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Section 1: 10-Q (10-Q)

aac-10q_20190331.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 March 31, 2019

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)

 

 

 

 

Title of class of stock

Common Stock, $0.001 par value

 

Trading Symbol

AAC

Name of exchange registered on

New York Stock Exchange

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, a 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 May 3, 2019, the registrant had 25,301,901 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


AAC HOLDINGS, INC.

Form 10-Q

March 31, 2019

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

PART I

 

 

 

FINANCIAL INFORMATION

 

 

 

Item 1:

 

 

Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

 

4

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2019 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

Item 2:

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

Item 3:

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

Item 4:

 

 

Controls and Procedures

 

31

 

 

 

PART II

 

 

 

OTHER INFORMATION

 

 

 

Item 1:

 

 

Legal Proceedings

 

32

 

Item 1A:

 

 

Risk Factors

 

32

 

Item 2:

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

Item 6:

 

 

Exhibits

 

33

 

SIGNATURES

2


 

PART 1. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

AAC HOLDINGS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

Unaudited

(Dollars in thousands, except share data)

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

Client related revenue

$

53,489

 

 

$

78,630

 

Non-client related revenue

 

1,881

 

 

 

2,557

 

Total revenues

 

55,370

 

 

 

81,187

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Salaries, wages and benefits

 

40,553

 

 

 

40,084

 

Client related services

 

6,041

 

 

 

7,747

 

Advertising and marketing

 

3,295

 

 

 

2,599

 

Professional fees

 

4,122

 

 

 

3,650

 

Other operating expenses

 

11,363

 

 

 

10,588

 

Rentals and leases

 

2,000

 

 

 

2,116

 

Litigation settlement

 

(1,238

)

 

 

2,791

 

Depreciation and amortization

 

4,344

 

 

 

5,464

 

Gain on sale

 

(1,010

)

 

 

 

Acquisition-related expenses

 

 

 

 

305

 

Total operating expenses

 

69,470

 

 

 

75,344

 

(Loss) income from operations

 

(14,100

)

 

 

5,843

 

Interest expense, net

 

10,260

 

 

 

6,709

 

Other (income) expense, net

 

(211

)

 

 

9

 

Loss before income tax benefit

 

(24,149

)

 

 

(875

)

Income tax benefit

 

(33

)

 

 

(38

)

Net loss

 

(24,116

)

 

 

(837

)

Less: net loss attributable to noncontrolling interest

 

2,097

 

 

 

1,893

 

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

       common stockholders

$

(22,019

)

 

$

1,056

 

Basic (loss) earnings per common share

$

(0.90

)

 

$

0.04

 

Diluted (loss) earnings per common share

$

(0.90

)

 

$

0.04

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

24,495,613

 

 

 

23,744,208

 

Diluted

 

24,495,613

 

 

 

23,781,604

 

See accompanying notes to condensed consolidated financial statements (unaudited).

3


 

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,869

 

 

$

5,409

 

Accounts receivable, net of allowances

 

 

45,684

 

 

 

47,860

 

Prepaid expenses and other current assets

 

 

2,518

 

 

 

10,695

 

Total current assets

 

 

66,071

 

 

 

63,964

 

Property and equipment, net

 

 

163,045

 

 

 

166,921

 

Right-of-use assets - operating, net

 

 

29,442

 

 

 

 

Goodwill

 

 

198,952

 

 

 

198,952

 

Intangible assets, net

 

 

10,834

 

 

 

12,063

 

Other assets

 

 

11,880

 

 

 

10,377

 

Total assets

 

$

480,224

 

 

$

452,277

 

 

 

Liabilities and Stockholders’ Equity

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,167

 

 

$

13,507

 

Accrued and other current liabilities

 

 

29,101

 

 

 

30,544

 

Accrued litigation

 

 

4,827

 

 

 

8,000

 

Current portion of lease liability - operating

 

 

5,076

 

 

 

 

Current portion of long-term debt

 

 

332,925

 

 

 

309,394

 

Total current liabilities

 

 

389,096

 

 

 

361,445

 

Deferred tax liabilities

 

 

1,137

 

 

 

1,227

 

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

 

 

9,039

 

 

 

9,764

 

Lease liability - operating, net of current portion

 

 

29,411

 

 

 

 

Financing lease obligation, net of current portion

 

 

24,384

 

 

 

24,421

 

Other long-term liabilities

 

 

8,499

 

 

 

13,147

 

Total liabilities

 

 

461,566

 

 

 

410,004

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value:

   70,000,000 shares authorized, 24,665,545 and 24,573,679 shares issued

   and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

25

 

 

 

25

 

Additional paid-in capital

 

 

162,463

 

 

 

161,962

 

Retained deficit

 

 

(119,593

)

 

 

(97,574

)

Total stockholders’ equity

 

 

42,895

 

 

 

64,413

 

Noncontrolling interest

 

 

(24,237

)

 

 

(22,140

)

Total stockholders’ equity including noncontrolling interest

 

 

18,658

 

 

 

42,273

 

Total liabilities and stockholders’ equity

 

$

480,224

 

 

$

452,277

 

See accompanying notes to condensed consolidated financial statements (unaudited).

4


 

AAC HOLDINGS, Inc.

CONDENSED Consolidated Statement of Stockholders’ Equity

Unaudited

(Dollars in thousands)

 

 

 

Three Months Ended March 31, 2019

 

 

 

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, 2018

 

 

24,573,679

 

 

$

25

 

 

$

161,962

 

 

$

(97,574

)

 

$

64,413

 

 

$

(22,140

)

 

$

42,273

 

Common stock granted and issued under stock incentive

     plan, net of forfeitures

 

 

(24,666

)

 

 

 

 

 

364

 

 

 

 

 

 

364

 

 

 

 

 

 

364

 

Effect of employee stock purchase plan

 

 

116,532

 

 

 

 

 

 

137

 

 

 

 

 

 

137

 

 

 

 

 

 

137

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(22,019

)

 

 

(22,019

)

 

 

(2,097

)

 

 

(24,116

)

Balance at March 31, 2019

 

 

24,665,545

 

 

$

25

 

 

$

162,463

 

 

$

(119,593

)

 

$

42,895

 

 

$

(24,237

)

 

$

18,658

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

5


 

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(Dollars in thousands)

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows used in operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,116

)

 

$

(837

)

Adjustments to reconcile net loss to net cash used in

      operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,344

 

 

 

5,464

 

Equity compensation

 

 

364

 

 

 

798

 

Loss on disposal of property and equipment

 

 

145

 

 

 

34

 

Amortization of deferred financing costs

 

 

1,243

 

 

 

637

 

Deferred income tax benefit

 

 

(90

)

 

 

436

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,176

 

 

 

(3,843

)

Prepaid expenses and other assets

 

 

7,808

 

 

 

1,485

 

Accounts payable

 

 

3,660

 

 

 

(4,739

)

Accrued and other current liabilities

 

 

4,819

 

 

 

4,141

 

Accrued litigation

 

 

(3,173

)

 

 

(22,300

)

Other liabilities

 

 

(6,763

)

 

 

(275

)

Net cash used in operating activities

 

 

(9,583

)

 

 

(18,999

)

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(913

)

 

 

(7,305

)

Acquisition of subsidiaries

 

 

 

 

 

(65,185

)

Sale of subsidiary

 

 

887

 

 

 

 

Net cash used in investing activities

 

 

(26

)

 

 

(72,490

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Payments on 2017 Credit Facility

 

 

(1,924

)

 

 

(1,724

)

Proceeds from 2019 Priming Facility, net of deferred financing costs

 

 

24,284

 

 

 

 

Proceeds from 2017 Credit Facility, net of deferred financing costs

 

 

250

 

 

 

94,432

 

Payments on finance leases and other

 

 

(291

)

 

 

(221

)

Payments on AdCare Note

 

 

(250

)

 

 

 

Payment of employee taxes for net share settlement

 

 

 

 

 

(475

)

Net cash provided by financing activities

 

 

22,069

 

 

 

92,012

 

Net change in cash and cash equivalents

 

 

12,460

 

 

 

523

 

Cash and cash equivalents, beginning of period

 

 

5,409

 

 

 

13,818

 

Cash and cash equivalents, end of period

 

$

17,869

 

 

$

14,341

 

 

 

 

 

 

 

 

 

 

Supplemental information on non-cash investing and financing transactions:

 

 

Cash and cash equivalents paid for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

9,705

 

 

$

 

Acquisition of equipment through leases

 

 

65

 

 

 

975

 

Accrued purchase of property and equipment

 

 

 

 

 

1,208

 

Accrued employee taxes for net share settlement

 

 

 

 

 

14

 

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 (unaudited).

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

Principles of Consolidation

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

 The Company consolidated seven professional groups (“Professional Groups”) that constituted VIEs as of March 31, 2019 and 2018. 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 March 31, 2019 and December 31, 2018 include assets of $1.7 million and $1.5 million, respectively, and liabilities of $0.6 million and $0.6 million, respectively, related to the VIEs. The accompanying condensed consolidated statements of operations include net loss attributable to noncontrolling interest of $2.1 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively.

The accompanying condensed consolidated financial statements are unaudited, with the exception of the December 31, 2018 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, 2018 included in the Company’s Annual Report filed with the United States Securities and Exchange Commission (the “SEC” or the “Commission”) on April 15, 2019. 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, 2019 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.

Going Concern

The Company incurred a loss from operations and had negative cash flows from operations for the year ended December 31, 2018 and the first quarter of 2019, which has contributed to limited liquidity. This resulted primarily from declines in patient census during the second half of 2018 and into the first quarter of 2019. The Company’s revenue is directly impacted by its ability to maintain census, which is dependent on a variety of factors, many of which are outside of the Company’s control, including its referral relationships, average length of stay of its clients, the extent to which third-party payors require preadmission authorization or utilization review controls, competition in the industry, the effectiveness of the Company’s multi-faceted sales and marketing strategy and the individual decisions of the Company’s clients to seek and commit to treatment. On March 8, 2019 the Company entered into an incremental senior credit facility for a principal loan of $30 million which originally matured on March 31, 2020 and was subsequently amended to mature on April 15, 2020.

7


 

The uncertainties associated with the factors described above raise substantial doubt about the Company's ability to continue as a going concern. In order for the Company to continue operations beyond the next twelve months and to be able to discharge its liabilities and commitments in the normal course of business, the Company must do some or all of the following: (i) improve operating results by increasing census while maintaining efficiency regarding operating expenses through the cost savings initiatives implemented in late 2018 and early 2019; (ii) execute strategic alternatives related to the Company’s real-estate portfolio which could include further sale leasebacks of individual facilities or larger portions of the company’s real estate portfolio (iii) sell additional non-core or non-essential assets; and/or (iv) obtain additional financing. There can be no assurance that the Company will be able to achieve any or all of the foregoing.

The consolidated financial statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that the Company will continue in operation for the next twelve months and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. It does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from its inability to continue as a going concern.

 

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 March 31, 2019 and 2018 (in thousands):

 

Three Months Ended

March 31, 2019

 

 

Three Months Ended

March 31, 2018

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

44,889

 

 

 

83.9

 

 

$

66,874

 

 

 

85.0

 

Outpatient facility and sober living services

 

6,454

 

 

 

12.1

 

 

 

8,946

 

 

 

11.4

 

Client related diagnostic services

 

2,146

 

 

 

4.0

 

 

 

2,810

 

 

 

3.6

 

Total client related revenue

$

53,489

 

 

 

100.0

 

 

$

78,630

 

 

 

100.0

 

 

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.

8


 

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 $16.4 million and $22.0 million for the three months ended March 31, 2019 and 2018, respectively.

5.   Earnings (Loss) Per Share

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

For the calculation of diluted EPS, net income (loss) attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities, including awards under stock-based payment arrangements, and outstanding convertible debt securities. Diluted EPS attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of 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 months ended March 31, 2019 and 2018 (in thousands, except share data):

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Numerator

 

 

 

 

 

 

 

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

$

(22,019

)

 

$

1,056

 

Denominator

 

 

 

 

 

 

 

Weighted-average common shares outstanding – basic

 

24,495,613

 

 

 

23,744,208

 

Dilutive securities

 

 

 

 

37,396

 

Weighted-average common shares outstanding – diluted

 

24,495,613

 

 

 

23,781,604

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share

$

(0.90

)

 

$

0.04

 

Diluted (loss) earnings per common share

$

(0.90

)

 

$

0.04

 

 

For the three months ended March 31, 2019 and 2018, the Company had 27,396 and 37,396 potentially dilutive shares, respectively. These dilutive shares are not included in the diluted EPS calculation above for the three months ended March 31, 2019, because to do so would be anti-dilutive for the period 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.

9


 

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

 

$

2,700

 

Accounts receivable

 

 

4,357

 

Prepaid expenses and other assets

 

 

996

 

Property and equipment

 

 

15,309

 

Goodwill

 

 

64,556

 

Intangible assets

 

 

5,120

 

Total assets acquired

 

 

93,038

 

Accrued and other current liabilities

 

 

5,931

 

Long-term liabilities

 

 

2,004

 

Net assets acquired

 

$

85,103

 

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

7.   Accounts Receivable

For the three months ended March 31, 2019 and 2018, no payor accounted for more than 10% of revenue reimbursements.

As of March 31, 2019, substantially all accounts receivable aged greater than 360 days were fully reserved in the Company’s condensed consolidated financial statements.

Approximately $0.9 million and $2.2 million of accounts receivable, as of March 31, 2019 and December 31, 2018, respectively, includes accounts where the Company has received a partial payment from a commercial insurance company and the Company is continuing to pursue additional collections for the balance that the Company estimates remains outstanding. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible.

8.   Property and Equipment, Net

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

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Land

 

$

19,364

 

 

$

19,364

 

Buildings and improvements

 

 

162,184

 

 

 

161,723

 

Equipment and software

 

 

30,717

 

 

 

35,059

 

Construction in progress

 

 

16,236

 

 

 

16,413

 

Total property and equipment

 

 

228,501

 

 

 

232,559

 

Less accumulated depreciation

 

 

(65,456

)

 

 

(65,638

)

Property and equipment, net

 

$

163,045

 

 

$

166,921

 

For the three months ended March 31, 2019 and 2018, depreciation expense was $3.6 million and $5.1 million, respectively.

9.   Leases

On January 1, 2019, the Company adopted the cumulative accounting standard updates issued by the FASB that amend the accounting for leases under ASC 842. These changes to the lease accounting model require operating leases be recorded on the balance sheet through recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset. The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded for the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. When able, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not determinable, the Company uses its incremental borrowing rate. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.

A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company elected the transition requirements in accordance with Accounting Standards Update (“ASU”) 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition guidance elected by the Company 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 utilized available practical expedients, including the package of practical expedients not to reassess whether a contract is or contains a

10


 

lease, the lease classification and initial direct costs, as well as the expedient forgoing the separation of lease and non-lease components.

Total right-of-use assets and related operating lease obligations of $32.9 million and $38.0 million, respectively were recorded on the consolidated balance sheet on adoption, with no material impact to our Consolidated Statements of Operations.

The Company makes use of operating leases for property and equipment, and finance leases for equipment and vehicles. The Company’s leases have a remaining life ranging from 0.5 years to 11 years, some of which contain an option to extend at the discretion of the Company.

The Company elected the transition provision of Topic 842 allowing entities to not restate comparative periods for the effects of the application of the new standard. The Topic 842 disclosures below are for the three months ended March 31, 2019.

Components of lease expense are as follows (in thousands):

 

 

March 31, 2019

 

 

 

 

 

 

Operating lease cost

 

$

2,032

 

 

 

 

 

 

Finance lease cost

 

 

 

 

     Amortization of ROU assets

 

 

263

 

     Interest on lease liabilities

 

 

33

 

Total finance lease cost

 

$

296

 

 

 

 

 

 

Total lease cost

 

$

2,328

 

Supplemental balance sheet information related to leases are as follows (in thousands):

Component of Lease Balances

 

Classification

 

March 31, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

     Operating lease assets

 

Right-of-use asset - operating, net

 

$

29,442

 

     Finance lease assets

 

Other assets

 

 

1,064

 

         Accumulated Amortization ROU asset

 

Other assets

 

 

(263

)

Total leased assets

 

 

 

$

30,243

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

     Operating lease liabilities:

 

 

 

 

 

 

         current portion

 

Current portion of lease liability - operating

 

$

5,076

 

         long-term portion

 

Lease liability - operating, net of current portion

 

 

29,411

 

     Total Operating lease liabilities

 

 

 

 

34,487

 

     Finance lease liabilities:

 

 

 

 

 

 

         current portion

 

Accrued and other current liabilities

 

$

569

 

         long-term portion

 

Other long-term liabilities

 

 

270

 

     Total Finance lease liabilities

 

 

 

 

839

 

 

 

 

 

 

 

 

Total lease liabilities

 

 

 

$

35,326

 

 

 

 

 

 

 

 

Weighted average remaining lease term

 

 

 

 

 

 

     Operating leases

 

 

 

8 years

 

     Finance leases

 

 

 

2 years

 

Weighted average discount rate

 

 

 

 

 

 

     Operating leases

 

 

 

 

9.9

%

     Finance leases

 

 

 

 

20.9

%

11


 

Supplemental cash flow information related to leases are as follows (in thousands):

 

 

March 31, 2019

 

Cash used in operating activities

 

 

 

 

     Operating leases

 

$

1,992

 

     Finance leases

 

 

33

 

 

 

 

 

 

Cash used in financing activities

 

 

 

 

     Finance leases

 

$

238

 

 

 

 

 

 

Right-of-use assets recognized

     in exchange for new lease obligations

 

 

 

 

     Operating leases

 

$

 

     Finance leases

 

 

65

 

Maturities of lease liabilities are as follows (in thousands):

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Finance

 

 

Operating

 

 

Capital

 

 

Operating

 

2019

 

 

478

 

 

 

3,949

 

 

 

601

 

 

 

5,144

 

2020

 

 

231

 

 

 

4,158

 

 

 

200

 

 

 

4,158

 

2021

 

 

80

 

 

 

3,617

 

 

 

60

 

 

 

3,617

 

2022

 

 

26

 

 

 

3,768

 

 

 

12

 

 

 

3,768

 

2023

 

 

23

 

 

 

3,692

 

 

 

8

 

 

 

3,692

 

Thereafter

 

 

1

 

 

 

15,303

 

 

 

 

 

 

15,302

 

Total

 

$

839

 

 

$

34,487

 

 

$

881

 

 

$

35,681

 

 

10.   Goodwill and Intangible Assets

The Company has only one operating segment, substance use and behavioral healthcare treatment services, for segment reporting purposes. The substance abuse and behavioral healthcare treatment services operating segment represents one reporting unit for purposes of the Company’s goodwill impairment test. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is recorded. The Company has no intangible assets with indefinite useful lives other than goodwill. The Company performed its most recent goodwill impairment testing as of December 31, 2018 and did not incur an impairment charge.

The Company’s goodwill balance as of March 31, 2019 and December 31, 2018 was $199.0 million. The increase in goodwill during the three months ended March 31, 2018 is due to the AdCare Acquisition as shown below and discussed in Note 6. Acquisition (in thousands):

 

Balance at December 31, 2017

 

$

134,396

 

AdCare Acquisition

 

$

64,556

 

Balance at December 31, 2018

 

$

198,952

 

2019 Activity

 

 

 

Balance at March 31, 2019

 

$

198,952

 

 

 

 

 

 

 

 

 

12


 

Other identifiable intangible assets and related accumulated amortization consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

Gross Carrying Value

 

 

Accumulated Amortization

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Trademarks and trade names

 

$

7,552

 

 

$

8,422

 

 

$

2,726

 

 

$

2,777

 

Non-compete agreements

 

 

1,777

 

 

 

2,107

 

 

 

1,445

 

 

 

1,583

 

Marketing intangibles

 

 

5,651

 

 

 

5,651

 

 

 

2,191

 

 

 

2,050

 

Leasehold interests

 

 

1,498

 

 

 

1,498

 

 

 

625

 

 

 

587

 

Service contracts

 

 

950

 

 

 

950

 

 

 

103

 

 

 

79

 

Other

 

 

601

 

 

 

601

 

 

 

105

 

 

 

90

 

 

 

$

18,029

 

 

$

19,229

 

 

$

7,195

 

 

$

7,166

 

Amortization expense for the three months ended March 31, 2019 and 2018 was $0.5 million and $0.4 million, respectively.

All intangible assets are amortized using the straight-line method. The following table presents amortization expense expected to be recognized subsequent to March 31, 2019 (in thousands):

Fiscal Year Ended

 

Expected Amortization Expense

 

2019

 

 

1,351

 

2020

 

 

1,798

 

2021

 

 

1,652

 

2022

 

 

1,532

 

2023

 

 

1,298

 

Thereafter

 

 

3,203

 

Total

 

$

10,834

 

 

11.   Debt

In connection with the 2019 Senior Credit Facility further described below, on March 8, 2019, the Company entered into the Amendments to the 2017 Credit Facility together with the required lenders party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other loan parties party thereto, amending that certain Credit Agreement (the “2017 Credit Facility”), dated as of June 30, 2017, by and among the Company, Credit Suisse AG, as administrative agent and collateral agent, and the lenders party thereto.

The 2017 Credit Facility requires the maintenance of a certain coverage ratio in order for the Company to be in compliance with the agreement. As of December 31, 2018, the Company would have been in violation of this covenant absent the amendment. For the aforementioned factors, and in accordance with ASC 470-10-55, due to the uncertainties noted under Going Concern in Note 2 – Basis of Presentation, the Company has classified its obligations related to the 2017 Credit Facility as current liabilities as of March 31, 2019. This reclassification has no impact on the scheduled maturities or the timing of payments related to the debt obligations.

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

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Senior secured loans

 

$

346,159

 

 

$

317,479

 

Subordinated debt

 

 

8,634

 

 

 

8,884

 

Unamortized deferred financing costs

 

 

(12,829

)

 

 

(8,085

)

Capital lease obligations

 

 

 

 

 

880

 

Total debt

 

 

341,964

 

 

 

319,158

 

Less current portion of long-term debt

 

 

(332,925

)

 

 

(309,394

)

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

 

$

9,039

 

 

$

9,764

 

2019 Senior Credit Facility

On March 8, 2019, the Company entered into that certain Credit Agreement (the “2019 Senior Credit Facility”) with Credit Suisse AG, as administrative agent and collateral agent, and the lenders party thereto. The 2019 Senior Credit Facility makes available to the Company a term loan in the principal amount of $30.0 million. The 2019 Senior Credit Facility will mature on April 15, 2020.  Net proceeds from funding of the 2019 Senior Credit Facility were approximately $23 million after the payment of fees, costs and other expenses.

13


 

The 2019 Senior Credit Facility is guaranteed by the Company’s wholly-owned subsidiary, American Addiction Centers, Inc., and certain of its other subsidiaries. The obligations are secured by a first priority lien (senior to liens granted in connection with the 2017 Credit Facility) on substantially all of the Company’s and each subsidiary guarantor’s assets.

The 2019 Senior Credit Facility bears interest at a rate per annum equal to LIBOR (with a 1.0% floor) plus 11.00% per annum.  In the event of any repayment or prepayment of the 2019 Senior Credit Facility or any acceleration of the 2019 Senior Credit Facility after an event of default, the Company must make a payment equal to 1.00% of the then outstanding principal amount of the 2019 Senior Credit Facility (the “Exit Payment”) if such event occurs on or prior to the date that is nine months after the closing date of the 2019 Senior Credit Facility (the “2019 Senior Credit Facility Closing Date”).  The Exit Payment will be increased by an additional 1.0% at the end of each 30-day period after the nine-month anniversary of the 2019 Senior Credit Facility Closing Date until the 2019 Senior Credit Facility matures.

The terms of the 2019 Senior Credit Facility contain certain financial covenants, including, a maximum Senior Secured Leverage Ratio of (i) 7.75:1.00 as of the last day of the fiscal quarter ending June 30, 2019, (ii) 6.50:1.00 as of the last day of the fiscal quarter ending September 30, 2019, (iii) 6.25:1.00 as of the last day of the fiscal quarter ending December 31, 2019, (iv) 5.75:1.00 as of the last day of the fiscal quarter ending March 31, 2020, (v) 5.50:1.00 as of the last day of the fiscal quarter ending June 30, 2020, (vi) 5.25:1.00 as of the last day of the fiscal quarters ending September 30, 2020 and December 31, 2020, (vii) 5.00:1.00 as of the last day of the fiscal quarters ending  March 31 and June 30, 2021 and (viii) 4.75:1.00 as of the last day of each fiscal quarter ending on and after December 31, 2020.  The 2019 Senior Credit Facility requires the Company to periodically report to lenders with respect to, and to comply with, the Company’s operating budget.  The Company is also required to (i) maintain no less than $5.0 million at any time of cash, cash equivalents and undrawn revolving loans under the 2017 Credit Facility (“Available Liquidity”) and (ii) to maintain no less than $7.5 million of Available Liquidity for any calendar week.

Amendments to the 2017 Credit Facility

In connection with the 2019 Senior Credit Facility, on March 8, 2019, the Company entered into the Amendment to the 2017 Credit Facility together with the required lenders party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other loan parties party thereto, amending that certain Credit Agreement, dated as of June 30, 2017, by and among the Company, Credit Suisse AG, as administrative agent and collateral agent, and the lenders party thereto.

The Amendment to the 2017 Credit Facility increased the interest rate on the term loans outstanding under the 2017 Credit Facility (the “2017 Term Loans”) by, at the Company’s option, either (i) 2.00% per annum (which shall be reduced to 1.00% per annum if the Senior Secured Leverage Ratio Condition, as defined in the Amendment to the 2017 Credit Facility is satisfied), payable in cash or (ii) 4.00% per annum, payable-in-kind. In addition, the Amendment to the 2017 Credit Facility increased the commitment fee for the undrawn portion of the revolving credit facility under the 2017 Credit Facility from 0.50% to 1.00% per annum.

If the Company has repaid all indebtedness under the 2019 Senior Credit Facility, the Amendments to the 2017 Credit Facility requires the Company to use net cash proceeds of certain asset sales and other dispositions of property to prepay outstanding term and revolving credit loans.  If the 2017 Term Loans are prepaid at any time, the Amendment to the 2017 Credit Facility requires the payment of (i) a 2.00% premium if paid on or prior to the first anniversary of the closing of the Amendment to the 2017 Credit Facility and (ii) a 1.00% premium if paid after the first anniversary but before the second anniversary of the closing of the Amendment to the 2017 Credit Facility.

The Amendment to the 2017 Credit Facility amended financial covenants with respect to the Senior Secured Leverage Ratio (as defined therein) and budgeting and lender reporting covenants that mirror those contained in the 2019 Senior Credit Facility. It also restricts certain Company actions, including certain acquisitions and joint venture arrangements.

On March 1, 2018, in conjunction with the AdCare Acquisition, we secured a $65.0 million incremental term loan commitment under the 2017 Credit Facility. In connection with the incremental term loan, we incurred $2.6 million in deferred financing costs related to underwriting and other professional fees. 

2017 Credit Facility

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

The 2017 Term Loan matures on June 30, 2023 and requires scheduled quarterly principal repayments in an amount equal to $1.7 million for September 30, 2017, through June 30, 2019, $3.4 million for September 30, 2019, through March 31, 2023, with the remaining principal balance of the term loan due on the maturity date of June 30, 2023. The 2017 Term Loan was fully drawn on June 30, 2017.

14


 

The 2017 Revolver matures on June 30, 2022. As of December 31, 2018, $52.0 million was outstanding on the 2017 Revolver.

The 2017 Credit Facility also includes an incremental facility providing for the Company to incur Additional Term Loans in an aggregate principal amount of up to $25.0 million (plus such additional amounts, so long as, after giving pro forma effect to the incurrence of such additional borrowings, the Company’s Senior Secured Leverage Ratio (as defined in the 2017 Credit Facility) would be less than 3.90:1.00) (each, an “Incremental Term Loan”) and/or Additional Revolving Commitments in an aggregate principal amount of up to $15.0 million (the “Incremental Revolver”), each subject to the satisfaction of certain conditions contained in the 2017 Credit Facility, including obtaining additional commitments from existing or additional lenders. On September 25, 2017, the Company obtained its Incremental Revolver from certain incremental revolving credit lenders thereby increasing the 2017 Revolver pursuant to the 2017 Credit Facility from $40.0 million to $55.0 million. The lenders under the 2017 Credit Facility are not under any obligation to provide any Incremental Term Loans.

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

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

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

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

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

During the quarter ended June 30, 2017, the Company incurred approximately $12.9 million in debt issuance costs related to underwriting and other professional fees, of which $7.6 million related to the 2017 Term Loan and $5.3 million related to the 2017 Revolver.

On October 6, 2017, in conjunction with the Company’s pending acquisition of AdCare, Inc., the Company secured a $65.0 million incremental term loan commitment in conjunction with the 2017 Credit Facility, subject to customary closing conditions and regulatory provisions. In connection with the financing, the Company committed to a ticking fee that commenced on October 17, 2017, at a rate of LIBOR plus 3.375%, which increased to LIBOR plus 6.75% from November 2017, until the closing date of the acquisition.

As of March 31, 2019, the Company had fully drawn on the 2017 Revolver less $2.9 million of outstanding letters of credit.

15


 

Subordinated Note

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

12.   Financing Lease Obligation

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

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

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

Due to the nature of the agreement, the transaction did not qualify for sale-leaseback accounting under GAAP. Therefore, the Sale-Leaseback Facilities remain on the Company’s balance sheets and continue to be depreciated over their remaining useful lives. The Company accounted for the $25.0 million of proceeds, less $0.4 million of transaction costs, as a financing obligation, of which $0.1 million was classified as a short-term liability. On a monthly basis, a portion of the payment is allocated to principal, which reduces the obligation balance, and interest, computed based on the Company’s incremental borrowing rate at the time of the transaction.

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

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Financing lease obligation: Sale-Leaseback facilities

 

$

24,516

 

 

$

24,542

 

Less current portion (included in accrued and other current liabilities)

 

 

(132

)

 

 

(121

)

Total Financing lease obligation, net of current portion

 

$

24,384