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Section 1: 10-Q (10-Q)

aac-10q_20190930.htm

 

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, 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

AACH

Name of exchange registered on

OTC

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 8, 2019, the registrant had 25,157,712 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


 

AAC HOLDINGS, INC.

Form 10-Q

September 30, 2019

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, 2019 and 2018 (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018

 

4

 

 

 

Condensed Consolidated Statement of Stockholders’ (Deficit) Equity for the nine months ended September 30, 2019 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

Item 2:

 

 

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

 

23

 

Item 3:

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

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

 

42

 

Item 3:

 

 

Defaults Upon Senior Securities

 

42

 

Item 6:

 

 

Exhibits

 

43

 

Signatures

 

44

 

 

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 ENDEDS SEPTEMBER 30, 2019 AND 2018

Unaudited

(Dollars in thousands, except share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client related revenue

$

58,165

 

 

$

66,107

 

 

$

172,249

 

 

$

229,357

 

Non-client related revenue

 

690

 

 

 

2,927

 

 

 

4,700

 

 

 

8,958

 

Total revenues

 

58,855

 

 

 

69,034

 

 

 

176,949

 

 

 

238,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

36,274

 

 

 

44,831

 

 

 

115,755

 

 

 

131,765

 

Client related services

 

6,102

 

 

 

8,594

 

 

 

18,118

 

 

 

24,734

 

Provision for doubtful accounts

 

 

 

 

 

 

 

 

 

 

366

 

Advertising and marketing

 

1,621

 

 

 

3,037

 

 

 

7,641

 

 

 

8,220

 

Professional fees

 

4,517

 

 

 

5,697

 

 

 

14,196

 

 

 

14,297

 

Other operating expenses

 

9,162

 

 

 

12,833

 

 

 

30,785

 

 

 

35,615

 

Rentals and leases

 

2,011

 

 

 

2,760

 

 

 

6,105

 

 

 

7,439

 

Litigation settlement

 

(2,083

)

 

 

100

 

 

 

(3,321

)

 

 

3,135

 

Depreciation and amortization

 

3,507

 

 

 

5,573

 

 

 

11,423

 

 

 

16,946

 

Gain on sale

 

 

 

 

 

 

 

(1,010

)

 

 

 

Acquisition-related expenses

 

 

 

 

111

 

 

 

 

 

 

592

 

Total operating expenses

 

61,111

 

 

 

83,536

 

 

 

199,692

 

 

 

243,109

 

Loss from operations

 

(2,256

)

 

 

(14,502

)

 

 

(22,743

)

 

 

(4,794

)

Interest expense, net

 

14,274

 

 

 

8,738

 

 

 

37,116

 

 

 

23,340

 

Loss on contingent consideration

 

 

 

 

947

 

 

 

 

 

 

771

 

Other (income) expense, net

 

(770

)

 

 

732

 

 

 

(1,213

)

 

 

643

 

Loss before income tax expense (benefit)

 

(15,760

)

 

 

(24,919

)

 

 

(58,646

)

 

 

(29,548

)

Income tax expense (benefit)

 

298

 

 

 

(1,075

)

 

 

588

 

 

 

(1,275

)

Net loss

 

(16,058

)

 

 

(23,844

)

 

 

(59,234

)

 

 

(28,273

)

Less: net loss attributable to noncontrolling interest

 

2,985

 

 

 

1,663

 

 

 

7,770

 

 

 

5,546

 

Net loss attributable to AAC Holdings, Inc.

       common stockholders

$

(13,073

)

 

$

(22,181

)

 

$

(51,464

)

 

$

(22,727

)

Basic loss per common share

$

(0.52

)

 

$

(0.92

)

 

$

(2.08

)

 

$

(0.95

)

Diluted loss per common share

$

(0.52

)

 

$

(0.92

)

 

$

(2.08

)

 

$

(0.95

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

24,938,894

 

 

 

24,205,159

 

 

 

24,728,135

 

 

 

24,039,550

 

Diluted

 

24,938,894

 

 

 

24,205,159

 

 

 

24,728,135

 

 

 

24,039,550

 

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,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,521

 

 

$

5,409

 

Accounts receivable, net of allowances

 

 

52,153

 

 

 

47,860

 

Prepaid expenses and other current assets

 

 

5,167

 

 

 

10,695

 

Total current assets

 

 

58,841

 

 

 

63,964

 

Property and equipment, net

 

 

158,467

 

 

 

166,921

 

Right-of-use assets - operating, net

 

 

27,186

 

 

 

 

Goodwill

 

 

198,952

 

 

 

198,952

 

Intangible assets, net

 

 

9,933

 

 

 

12,063

 

Other assets

 

 

10,975

 

 

 

10,377

 

Total assets

 

$

464,354

 

 

$

452,277

 

 

 

Liabilities and Stockholders’ Equity

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

24,270

 

 

$

13,507

 

Accrued and other current liabilities

 

 

40,771

 

 

 

30,423

 

Accrued litigation

 

 

3,416

 

 

 

8,000

 

Current portion of long-term debt

 

 

338,014

 

 

 

309,394

 

Current portion of lease liability - operating

 

 

4,921

 

 

 

 

Current portion of financing lease obligation

 

 

24,457

 

 

 

121

 

Total current liabilities

 

 

435,849

 

 

 

361,445

 

Deferred tax liabilities

 

 

1,643

 

 

 

1,227

 

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

 

 

7,134

 

 

 

9,764

 

Lease liability - operating, net of current portion

 

 

27,393

 

 

 

 

Financing lease obligation, net of current portion

 

 

 

 

 

24,421

 

Other long-term liabilities

 

 

7,737

 

 

 

13,147

 

Total liabilities

 

 

479,756

 

 

 

410,004

 

 

 

 

 

 

 

 

 

 

Stockholders’ (Deficit) equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value:

   70,000,000 shares authorized, 25,157,712 and 24,573,679 shares issued

   and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

25

 

 

 

25

 

Additional paid-in capital

 

 

163,521

 

 

 

161,962

 

Accumulated deficit

 

 

(149,038

)

 

 

(97,574

)

Total stockholders’ equity

 

 

14,508

 

 

 

64,413

 

Noncontrolling interest

 

 

(29,910

)

 

 

(22,140

)

Total stockholders’ (deficit) equity including noncontrolling interest

 

 

(15,402

)

 

 

42,273

 

Total liabilities and stockholders’ (deficit) equity

 

$

464,354

 

 

$

452,277

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

AAC HOLDINGS, Inc.

CONDENSED Consolidated Statement of Stockholders’ (Deficit) Equity

Unaudited

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAC Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Shares

Outstanding

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity of

AAC Holdings, Inc.

 

 

Non-

Controlling

Interest

 

 

Total

Stockholders'

(Deficit)

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

 

 

341,750

 

 

 

 

 

 

1,329

 

 

 

 

 

 

1,329

 

 

 

 

 

 

1,329

 

Effect of employee stock purchase plan

 

 

242,283

 

 

 

 

 

 

230

 

 

 

 

 

 

230

 

 

 

 

 

 

230

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(51,464

)

 

 

(51,464

)

 

 

(7,770

)

 

 

(59,234

)

Balance at September 30, 2019

 

 

25,157,712

 

 

$

25

 

 

$

163,521

 

 

$

(149,038

)

 

$

14,508

 

 

$

(29,910

)

 

$

(15,402

)

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,

 

 

 

2019

 

 

2018

 

Cash flows used in operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(59,234

)

 

$

(28,273

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

 

 

 

366

 

Depreciation and amortization

 

 

11,423

 

 

 

16,946

 

Equity compensation

 

 

1,329

 

 

 

3,104

 

Loss on contingent consideration

 

 

 

 

 

771

 

Loss on disposal of property and equipment

 

 

617

 

 

 

1,000

 

Amortization of deferred financing costs

 

 

3,027

 

 

 

2,077

 

Deferred income taxes

 

 

416

 

 

 

(1,405

)

Non-cash interest expense

 

 

2,695

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,293

)

 

 

7,895

 

Prepaid expenses and other assets

 

 

7,433

 

 

 

(461

)

Accounts payable

 

 

10,763

 

 

 

645

 

Accrued and other current liabilities

 

 

16,725

 

 

 

1,436

 

Accrued litigation

 

 

(4,584

)

 

 

(23,300

)

Other liabilities

 

 

(9,390

)

 

 

(559

)

Net cash used in operating activities

 

 

(23,073

)

 

 

(19,758

)

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,640

)

 

 

(15,458

)

Acquisition of subsidiaries

 

 

 

 

 

(65,827

)

Sale of subsidiary

 

 

887

 

 

 

 

Net cash used in investing activities

 

 

(1,753

)

 

 

(81,285

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Payments on 2017 Credit Facility

 

 

(3,648

)

 

 

(5,172

)

Proceeds from 2019 Senior Credit Facility, net of deferred financing costs

 

 

24,544

 

 

 

 

Proceeds from 2017 Credit Facility, net of deferred financing costs

 

 

1,461

 

 

 

99,286

 

Payments on finance leases and other

 

 

(669

)

 

 

(563

)

Payments on AdCare Note

 

 

(750

)

 

 

(500

)

Payment of employee taxes for net share settlement

 

 

 

 

 

(567

)

Net cash provided by financing activities

 

 

20,938

 

 

 

92,484

 

Net change in cash and cash equivalents

 

 

(3,888

)

 

 

(8,559

)

Cash and cash equivalents, beginning of period

 

 

5,409

 

 

 

13,818

 

Cash and cash equivalents, end of period

 

$

1,521

 

 

$

5,259

 

 

 

 

 

 

 

 

 

 

Supplemental information on non-cash investing and financing transactions:

 

 

Cash and cash equivalents paid for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

19,757

 

 

$

 

Acquisition of equipment through leases

 

 

65

 

 

 

 

Accrued purchase of property and equipment

 

 

 

 

 

102

 

Accrued employee taxes for net share settlement

 

 

 

 

 

54

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

(1,000

)

Cash paid for acquisition

 

$

 

 

$

68,527

 

See accompanying notes to condensed consolidated financial statement

 

6


AAC HOLDINGS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.   Description of Business

AAC Holdings, Inc. (collectively with its subsidiaries, the “Company”, “AAC Holdings”, or “AAC”) 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 constitute VIEs as of and for the periods ended September 30, 2019 and December 31, 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 September 30, 2019 and December 31, 2018 include assets of $0.6 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 $3.0 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and net loss of $7.8 million and $5.5 million for the nine months ended September 30, 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.

Reclassifications

Certain prior year amounts have been reclassed to conform to the current year presentations.

7


 

Going Concern

The Company incurred losses from operations and had negative cash flows from operations for the year ended December 31, 2018 and the first nine months 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 nine months 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. During the quarters ended June 30, 2019 and September 30, 2019, certain events of default occurred under the 2019 Senior Credit Facility, the 2017 Credit Facility and the Company’s sale leaseback agreement as further discussed in Note 12. On October 30, 2019, the Company reached an agreement with its senior secured lenders that provided an additional $5 million of liquidity and a forbearance agreement through March 31, 2020, regarding certain events of default.

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 in 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. An inability to obtain funding from sale leasebacks, sales of non-core assets or to obtain additional debt or equity financing, on attractive terms or at all, could have a substantial negative effect on our liquidity and our ability to continue to operate without pursuing restructuring alternatives.

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.

8


 

The following tables summarize the composition of our 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, 2019 and 2018 (in thousands):

 

Three Months Ended

September 30, 2019

 

 

Three Months Ended

September 30, 2018

 

 

Increase (Decrease)

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

51,264

 

 

 

88.1

 

 

$

54,091

 

 

 

81.8

 

 

$

(2,827

)

 

 

(5.2

)

Outpatient facility and sober living services

 

5,344

 

 

 

9.2

 

 

$

10,253

 

 

 

15.5

 

 

 

(4,909

)

 

 

(47.9

)

Client related diagnostic services

 

1,557

 

 

 

2.7

 

 

$

1,763

 

 

 

2.7

 

 

 

(206

)

 

 

(11.7

)

Total client related revenue

$

58,165

 

 

 

100.0

 

 

$

66,107

 

 

 

100.0

 

 

$

(7,942

)

 

 

(12.0

)

 

For the nine months ended September 30, 2019 and 2018 (in thousands):

 

Nine Months Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2018

 

 

Increase (Decrease)

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Inpatient treatment facility services

$

153,843

 

 

 

89.3

 

 

$

188,392

 

 

 

82.1

 

 

$

(34,549

)

 

 

(18.3

)

Outpatient facility and sober living services

 

17,205

 

 

 

10.0

 

 

 

28,763

 

 

 

12.5

 

 

 

(11,558

)

 

 

(40.2

)

Client related diagnostic services

 

1,201

 

 

 

0.7

 

 

 

12,202

 

 

 

5.3

 

 

 

(11,001

)

 

 

(90.2

)

Total client related revenue

$

172,249

 

 

 

100.0

 

 

$

229,357

 

 

 

100.0

 

 

$

(57,108

)

 

 

(24.9

)

 

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 our 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 and Rhode Island state agencies.

Revenue from third-party behavioral health providers who use our 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 $15.0 million and $19.2 million for the three months ended September 30, 2019 and 2018, respectively, and $49.4 million and $62.4 million for the nine months ended September 30, 2019 and 2018, respectively.

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.

9


 

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, 2019 and 2018 (in thousands, except share data):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to AAC Holdings, Inc. common stockholders

$

(13,073

)

 

$

(22,181

)

 

$

(51,464

)

 

$

(22,727

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding – basic

 

24,938,894

 

 

 

24,205,159

 

 

 

24,728,135

 

 

 

24,039,550

 

Dilutive securities

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding – diluted

 

24,938,894

 

 

 

24,205,159

 

 

 

24,728,135

 

 

 

24,039,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per common share

$

(0.52

)

 

$

(0.92

)

 

$

(2.08

)

 

$

(0.95

)

Diluted loss per common share

$

(0.52

)

 

$

(0.92

)

 

$

(2.08

)

 

$

(0.95

)

 

For the three months ended September 30, 2019 and 2018, the Company had 22,040 and 87,801 potentially dilutive shares, respectively. For the nine months ended September 30, 2019 and 2018, the Company had 44,908 and 100,804 potentially dilutive shares, respectively. These dilutive shares are not included in the diluted EPS calculation above because to do so would be anti-dilutive for the periods presented.

6.   Acquisition

On March 1, 2018, the Company acquired all of the outstanding shares of AdCare, Inc., a Massachusetts corporation (“AdCare”), and wholly owned subsidiary of AdCare Holding Trust, a Massachusetts business trust (the “Seller”) (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 $65.2 million in cash, excluding expenses and other adjustments, (ii) approximately $5.4 million in shares of AAC Holdings’ common stock (or 562,051 shares at $9.68 per share), (iii) a promissory note in the aggregate principal amount of approximately $9.6 million (the “AdCare Note”), and (iv) contingent consideration valued at $0.5 million recorded in accrued and other current liabilities.

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

 

 

AdCare 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

As of September 30, 2019, approximately 25.1% of the Company’s accounts receivable were due from TriWest Healthcare Alliance. No other payor accounted for more than 10% of accounts receivable as of September 30, 2019. As of December 31, 2018, no payor comprised more than 10% of accounts receivable.

As of September 30, 2019, substantially all accounts receivable aged greater than 360 days were fully reserved in our condensed consolidated financial statements.

10


 

Approximately $0.7 million and $2.2 million of accounts receivable, net of the allowance for doubtful accounts, at September 30, 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 remaining balance. 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, net consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Land

 

$

19,365

 

 

$

19,364

 

Buildings and improvements

 

 

167,910

 

 

 

161,723

 

Equipment and software

 

 

35,158

 

 

 

35,059

 

Construction in progress

 

 

14,910

 

 

 

16,413

 

Total property and equipment

 

 

237,343

 

 

 

232,559

 

Less accumulated depreciation

 

 

(78,876

)

 

 

(65,638

)

Property and equipment, net

 

$

158,467

 

 

$

166,921

 

For the three months ended September 30, 2019 and 2018, depreciation expense was $2.9 million and $5.1 million, respectively.

For the nine months ended September 30, 2019 and 2018, depreciation expense was $9.4 million and $15.6 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. The Company’s 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 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 0.1 years to 11 years, some of which contain an option to extend at the discretion of the Company.

11


 

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

 

 

Three Months Ended September 30, 2019

 

 

Nine Months Ended September 30, 2019

 

Operating lease cost

 

$

1,991

 

 

$

6,001

 

 

 

 

 

 

 

 

 

 

Finance lease cost

 

 

 

 

 

 

 

 

     Amortization of ROU assets

 

 

131

 

 

 

606

 

     Interest on lease liabilities

 

 

22

 

 

 

83

 

Total finance lease cost

 

 

153

 

 

 

689

 

 

 

 

 

 

 

 

 

 

Total lease cost

 

$

2,144

 

 

$

6,690

 

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

Component of Lease Balances

 

Classification

 

September 30, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

     Operating lease assets

 

Right-of-use asset - operating, net

 

$

27,186

 

     Finance lease assets

 

Other assets

 

 

1,060

 

         Accumulated Amortization ROU asset

 

Other assets

 

 

(606

)

Total leased assets

 

 

 

$

27,640

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

     Operating lease liabilities:

 

 

 

 

 

 

         current portion

 

Current portion of lease liability - operating

 

$

4,921

 

         long-term portion

 

Lease liability - operating, net of current portion

 

 

27,393

 

     Total Operating lease liabilities

 

 

 

 

32,314

 

     Finance lease liabilities:

 

 

 

 

 

 

         current portion

 

Accrued and other current liabilities

 

 

419

 

         long-term portion

 

Other long-term liabilities

 

 

167