activities:

 

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

366

 

 

 

25,765

 

Depreciation and amortization

 

 

16,946

 

 

 

15,745

 

Equity compensation

 

 

3,104

 

 

 

6,048

 

Loss on extinguishment of debt

 

 

 

 

 

5,435

 

Loss on disposal of property and equipment

 

 

1,000

 

 

 

 

Amortization of deferred financing costs

 

 

2,077

 

 

 

949

 

Deferred income tax benefit

 

 

(5,032

)

 

 

(981

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,503

 

 

 

(30,978

)

Prepaid expenses and other assets

 

 

(461

)

 

 

(703

)

Accounts payable

 

 

645

 

 

 

(3,423

)

Accrued and other current liabilities

 

 

2,207

 

 

 

1,171

 

Accrued litigation

 

 

(23,300

)

 

 

165

 

Other long-term liabilities

 

 

(559

)

 

 

(257

)

Net cash (used in) provided by operating activities

 

 

(19,758

)

 

 

14,030

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(15,458

)

 

 

(27,186

)

Acquisition of AdCare, Inc., net of cash acquired

 

 

(65,827

)

 

 

 

Net cash used in investing activities

 

 

(81,285

)

 

 

(27,186

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Payments on 2015 Credit Facility and Deerfield Facility

 

 

 

 

 

(211,094

)

Proceeds from 2015 Credit Facility and Deerfield Facility, net of

   deferred financing costs

 

 

 

 

 

18,000

 

Payments on 2017 Credit Facility

 

 

(5,172

)

 

 

(15,813

)

Proceeds from 2017 Credit Facility, net of deferred financing costs

 

 

99,286

 

 

 

211,494

 

Proceeds from financing lease obligation, net of deferred financing costs

 

 

 

 

 

24,617

 

Payments on capital leases and other

 

 

(563

)

 

 

(596

)

Payments on AdCare Note

 

 

(500

)

 

 

 

Payment of employee taxes for net share settlement

 

 

(567

)

 

 

(1,004

)

Net cash provided by financing activities

 

 

92,484

 

 

 

25,604

 

Net change in cash and cash equivalents

 

 

(8,559

)

 

 

12,448

 

Cash and cash equivalents, beginning of period

 

 

13,818

 

 

 

3,964

 

Cash and cash equivalents, end of period

 

$

5,259

 

 

$

16,412

 

 

 

 

 

 

 

 

 

 

Supplemental information on non-cash investing and financing transactions:

 

 

Accrued purchase of property and equipment

 

$

102

 

 

$

419

 

Accrued employee taxes for net share settlement

 

$

54

 

 

$

76

 

 

 

 

 

 

 

 

 

 

2018 Acquisition:

 

 

 

 

 

 

 

 

Purchase price, including contingent consideration

 

$

85,103

 

 

$

 

Buyer common stock issued

 

 

(5,439

)

 

 

 

Contingent consideration

 

 

(501

)

 

 

 

Promissory note issued

 

 

(9,636

)

 

 

 

Cash acquired

 

 

(2,700

)

 

 

 

Change in funds held on acquisition

 

 

(1,000

)

 

 

 

Cash paid for acquisition

 

$

65,827

 

 

$

 

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 inpatient substance abuse treatment facilities, standalone outpatient centers and sober living facilities that focus on delivering effective clinical care and treatment solutions.

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 September 30, 2018 and 2017. The Professional Groups are responsible for the supervision and delivery of medical services to the Company’s clients, and 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 September 30, 2018 and December 31, 2017 include assets of $1.6 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 $1.7 million and $1.1 million for the three months ended September 30, 2018 and 2017, respectively, and net loss of $5.5 and $3.1 million for the nine months ended September 30, 2018 and 2017, respectively.

The accompanying condensed consolidated financial statements are unaudited, with the exception of the December 31, 2017 balance sheet, which is derived from 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 United States Securities and Exchange Commission (the “SEC” or the “Commission”) 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.

7


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Change in Accounting Estimate

During the three months ended September 30, 2018 and effective as of July 1, 2018, the Company made a change in its accounting estimate of the collectability of accounts receivable, specifically relating to 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 (“partial payment accounts receivable”). Based on the limited number of claims that were closed through the Company’s historical appeals process, information with respect to the ultimate resolution of the appeals of these partial payment accounts receivable has been limited. As a result, initial assumptions of the ultimate collectability rates for partial payment accounts receivable were primarily based on industry and other data. During 2018, to enhance the Company’s own collection processes, the Company began using a third-party vendor to pursue collections on these partial payment accounts receivable. As of September 30, 2018, the Company is using this vendor exclusively for collection of the partial payment accounts receivable. As a result of utilizing the third-party vendor, the number of partial payment claims closed through the appeals process has increased allowing the Company to rely on its own collection history and additional information obtained from the third party vendor to estimate ultimate collectability. This recent information indicated that the Company’s current assumptions were different from its historical assumptions. The Company used this additional information to further refine its procedures to more precisely estimate the collectability of partial payment accounts receivable. This change in estimate resulted in a reduction in revenue of approximately $6.0 million, an increase in net loss of approximately $4.8 million, or $0.20 loss per basic and diluted share for the three and nine months ended September 30, 2018. The Company determined this change in assumptions and estimation procedures of the collectability of partial payment accounts receivable is a change in accounting estimate in accordance with Accounting Standards Codification (“ASC”) 250-10 “Accounting Changes and Error Corrections.”

Reclassifications

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

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.  In July 2018, the FASB issued amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of the standard, including practical expedients and updates to the standard, and assessing its existing lease portfolio to determine the impact of adoption on its condensed consolidated financial statements and related disclosures. The Company anticipates that the adoption of ASU 2016-02 will have an impact on its consolidated balance sheets, including an increase in both total assets and total liabilities.

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 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 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.

8


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The only activity that will be recorded as an operating expense from 2018 forward will be bad debt related to specific customers that experience significant adverse changes in creditworthiness, such as bankruptcies. The Company recorded $0.4 million of expense related to one of the Company’s digital outreach platform customers during the nine months ended September 30, 2018.

The initial application of Topic 606 had no impact to the beginning balances of the Company's consolidated financial statements as of January 1, 2018. In adopting Topic 606, the Company elected the practical expedients related to immaterial contract acquisition costs and insignificant financing components of the transaction price.

For the three and nine months ended September 30, 2018, the impact on the Company's Condensed Consolidated Statements of Operations was as follows (in thousands):

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

 

 

As Reported

 

 

Previous Accounting Guidance

 

 

Impact of Adopting Topic 606

 

 

As Reported

 

 

Previous Accounting Guidance

 

 

Impact of Adopting Topic 606

 

Client related revenue

 

$

74,477

 

 

$

81,626

 

 

$

(7,149

)

 

$

233,693

 

 

$

260,256

 

 

$

(26,563

)

Non-client related revenue

 

$

2,996

 

 

$

3,030

 

 

$

(34

)

 

$

9,014

 

 

$

9,444

 

 

$

(430

)

Provision for doubtful accounts

 

$

 

 

$

7,183

 

 

$

(7,183

)

 

$

366

 

 

$

27,359

 

 

$

(26,993

)

 

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 because the promise to deliver services is not separately identifiable from other promises in the contracts. The Company’s performance obligations are satisfied over time as clients simultaneously receive and consume the benefits provided. Therefore, the Company recognizes revenue in the same period the services are performed, and there are no remaining performance obligations at period-end.

Due to the nature of the industry, there are often more than two 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. 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.

The following tables summarize the composition of the Company’s client related revenue for inpatient treatment facility services, outpatient facility and sober living services, and client related diagnostic services. Inpatient treatment facility services include revenues from related professional services, and client related diagnostic services includes revenues from point of care services as well as laboratory services.

For the three months ended September 30, 2018 and 2017, on an as reported basis (in thousands):

 

Three Months Ended

September 30, 2018

 

 

Three Months Ended

September 30, 2017

 

 

Increase (Decrease)

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

58,464

 

 

 

78.5

 

 

$

64,237

 

 

 

82.4

 

 

$

(5,773

)

 

 

(9.0

)

Outpatient facility and sober living services

 

11,332

 

 

 

15.2

 

 

 

8,085

 

 

 

10.4

 

 

 

3,247

 

 

 

40.2

 

Client related diagnostic services

 

4,681

 

 

 

6.3

 

 

 

5,626

 

 

 

7.2

 

 

 

(945

)

 

 

(16.8

)

Total client related revenue

$

74,477

 

 

 

100.0

 

 

$

77,948

 

 

 

100.0

 

 

$

(3,471

)

 

 

(4.5

)


9


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three months ended September 30, 2018 and 2017, on a comparable accounting basis as if the Company had not adopted Topic 606 (in thousands):

 

Previous Accounting Guidance

 

 

As Reported

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30, 2018

 

 

Three Months Ended

September 30, 2017

 

 

Increase (Decrease)

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

59,933

 

 

 

73.4

 

 

$

64,237

 

 

 

82.4

 

 

$

(4,304

)

 

 

(6.7

)

Outpatient facility and sober living services

 

11,663

 

 

 

14.3

 

 

 

8,085

 

 

 

10.4

 

 

 

3,578

 

 

 

44.3

 

Client related diagnostic services

 

10,030

 

 

 

12.3

 

 

 

5,626

 

 

 

7.2

 

 

 

4,404

 

 

 

78.3

 

Total client related revenue

$

81,626

 

 

 

100.0

 

 

$

77,948

 

 

 

100.0

 

 

$

3,678

 

 

 

4.7

 

For the nine months ended September 30, 2018 and 2017, on an as reported basis (in thousands):

 

Nine Months Ended

September 30, 2018

 

 

Nine Months Ended

September 30, 2017

 

 

Increase (Decrease)

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

190,080

 

 

 

81.3

 

 

$

175,486

 

 

 

78.0

 

 

$

14,594

 

 

 

8.3

 

Outpatient facility and sober living services

 

28,772

 

 

 

12.3

 

 

 

20,038

 

 

 

8.9

 

 

 

8,734

 

 

 

43.6

 

Client related diagnostic services

 

14,841

 

 

 

6.4

 

 

 

29,335

 

 

 

13.1

 

 

 

(14,494

)

 

 

(49.4

)

Total client related revenue

$

233,693

 

 

 

100.0

 

 

$

224,859

 

 

 

100.0

 

 

$

8,834

 

 

 

3.9

 

 

For the nine months ended September 30, 2018 and 2017, on a comparable accounting basis as if the Company had not adopted Topic 606 (in thousands):

 

Previous Accounting Guidance

 

 

As Reported

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

September 30, 2018

 

 

Nine Months Ended

September 30, 2017

 

 

Increase (Decrease)

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

202,683

 

 

 

77.9

 

 

$

175,486

 

 

 

78.0

 

 

$

27,197

 

 

 

15.5

 

Outpatient facility and sober living services

 

30,689

 

 

 

11.8

 

 

 

20,038

 

 

 

8.9

 

 

 

10,651

 

 

 

53.2

 

Client related diagnostic services

 

26,884

 

 

 

10.3

 

 

 

29,335

 

 

 

13.1

 

 

 

(2,451

)

 

 

(8.4

)

Total client related revenue

$

260,256

 

 

 

100.0

 

 

$

224,859

 

 

 

100.0

 

 

$

35,397

 

 

 

15.7

 

 

Non-Client Related Revenue

Non-client related revenue consists of diagnostic laboratory services provided to clients of third-party addiction treatment providers, addiction care treatment services for individuals in the criminal justice system and services provided to third-party behavioral health providers who use the Company’s digital outreach platforms.

Revenue from diagnostic laboratory services provided to clients of third-party addiction treatment providers is recognized at the point in time when the order is completed. These contracts have a single performance obligation, and the transaction price is agreed upon between the Company and the third-party lab provider to services being rendered.

Revenue for addiction care treatment services for individuals in the criminal justice system is recognized as services are provided in accordance with contracts with certain Massachusetts state agencies.

Revenue from third-party behavioral health providers who use the Company’s digital outreach platforms is recognized over time as these 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 judgments in determining the transaction price as the price is listed in the contract and not subject to change.

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 $19.2 million and $17.5 million for the three months ended September 30, 2018 and 2017, respectively, and $62.4 and $54.2 million for the nine months ended September 30, 2018 and 2017, respectively.

10


AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.   Earnings (Loss) Per Share

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

The following table presents the components of the numerator and denominator used in the calculation of basic and diluted EPS for the three and nine months ended September 30, 2018 and 2017 (in thousands, except share data):

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to AAC Holdings, Inc. common stockholders

$

(11,493

)

 

$

762

 

 

$

(14,708

)

 

$

(1,757

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding – basic

 

24,205,159

 

 

 

23,331,414

 

 

 

24,039,550

 

 

 

23,246,353

 

Dilutive securities

 

 

 

 

138,571

 

 

 

 

 

 

 

Weighted-average common shares outstanding – diluted

 

24,205,159

 

 

 

23,469,985

 

 

 

24,039,550

 

 

 

23,246,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share

$

(0.47

)

 

$

0.03

 

 

$

(0.61

)

 

$

(0.08

)

Diluted (loss) earnings per common share

$

(0.47

)

 

$

0.03

 

 

$

(0.61

)

 

$

(0.08

)

 

For the three months ended September 30, 2018 and 2017, the Company had 87,801 and 138,571 potentially dilutive shares, respectively. For the nine months ended September 30, 2018 and 2017, the Company had 100,804 and 902,293 potentially dilutive shares, respectively. These dilutive shares are not included in the diluted EPS calculation above for the three months ended September 30, 2018 and for the nine months ended September 30, 2018 and 2017, 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”) (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 $85.1 million, including 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 $66.8 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 $0.5 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 $1.7 million, subject to achievement of a certain adjusted EBITDA target over the 12 months following the closing date of the transaction.

FASB ASC 805 requires that the fair value of a contingent consideration liability be updated at each reporting period until the contingency is resolved. The Company remeasured the fair value of the contingent consideration related to the AdCare Acquisition as of September 30, 2018 and determined that the fair value was $1.3 million. The increase in the fair value resulted in $0.9 million of acquisition related expense recognized during the three months ended September 30, 2018.

11


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 allocated to the fair value of the assets acquired and liabilities assumed on the acquisition date.

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

 

 

AdCare Acquisition

 

Cash and cash equivalents

 

$