AAC Ares Acquisition Corporation

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2015

OR

For the transition period from           to           

Commission File Number: 001-36643

 

AAC Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

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  x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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  x

As of November 2, 2015, the registrant had 22,407,311 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 

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AAC HOLDINGS, INC.

Form 10-Q

September 30, 2015

TABLE OF CONTENTS

 

 

 

 

 

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PART 1. FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements

AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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AAC HOLDINGS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2015

Unaudited

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

 

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AAC HOLDINGS, Inc.

CONDENSED Consolidated Statements of Stockholders’ Equity

Unaudited

(Dollars in thousands)

 

See accompanying notes to consolidated financial statements.

 

 

 

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AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(Dollars in thousands)

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

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AAC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

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AAC Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AAC Holdings, Inc. (collectively with its subsidiaries, the “Company” or “Holdings”), was incorporated on February 12, 2014 for the purpose of acquiring all the common stock of American Addiction Centers, Inc. (“AAC”) and to engage in certain reorganization transactions as more fully described in Note 3. The Company is headquartered in Brentwood, Tennessee and provides substance abuse treatment services for individuals with drug and alcohol addiction.  The Company also provides treatment services for clients struggling with behavioral health disorders, including disorders associated with overeating.  At September 30, 2015, the Company, through its subsidiaries, operated eight residential substance abuse treatment facilities, eight standalone outpatient centers, and one facility that provides treatment services for men and women who struggle with overeating-related behavioral disorders.

 

Following the Company’s acquisition of Referral Solutions Group, LLC (“RSG”) on July 2, 2015, combined with its previously existing internet assets, the Company operates a broad portfolio of internet assets that service millions of website visits each month. RSG, through its wholly owned subsidiary Recovery Brands, LLC (“Recovery Brands”), a leading publisher of “authority” websites such as Rehabs.com and Recovery.org, serves families and individuals struggling with addiction and seeking treatment options through comprehensive online directories, treatment provider reviews, forums and professional communities.  Recovery Brands also provides online marketing solutions to other treatment providers such as enhanced facility profiles, audience targeting, lead generation and tools for digital reputation management.

 

 

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, the accounts of variable interest entities (“VIEs”) in which the Company is the primary beneficiary, and certain professional groups through rights granted to the Company by contract to manage and control the business of such professional groups.  All intercompany transactions and balances have been eliminated in consolidation.

The Private Share Exchange (defined below) transaction between the Company and AAC’s stockholders (as discussed in Note 3) was accounted for similar to a common control transaction resulting in the assets, liabilities, and equity of AAC being carried over at their historical bases.  At the time of the Private Share Exchange, Holdings was a shell company that had not conducted any business and had no material assets or liabilities.  As such, the historical financial statements presented for periods prior to the Private Share Exchange represent the historical results of operations of AAC.

During the nine months ended September 30, 2014, the Company consolidated one real estate VIE, Behavioral Healthcare Realty, LLC (“BHR”) through April 15, 2014, at which point BHR was acquired by the Company and became a wholly owned subsidiary of the Company (see Note 3 for further discussion).  BHR leased two treatment facilities to the Company under long-term triple net leases and was renovating and constructing additional treatment facilities that it planned to lease to the Company. The Company was the primary beneficiary as a result of its guarantee of BHR’s debt prior to the acquisition. The Company also consolidated five professional groups (“Professional Groups”) that constituted VIEs as of September 30, 2014 and six Professional Groups that constituted VIEs as of September 30, 2015.  The Professional Groups are responsible for the supervision and delivery of medical services to the Company’s clients. The Company provides management services to the Professional Groups.  Based on the Company’s ability to direct the activities that most significantly impact the economic performance of the Professional Groups, provide necessary funding and the obligation and likelihood of absorbing all expected gains and losses, the Company has determined that it is the primary beneficiary of these Professional Groups.  The accompanying consolidated balance sheets as of December 31, 2014 and September 30, 2015 include assets of $0.5 million and $2.6 million, respectively, and liabilities of $3.3 million and $0.6 million, respectively, related to the VIEs.  The accompanying consolidated income statements include net loss attributable to noncontrolling interest of $0.4 million and $0.7 million related to the VIEs for the three months ended September 30, 2014 and 2015, respectively, and $1.1 million and $1.7 million for the nine months ended September 30, 2014 and 2015, respectively.

The accompanying condensed consolidated financial statements are unaudited, with the exception of the December 31, 2014 balance sheet which is consistent with the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for a complete set of financial statements. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2015.  The preparation of financial statements

 

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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.

Recent Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. Companies across all industries will use a new five-step model to recognize revenue from customer contracts. The new standard, which replaces nearly all existing GAAP and International Financial Reporting Standards revenue recognition guidance, will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016.  The Company is currently evaluating the impact that the adoption of this standard will have on its revenue recognition policies and procedures, financial position, result of operations, cash flows, financial disclosures and control framework.

In March 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs.  The update is effective for financial statements issued for fiscal years beginning after December 15, 2015, and those interim periods within those fiscal years, with early adoption permitted.  The update requires debt issuance costs related to a note to be reported in the balance sheet as a direct deduction from the face amount of that note on a retrospective basis upon adoption.  The Company determined to early adopt the revised guidance and presented $1.4 million of deferred debt issuance costs associated with the Company’s 2015 Credit Facility (as later defined) net of the debt balance at September 30, 2015 (see Note 11).  The impact on prior periods was not material.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations:  Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”).  ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust its financial statements for changes to provisional amounts that are identified during the measurement-period following the consummation of a business combination.  Instead, ASU 2015-16 requires these types of adjustments to be made during the reporting period in which they are identified and would require additional disclosure or separate presentation of the portion of the adjustment that would have been recorded in the previously reported periods as if the adjustment to the provisional amounts had been recognized as of the acquisition date.  ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those years.  The Company does not expect the adoption of ASU 2015-16 will have a material impact on its results of operations.

 

 

On April 15, 2014, the Company completed the following transactions which were all completed substantially concurrently (collectively, the “Reorganization Transactions”):

As a result of the foregoing transactions, the Company owned (i) over 93.6% of the outstanding common stock of AAC, (ii) 100% of the outstanding common membership interests in BHR, and (iii) 100% of the outstanding membership interests in CRMS. To help fund or facilitate these transactions, the following additional financing transactions were undertaken in 2014 prior to or in connection with the aforementioned transactions:  (i) AAC sold 741,322 shares of its common stock in a private placement to certain accredited investors from February 2014 through April 2014, with net proceeds of $6.0 million, (ii) BHR sold 8.5 Series A Preferred Units in a private placement to certain accredited investors in January and February 2014, with net proceeds of $0.4 million, (iii) BHR redeemed all of its outstanding 36.5 Series A Preferred Units from certain accredited investors in April 2014 and (iv) BHR sold 160 new Series A Preferred Units in a private placement to an accredited investor in April 2014, with net proceeds of $7.8 million.

 

 

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Private Share Exchange

Certain common shares of AAC issued in 2008 under the previous board of directors exceeded the number of shares duly authorized by AAC’s Articles of Incorporation.  These common shares were previously classified as mezzanine equity in the consolidated balance sheets because they did not meet the definition of permanent equity as a result of these legal imperfections.  To cure these legal imperfections and in preparation for an initial public offering, in the first quarter of 2014, the Company initiated a voluntary private share exchange with certain of AAC’s stockholders whereby the Company offered to certain of AAC’s stockholders the opportunity to receive one share of the Company’s common stock for (i) each share of AAC’s common stock held by such stockholders and (ii) a release from claims arising from or related to the share imperfections (collectively, the “Private Share Exchange”). The Private Share Exchange was conditioned upon, among other things, holders of AAC’s common stock who participated in the Private Share Exchange validly assigning and transferring to the Company at least 90% of the outstanding shares of AAC prior to the expiration of the Private Share Exchange. At the expiration of the Private Share Exchange in April 2014, holders representing 93.6% of AAC’s common stock had exchanged their shares for shares of common stock of the Company, and AAC became a majority-owned subsidiary of the Company. The Private Share Exchange was accounted for similar to a common control transaction resulting in the assets, liabilities and equity of AAC being carried over at their historical bases. Prior to the completion of the Reorganization Transactions, Holdings had not engaged in any business or other activities except in connection with its formation.   Shares of AAC common stock that were not exchanged remained in mezzanine equity or stockholders’ equity until the completion of the short-form merger in November 2014.

Behavioral Healthcare Realty, LLC Acquisition

On April 15, 2014, BHR redeemed 36.5 of its non-controlling Series A Preferred Units for $1.8 million.  These former holders of Series A Preferred Units used the proceeds from the redemption to purchase 224,697 shares of AAC’s common stock at $8.12 per share as part of an exempt common stock offering.  As part of the aforementioned transaction, nine of the Series A Preferred Units were redeemed from directors and relatives of directors who purchased 55,406 shares of AAC’s common stock valued at approximately $450,000.

Simultaneously, BHR amended and restated its limited liability company agreement which among other things changed the rights and privileges of the Series A Preferred Units.  On April 15, 2014, BHR received $7.8 million in net proceeds from the sale of 160 units of its non-controlling Series A Preferred Units ($50,000 per unit) to BNY Alcentra Group Holdings, Inc. (“Alcentra”).  Alcentra received a 1% fee at closing and is entitled to receive a preferred return of 12% per annum on its initial investment, payable quarterly in arrears.  The Series A Preferred Units contained certain embedded issuer call and holder put provisions. BHR had the option to redeem a minimum of 40 Series A Preferred Units and up to 100% of the outstanding Series A Preferred Units for $50,000 per unit, plus (i) any accrued and unpaid preferred return and (ii) a call premium of (a) 3.0% through April 15, 2015, (b) 2.0% from April 16, 2015 through April 15, 2017 and (c) no premium any time after April 15, 2017. Alcentra had a put right that, if exercised, required BHR to redeem all of the issued and outstanding Series A Preferred Units by making a payment equal to $50,000 per unit plus the accrued but unpaid preferred return. Alcentra had the ability to exercise its put right for a period of 30 days following the 36^th month or 48^th month after the date of issuance and at any time following the 60^th month after the date of issuance. In the event of a sale of a property owned by BHR, Alcentra was entitled to the repayment of its initial capital contribution plus (i) any accrued and unpaid preferred return and (ii) any applicable call premium.  Distributions to affiliates of BHR were limited to $3.0 million annually, so long as any of the Series A Preferred Units were outstanding.  

The Series A Preferred Units generally had no voting or approval rights regarding the management of BHR. However, the holders of Series A Preferred Units were entitled to vote with respect to (i) any action that would change the rights or restrictions of the Series A Preferred Units in a way that would adversely affect such holders and (ii) the creation or issuance of any other security convertible into or exercisable for any equity security of BHR having rights, preferences or privileges senior to the common units of BHR. In addition, unanimous approval of all BHR members, including the holders of Series A Preferred Units, is required to approve the sale by BHR of more than 50% of its real property, more than 50% of the voting or economic rights of any BHR subsidiary or the merger, consolidation, sale of all or substantially all of the assets of BHR or sale of a majority of the common units of BHR.

In addition, as long as Alcentra owned at least 60 Series A Preferred Units, subject to adjustment for certain BHR redemptions, the manager of BHR could not engage in certain transactions without the approval of a majority of the Series A Preferred Unit holders, including, without limitation, the following: (i) liquidate, dissolve or wind up the business of BHR; (ii) authorize the issuance of additional Series A Preferred Units or any class or series of equity securities with rights, preferences or parity with or senior to that of the Series A Preferred Units; (iii) declare or pay any cash distribution or make any other distribution not permitted under the limited liability company agreement; (iv) pay any management or similar fees; (v) pay rebates or reduce payments payable by any primary tenants or (vi) make payments to affiliates of BHR in excess of $3.0 million per year in the aggregate.

 

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On February 25, 2015, the Company exercised its call provision and redeemed 100% of the outstanding Series A Preferred Units for a total redemption price of approximately $8.5 million, which included $0.2 million for the 3.0% call premium and $0.3 million for unpaid preferred returns.

Substantially concurrent with the Private Share Exchange in April 2014, the Company acquired all of the outstanding common membership interests of BHR by issuing 820,124 shares of Company common stock (at a fair value of $8.54 per share as determined by the Company), paying $3.0 million in cash and assuming a $1.7 million term loan from a financial institution to our CEO, President and CFO.  The original proceeds from this loan were used to repay a loan related to Greenhouse Real Estate, LLC and was accounted for as an additional capital contribution in BHR.  The Company refinanced the assumed term loan and was required to make monthly principal payments of $35,855 to a financial institution, plus 5.0% interest and a balloon payment of $1.4 million in April 2015.  Prior to the BHR Acquisition, BHR was controlled by the CEO, President and CFO of the Company. BHR owns the real property associated with treatment facilities, which are leased to the Company, as well as other properties that are currently in development or are being held for future development.  The BHR Acquisition was accounted for as a common control transaction as BHR was already being consolidated as a VIE in accordance with FASB ASC 810, Consolidations, and, accordingly, the Company recognized $4.9 million of the $11.8 million in fair value of consideration transferred (consisting of $3.0 million cash consideration, the $1.7 million loan assumed and the net deferred tax assets of $0.2 million).  The Company eliminated the noncontrolling interest attributable to BHR of $3.7 million with the excess of fair value over the carrying value of noncontrolling interest recorded as a reduction to additional paid-in capital of $1.2 million.

Clinical Revenue Management Services, LLC Acquisition

On April 15, 2014, the Company acquired all the outstanding membership interests of CRMS in exchange for $0.5 million in cash and 234,324 common shares of the Company’s common stock (at a fair value of $8.54 per common share as determined by the Company) for total consideration paid of $2.5 million (collectively, the “CRMS Acquisition”). The purchase price was based upon a third party valuation report of CRMS obtained by the Company.  CRMS provides billing and collections services to the Company, and after this acquisition continues to provide all billing and collection services for the Company as a wholly owned subsidiary.  Prior to its acquisition by the Company, CRMS was owned by the spouses of the Company’s CEO and President.  The purchase price resulted in a premium to the fair value of the net assets acquired and, correspondingly, the recognition of goodwill. The amount recorded for goodwill was consistent with the Company’s intentions for the acquisition.

The acquisition was accounted for as a business combination. The Company recorded the transaction based upon the fair value of the consideration paid. This consideration was allocated to the assets acquired and liabilities assumed at the acquisition date based on their fair values as follows (in thousands):

 

Qualitative factors that contributed to the recognition of goodwill include certain intangible assets that are not recognized as a separate identifiable intangible asset apart from goodwill and expected cost reduction synergies in annual cost savings. Intangible assets not recognized apart from goodwill consist primarily of the assembled workforce. Acquisition related costs were $- million and $0.1 million for the three and nine months ended September 30, 2014, respectively, and were expensed in other operating expenses in the condensed consolidated statements of income.

Fair Value of Shares Issued

The Company determined the fair value of shares of restricted common stock of the Company issued in connection with the BHR Acquisition and the CRMS Acquisition to be $8.54 per share. Management analyzed a valuation report prepared by an independent third party with respect to the valuation of the Company taking into account the Private Share Exchange, the BHR Acquisition and the CRMS Acquisition. In particular, the valuation report analyzed the potential impact of the then-proposed Reorganization Transactions on the valuation of the Company, such as the increase in 2013 pro forma net income as a result of BHR results of operations being included for all of 2013. The valuation report also noted that the impact of the BHR Acquisition on the enterprise value would be mixed, as the additional earnings before interest, taxes, depreciation, and amortization (“EBITDA”) generated at the Company level due to recapture rents and cash and non-cash expenses was not sufficient to overcome the negative

 

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impact on enterprise value of BHR’s debt outstanding for the entire year. With respect to CRMS, the analysis determined that the CRMS Acquisition would allow the recapture of additional EBITDA (on a pro forma basis for 2013) due to a combination of recapture revenues (commissions no longer paid) and the expected cost savings. In determining the fair value of the Company’s common stock, management also considered investor demand in the private placement of AAC common stock from February 2014 through April 2014 at $8.12 per share, the improved projected results of operations of the remainder of 2014 and the probability of an initial public offering in 2014. Based on the foregoing analysis, the Company determined the fair value of the Company’s common stock as of April 15, 2014 to be $8.54 per share.

 

Initial Public Offering and Short-Form Merger

On October 7, 2014, the Company completed an initial public offering (“IPO”) of 5,750,000 shares of its common stock at a public offering price of $15.00 per share, which included the exercise in full of the underwriters’ option to purchase an additional 250,000 shares from the Company and 500,000 shares from certain selling stockholders.  Net proceeds to the Company from the IPO were approximately $68.8 million, after deducting underwriting discounts and offering costs.

 

On November 10, 2014, the Company completed a subsidiary short-form merger with AAC and a wholly-owned merger subsidiary whereby the legacy holders of AAC common stock who did not participate in the Private Share Exchange received 1.571119 shares of Holdings common stock for each share of AAC common stock owned at the effective time of the merger (for an aggregate of 293,040 shares of Holdings common stock).  Upon completion of the short-form merger, Holdings owned 100% of the outstanding shares of AAC.  The short-form merger was accounted for as an equity transaction in accordance with ASC 810, Consolidation.

 

 

 

Our other revenue consists of service charges from the delivery of quality targeted leads to behavioral and mental health service businesses through our operating subsidiary Referral Solutions Group, LLC, which was acquired on July 2, 2015.  Revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the fee for services is fixed or determinable, and collectability of the fee is reasonably assured.  

 

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 $6.9 million and $13.4 million for the three months ended September 30, 2014 and 2015, respectively, and $18.6 million and $32.6 million for the nine months ended September 30, 2014 and 2015, respectively.

 

 

Earnings per share (“EPS”) is calculated using the two-class method required for participating securities. Undistributed earnings allocated to these participating securities are subtracted from net income in determining net income attributable to common stockholders. Net losses, if any, are not allocated to these participating securities. Basic 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. Common shares outstanding include both the common shares classified as mezzanine equity and those classified as equity.

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. Diluted EPS attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding during the period.

 

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The following tables reconcile the numerator and denominator used in the calculation of basic and diluted EPS for the three and nine months ended September 30, 2014 and 2015 (in thousands except share and per share amounts):

 

 

 

On February 20, 2015, the Company acquired certain assets of Recovery First, Inc. (“Recovery First”), a Florida-based provider of substance abuse treatment and rehabilitation services, for $13.1 million in cash and the assumption of certain liabilities.  The purchase price was based upon arms-length negotiations between the Company and Recovery First, an unrelated third party, that resulted in a premium to the fair value of the net assets acquired (including identifiable intangible assets) and, correspondingly, the recognition of goodwill. The amount recorded for goodwill is consistent with the Company’s intentions for the acquisition and is deductible for income tax purposes.

On April 17, 2015, the Company acquired certain assets of Clinical Services of Rhode Island, Inc. (“CSRI”), a provider of intensive outpatient substance abuse treatment services, for $0.7 million in cash and 42,460 in shares of Holdings’ common stock.  The purchase price was based upon arms-length negotiations between the Company and CSRI, an unrelated third party, that resulted in a premium to the fair value of the net assets acquired and, correspondingly, the recognition of goodwill.  The amount recorded for goodwill is consistent with the Company’s intentions for the acquisition and is deductible for income tax purposes.

On July 2, 2015, the Company acquired RSG, a leading online publisher in the substance abuse treatment industry with a comprehensive portfolio of websites and marketing assets, for $32.5 million in cash and 540,193 in shares of Holdings’ common stock.  The purchase price was based upon arms-length negotiations between the Company and RSG, an unrelated third party, that resulted in a premium to the fair value of the net assets acquired and, correspondingly, the recognition of goodwill.  The amount recorded for goodwill is consistent with the Company’s intentions for the acquisition.  The Company is currently evaluating whether goodwill is deductible for income tax purposes.

On July 2, 2015, the Company acquired Taj Media, LLC (“Taj Media”), a premier digital marketing agency with addiction treatment industry expertise, for $2.2 million in cash and 37,253 in shares of Holdings’ common stock.  The purchase price was based upon arms-length negotiations between the Company and Taj Media, an unrelated third party, that resulted in a premium to the fair value of the net assets acquired and, correspondingly, the recognition of goodwill.  The amount recorded for goodwill is consistent with the Company’s intentions for the acquisition.  The Company is currently evaluating whether goodwill is deductible for income tax purposes.

On August 10, 2015, the Company acquired certain assets of The Oxford Centre, Inc. and its affiliates (“Oxford”), which operates a 76-bed residential facility located on a 110-acre campus in Etta, Mississippi, which is 65 miles southwest of Memphis, Tennessee, and three outpatient treatment locations in Oxford, Tupelo and Olive Branch, Mississippi, for $35.0 million in cash.  The purchase price was based upon arms-length negotiations between the Company and Oxford, an unrelated third party, that resulted in a premium to the fair value of the net assets acquired and, correspondingly, the recognition of goodwill.  The amount recorded for goodwill is consistent with the Company’s intentions for the acquisition and is deductible for income tax purposes.

Each of these acquisitions was accounted for as a business combination. The Company recorded each transaction based upon the fair value of the consideration paid. This consideration was preliminarily allocated to the assets acquired and liabilities assumed at the corresponding acquisition dates, based on their fair values.   The Company is further assessing the valuation of certain tax matters

 

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for all acquisitions, as well as certain receivables, assumed liabilities, and the valuation of real property and intangible assets of RSG, Taj Media, and Oxford, some of which are dependent on the completion of valuations being performed by independent valuation specialists. The preliminary fair values of assets acquired and liabilities assumed, at the corresponding acquisition dates, were as follows (in thousands):

 

 

Acquisition-related costs for the acquisitions were expensed in acquisition-related expenses in the condensed consolidated statements of income.

 

The following provides a breakdown of the identifiable intangible assets acquired in the above transactions, the valuation method applied in arriving at fair value, their assigned values and expected lives (in thousands, except years):

 

 

The results of operations for the acquired entities from the respective acquisition dates are included in the condensed consolidated statements of income for the nine months ended September 30, 2015, and include revenues of $11.1 million and income before income taxes of $3.3 million.  The following presents the unaudited pro forma revenues and income before taxes of the combined entity had the acquisitions occurred on January 1, 2014 (in thousands):

 

 

 

A summary of activity in the Company’s allowance for doubtful accounts is as follows (in thousands):

 

 

For the nine months ended September 30, 2014, approximately 15.9% of the Company’s revenues were reimbursed by Anthem Blue Cross Blue Shield of Colorado; 12.4% by Blue Cross Blue Shield of California; 11.9% by Aetna; and 11.4% by United Behavioral Health. No other payor accounted for more than 10% of revenue reimbursements for the nine months ended September 30, 2014.

 

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For the nine months ended September 30, 2015, approximately 15.9% of the Company’s revenues were reimbursed by Anthem Blue Cross Blue Shield of Colorado; 13.2% by Blue Cross Blue Shield of Texas; 11.4% by Blue Cross Blue Shield of California, and 11.2% by Aetna. No other payor accounted for more than 10% of revenue reimbursements for the nine months ended September 30, 2015.

 

 

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

 

Acquired Property

On February 24, 2015, the Company purchased a piece of property including buildings, structures, and 96 acres of land in Ringwood, New Jersey for $6.4 million in cash and recorded the balance in construction in progress. The Company funded the purchase price from cash on hand with the intention of converting the property into a treatment center.

On April 1, 2015, the Company acquired an 84-bed hospital in southern California for cash consideration of $13.5 million and recorded the balance in construction in progress.  The Company funded the purchase price from cash on hand with the intention of converting the property into a chemical dependency recovery hospital.

 

 

The Company’s business comprises a single reporting unit for impairment test purposes. The Company’s estimates of fair value are based on the income approach, which estimates the fair value of the Company based on its future discounted cash flows. In addition to an annual impairment review, impairment reviews are performed whenever circumstances indicate a possible impairment may exist. The Company performed its most recent goodwill impairment testing as of December 31, 2014 and did not incur an impairment charge.

The Company’s goodwill balance as of December 31, 2014 and September 30, 2015 was $12.7 million and $103.1 million, respectively. The increase in goodwill relates to the acquisitions noted below and as discussed in Note 7.

 

 

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Other identifiable intangible assets and their assigned and related accumulated amortization consisted of the following as of December 31, 2014 and September 30, 2015 (in thousands):

 

 

Changes to the carrying value of identifiable intangible assets during the nine months ended September 30, 2015 were as follows (in thousands):

 

On April 17, 2015, the Company acquired certain marketing assets with a value of $1.1 million for cash consideration of $0.5 million and 17,110 shares of the Company’s common stock, worth an estimated fair value of $0.5 million at the date of acquisition.  The Company utilizes an estimated useful life of 10 years for marketing intangible assets.

 

 

 

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

 

Credit Facility

The Company’s prior credit facility borrowing base provided for borrowings up to the lesser of (i) $20 million or (ii) 80% of the Company’s eligible accounts receivable at any time prior to February 1, 2014, and 70% of the Company’s eligible accounts receivable at any time on or after February 1, 2014, subject to adjustment if the aggregate of all returns, rebates, discounts, credits and

 

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allowances for the immediately preceding three months is less than 8% of the Company’s gross revenues for such period. The prior credit facility was secured by the Company’s accounts receivable, deposit accounts and other rights to payment, inventory, and equipment, and was guaranteed jointly and severally by all of the Company’s subsidiaries that have significant operations and/or assets and the Company’s CEO and President. The prior credit facility, as amended, required the Company to maintain a tangible net worth ratio not greater than 2.50 to 1.00, a fixed charge coverage ratio not less than 1.25 to 1.00, and net income of at least $1.00, all determined as of each quarter end. The prior credit facility limited capital expenditures to $0.1 million in each fiscal year unless approved by the financial institution, limited additional borrowing to $50,000 during the term of the agreement unless approved by the financial institution, limited operating lease expense to $0.1 million in each fiscal year and prohibited the payment of dividends in cash or stock. The prior credit facility also contained a cross-default clause linking a default under the prior credit facility to the occurrence of a default by the Company under any other debt agreement, material lease commitment, contract, instrument or obligation.

The Company was not in compliance with certain financial covenants contained in the prior credit facility as of March 31, 2014. These covenant violations created a cross-default under the debt agreements between the same lender and each of Greenhouse Real Estate, LLC (“Greenhouse Real Estate”), Concorde Real Estate, LLC (“Concorde Real Estate”), and The Academy Real Estate, LLC (“Academy Real Estate”), but for which the Company obtained waivers.

On April 15, 2014, the Company’s prior credit facility was amended and restated and included a waiver for the noncompliance with the financial covenants and negative covenants described in the preceding paragraphs.

On April 15, 2014, the Company entered into a Second Amended and Restated Credit Facility (the “2014 Credit Facility”) with Wells Fargo Bank, National Association. The 2014 Credit Facility made available to the Company a $15.0 million revolving line of credit, subject to borrowing base limitations (the “Amended Revolving Line”), and amended and restated two existing term loans in the outstanding principal amounts of $0.6 million (“Term Loan A”) and $1.5 million (“Term Loan B”). In June 2014, the Company repaid in full the $1.5 million outstanding balance of Term Loan B.

The Amended Revolving Line bore interest at one-month LIBOR, plus an applicable margin that was determined by the Company’s leverage ratio, as defined by the agreement, at the end of each quarter. A quarter-end leverage ratio of 4.75 to 1.00 or above resulted in an applicable margin of 3.00%, a ratio below 4.75 to 1.00 and equal to or above 4.00 to 1.00 results in an applicable margin of 2.75%, and a ratio below 4.00 to 1.00 results in an applicable margin of 2.50%. Term Loan A bore interest at LIBOR plus 3.15%. The borrowing base for the Amended Revolving Line was 70% of the Company’s eligible accounts receivable and was established with the understanding that the aggregate of all returns, rebates, discounts, credits and allowances, exclusive of the initial adjustment to record net revenues at the time of billing, for the immediately preceding three months will be less than 20% of gross revenues for such period (up from the previous restriction of 8%).

On December 18, 2014, the Company terminated the 2014 Credit Facility, after having repaid the then outstanding principal balance of $487,500 plus accrued interest.   The 2014 Credit Agreement also included one outstanding term loan in the outstanding principal amount of $0.5 million. The Company did not incur any early termination penalties as a result of the early termination of the 2014 Credit Facility.

On March 9, 2015, the Company entered into a five year $125.0 million senior secured credit facility (the “2015 Credit Facility”) with Bank of America, N.A., as administrative agent for the lenders party thereto.   The 2015 Credit Facility consists of a $50.0 million revolver and a $75.0 million term loan.  The Company used the proceeds to re-pay certain existing indebtedness, fund acquisitions and de novo treatment facilities and for general corporate purposes.  The 2015 Credit Facility also has an accordion feature that allows the total borrowing capacity to be increased up to $200 million, subject to certain conditions, including obtaining additional commitments from lenders.  On June 16, 2015, the Company amended the 2015 Credit Facility to remove from the definition of “change of control” what is often referred to as a “dead hand proxy put” provision.

The 2015 Credit Facility requires quarterly term loan principal repayments for the outstanding term loan of $0.9 million from September 30, 2015 to December 31, 2016, $1.4 million for March 31, 2017 to December 31, 2017, $2.3 million from March 31, 2018 to December 31, 2018, and $2.8 million from March 31, 2019 to December 31, 2019, with the remaining principal balance of the term loan due on the maturity date of March 9, 2020.  Repayment of the revolving loan is due on the maturity date of March 9, 2020.    The 2015 Credit Facility generally requires quarterly interest payments.

Borrowings under the 2015 Credit Facility are guaranteed by the Company and each of its subsidiaries and are secured by a lien on substantially all of the Company’s and its subsidiaries’ assets. Borrowings under the 2015 Credit Facility bear interest at a rate tied to the Company’s Consolidated Total Leverage Ratio (defined as Consolidated Funded Indebtedness to Consolidated EBITDA, in each case as defined in the credit agreement).   Eurodollar Rate Loans with respect to the 2015 Credit Facility bear interest at the Applicable Rate plus the Eurodollar Rate (each as defined in the credit agreement) (based upon the LIBOR Rate (as defined in the credit agreement) prior to commencement of the interest rate period). Base Rate Loans with respect to the 2015 Credit Facility bear

 

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interest at the Applicable Rate plus the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the Eurodollar Rate plus 1.0% (the interest rate at September 30, 2015 was 2.83%).  In addition, the Company is required to pay a commitment fee on undrawn amounts under the revolving credit facility of 0.35% to 0.50% depending on the Company’s Consolidated Total Leverage Ratio (the commitment fee rate at September 30, 2015 was 0.35%).   The Applicable Rates and the unused commitment fees of the 2015 Credit Facility are based upon the following tiers:

 

The 2015 Credit Facility requires the Company to comply with customary affirmative, negative and financial covenants, including a Consolidated Fixed Charge Coverage Ratio, Consolidated Total Leverage Ratio and a Consolidated Senior Secured Leverage Ratio (each as defined in the credit agreement). The Company may be required to pay all of its indebtedness immediately if the Company defaults on any of the financial or other restrictive covenants contained in the 2015 Credit Facility.   The financial covenants include maintenance of the following:  

 

 

At September 30, 2015, the Company was in compliance with all applicable covenants.

The Company incurred approximately $1.4 million in debt issuance costs related to underwriting and other professional fees, and deferred these costs over the term of the 2015 Credit Facility.  Additionally, the Company used approximately $24.9 million of the proceeds from the $75.0 million term loan to repay in full the outstanding real estate debt, certain equipment notes and certain capital leases. The Company did not incur any significant early termination fees.    

On July 1, 2015, the Company borrowed $15.0 million under the $50.0 million revolver of the 2015 Credit Facility.  The Company used the proceeds to fund de novo development projects and acquisitions.

On August 7, 2015, the Company borrowed $32.0 million under the $50.0 million revolver of the 2015 Credit Facility.  The Company used the proceeds to fund de novo development projects and acquisitions.

 

 

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As of September 30, 2015, our availability under the $50.0 million revolver portion of the 2015 Credit Facility was $1.0 million, net of $47.0 million in borrowings as noted above, and $2.0 million in standby letters of credit issued for various corporate purposes.  

Interest Rate Swap Agreements

In July 2014, the Company entered into two interest rate swap agreements to mitigate its exposure to fluctuations in interest rates. The interest rate swap agreements had initial notional amounts of $8.9 million and $13.2 million which fix interest rates over the life of the respective interest rate swap agreement at 4.21% and 4.73%, respectively.  The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not the Company’s assets or liabilities.  The interest payments under these agreements are settled on a net basis.  The Company has not designated the interest rate swaps as cash flow hedges and therefore the changes in the fair value of the interest rate swaps are included within interest expense in the condensed consolidated statements of income.

The fair value of the interest rate swaps at December 31, 2014 and September 30, 2015 represented a liability of $431,000 and $683,000, respectively, and is reflected in other long-term liabilities on the condensed consolidated balance sheets.  Refer to Note 15 for further discussion of fair value of the interest rate swap agreements.  The Company’s credit risk related to these agreements is considered low because the swap agreements are with a creditworthy financial institution.

The following table sets forth our interest rate swap agreements at September 30, 2015 (dollars in thousands):

Real Estate Debt

As discussed in Note 3, on April 15, 2014, the Company acquired BHR and assumed a $1.8 million term loan, which was subsequently paid off in 2014 with proceeds from the Company’s initial public offering.  The Company’s total real estate debt totaled $24.6 million at December 31, 2014. The terms of the debt are discussed below. On March 9, 2015, the Company repaid in full all outstanding real estate debt as discussed further below.  The Company did not incur any early termination penalties in the repayment of the notes.

 

Concorde Real Estate

In conjunction with the consolidation of Concorde Real Estate on June 27, 2012, the Company assumed a $3.5 million promissory note which was refinanced in July 2012 and replaced with loans totaling $7.4 million in two tranches to fund the renovation of the Desert Hope facility. The first tranche totaled $4.4 million and bore interest at 3.0% plus one-month LIBOR, with interest payable monthly, and required a lump sum principal payment in July 2013. The second tranche totaled $3.0 million, bore interest at 2.0% plus the lender’s prime rate (3.25% at December 31, 2012), with interest payable monthly, and required a lump sum principal payment in July 2013.

 

In May 2013, Concorde Real Estate refinanced these two outstanding loans with a $9.6 million note payable that matured on May 15, 2018. The additional debt in 2013 was used to redeem the preferred membership interests in Concorde Real Estate. The note required monthly principal payments of $53,228 plus interest and a balloon payment of $6.6 million due at maturity. Interest was calculated based on a 360 day year and accrued at the Company’s option of either (i) one-month LIBOR (as defined in the agreement) plus 2.5%, with such rate fixed until the next monthly reset date, or (ii) floating at one-month LIBOR (as defined in the agreement) plus 2.5%. In the event that the Company elected the floating option for either two consecutive periods or a total of three periods, the floating rate increased by 0.25%. The interest rate at December 31, 2014 was 2.67% and the amount outstanding at December 31, 2014 was $8.6 million.  The Company repaid this note in full on March 9, 2015 for its stated outstanding principal balance and did not incur any early termination fees.

The note was guaranteed by the Company and its CEO and President and was secured by a deed of trust and the assignment of certain leases and rents. The note contained financial covenants that require the Company to maintain a fixed charge coverage ratio of not less than 1.25 to 1.00. The note also contained a cross-default clause linking a default under the note to the occurrence of a default by any guarantor or an affiliate of a guarantor with respect to any other indebtedness.

Greenhouse Real Estate

 

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Greenhouse Real Estate entered into a $13.2 million construction loan facility (the “Construction Facility”) with a financial institution on October 8, 2013 to refinance existing debt related to a 70-bed facility and to fund the construction of an additional 60 beds at this facility located in Grand Prairie, Texas. Monthly draws could be made against the Construction Facility based on actual construction costs incurred.

Interest, which was payable monthly, was calculated based on a 360 day year and accrued at the Company’s option of either (i) one-month LIBOR (as defined in the agreement) plus 3.0%, with such rate fixed until the next monthly reset date, or (ii) floating at one-month LIBOR (as defined in the agreement) plus 3.0%. In the event that the Company elected the floating option for either two consecutive periods or a total of three periods, the floating rate increased by 0.25%.

At Greenhouse Real Estate’s option, the Construction Facility was convertible to a permanent term loan with an extended maturity of October 31, 2019 provided (i) there was no default, (ii) the construction was 100% complete, (iii) there was no material adverse change, as determined by the financial institution in its sole discretion, in the financial condition of Greenhouse Real Estate and (iv) other terms and conditions were satisfied. The maximum amount that may be converted was 65% of the appraised value at the time of the conversion. If at the time of the conversion the loan value exceeded the 65% loan-to-value ratio, Greenhouse Real Estate was permitted to make principal payments to reduce the loan-to-value to the 65% threshold. In the event Greenhouse Real Estate did not elect to or was unable to convert the Construction Facility to a permanent term loan, Greenhouse Real Estate was required to pay an exit fee equal to 3.0% of the then outstanding balance. Principal payments at the time of the conversion were to be calculated based on a 15-year amortization schedule, and monthly principal and interest payments are required with a balloon payment at maturity.

The Construction Facility was secured by a deed of trust and the assignment of certain leases and rents and was guaranteed by the Company and the CEO and President of the Company. Greenhouse Real Estate was required to maintain a minimum debt service coverage ratio of 1.25 to 1.00. The note also contained a cross-default clause linking a default under the Greenhouse Real Estate loan to the occurrence of a default by any guarantor or an affiliate of a guarantor with respect to any other indebtedness.

In August 2014, the outstanding balance of the construction loan was converted to a $12.7 million permanent loan that matured in August 2019 and had an annual interest rate equal to the one-month LIBOR plus 2.5%. The permanent loan required monthly principal payments of $70,778 plus interest and a balloon payment of $8.5 million at maturity.  The outstanding balance at December 31, 2014 was $12.5 million and the interest rate was 2.67%.  The Company repaid this note in full on March 9, 2015 for its stated outstanding principal balance and did not incur any early termination fees.

Academy Real Estate

In May 2013, the Company, through Academy Real Estate, obtained a $3.6 million note payable (the “Academy Loan”) from a financial institution to fund a portion of the acquisition of the property located in Riverview, Florida (just outside of Tampa, Florida). The note payable matured on November 10, 2013 and was renewed under identical terms.  In connection with the Company’s sale to BHR of its membership interests of Academy Real Estate on December 10, 2013, BHR assumed the $3.6 million note payable. Interest, which was payable monthly, was calculated based on a 360 day year and accrued at the Company’s option of either (i) one-month LIBOR (as defined in the agreement) plus 3.0%, with such rate fixed until the next monthly reset date or (ii) floating at one-month LIBOR (as defined in the agreement) plus 3.0%.  In the event that the Company elected the floating option for either two consecutive periods or a total of three periods, the floating rate increases by 0.25%. In April 2014, the Company effected an amendment to the Academy Loan to extend the maturity date to July 14, 2019. Under the amended Academy Loan, the Company made monthly principal payments of $30,000 plus interest commencing in October 2014 and a balloon payment of remaining unpaid principal of $1.9 million at the maturity date.  The agreement required the Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00 and contains other restrictive financial covenants. The agreement also contained a cross-default clause linking a default under the Academy Real Estate note to the occurrence of a default by any guarantor or an affiliate of a guarantor with respect to any other indebtedness. The outstanding balance at December 31, 2014 was $3.5 million and the interest rate was 3.17%.  The Company repaid this note in full on March 9, 2015 for its stated outstanding principal balance and did not incur any early termination fees.

At December 31, 2013 and 2014, the Company was in compliance with the financial covenants of the BHR debt. The instances of noncompliance under its prior credit facility created a cross-default with the Construction Facility, the Concorde Real Estate note payable and the Academy Real Estate note payable.  The Company obtained a waiver for the covenant defaults under its prior credit facility for 2012, and the amendment and restatement of its prior credit facility in April 2014 included a waiver for the noncompliance of the financial covenants and negative covenants that occurred under the prior credit facility in 2013 and the quarter ended March 31, 2014.  The Company also obtained waivers for the cross-defaults under the Construction Facility, the Concorde Real Estate note payable and the Academy Real Estate note payable.

 

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Behavioral Healthcare Realty, LLC

As discussed in Note 3, the Company assumed a $1.7 million term loan in conjunction with the acquisition of BHR. The Company refinanced this loan with a financial institution and the new loan required monthly principal payments of $35,855 plus interest at 5.0% with a balloon payment of $1.4 million due at maturity in April 2015. The Company used a portion of the net proceeds from the IPO received in October 2014 to repay in full the outstanding balance of the term loan of $1.6 million on October 7, 2014.

Acquisition Related Debt

On August 31, 2012, the Company acquired certain assets of AJG Solutions, Inc. and its subsidiaries and the equity of B&B Holdings INTL LLC (collectively, the “TSN Acquisition”) from the two individual owners of such entities (the “TSN Sellers”). The Company financed a portion of the TSN Acquisition with the following sources of debt. The Company entered into a $6.2 million subordinated note payable with the TSN Sellers. Under the terms of the agreement, the note is separated into the following tranches: (i) $2.2 million paid in equal monthly principal installments over 36 months, bearing interest at 5% per annum, (ii) $2.5 million due on August 31, 2015 (the “Balloon Payment”), bearing interest at 3.125% per annum and (iii) a contingent balloon payment of up to $1.5 million due on August 31, 2015 (the “Contingent Payment”), bearing interest at 3.125% per annum. The Contingent Payment is contingent on the achievement of certain performance metrics over the term of the note. Due to the contingent nature of the Contingent Payment, a discount of approximately 13% was applied to the Contingent Payment to reflect the weighted-average probability the Contingent Payment would not be made. In April 2013, $0.5 million outstanding under the Balloon Payment was converted into 95,451 shares of the Company’s common stock at a conversion price of $5.24 per share. The Company estimates the fair value of the Contingent Payment each reporting period through an analysis of the TSN Sellers’ estimated achievement of the performance metrics specified in the agreement. Based upon this analysis, the Company determined a claw back of $0.5 million of the Contingent Payment existed at December 31, 2013 and, accordingly, adjusted the outstanding balance of the Balloon Payment to $3.0 million at that date. In addition to the claw back on the Contingent Payment, the Company has included a reduction of 118,576 shares of common stock in the computation of its earnings per share for the year ended December 31, 2013 to reflect the claw back of those shares based upon this analysis.  On August 15, 2014, the Company entered into two settlement agreements with one of the TSN Sellers.  Pursuant to the terms of the settlement agreements, the Company agreed to pay $7.6 million in exchange for full and final satisfaction of all obligations to the party.  As a result, the Company repaid $0.2 million of the note payable and $1.5 million of Balloon Payment.   

On August 31, 2015, the Company paid in full the remaining note payable balance and entered into an amendment on the Balloon Payment with the remaining party of the TSN Sellers.  Under the modified note, the Company made a principal payment of $0.3 million at the date of execution, extended the maturity date to February 29, 2016, and increased the interest rate to 6.25% per annum.

At December 31, 2014 and September 30, 2015, the outstanding balance remaining under the seller subordinated notes payable was $1.8 million and $1.2 million, respectively.  

Subordinated Debt Issued with Detachable Warrants (Related Party and Non-related Party)

In March and April 2012, the Company issued $1.0 million of subordinated promissory notes, of which $0.2 million was issued to a director of the Company. The notes bore interest at 12% per annum. The notes were scheduled to mature at various dates throughout 2015 and 2017. Interest was payable monthly and the principal amount was due, in full, on the applicable maturity date of the note. In connection with the issuance of these notes, the Company issued detachable warrants to the lenders to purchase a total of 112,658 shares of common stock of AAC at $0.64 per share. The warrants were exercisable at any time up to their expiration on March 31, 2022. The Company recorded a debt discount of $0.1 million related to the warrants which reduced the carrying value of the subordinated notes.  As of December 31, 2014, the outstanding balance of the notes, net of the unamortized debt discount of $55,000, was $0.9 million, of which $0.2 million was owed to a director of the Company. On February 27, 2015, the Company repaid in full the $1.0 million of the outstanding subordinated promissory notes.  The Company did not incur any early termination fees.

The Company calculated the fair value of warrants issued with the subordinated notes using the Black-Scholes valuation method. The following assumptions were used to value the warrants: a stock price of $1.36, an exercise price of $0.64, expected life of 10 years, expected volatility of 20%, risk free interest rates ranging from 2.1% to 4.0% and no expected dividend yield. In March 2014, warrants representing the right to purchase 106,728 shares of common stock of AAC were exercised and a total of 106,728 shares of common stock of AAC were issued to the exercising warrant holders, including 23,717 shares to a director of the Company.

 

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Mezzanine Equity

Changes to mezzanine amounts during the nine months ended September 30, 2015 were as follows (dollars in thousands): 

On February 25, 2015, the Company exercised its call provision and redeemed 100% of the outstanding Series A Preferred Units for a total redemption price of approximately $8.5 million which included $0.2 million for the 3.0% call premium and $0.3 million for unpaid preferred returns.

 

 

Stock Based Compensation Plans

In March 2014, the Company granted 5,834 shares of fully vested common stock of AAC to each of its five non-employee directors. The Company recognized $0.2 million of compensation expense in the first quarter of 2014 as a result of these grants. The fair value on the award date was $8.12 per share, as estimated by the Company’s management.

On April 11, 2014, the Company granted a total of 82,509 shares of restricted common stock of AAC to two employees.  The fair value on the award date was $8.12 per share. 

On October 7, 2014, the Company granted a total of 158,000 shares of restricted common stock to employees as part of the Company’s 2014 Equity Incentive Plan.

On January 7, 2015, the Company granted a total of 400,000 shares of restricted common stock to employees as part of the Company’s 2014 Equity Incentive Plan.

On January 8, 2015, the Company granted 2,544 shares of fully vested common stock to each of its five non-employee directors. The Company recognized $- million and  $0.4 million of compensation expense for the three and nine months ended September 30, 2015, respectively, as a result of these grants. The fair value on the award date was $29.37 per share based on the closing market value.

On May 19, 2015, the Company’s shareholders approved the Company’s Employee Stock Purchase Plan (“ESPP”).  The ESPP enables eligible employees to purchase shares of the Company’s common stock through a payroll deduction during certain option periods, generally commencing on January 1 and July 1 of each year and ending on June 30 and December 31 of each year.  On the exercise date (the last trading day of each option period), the cumulative amount deducted from each participant’s salary during that option period will be used to purchase the maximum number of shares of the Company’s common stock at a purchase price equal to the lesser of (i) 85% of the closing market price of our Common Stock as quoted on the New York Stock Exchange on the exercise date or (ii) 85% of the closing market price of the Company’s common stock as quoted on the New York Stock Exchange on the grant date, subject to certain limitations and restrictions.  In July 2015, the Company issued 12,637 shares of the Company’s common stock at a stock price of $25.68 in connection with employee deductions of $0.3 million contributed in the January 1, 2015 through June 30, 2015 ESPP option period.

For the three and nine months ended September 30, 2015, the Company recognized $45,000 and $168,000, respectively, of compensation expense related to the ESPP. The company did not recognize any expense related to the ESPP in 2014.

The Company recognized $0.4 million and $1.3 million in equity-based compensation expense for the three months ended September 30, 2014 and 2015, respectively, and $1.2 million and $4.1 million for the nine months ended September 30, 2014 and 2015, respectively.  As of September 30, 2015, there was $11.6 million of unrecognized compensation expense related to unvested restricted stock, which is expected to be recognized over the remaining weighted average vesting period of 2.9 years.

 

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A summary of share activity under the Company’s 2014 Equity Incentive Plan is set forth below:

 

 

 

The provision for income taxes for the three and nine months ended September 30, 2014 reflects an effective tax rate of 42.7% and 43.4%, respectively, compared to an effective tax rate for the three and nine months ended September 30, 2015 of 27.0% and 35.8%, respectively.  The decrease in effective tax rate for the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014 was primarily attributable to a discrete item related to certain state income tax incentives recognized during the third quarter of 2015.

 

 

An entity beneficially owned by Mr. Cartwright, our Chief Executive Officer, owns an airplane that the Company uses for business purposes in the course of its operations pursuant to a written lease agreement. The Company pays an hourly rate for use of the airplane as well as fuel and certain maintenance costs.  For the three and nine months ended September 30, 2015, the Company made aggregate payments to the related entity for use of the airplane of approximately $0.3 million and $0.7 million, respectively.

 

The carrying amounts reported at December 31, 2014 and September 30, 2015 for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value because of the short-term maturity of these instruments and are categorized as Level 1 within the GAAP fair value hierarchy. The carrying amount of the Company’s debt approximates fair value because interest rates approximate the current rates available to the Company.

The Company has debt with variable and fixed interest rates. The fair value of debt with fixed interest rates was determined using the quoted market prices of debt instruments with similar terms and maturities, which are considered Level 2 inputs. The fair value of debt with variable interest rates was also measured using Level 2 inputs, including good faith estimates of the market value for the particular debt instrument, which represent the amount an independent market participant would provide, based upon market observations and other factors relevant under the circumstances. The carrying value of such debt approximated its estimated fair value at December 31, 2014 and September 30, 2015.

The Company has entered into interest rate swap agreements to manage exposure to fluctuations in interest rates.  Fair value of the interest rate swaps is determined using a pricing model based on published interest rates and other observable market data. The fair value was determined after considering the potential impact of collateralization, adjusted to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.  The fair value measurement of interest rate swaps utilizes Level 2 inputs.  At September 30, 2015, the fair value of the interest rate swaps represented a liability of $0.7 million.  Refer to Note 11 for further discussion of the interest rate swap agreements.

 

 

Horizon Blue Cross Blue Shield of New Jersey v. Avee Laboratories et al.

On September 4, 2013, Horizon Blue Cross Blue Shield of New Jersey (“Horizon”) filed an amended complaint in the Superior Court of New Jersey against several defendants, including Leading Edge Recovery Center, LLC, one of the Company’s subsidiaries. Leading Edge Recovery Center, LLC formerly operated a drug and alcohol treatment facility in New Jersey. Horizon alleges the defendants submitted and caused others to submit unnecessary drug tests in violation of New Jersey law and is seeking recovery for monetary and treble damages. The parties have reached a confidential settlement in this matter and consider it closed. The Company recognized $1.5 million in reserves related to this matter in the second quarter of 2015, and increased the reserve amount by $0.7 million to $2.2 million as of September 30, 2015.  

 

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State of California

 

On July 29, 2015, the Superior Court of the State of California court unsealed a criminal indictment returned by a grand jury against our subsidiaries ABTTC, Inc. dba A Better Tomorrow Treatment Centers, Forterus, Inc. and Forterus Health Care Services, Inc., Jerrod N. Menz, our former President and former member of our Board of Directors, as well as a current facility-level employee and three former employees.  The indictment was returned in connection with a criminal investigation by the California Department of Justice and charged the defendants with second-degree murder and dependent adult abuse in connection with the death of a client in 2010 at one of our former locations. We believe the allegations are legally and factually unfounded and intend to contest them vigorously. Given the early stage of this proceeding, we cannot estimate the amount or range of loss if the defendants were to be convicted; however, such loss could be material.

 

Kasper v. AAC Holdings, Inc. et al. and Tenzyk c. AAC Holdings, Inc. et al.

 

On August 24, 2015, a shareholder filed a purported class action in the United States District Court for the Middle District of Tennessee against the Company and certain of its current and former officers.  The plaintiff generally alleges that the Company and certain of its current and former officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements and failing to disclose certain information.  On September 14, 2015, a second class action against the same defendants asserting essentially the same allegations was filed in the same court.  On October 26, 2015, the court entered an order consolidating these two described actions into one action.  The Company intends to defend this action vigorously.  At this time the Company cannot predict the results of litigation with certainty, and cannot estimate the amount or range of loss, if any.  The Company believes the disposition of this action will not have a material adverse effect on its consolidated results of operations or consolidated financial position.

Other

The Company is aware of various other legal matters arising in the ordinary course of business. To cover these types of claims, the Company maintains insurance it believes to be sufficient for its operations, although some claims may potentially exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. After taking into consideration the evaluation of such matters by the Company’s legal counsel, the Company’s management believes the outcome of these matters will not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

 

 

On October 1, 2015, the Company completed the acquisition of the assets of Sunrise House Foundation, Inc., a non-profit corporation operating a 110-bed substance abuse treatment center, 30 halfway house beds and two outpatient programs all in Western New Jersey, for a total purchase price of $6.6 million in cash.

On October 2, 2015, the Company completed the closing of two financing facilities with affiliates of Deerfield Management Company, L.P. (“Deerfield”). The capital commitment consists of $25.0 million of subordinated convertible debt and up to $25.0 million of unsecured subordinated debt, together with an incremental facility of up to an additional $50.0 million of subordinated convertible debt (subject to certain conditions). The Company drew down $25.0 million of subordinated convertible debt at closing and will use the proceeds to fund its active acquisition strategy, its de novo pipeline and for other corporate purposes.  The $25.0 million of subordinated convertible debt bears interest at an annual rate of 2.50% and matures on September 30, 2021. The $25.0 million of subordinated convertible debt funded at closing is convertible into shares of the Company’s common stock at $30.00 per share.

The Company may borrow up to $25.0 million of unsecured subordinated debt that will bear interest at an annual rate of 12.0% and mature on September 30, 2020. The $25.0 million of unsecured subordinated debt may be drawn for acquisition financing through September 30, 2016 and can be repaid under certain conditions without penalty prior to October 2, 2017.

On October 16, 2015, the Company began treating clients at its River Oaks facility, a 162-bed residential treatment center located near Tampa, Florida after completing construction and receiving licensure. The total construction cost of the River Oaks facility was $18.8 million.

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This quarterly report contains forward-looking statements within the meaning of the federal securities laws.  These forward-looking statements are made only as of the date of this quarterly report.  In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “may,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words.  Forward-looking statements may include information concerning AAC Holdings, Inc.’s (collectively with its subsidiaries; “Holdings” or the “Company”) possible or assumed future results of operations, including descriptions of Holdings’ revenues, profitability, outlook and overall business strategy.  These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from the information contained in the forward-looking statements.  These risks, uncertainties and other factors include, without limitation: (i) our inability to operate our facilities; (ii) our reliance on our sales and marketing program to continuously attract and enroll clients; (iii) a reduction in reimbursement rates by certain third-party payors for inpatient and outpatient services and point of care and definitive lab testing; (iv) our failure to successfully achieve growth through acquisitions and de novo expansions; (v) uncertainties regarding the timing of the closing of pending acquisitions and the integration thereof; (vi) our failure to achieve anticipated financial results from contemplated acquisitions; (vii) the possibility that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the acquisitions; (viii) a disruption in our ability to perform diagnostic drug testing services; (ix) maintaining compliance with applicable regulatory authorities, licensure and permits to operate our facilities and lab; (x) a disruption in our business related to the recent indictment of certain of our subsidiaries and current and former employees; (xi) our inability to agree on conversion and other terms for the balance of convertible debt; (xii) our inability to meet our covenants in the loan documents; (xiii) our inability to obtain senior lender consent to exceed the current $50 million limit in unsecured subordinated debt; (xiv) our inability to integrate newly acquired facilities; (xv) a disruption to our business and reputational and potential economic risks associated with the civil securities claims brought by shareholders; and (xvi) general economic conditions, as well as other risks discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K, and other filings with the Securities and Exchange Commission.  As a result of these factors, we cannot assure you that the forward-looking statements in this quarterly report will prove to be accurate.  Investors should not place undue reliance upon forward looking statements.

Overview

We believe we are a leading provider of inpatient substance abuse treatment services for individuals with drug and alcohol addiction.  As of September 30, 2015, we operated eight residential substance abuse treatment facilities located throughout the United States, focused on delivering effective clinical care and treatment solutions across 643 beds, which includes 400 licensed detoxification beds. We also operate eight standalone outpatient centers and an overeating behavioral disorder treatment center, FitRx. As of September 30, 2015, we had three residential facilities under development including a 24-acre, 162-bed campus near Tampa, Florida which began treating clients in October 2015; an 84-bed chemical dependency recovery hospital (“CDRH”) near Aliso Viejo, California; and a 96-acre, 150-bed treatment facility in Ringwood, New Jersey.  

With the completed acquisition of Sunrise House and the opening of our River Oaks facility in October 2015, we added 110 and 162 beds, respectively, including 82 licensed detoxification beds, for a total of 915 beds across ten residential substance abuse treatment facilities, as well as ten standalone outpatient centers.  In addition, we are in the process of expanding our Recovery First facility in the Fort Lauderdale area to accommodate 22 additional detoxification beds, and are also expanding The Oxford Centre facility to accommodate 44 additional residential beds and 48 sober living beds.  

The majority of our approximately 1,500 employees, as of September 30, 2015 are highly trained clinical staff who deploy research-based treatment programs with structured curricula for detoxification, residential treatment, partial hospitalization and intensive outpatient care.  By applying a tailored treatment program based on the individual needs of each client, many of whom require treatment for a co-occurring mental health disorder, such as depression, bipolar disorder and schizophrenia, we believe we offer the level of quality care and service necessary for our clients to achieve and maintain sobriety.

We believe we are also one of the largest internet marketers in the addiction treatment industry with respect to website visits and leads generated. Following our recent acquisition of Referral Solutions Group, LLC (“RSG”) on July 2, 2015, combined with our previously existing internet assets, we now operate a broad portfolio of internet assets that services millions of website visits each month. RSG, through its wholly owned subsidiary Recovery Brands, LLC (“Recovery Brands”), a leading publisher of “authority” websites such as Rehabs.com and Recovery.org, serves families and individuals struggling with addiction and seeking treatment options through comprehensive online directories, treatment provider reviews, forums and professional communities.  Recovery Brands also provides online marketing solutions to other treatment providers such as enhanced facility profiles, audience targeting, lead generation and tools for digital reputation management.

 

 

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Facilities

The following table presents information, as of September 30, 2015, about our network of substance abuse treatment facilities, including current facilities, facilities under development and properties under contract:

 

 

 

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Recent Developments

Existing Facilities and Ancillary Services

On January 1, 2015, we increased capacity at our Forterus facility in Temecula, California with the addition of 31 beds, including 24 detoxification beds.

On January 6, 2015, we entered into an office space lease (the “Lease Agreement”) for our new corporate headquarters and call center pursuant to which AAC agreed to lease approximately 102,000 square feet of office space located in Brentwood, Tennessee. We are relocating to the new headquarters in the fourth quarter of 2015.

On January 8, 2015, our 20,000 square foot substance abuse outpatient center in Las Vegas, Nevada, received licensure for intensive outpatient treatment services and immediately began treating patients at the facility.

On February 18, 2015, our 20,000 square foot substance abuse outpatient center in Arlington, Texas, received licensure for intensive outpatient treatment services and began treating patients at the facility in April 2015.

In April 2015, we began performing definitive and confirmatory lab testing for AAC facilities in Rhode Island and California.

In August 2015, we completed an 8,000-square-foot expansion of our lab in Brentwood, Tennessee.

New Property Developments and Acquisitions

On February 20, 2015, we acquired the assets of Recovery First, a Florida-based provider of substance abuse treatment and rehabilitation services, including a 63-bed inpatient substance abuse treatment facility in the greater Fort Lauderdale, Florida area, for cash consideration of $13.1 million (the “Recovery First Acquisition”).  

On February 24, 2015, we acquired a property in Ringwood, New Jersey for aggregate cash consideration of $6.4 million, which we expect to develop into an inpatient facility with approximately 150 beds (the “Ringwood Property Acquisition”).  We expect to invest approximately $16.0 million for renovations and construction.

On April 1, 2015, we acquired an 84-bed hospital in southern California for an aggregate purchase price of $13.5 million in cash (the “Aliso Viejo Acquisition”). We began renovation and rehabilitation of the facility in the second quarter of 2015 and expect to apply for a license to operate it as a CDRH. We expect to invest approximately $5.0 million for renovations and construction and have targeted a completion date for the first half of 2016.

 

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On April 17, 2015, we completed the acquisition of CSRI, a provider of intensive outpatient substance abuse treatment services in Greenville, Portsmouth and South Kingstown, Rhode Island, for $665,000 in cash and approximately 42,460 shares of our common stock (the “CSRI Acquisition”).

On April 17, 2015, we acquired certain marketing assets with a value of $1.1 million for cash consideration of $0.5 million and 17,110 shares of the Company’s common stock.

On July 2, 2015, we acquired RSG, a leading publisher in the substance abuse treatment industry with a comprehensive portfolio of websites and marketing assets, for aggregate consideration of approximately $32.5 million in cash and 540,193 shares of our common stock (the “RSG Acquisition”).

On July 2, 2015, we also acquired Taj Media, a premier digital marketing agency with significant experience in the substance abuse treatment industry, for aggregate consideration of approximately $2.2 million in cash and 37,253 shares of our common stock (the “Taj Media Acquisition”).

On August 10, 2015, we completed the acquisition of The Oxford Centre, a Mississippi-based provider of substance abuse treatment and rehabilitation services, including a 76-bed inpatient substance abuse treatment facility in Etta, Mississippi and three outpatient facilities in Oxford, Tupelo and Olive Branch, Mississippi, for an aggregate of $35.0 million in cash and the assumption of certain liabilities (the “Oxford Centre Acquisition”).

On October 1, 2015, we completed the acquisition of Sunrise House, a New Jersey-based provider of substance abuse treatment and rehabilitation services, including a 110-bed inpatient substance abuse treatment facility in Lafayette, New Jersey, for cash consideration of $6.6 million and the assumption of certain liabilities (the “Sunrise House Acquisition”).

On October 16, 2015, we began treating clients at our River Oaks facility, a 162-bed residential treatment center located near Tampa, Florida after completing construction and receiving licensure.  The total construction cost of the River Oaks facility was $18.8 million.

Financing

On March 9, 2015, we entered into a five-year, $125.0 million senior secured credit facility with Bank of America, N.A., as administrative agent for the lenders party thereto (the “2015 Credit Facility”), which consists of a $50.0 million revolver and a $75.0 million term loan.  We used a portion of the proceeds from the $75.0 million term loan to repay $24.9 million of prior indebtedness.   On July 1, 2015, we borrowed $15.0 million under the revolver, and on August 7, 2015, we borrowed an additional $32.0 million under the revolver.  Proceeds were used to fund de novo development projects and acquisitions. For additional discussion related to the 2015 Credit Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financing Relationships.”

On October 2, 2015, we completed the closing of two financing facilities with affiliates of Deerfield Management Company, L.P. (“Deerfield”). The capital commitment consists of $25.0 million of subordinated convertible debt and up to $25.0 million of unsecured subordinated debt, together with an incremental facility of up to an additional $50.0 million of subordinated convertible debt (subject to certain conditions). We drew down $25.0 million of subordinated convertible debt at closing and will use the proceeds to fund our active acquisition strategy, de novo pipeline and for other corporate purposes.  For additional discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financing Relationships.”

Components of Results of Operations

Client Related Revenue.  Our client related revenue primarily consists of service charges related to providing addiction treatment and related services, including the collection and laboratory testing of urine for controlled substances. We recognize revenues at the estimated net realizable value in the period in which services are provided. For the three and nine months ended September 30, 2015 and September 30, 2014, approximately 90% of our client related revenues were reimbursable by commercial payors, including amounts paid by such payors to clients, with the remaining revenues payable directly by our clients. Given the scale and nationwide reach of our network of substance abuse treatment facilities, we generally have the ability to serve clients located across the country from any of our facilities, which allows us to operate our business and analyze revenue on a system-wide basis rather than focusing on any individual facility. For the three and nine months ended September 30, 2015 and 2014, no single payor accounted for more than 15.2% and 15.9%, and 18.6% and 15.9% of our revenue reimbursements, respectively.

The following table summarizes the composition of our client related revenues for detoxification and residential treatment services, partial hospitalization and intensive outpatient treatment services, and point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services for the three and nine months ended September 30, 2014 and 2015:

 

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¹ Professional groups and other ancillary services represent less than 10% of the total percentage of commercial payor revenues for point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services.

We recognize revenues from commercial payors at the time services are provided based on our estimate of the amount that payors will pay us for the services performed. We estimate the net realizable value of revenues by adjusting gross client charges using our expected realization and applying this discount to gross client charges. Our expected realization is determined by management after taking into account the type of services provided and the historical collections received from the commercial payors, on a per facility basis, compared to the gross client charges billed.

Our accounts receivable primarily consists of amounts due from commercial payors. The client self-pay portion is usually collected upon admission and in limited circumstances the client will make a deposit and negotiate the remaining payments as part of the services. We do not recognize revenue for any amounts not collected from the client in either of these situations. From time to time, we may provide free care to a limited number of clients, which we refer to as scholarships. We do not recognize revenues for scholarships provided. Included in the aging of accounts receivable are amounts for which the commercial insurance company paid out-of-network claims directly to the client and for which the client has yet to remit the insurance payment to us (which we refer to as “paid to client”). Such amounts paid to clients continue to be reflected in our accounts receivable aging as amounts due from commercial payors. Accordingly, our accounts receivable aging does not provide for the distinct identification of paid to client receivables.

Other Revenue.  Our other revenue consists of service charges from the delivery of quality targeted leads to behavioral and mental health service businesses through our operating subsidiary RSG, which was acquired on July 2, 2015.  Revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the fee for services is fixed or determinable, and collectability of the fee is reasonably assured. 

Operating Expenses.  Our operating expenses are primarily impacted by nine categories of expenses: salaries, wages and benefits; advertising and marketing; professional fees; client related services; other operating expenses; rentals and leases; provision for doubtful accounts; depreciation and amortization; and acquisition-related expenses.

 

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Key Drivers of Our Results of Operations  

Our results of operations and financial condition are affected by numerous factors, including those described under “Risk Factors” in our Form 10-K filed with the SEC on March 11, 2015, our Quarterly Report on Form 10-Q filed with the SEC on August 3, 2015, and elsewhere in this Form 10-Q and those described below:

 

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The following table presents, for the nine months ended September 30, 2015, the average length of stay and average billed days with respect to detoxification and residential treatment services and partial hospitalization and intensive outpatient services of our commercial payor clients:

 

The average length of stay and average billed days with respect to our private pay clients, which is not separately allocated to any category of service is approximately 33 days for the nine months ended September 30, 2015, compared to 35 days for the nine months ended September 30, 2014.

 

 

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Results of Operations

Comparison of Three Months ended September 30, 2014 to Three Months ended September 30, 2015

The following table presents our consolidated income statements for the periods indicated (dollars in thousands):

 

Client Related Revenue

Client related revenues increased $17.1 million, or 46.7%, to $53.7 million for the three months ended September 30, 2015 from $36.6 million for the three months ended September 30, 2014.  Revenues were positively impacted by an increase in average daily residential census, outpatient visits at our eight standalone outpatient centers, and an increase in high complexity lab testing. As a percentage of client related revenues, point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services were 26% and 23% for the three months ended September 30, 2015 and 2014, respectively  

Our average daily residential census increased 36% to 560 clients for the three months ended September 30, 2015 from 413 clients for the three months ended September 30, 2014.  The increase in the residential average daily census was primarily driven by the 31 bed expansion at Forterus in January 2015, the Recovery First Acquisition, which added 56 beds, in February 2015, and the Oxford Centre Acquisition, which added 76 beds, in August 2015.  

With the opening of the Desert Hope Outpatient Center in January 2015, the opening of the Greenhouse Outpatient Center in April 2015, the CSRI Acquisition in April 2015 (which added three standalone outpatient centers), and the Oxford Centre Acquisition

 

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in August 2015 (which added three standalone outpatient centers), we operated eight standalone outpatient centers as of September 30, 2015.  We had 4,329 outpatient visits at our eight standalone outpatient centers for the three months ended September 30, 2015.  

On a sequential quarter basis, we experienced a decline of 12% in point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services as a percentage of client related revenues for the three months ended September 30, 2015 compared to the three months ended June 30, 2015.  Point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services as a percentage of client related revenues for three months ended September 30, 2015 and June 30, 2015 was 26% and 38%, respectively.  The decline as a percentage of client related revenues was primarily the result of a combination in a decrease in the number of tests performed on a per client basis and a decline in reimbursement rates for point-of-care testing and definitive laboratory services during the third quarter of 2015. We currently anticipate continued reimbursement pressure on point-of care testing and definitive laboratory services and as a result expect a marginal decline in point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services as a percentage of client-related revenues in subsequent quarters.

Other Revenue

Other revenue increased $3.7 million for the three months ended September 30, 2015 compared to zero other revenue for the three months ended September 30, 2014.  Our other revenue consists of service charges from the delivery of quality targeted leads to behavioral and mental health service businesses through our operating subsidiary Referral Solutions Group, LLC, which was acquired on July 2, 2015.  

Salaries, Wages and Benefits

Salaries, wages and benefits increased $8.2 million, or 52.2%, to $23.8 million for the three months ended September 30, 2015 from $15.6 million for the three months ended September 30, 2014. The increase in salaries and wages was primarily impacted by growth in our residential facilities and our standalone outpatient centers.  Our number of employees increased by approximately 670 employees, or 81%, to approximately 1,500 employees at September 30, 2015 from approximately 830 employees at September 30, 2014.  As a percentage of revenues, salaries, wages and benefits were 41.4% of total revenues for the three months ended September 30, 2015 compared to 42.7% of total revenues for the three months ended September 30, 2014.   

Advertising and Marketing

Advertising and marketing expenses increased $1.9 million, or 48.1%, to $5.8 million for the three months ended September 30, 2015 from $3.9 million for the three months ended September 30, 2014. The increase in advertising and marketing expense was primarily driven by the continued expansion of our national advertising and marketing programs, including the acquisition of RSG and Taj Media in July 2015.  As a percentage of revenues, advertising and marketing expenses were 10.1% of total revenues for the three months ended September 30, 2015 compared to 10.7% of total revenues for the three months ended September 30, 2014.

Professional Fees

Professional fees increased $1.7 million, or 96.5%, to $3.4 million for the three months ended September 30, 2015 from $1.7 million for the three months ended September 30, 2014.  As a percentage of revenues, professional fees were 5.9% of total revenues for the three months ended September 30, 2015 compared to 4.7% of total revenues for the three months ended September 30, 2014.  The increase in professional fees was primarily related to approximately $1.4 million in professional fees associated with certain litigation costs in California.

Client Related Services

Client related services expenses increased $1.6 million, or 59.1%, to $4.4 million for the three months ended September 30, 2015 from $2.8 million for the three months ended September 30, 2014. The increase in expense was primarily related to the growth in the average daily residential census to 560 for the three months ended September 30, 2015 from 413 for the three months ended September 30, 2014.  As a percentage of revenues, client related services expenses were 7.7% of total revenues for the three months ended September 30, 2015 compared to 7.6% of total revenues for the three months ended September 30, 2014.

Other Operating Expenses

Other operating expenses increased $1.6 million, or 40.1%, to $5.7 million for the three months ended September 30, 2015 from $4.1 million for the three months ended September 30, 2014. The increase was primarily the result of additional operating expenses associated with 31 bed expansion at Forterus in January 2015, the opening of the Desert Hope Outpatient Center in January 2015, the Recovery First Acquisition in February 2015, the opening of the Greenhouse Outpatient Center in April 2015, and the Oxford Centre

 

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Acquisition in August 2015.   As a percentage of revenues, other operating expenses was 9.9% of total revenues for the three months ended September 30, 2015 compared to 11.1% of total revenues for the three months ended September 30, 2014.  

Rentals and Leases

Rentals and leases increased $1.1 million to $1.6 million for the three months ended September 30, 2015 from $0.5 million for the three months ended September 30, 2014. The increase was primarily the result of increased rent as a result of the bed expansion at Forterus in January 2015, the Recovery First Acquisition in February 2015, the lease associated with our new corporate headquarters and call center beginning in June 2015, and the acquisitions of RSG and Taj Media in July 2015.  As a percentage of revenues, rentals and leases increased to 2.8% of total revenues for the three months ended September 30, 2015, compared to 1.5% of total revenues for the three months ended September 30, 2014.  

Provision for Doubtful Accounts

The provision for doubtful accounts increased $3.2 million to $5.4 million for the three months ended September 30, 2015 from $2.2 million for the three months ended September 30, 2014. As a percentage of total revenues, the provision for doubtful accounts was 9.4% of total revenues for the three months ended September 30, 2015 compared to 6.0% of total revenues for the three months ended September 30, 2014.  The increase in the provision doubtful accounts was primarily attributable to the increase on our days sales outstanding to 93 days at September 30, 2015 from 69 days at September 30, 2014.  

On a sequential quarter basis, our days sales outstanding increased to 93 days at September 30, 2015 from 80 days at June 30, 2015.   Acquired accounts receivable primarily associated with the Oxford Centre Acquisition accounted for approximately 7 days of the increase in days sales outstanding with the remaining increase primarily related to certain timing issues related to our recent acquisitions such as finalizing and implementing payor agreements.

We establish our provision for doubtful accounts based on the aging of the receivables and taking into consideration historical collection experience by facility, services provided, payor source and historical reimbursement rate, current economic trends and percentages applied to the accounts receivable aging categories. As of September 30, 2015, all accounts receivable aged greater than 360 days were fully reserved in our consolidated financial statements. In assessing the adequacy of the allowance for doubtful accounts, we rely on the results of detailed reviews of historical write-offs and recoveries (the hindsight analysis) as a primary source of information to utilize in estimating the collectability of our accounts receivable. We perform the hindsight analysis utilizing rolling twelve-month accounts receivable collection, write-off and recovery data. We supplement this hindsight analysis with other analytical tools, including, but not limited to, historical trends in cash collections compared to net revenues less bad debt and days sales outstanding.

The following table presents a summary of our aging of accounts receivable as of September 30, 2015 and 2014:

Litigation Settlement

Litigation settlement expense increased $0.7 million to $0.9 million for the three months ended September 30, 2015 from $0.1 million for the three months ended September 30, 2014.  In the third quarter of 2015, we recognized an additional $0.7 million of litigation expense related to reserves established for the Horizon matter, and $0.2 million related to other settlements. Total reserves related to the Horizon matter at September 30, 2015 were $2.2 million. For further discussion of significant legal matters, see Note 16 to the Company’s Condensed Consolidated Financial Statements included in this quarterly report for further discussion.

Depreciation and Amortization

Depreciation and amortization expense increased $0.7 million, or 58.9 %, to $1.9 million for the three months ended September 30, 2015 from $1.2 million for the three months ended September 30, 2014. As a percentage of revenues, depreciation and amortization expense was 3.3% of total revenues for each of the three months ended September 30, 2015 and 2014.      

Acquisition-related Expense

Acquisition-related expense was $0.9 million for the three months ended September 30, 2015.   As a percentage of revenues, acquisition-related expense was 1.6% of total revenues for the three months ended September 30, 2015.  The acquisition-related

 

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expense for the three months ended September 30, 2015 was primarily related to professional fees and travel costs associated with our acquisition activity.   For the three months ended September 30, 2014, we did not recognize any acquisition-related expense.

Interest Expense

Interest expense increased by approximately $0.4 million, or 42.4%, to $1.2 million for the three months ended September 30, 2015 from $0.8 million for the three months ended September 30, 2014.   The increase in interest expense was primarily due to an increase in outstanding debt as partially offset by a reduction in interest rates.   The net impact of the increase in outstanding debt and the decrease in interest rates during the third quarter of 2015 was approximately $0.5 million.  Outstanding debt at September 30, 2015 was approximately $121.6 million compared to $46.4 million at September 30, 2014.   The interest rate on the $121.6 million outstanding under the 2015 Credit Facility was 2.83% at September 30, 2015.  Interest expense was also impacted by the change in fair value of the interest rate swaps of approximately $0.1 million during the third quarter of 2015, compared to $0.3 million in the third quarter of 2014, resulting in a $0.2 million decrease to interest expense quarter over quarter.  In July 2014, the Company entered into two interest rate swap agreements to mitigate its exposure to interest rate risks. The interest rate swap agreements had a combined initial notional amount of $22.1 million which fixed the interest rates over the life of interest rate swap agreements.  The Company has not designated the interest rate swaps as hedges and therefore changes in the fair value of the interest rate swaps are included in interest expense in the condensed consolidated income statements.

As a percentage of revenues, interest expense was 2.1% of total revenues for the three months ended September 30, 2015 compared to 2.3% of total revenues for the three months ended September 30, 2014.  

Income Tax Expense

For the three months ended September 30, 2015, income tax expense was $0.6 million, reflecting an effective tax rate of 27.0%, compared to income tax expense of $1.5 million, reflecting an effective tax rate of 42.7% for the three months ended September 30, 2014.  The decrease in income tax expense and the effective tax rate is primarily related to a discrete item related to certain state income tax incentives recognized during the third quarter of 2015.

Net Loss Attributable to Noncontrolling Interest

For the three months ended September 30, 2015, net loss attributable to noncontrolling interest was $0.7 million compared to $0.4 million for the three months ended September 30, 2014, representing an increase in loss of $0.3 million.  The net loss attributable to noncontrolling interest is directly related to our consolidated VIEs.   During the three months ended September 30, 2015 and 2014, we consolidated six and five professional group VIEs, respectively.

 

 

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Comparison of Nine months ended September 30, 2014 to Nine months ended September 30, 2015

The following table presents our consolidated income statements for the periods indicated (dollars in thousands):

 

Client Related Revenue

Client related revenues increased $54.5 million, or 56.9%, to $150.3 million for the nine months ended September 30, 2015 from $95.8 million for the nine months ended September 30, 2014.  Revenues were positively impacted by an increase in average daily residential census, outpatient visits at our eight standalone outpatient centers, and an increase in high complexity lab testing.    

As a percentage of client related revenues, point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services were 32% and 26% for the nine months ended September 30, 2015 and 2014, respectively.   On a sequential quarter basis, we experienced a decline of 12% in point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services as a percentage of client-related revenues for the three months ended September 30, 2015 compared to June 30, 2015.    Point-of-care drug testing, definitive laboratory services, professional groups and other ancillary services as a percentage of client-related revenues for three months ended June 30, 2015 was 38%.  The decline as a percentage of client related revenues was related to a combination in a decrease in the number of tests performed on a per patient basis and a decline in reimbursement rates for point-of-care testing and definitive laboratory services during the third quarter of 2015. We currently anticipate continued reimbursement pressure on point-of care testing and definitive laboratory services and as a result expect a marginal decline in point-

 

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of-care drug testing, definitive laboratory services, professional groups and other ancillary services as a percentage of client-related revenues in subsequent quarters.

Our average daily residential census increased by 35.8% to 527 clients for the nine months ended September 30, 2015 from 388 clients for the nine months ended September 30, 2014.  The increase in average daily census was driven by the 60 bed expansion of Greenhouse in July 2014, the 31 bed expansion at Forterus in January 2015, the Recovery First Acquisition, which added 56 beds, in February 2015, and Oxford Centre Acquisition, which added 76 beds, in August 2015.

With the opening of the Desert Hope Outpatient Center in January 2015, the opening of the Greenhouse Outpatient Center in April 2015, the CSRI Acquisition in April 2015 (which added three standalone outpatient centers), and the Oxford Centre Acquisition in August (which added three standalone outpatient centers), we now operate eight standalone outpatient centers.  We had 8,551 outpatient visits at our eight standalone outpatient centers for the nine months ended September 30, 2015.      

Other Revenue  

 

Other revenue increased $3.7 million for the nine months ended September 30, 2015 compared to zero for the nine months ended September 30, 2014.  Other revenue consists of service charges from the delivery of quality targeted leads to behavioral and mental health service businesses obtained through phone calls from online inquiries and click-throughs from our suite of websites and network ad campaigns through RSG, which we acquired in July 2015.

Salaries, Wages and Benefits

Salaries, wages and benefits increased $22.1 million, or 55.7%, to $61.9 million for the nine months ended September 30, 2015 from $39.7 million for the nine months ended September 30, 2014.  The increase in salaries and wages was primarily impacted by growth in our residential facilities and our standalone outpatient centers.  Our number of employees increased by approximately 670 employees, or 81%, to approximately 1,500 employees at September 30, 2015 from approximately 830 employees at September 30, 2014. Also contributing to the increase was an increase in equity compensation of $1.4 million to $4.1 million for the nine months ended September 30, 2015 from $2.4 million for the nine months ended September 30, 2014.  As a percentage of revenues, salaries, wages and benefits were 40.2% of total revenues for the nine months ended September 30, 2015 compared to 41.5% of total revenues for the nine months ended September 30, 2014.  

Advertising and Marketing

Advertising and marketing expenses increased $4.5 million, or 41.3%, to $15.5 million for the nine months ended September 30, 2015 from $11.0 million for the nine months ended September 30, 2014.  The increase in advertising and marketing expenses was primarily driven by the continued expansion of our national advertising and marketing programs, including the acquisitions of RSG and Taj Media in July 2015.  As a percentage of revenues, advertising and marketing expenses were 10.1% of total revenues for the nine months ended September 30, 2015 compared to 11.5% of total revenues for the nine months ended September 30, 2014.  

Professional Fees

Professional fees were $6.7 million for the nine months ended September 30, 2015 compared to $6.6 million for the nine months ended September 30, 2014. As a percentage of revenues, professional fees were 4.4% of revenues for the nine months ended September 30, 2015 compared to 6.9% of total revenues for the nine months ended September 30, 2014.  The decrease in professional fees as a percentage of total revenues was primarily related to the elimination of customer and billing collection fees as a result of the CRMS Acquisition in April 2014, and as partially offset by approximately $1.4 million in professional fees incurred during the third quarter of 2015 associated with certain litigation in California.

Client Related Services

Client related service expenses increased $2.8 million, or 35.4%, to $10.8 million for the nine months ended September 30, 2015 from $8.0 million for the nine months ended September 30, 2014. The increase in expense was primarily related to increases in clinician fees paid due to the increase in average daily residential census to 527 for the nine months ended September 30, 2015 from 388 for the nine months ended September 30, 2014.   As a percentage of revenues, client related services expenses were 7.0% of total revenues for the nine months ended September 30, 2015 compared to 8.4% of total revenues for the nine months ended September 30, 2014.  The decline in client related services as a percentage of revenues is primarily related to increased revenues for high complexity lab testing for our facilities in Florida and California and increased other revenues which do not require client related services.

 

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Other Operating Expenses

Other operating expenses increased $6.4 million, or 66.9%, to $16.0 million for the nine months ended September 30, 2015 from $9.6 million for the nine months ended September 30, 2014.  The increase was primarily the result of additional operating expenses associated with the 31 bed expansion at Forterus in January 2015, the opening of the Desert Hope Outpatient Center in January 2015, the Recovery First Acquisition in February 2015, the opening of the Greenhouse Outpatient Center in April 2015, and the Oxford Centre Acquisition in August 2015.  As a percentage of revenues, other operating expenses were 10.4% of total revenues for the nine months ended September 30, 2015 compared to 10.0% of total revenues for the nine months ended September 30, 2014.

Rentals and Leases

Rentals and leases increased $2.0 million, or 133.2%, to $3.4 million for the nine months ended September 30, 2015 from $1.5 million for the nine months ended September 30, 2014.  The increase was primarily the result of increased rent as a result of the bed expansion at Forterus in January 2015, the Recovery First Acquisition in February 2015, the lease associated with our new corporate headquarters and call center beginning in June 2015, and the acquisitions of RSG and Taj Media in July 2015.  As a percentage of revenues, rentals and leases were 2.2% of total revenues for the nine months ended September 30, 2015 compared to 1.5% of total revenues for the nine months ended September 30, 2014.

Provision for Doubtful Accounts

The provision for doubtful accounts increased $4.5 million, or 52.6% to $12.9 million for the nine months ended September 30, 2015 from $8.5 million for the nine months ended September 30, 2014. As a percentage of revenues, the provision for doubtful accounts was 8.4% of total revenues for the nine months ended September 30, 2015 compared to 8.8% of total revenues for the nine months ended September 30, 2014.  

During the second quarter of 2014, management analyzed the past two years of accounts receivable collection and write-off history and the current projected bad debt write-offs for all client accounts covered by insurance. Based on the results of this analysis, including improvements noted in the credit quality of receivables aged 120-180 days, management concluded that the current methodology for establishing the allowance for doubtful accounts resulted in, and would continue to result in, an overstatement of the reserve requirement. As a result, management revised the estimates used to establish the provision for doubtful accounts, effective as of the second quarter of 2014. This change in estimate reduced the reserve percentages applied to various aging classes of accounts receivable aged less than 360 days to more closely reflect actual collection and write-off history that we have experienced and expect to experience in the future. These adjustments resulted in a reserve release of approximately $1.5 million during the second quarter of 2014.

Litigation Settlement

 

Litigation settlement expense increased $2.0 million to $2.4 million for the nine months ended September 30, 2015 from $0.4 million for the nine months ended September 30, 2014. The increase is primarily attributed to $2.2 million of litigation expense incurred in 2015 related to reserves established for the Horizon matter.  For further discussion of this matter, see Note 16 to the Company’s Condensed Consolidated Financial Statements included in this quarterly report.

Depreciation and Amortization

Depreciation and amortization expense increased $1.5 million, or 43.6%, to $4.9 million for the nine months ended September 30, 2015 from $3.4 million for the nine months ended September 30, 2014.  The increase in depreciation and amortization expense was primarily attributable to additions of property and equipment and intangible assets, including as a result of recent acquisitions.  As a percentage of revenues, depreciation and amortization expense was 3.2% of total revenues for the nine months ended September 30, 2015 compared to 3.6% of total revenues for the nine months ended September 30, 2014.  

Acquisition-related Expense

Acquisition-related expense was $2.9 million for the nine months ended September 30, 2015.   As a percentage of revenues, acquisition-related expense was 1.9% of total revenues for the nine months ended September 30, 2015.  The acquisition-related expense for the nine months ended September 30, 2015 was primarily related to professional fees and travel costs associated with our acquisition activity.   For the nine months ended September 30, 2014, we did not recognize any acquisition-related expense.

 

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Interest Expense

Interest expense was $2.4 million for the nine months ended September 30, 2015 compared to $1.6 million for the nine months ended September 30, 2014.  The increase in interest expense was primarily due to an increase in outstanding debt as partially offset by a reduction in interest rates.  The net impact of the increase in outstanding debt and the decrease in interest rates during the nine months ended 2015 was approximately $0.5 million.  Outstanding debt at September 30, 2015 was approximately $121.6 million compared to $46.4 million at September 30, 2014.  The interest rate on the $121.6 million outstanding under the 2015 Credit Facility was 2.83% at September 30, 2015.  Interest expense was also impacted by the change in fair value of the interest rate swaps of approximately $0.7 million during the nine months ended September 30, 2015, compared to $0.3 million during the nine months ended September 30, 2014, resulting in a $0.4 million increase to interest expense period over period.  In July 2014, the Company entered into two interest rate swap agreements to mitigate its exposure to interest rate risks. The interest rate swap agreements had a combined initial notional amount of $22.1 million which fixed the interest rates over the life of interest rate swap agreements.  The Company has not designated the interest rate swaps as hedges and therefore changes in the fair value of the interest rate swaps are included in interest expense in the condensed consolidated income statements.

As a percentage of revenues, interest expense was 1.6% of total revenues for the nine months ended September 30, 2015 and 2014.

Income Tax Expense

For the nine months ended September 30, 2015, income tax expense was $5.0 million, reflecting an effective tax rate of 35.8%, compared to $2.4 million, reflecting an effective tax rate of 43.4%, for the nine months ended September 30, 2014. The decrease in the effective tax rate for the nine months ended September 30, 2015 was primarily attributable to a discrete item related to certain state income tax incentives recognized during the third quarter of 2015.

Net Loss Attributable to Noncontrolling Interest

For the nine months ended September 30, 2015, net loss attributable to noncontrolling interest was $1.7 million compared to net loss attributable to noncontrolling interest of $1.1 million for the nine months ended September 30, 2014, representing a $0.6 million change.  The net loss attributable to noncontrolling interest is directly related to our consolidated VIEs.   During the nine months ended September 30, 2014, we consolidated one real estate VIE, BHR, through April 15, 2014 at which point it became a wholly owned subsidiary; and five professional group VIEs.   During the nine months ended September 30, 2015, noncontrolling interest was comprised of six professional group VIEs.

Liquidity and Capital Resources

General

Our primary sources of liquidity are net cash generated from operations, borrowings under our 2015 Credit Facility, proceeds from issuances of our common stock and the issuance of subordinated debt. We have also utilized operating lease transactions with respect to commercial properties primarily to perform client services and provide space for administrative facilities. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Our future liquidity could be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements.

We anticipate that our current level of cash on hand and internally generated cash flows will be sufficient to fund our anticipated working capital needs, debt service and repayment obligations and interest and maintenance capital expenditures for at least the next twelve months.

Cash Flow Analysis

Our cash flows are summarized as follows (in thousands):  

 

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Net Cash Provided by Operating Activities

Cash provided by operating activities was $5.8 million for both the nine months ended September 30, 2015 and 2014.  Cash flows for operations for the nine months ended September 30, 2015 were positively impacted by net income, adjusted for non-cash expenses, as well as the timing of accounts payable and accrued liabilities for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.  These increases were offset by an increase in accounts receivable of $25.0 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 and by approximately $4.8 million of increased cash outflows related to certain litigation in California, of which $1.4 million was expensed during the three months ended September 30, 2015.  The increase in accounts receivable was primarily related to an increase in revenues for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.   Also contributing to the increase in accounts receivable were increases related to billing and collection delays associated with our recent acquisitions.  Working capital totaled $44.6 million at September 30, 2015 and $63.2 million at December 31, 2014.   

Net Cash Used in Investing Activities

Cash used in investing activities was $127.8 million for the nine months ended September 30, 2015, an increase of $112.5 million compared to cash used in investing activities of $15.3 million for the nine months ended September 30, 2014.  The increase was primarily related to the business acquisitions and de novo activity during 2015, including $35.0 million for The Oxford Centre, $32.5 million for RSG, $13.5 million for the purchase of a property in Aliso Viejo, California, $13.1 million for Recovery First, $6.4 million for the purchase of a property in Ringwood, New Jersey, and $2.2 million for Taj Media, with the remaining amount related to continuing costs associated with our de novo projects and completion of our new corporate headquarters.  

Net Cash Provided by Financing Activities

Cash provided by financing activities was $84.2 million for the nine months ended September 30, 2015, an increase of $71.9 million compared to cash provided by financing activities of $12.3 million for the nine months ended September 30, 2014.  The increase was primarily related to net proceeds from the 2015 Credit Facility of $120.8 million as partially offset by the redemption of the BHR Series A Preferred Units of $8.5 million, repayments of long-term debt and capital leases of $26.5 million and repayments of subordinated notes payable of $0.9 million.

Financing Relationships

2015 Credit Facility

For a summary of the terms of our 2015 Credit Facility, see Note 11 to the accompanying Condensed Consolidated Financial Statements.  

We used approximately $24.9 million of the proceeds from the $75.0 million term loans to repay in full the outstanding real estate debt, certain equipment loans and certain capital leases. We did not incur any significant early termination fees.

On July 1, 2015 and August 7, 2015, we borrowed $15.0 million and $32.0 million, respectively, under the $50.0 million revolver portion of the 2015 Credit Facility.  Proceeds from these borrowings were primarily used to fund acquisitions and de novo development projects.

As of September 30, 2015, we had $47.0 million outstanding under our revolver and $74.1 million outstanding on our term loan.  As of September 30, 2015, our availability under the revolver portion of the 2015 Credit Facility was $1.0 million, net of $2.0 million in standby letters of credit issued for various corporate purposes and are secured by the Company’s revolver. The 2015 Credit Facility also has an accordion feature that allows the total borrowing capacity to be increased to $200.0 million, subject to certain conditions, including obtaining additional commitments from lenders.

Deerfield Financing

On October 2, 2015, we completed the closing of two financing facilities with affiliates of Deerfield Management Company, L.P. (“Deerfield”).  The capital commitment consists of $25.0 million of subordinated convertible debt and up to $25.0 million of unsecured subordinated debt, together with an incremental facility of up to an additional $50.0 million of subordinated convertible debt (subject to certain conditions).  We drew down $25.0 million of subordinated convertible debt at closing and will use the proceeds to fund our active acquisition strategy, our de novo pipeline and for other corporate purposes.

 

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The $25.0 million of subordinated convertible debt bears interest at an annual rate of 2.50% and matures on September 30, 2021. The $25.0 million of subordinated convertible debt funded at closing is convertible into shares of our common stock at $30.00 per share. In addition, we may borrow up to $25.0 million of unsecured subordinated debt that will bear interest at an annual rate of 12.0% and mature on September 30, 2020. The $25.0 million of unsecured subordinated debt may be drawn for acquisition financing through September 30, 2016 and can be repaid under certain conditions without penalty prior to October 2, 2017.

BHR Preferred Equity

For a summary of the terms of the BHR Series A Preferred Units, see Note 3 to the accompanying Condensed Consolidated Financial Statements.  

On February 25, 2015, we exercised our call provision and redeemed 100% of the outstanding Series A Preferred Units for a total redemption price of approximately $8.5 million, which included $0.2 million for the 3.0% call premium and $0.3 million for unpaid preferred returns.

Related Party Notes Payable  

During 2015, we had outstanding notes payables resulting from the seller financing of the TSN Acquisition.  On August 31, 2015, one of the notes payable was paid in full.  The remaining note payable which constitutes a balloon payment was amended, which required a principal payment of $0.3 million on date of execution of the amendment, extended the maturity date to February 29, 2016, and increased the interest rate to 6.25%.  The amount outstanding on these borrowings at September 30, 2015 was $1.2 million.

Subordinated Promissory Notes (Related Party and Non-related Party)

In March 2012 through April 2012, we issued $1.0 million of subordinated promissory notes to certain accredited investors, of which $0.2 million was issued to one of our directors. The notes bore interest at 12% per annum. Interest was payable monthly and the principal amount was due, in full, on the applicable maturity date of the note. Notes in the principal amount of $0.2 million matured on March 31, 2015 and the remaining notes, in the principal amount of $0.8 million, matured on March 31, 2017. In connection with the issuance of these notes, we issued detachable warrants to the lenders to purchase 112,658 shares of AAC common stock at $0.64 per share. The warrants were exercisable at any time up to their expiration on March 31, 2022. We recorded a debt discount of $0.1 million related to the warrants which reduced the carrying value of the subordinated notes. As of December 31, 2014, the outstanding balance, net of the unamortized debt discount of $71,000, was $0.9 million, of which $0.2 million was due to one of our directors. In connection with the Reorganization Transactions, warrants representing 106,728 shares of AAC common stock were exercised in March 2014 and the remaining warrants representing 5,930 shares of AAC common stock were exercised in April 2014.   On February 27, 2015, we repaid in full the $1.0 million of the outstanding subordinated promissory notes.

Capital Lease Obligations  

We have capital leases with third party leasing companies for equipment and office furniture. The capital leases bear interest at rates ranging from 4.47% to 6.25% and have maturity dates from December 2015 through March 2019. Total obligations under capital leases at September 30, 2015 were $0.5 million, of which $0.2 million was included in the current portion of long-term debt.

Consolidation of VIEs

The Professional Groups engage physicians and mid-level service providers and provide professional services to our clients through professional services agreements with each treatment facility. Under the professional services agreements, the Professional Groups also provide a physician to serve as medical director for the applicable facility. The Professional Groups either bill the payor for their services directly or are compensated by the treatment facility based on fair market value hourly rates. Each of the professional services agreements has a term of five years and will automatically renew for additional one-year periods.

We provided the initial working capital funding in connection with the formation of the Professional Groups and recorded a receivable. We make additional advances to the Professional Groups during periods in which there is a shortfall between revenues collected by the Professional Groups from the treatment facilities and payors, on the one hand, and the Professional Group’s contracting expenses and payroll requirements, on the other hand, thereby increasing the balance of the receivable. Excess cash flow of the Professional Groups is repaid to us, resulting in a decrease in the receivable. The Professional Groups are obligated to repay these funds and are charged commercially reasonable interest. We had receivables from the Professional Groups at September 30, 2015. The receivables due to us from the Professional Groups are eliminated in consolidation as the Professional Groups are VIEs of which we are the primary beneficiary.

 

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AAC has entered into written management services agreements with each of the Professional Groups under which AAC provides management and other administrative services to the Professional Groups. These services include billing, collection of accounts receivable, accounting, management and human resource functions and setting policies and procedures. Pursuant to the management services agreements, the Professional Groups’ monthly revenues will first be applied to the payment of operating expenses consisting of refunds or rebates owed to clients or payors, compensation expenses of the physicians and other service providers, lease payments, professional and liability insurance premiums and any other costs or expenses incurred by AAC for the benefit of the Professional Groups and, thereafter, to the payment to AAC of a management fee equal to 20% of the Professional Groups’ gross collected monthly revenues. As described above, AAC will also provide financial support to each Professional Group on an as-needed basis to cover any shortfall between revenues collected by such Professional Groups from the treatment facilities and payors and the Professional Group’s contracting expenses and payroll requirements. Through these arrangements, we are directing the activities that most significantly impact the financial results of the respective Professional Groups; however, treatment decisions are made solely by licensed healthcare professionals employed or engaged by the Professional Groups as required by various state laws. Based on our ability to direct the activities that most significantly impact the financial results of the Professional Groups, provide necessary funding and the obligation and likelihood of absorbing all expected gains and losses, we have determined that we are the primary beneficiary, and, therefore, consolidate the six Professional Groups as VIEs.

Off Balance Sheet Arrangements

We have entered into various non-cancelable operating leases expiring through October 2018. Commercial properties under operating leases primarily include space required to perform client services and space for administrative facilities. Rent expense was $1.6 million and $0.6 million for the three months ended September 30, 2015 and 2014, respectively, and $3.4 million and $1.5 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

Our interest expense is sensitive to changes in market interest rates. With respect to our interest-bearing liabilities, our long-term debt outstanding at September 30, 2015 consisted of $121.1 million of variable rate debt with interest based on LIBOR plus an applicable margin. In July 2014, we entered into two interest rate swap agreements to mitigate our exposure to interest rate risks. The interest rate swap agreements have initial notional amounts of $13.2 million and $8.9 million which fix the interest rates over the life of the interest rate swap agreements at 4.73% and 4.21%, respectively.  A hypothetical 1% increase in interest rates would decrease our pre-tax income and cash flows by approximately $1.0 million on an annual basis based upon our borrowing level at September 30, 2015.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. Except as described in Note 16 to the Company’s Condensed Consolidated Financial Statements included in this quarterly report and incorporated by reference in this Item 1, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.

 

Item 1A.   Risk Factors

In addition to the other information contained in this Report, the risks and uncertainties that we believe could materially affect our business, financial condition or future results and are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and subsequent filings with the SEC.  Additional risks and uncertainties which are not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also materially and adversely affect any of our business, financial position or future results.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On October 2, 2015, we issued $25.0 million in aggregate principal of 2.5% subordinated convertible notes (the “Convertible Notes”) to certain affiliates of Deerfield Management Company, L.P. The Convertible Notes are convertible at any time into shares of our common stock at a conversion price of $30.00 per share.

As partial consideration for our acquisition of all of the outstanding equity interests of Referral Solutions Group, LLC, a California limited liability company (“RSG”), which closed on July 2, 2015, we issued 540,193 shares of our common stock to the direct and indirect owners of RSG.  

As partial consideration for our acquisition of all of the outstanding equity interests of Taj Media, LLC, a California limited liability company (“Taj Media”), which closed on July 2, 2015, we issued 37,253 shares of our common stock to the sole member of Taj Media.

None of the transactions set forth in this Item 2 involved any underwriters, underwriting discounts or commissions or any public offering.  These transactions were made in reliance upon Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D promulgated thereunder) as transactions by an issuer not involving a public offering.  The recipient of the securities in each of these transactions represented his, her, or its intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates or book-entry positions representing the shares issued in each of these transactions.  In each case, the recipient had adequate access, through his, her or its relationship with the Company, to information about the Company.

 

Item 3.    Defaults Upon Senior Securities

None.

 

Item 4.    Mine Safety Disclosures

Not applicable.

 

Item 5.    Other Information

On August 31, 2015, AAC entered into a Note Modification Agreement (the “Modification”) with Michael Blackburn, our Vice President of Business Development, that amended that certain Amended and Restated Subordinated Promissory Note dated April 2, 2013 issued by AAC and payable to the order of Michael Blackburn (the “Subordinated Note”). The Modification amended the Subordinated Note to (i) increase the annual interest rate from 3.125% to 6.250% and (ii) extend the maturity date from August 31, 2015 to February 29, 2016. In connection with the Modification, AAC paid Michael Blackburn $250,000 of the outstanding principal balance of the Subordinate Note. The foregoing description of the Modification does not purport to be complete and is qualified in its entirety by reference to the Modification, a copy of which is filed herewith as Exhibit 10.8 and incorporated herein by reference.

On November 9, 2015, AAC entered into a Non-Exclusive Aircraft Lease Agreement (the "Aircraft Lease") with AMC, Inc., an entity beneficially owned by Michael T. Cartwright, our Chairman and Chief Executive Officer. Pursuant to the Aircraft Lease, we will from time to time use an airplane owned by AMC, Inc. in the ordinary course of business, and will pay an hourly rate for use of the airplane plus all fuel costs and certain maintenance costs. The Aircraft Lease has an initial term of one year and renews automatically for successive one-year periods. For further discussion of the Aircraft Lease, see Note 14 to our Condensed

 

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Consolidated Financial Statements included in this quarterly report. The foregoing description of the Aircraft Lease does not purport to be complete and is qualified in its entirety by reference to the Aircraft Lease, a copy of which is filed herewith as Exhibit 10.7 and incorporated herein by reference.

 

Item 6.    Exhibits

The information required by this item is set forth on the exhibit index which follows the signature page of this report.

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 10, 2015

 

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EXHIBIT INDEX

 

†       Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. AAC Holdings, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

 

 

 

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Exhibit 10.7

 

NON-EXCLUSIVE AIRCRAFT LEASE AGREEMENT

(Part 91 Operations)

 

Dated as of the 1st day of November, 2015

 

by and between

 

AMC, Inc.,

as Lessor,

 

and

 

American Addiction Centers, Inc.,

as Lessee,

 

concerning one Challenger 300 aircraft bearing

U.S. registration number N463GR

and

manufacturer's serial number 20316

 

INSTRUCTIONS FOR COMPLIANCE WITH

"TRUTH IN LEASING" REQUIREMENTS UNDER FAR § 91.23

 

Within 24 hours after execution of this Aircraft Lease Agreement:

mail a copy of the executed document, without Schedule A, B or C to the

following address via certified mail, return receipt requested:

 

Federal Aviation Administration

Aircraft Registration Branch

ATTN: Technical Section

P.O. Box 25724

Oklahoma City, Oklahoma 73125

 

At least 48 hours prior to the first flight to be conducted under this Agreement:

deliver a completed Schedule B containing the departure airport and proposed

time of departure of said first flight by facsimile to the Flight Standards

District Office located nearest the departure airport.

 

Carry a copy of this Aircraft Lease Agreement in the aircraft at all times.

 

*     *     *    

 

Schedule A contains only economic rental data and is

intentionally omitted for FAA submission purposes.

Schedule B is a form FSDO Notification Letter and is

intentionally omitted for FAA submission purposes.

Schedule C is a form Aircraft Delivery Receipt and is

intentionally omitted for FAA submission purposes.

 

 

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NON-EXCLUSIVE AIRCRAFT LEASE AGREEMENT

 

This NON-EXCLUSIVE AIRCRAFT LEASE AGREEMENT (the "Agreement") is entered into as of this 1^st day of November, 2015 (the "Effective Date"), by and between AMC, Inc., a Tennessee corporation, ("Lessor"), and American Addiction Centers, Inc., a Nevada corporation ("Lessee").

 

W I T N E S S E T H :

 

WHEREAS, title to the Aircraft described and referred to herein is held by Lessor;

 

WHEREAS, Lessee desires to lease from Lessor, and Lessor desires to lease to Lessee, the Aircraft, without crew, upon and subject to the terms and conditions of this Agreement;

 

WHEREAS, Lessee intends to operate the Aircraft under Part 91 of the FAR within the scope of and incidental to its own business; and

 

WHEREAS, during the term of this Agreement, the Aircraft may be subject to concurrent leases to one (1) or more Co-Lessee(s).

 

NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valid consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

SECTION 1.DEFINITIONS

 

 

"Aircraft" means the Airframe, the Engines, the Parts, and the Aircraft Documents.  The Engines shall be deemed part of the "Aircraft" whether or not from time to time attached to the Airframe or removed from the Airframe.  

 

"Aircraft Delivery Receipt" means an Aircraft Delivery Receipt in the form of Schedule C attached hereto.

 

"Aircraft Documents" means all flight records, maintenance records, historical records, modification records, overhaul records, manuals, logbooks, authorizations, drawings and data relating to the Airframe, any Engine, or any Part, or that are required by Applicable Law to be created or maintained with respect to the maintenance and/or operation of the Aircraft.  

 

"Aircraft Incident" shall mean any event causing damage, whether substantial or cosmetic, or loss of value, to the Aircraft that is not ordinary wear and tear (including, without limitation, destruction, loss, theft, requisition of title or use, confiscation, and taking).

 

"Airframe" means that certain Challenger 300 aircraft bearing U.S. registration number N463GR, and manufacturer's serial number 20316, together with any and all Parts (including, but not limited to, landing gear and auxiliary power units but excluding Engines or engines) so long as such Parts shall be either incorporated or installed in or attached to the Airframe.

 

"Applicable Law" means, without limitation, all applicable laws, treaties, international agreements, decisions and orders of any court, arbitration or governmental agency or authority and rules, regulations, orders, directives, licenses and permits of any governmental body, instrumentality, agency or authority, including, without limitation, the FAR and 49 U.S.C. § 41101, et seq., as amended.

 

1

 

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"DOT" means the United States Department of Transportation or any successor agency.

 

"Engines" means two (2) Honeywell model AS907-1-1A engines bearing manufacturer's serial numbers P118769 and P118768, together with any and all Parts so long as the same shall be either incorporated or installed in or attached to such Engine. Any engine which may be, from time to time, substituted for an Engine shall be deemed to be an Engine and subject to this Agreement for so long as it remains attached to the Airframe.

 

"FAA" means the Federal Aviation Administration or any successor agency.

 

"FAR" means collectively the Aeronautics Regulations of the FAA and the DOT, as codified at Title 14, Parts 1 to 399 of the United States Code of Federal Regulations.

 

"Flight Hour" means one (1) hour of use of the Aircraft in flight operations, as recorded on the Aircraft Hobbs meter and measured from the time the Aircraft takes off at the beginning of a flight, to the time the Aircraft lands at the end of a flight, in one-tenth (1/10th) of an hour increments.

 

"Hourly Rent" means the hourly rent specified in Schedule A attached hereto for each Flight Hour of use of the Aircraft by Lessee.

 

"FSDO Notice" means an FSDO Notification Letter in the form of Schedule B attached hereto.

 

"Lien" means any mortgage, security interest, lease or other charge or encumbrance or claim or right of others, including, without limitation, rights of others under any airframe or engine interchange or pooling agreement, except for mechanics liens to be discharged in the ordinary course of business.

 

 

 

"Parts" means all appliances, components, parts, instruments, appurtenances, accessories, furnishings or other equipment of whatever nature (other than complete Engines or engines) which may from time to time be incorporated or installed in or attached to the Airframe or any Engine and includes replacement parts.

 

"Pilot in Command" has the same meaning given the term in Section 1.1 of the FAR.

 

 

"Taxes" means all taxes of every kind (excluding any tax measured by or assessed against a taxpayer's income, including, without limitation, any income tax, gross income tax, net income tax, or capital gains tax) assessed or levied by any federal, state, county, local, airport, district, foreign, or other governmental authority, including, without limitation, sales taxes, Tennessee sales tax, use taxes, retailer taxes, federal air transportation excise taxes, federal aviation fuel excise taxes, and other similar duties, fees, and excise taxes.

 

 

SECTION 2.LEASE, DELIVERY AND SCHEDULING OF THE AIRCRAFT

 

 

2

 

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SECTION 3.TERM, MINIMUM USAGE AND RENT

 

 

 

 

3

 

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SECTION 4. REPRESENTATIONS AND WARRANTIES  

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

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SECTION 5.REGISTRATION, USE, OPERATION, MAINTENANCE AND POSSESSION

 

 

5

 

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6

 

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SECTION 6.RETURN OF AIRCRAFT

 

 

 

 

SECTION 7.LIENS

 

 

SECTION 8.INSURANCE

 

 

 

 

7

 

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SECTION 9.DEFAULTS AND REMEDIES

 

 

 

SECTION 10.NOTICES

 

 

                                                                                  1070 Vaughn Crest Drive                  Fax:  615-309-6010

                                                                                  Franklin, TN 37069

                                                                                  Attn:  Michael T. Cartwright, President

                                                                                  Email: Michael@ContactAAC.com

 

                                                 If to Lessee:            American Addiction Centers, Inc.      Tel:  615-732-1366

                                                                                 115 East Park Drive                           Fax:  615-691-7130

                                                                                 Brentwood, TN 37027

                                                                                 Attn:  Kathryn S. Phillips

                                                                                 Email: ksphillips@ContactAAC.com

 

SECTION 11.EVENT OF LOSS AND INDEMNIFICATION

 

 

 

 

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SECTION 12.MISCELLANEOUS

 

 

 

 

 

 

 

 

 

 

 

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SECTION 13.TRUTH IN LEASING

 

 

WITHIN THE TWELVE (12) MONTH PERIOD PRECEDING THE DATE OF THIS AGREEMENT, EXCEPT TO THE EXTENT THE AIRCRAFT IS LESS THAN TWELVE (12) MONTHS OLD,  THE AIRCRAFT HAS BEEN INSPECTED AND MAINTAINED IN ACCORDANCE WITH THE FOLLOWING PROVISIONS OF THE FAR:

 

CHECK ONE:

 

 

 

( *)91.409 (f) (3):A current inspection program recommended by the manufacturer.

 

 

THE PARTIES HERETO CERTIFY THAT DURING THE TERM OF THIS AGREEMENT AND FOR OPERATIONS CONDUCTED HEREUNDER, THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED BY LESSOR IN ACCORDANCE WITH THE PROVISIONS OF FAR:

 

CHECK ONE:

 

( )     91.409 (f) (1)             ( )     91.409 (f) (2)             ( * )     91.409 (f) (3)             ( )     91.409 (f) (4)

 

LESSEE ACKNOWLEDGES THAT WHEN IT OPERATES THE AIRCRAFT UNDER THIS AGREEMENT, IT SHALL BE KNOWN AS, CONSIDERED, AND IN FACT WILL BE THE OPERATOR OF SUCH AIRCRAFT.  EACH PARTY HERETO CERTIFIES THAT IT UNDERSTANDS THE EXTENT OF ITS RESPONSIBILITIES, SET FORTH HEREIN, FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.  AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FEDERAL AVIATION ADMINISTRATION FLIGHT STANDARDS DISTRICT OFFICE.

 

THE PARTIES HERETO CERTIFY THAT A TRUE COPY OF THIS AGREEMENT SHALL BE CARRIED ON THE AIRCRAFT AT ALL TIMES, AND SHALL BE MADE AVAILABLE FOR INSPECTION UPON REQUEST BY AN APPROPRIATELY CONSTITUTED IDENTIFIED REPRESENTATIVE OF THE ADMINISTRATOR OF THE FAA.

*     *     *     Signature Page Follows     *     *     *

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IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this Non-Exclusive Aircraft Lease Agreement to be duly executed as of the Effective Date. 

 

 

LESSOR:

 

AMC, Inc.

 

 

By:     /s/ Michael T. Cartwright              

Print:  Michael T. Cartwright

Title:  President

 

 

 

LESSEE:

 

American Addiction Centers, Inc.

 

 

By:     /s/ Kathryn Sevier Phillips

Print:  Kathryn Sevier Phillips

Title:  General Counsel and Secretary

 

 

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NON-EXCLUSIVE AIRCRAFT LEASE AGREEMENT

 

Schedule A

 

 

 

Hourly Rent:*     $3,576 per Flight Hour

 

 

 

 

* The Hourly Rent includes Lessee’s reimbursement of Lessor’s costs ($576 per Flight Hour) for an engine maintenance service plan in effect with respect to the Aircraft, which costs are incurred by Lessor as a result of Lessee’s operation of the Aircraft.  

 

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NON-EXCLUSIVE AIRCRAFT LEASE AGREEMENT

 

Schedule B

 

FSDO Notification Letter

 

 

 

Date: ________________, 2015

 

Via Facsimile

Fax: _________________

 

Federal Aviation Administration

____________________

____________________

ATTN: ______________

 

First Flight under Lease of Challenger 300 Aircraft, N463GR, s/n 20316

 

Dear ____________:

 

Pursuant to the requirements of Federal Aviation Regulation Section 91.23(c)(3), please accept this letter as notification that the undersigned, American Addiction Centers, Inc., a Nevada corporation, will acquire and take delivery of a leasehold interest in the above referenced aircraft on the ____ day of ___________________, 2015 or as soon as possible thereafter, and that the first flight of the aircraft under the lease will depart from ________________ Airport (___), ______________ on the _____ day of ______________, 2015, at approximately _______ am/pm local time, with a destination of ______________ Airport (____), _______________.  The pilots of the first flight of the aircraft under the lease will be _________________ and _____________________.

 

Should you require any additional information, please contact our pilot, Mr. Matt Hicks, at telephone: 615-406-3511, or Gary Horowitz at telephone: 301-801-5161.

 

 

Sincerely,

 

American Addiction Centers, Inc.

 

 

By:     _______________________

Print:  Matt Hicks

Title:  Chief Pilot

 

 

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AIRCRAFT LEASE AGREEMENT

 

Schedule C

 

Aircraft Delivery Receipt

 

 

Matt Hicks hereby acknowledges delivery and acceptance of the Aircraft described in that Non-Exclusive Aircraft Lease Agreement (the "Agreement") by and between AMC, Inc. and American Addiction Centers, Inc. dated as of the 1^st day of November, 2015, and accepts custody of the Aircraft in good working order and airworthy condition for the purposes set forth in the Agreement.

 

 

 

TOTAL TIME AIRFRAME AT DELIVERY:             877.18 hours

 

                                            Right Engine:                    877.18 hours

 

TOTAL LANDINGS AT DELIVERY:                        567

 

 

 

American Addiction Centers, Inc.

 

 

By:     ________________________

Print:  Matt Hicks

Title:  Chief Pilot

Date:  ________________________

 

 

14

 

Exhibit 10.8

 

NOTE MODIFICATION AGREEMENT

 

This NOTE MODIFICATION AGREEMENT (“Agreement”), dated effective as of August 31, 2015, amends and supplements that certain Amended and Restated Subordinated Promissory Note dated April 2, 2013 (the “Note”) in the original principal amount of $2,355,331.00 (which amended and restated that certain Subordinated Promissory Note in the original principal amount of $3,060,000.00) issued by American Addiction Centers, Inc., a Nevada corporation (“Maker”) and payable to the order of  Michael Blackburn, an individual resident of Florida (“Payee”).

 

RECITAL

 

Maker and Payee desire to amend the Note as follows:

 

AGREEMENTS

 

In consideration of the promises and agreements contained in the Note, as amended hereby, Maker and Payee agree as follows:

 

1.Payment.  Concurrently with the execution hereof, Maker has paid and Payee acknowledges receipt of a $250,000.00 payment on the outstanding principal balance of the Note.

2.Modification Interest Rate.  The first paragraph is hereby amended to change the interest payable on the principal amount of $1,195,000.00 from the annual rate equal to 3.125% per annum to an annual rate equal to six and one-quarter percent (6.25%) per annum.  

3.Modification of Maturity Date.  The definition of Maturity Date set forth in Section 1(a)(ii) of the Note is hereby amended to delete August 31, 2015 and replace it with February 29, 2016.  

4.Full Force and Effect.  Except as expressly amended hereby, the Note shall remain in full force and effect.

5.Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee.

6.Amendments.  This Agreement cannot be amended, rescinded, supplemented or modified except in writing signed by the parties hereto.

7.Counterpart Signature Pages.  This Agreement may be executed in one or more counterparts and may be delivered by facsimile or electronic mail, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 

MAKER:

 

AMERICAN ADDICTION CENTERS, INC.

 

 

By:/s/ Michael Cartwright

Name: Michael Cartwright

Title: Chairman and Chief Executive Officer

 

 

 

PAYEE:

 

 

/s/ Michael Blackburn

Michael Blackburn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 31.1

 

 

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

 

I, Michael T. Cartwright, certify that:

 

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

 

I, Kirk R. Manz, certify that:

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of AAC Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of AAC Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.