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As filed with the Securities and Exchange Commission on September 10, 2014

Registration No. 333-197383

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

AAC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   8093   35-2496142

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

115 East Park Drive, Second Floor

Brentwood, TN 37027

(615) 732-1231

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

 

Michael T. Cartwright

Chief Executive Officer and Chairman of the Board

AAC Holdings, Inc.

115 East Park Drive, Second Floor

Brentwood, TN 37027

(615) 732-1231

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Howard H. Lamar III, Esq.

Laura R. Brothers, Esq.

Bass, Berry & Sims PLC

150 3 rd Avenue S., Suite 2800

Nashville, TN 37201

(615) 742-6200

 

Michael P. Heinz, Esq.

Lindsey A. Smith, Esq.

Sidley Austin LLP

One South Dearborn

Chicago, IL 60603

(312) 853-7000

 

 

Approximate date of commencement of proposed sale to the public : As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

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. (check one)

 

Large Accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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LOGO

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 2014

PRELIMINARY PROSPECTUS

Shares

Amercian Addiction Centers

AAC Holdings, Inc.

Common Stock

This is the initial public offering of our common stock, and no public market currently exists for our stock. We currently expect the initial public offering price to be between $         and $         per share of common stock.

We have granted the underwriters a 30-day option to purchase up to              additional shares of common stock to cover over-allotments, if any.

Our common stock has been approved for listing on the New York Stock Exchange under the symbol “AAC”.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 15.

Per Share

Total

Initial public offering price

  $            

  $            

Underwriting discounts and commissions1

  $            

  $            

Proceeds, before expenses, to us

  $            

  $            

1 We refer you to “Underwriting” beginning on page 138 for additional information regarding underwriting compensation.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

Joint Book-Running Managers

William Blair

Raymond James

Avondale Partners

The date of this prospectus is                     , 2014


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LOGO

Our research-based treatment methods and clinical practices have helped thousands treat their addictions. Greenhouse Dallas, Texas


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LOGO

American Addiction Centers’ treatment philosophy binds together decades of findings and practices into the essential elements that are designed to help anyone beat addiction.
Greenhouse Dallas, Texas


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LOGO

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     33   

Use of Proceeds

     35   

Dividend Policy

     36   

Capitalization

     37   

Dilution

     38   

Unaudited Pro Forma Consolidated Financial Statements

     40   

Selected Historical and Pro Forma Consolidated Financial and Operating Data

     48   

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

     53   

Business

     86   

Management

     108   

Executive Compensation

     116   

Certain Relationships and Related Party Transactions

     123   

Principal Stockholders

     130   

Description of Capital Stock

     132   

Shares Eligible For Future Sale

     135   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     137   

Underwriting

     141   

Validity of the Common Stock

     146   

Experts

     146   

Where You Can Find More Information

     146   

Index to Financial Statements

     F-1   

You should rely only on the information contained in this prospectus to which we have referred you. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus or as of another date specified herein.

Trademarks, Trade Names and Service Marks

This prospectus includes our trademarks such as “American Addiction Centers,” “Desert Hope,” “FitRx,” “Forterus,” “Greenhouse,” “Singer Island,” “The Academy” and other company trade names and service marks that are protected under applicable intellectual property laws and constitute the property of AAC Holdings, Inc. or its subsidiaries. For convenience, we may not include the ® or ™ symbols, but such failure is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law. Any other trademarks, trade names or service marks referred to in this registration statement are the property of their respective owners.

Industry and Market Data

Market data and other statistical information contained in this registration statement are based on independent industry publications, government publications, reports by market research firms and other published independent sources and reports. Some data is also based on our good faith estimates, which are derived from other relevant statistical information. Statements as to our market position are based on market data currently available to us and, primarily, on management estimates, as information regarding most of our major competitors is not publicly available. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.


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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. Because it is only a summary, it does not contain all of the information that may be important to you. Before investing in our common stock, you should read this entire prospectus, including the information set forth under the heading “Risk Factors” and the financial statements and the notes thereto. In this prospectus, unless we indicate otherwise or the context requires, “we,” “our,” “us” and the “company” refer, prior to the Reorganization Transactions discussed below, to American Addiction Centers, Inc. and, after the Reorganization Transactions, to AAC Holdings, Inc., in each case together with its consolidated subsidiaries. The term “Holdings” refers to AAC Holdings, Inc. and the term “AAC” refers to American Addiction Centers, Inc. Unless otherwise noted, all information in this prospectus assumes (i) no exercise of the underwriters’ over-allotment option and (ii) the consummation of the Reorganization Transactions described under the caption “Reorganization Transactions.”

Our Business

We believe we are a leading provider of inpatient substance abuse treatment services for individuals with drug and alcohol addiction. As of July 31, 2014, we operated six substance abuse treatment facilities located throughout the United States, focused on delivering effective clinical care and treatment solutions across our 467 beds, which included 338 licensed detoxification beds. In addition, we have three facilities under development and an additional property under contract that we plan to develop into a new facility. The majority of our 715 employees 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. For the years ended December 31, 2013 and December 31, 2012, we had $115.7 million and $66.0 million in revenues, $11.6 million and $7.2 million in Adjusted EBITDA and $1.5 million and $1.1 million in net income, respectively. See “Summary Historical and Pro Forma Consolidated Financial and Operating Data” for a discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure.

We have made substantial investments in our treatment facilities with a specific focus on providing aesthetically pleasing properties and grounds, numerous amenities, healthy food and a courteous and attentive staff to distinguish us from our competitors. Our commitment to clinical excellence, premium facilities and customer service has allowed us to form relationships across a broad set of key referral sources, including hospitals, other treatment facilities, employers, alumni and employee assistance programs. In 2013 and the six months ended June 30, 2014, approximately 90% of our revenues were reimbursable by commercial payors, including amounts paid by such payors to clients, and the remaining portion was payable directly by our clients. We currently do not receive any revenues from government healthcare payment programs such as Medicare and Medicaid. Our platform is supported by a centralized infrastructure that includes a multi-faceted sales and marketing program, call center operations, a laboratory facility, billing and collection services and support functions. This infrastructure, in conjunction with our premium service offerings, has enabled us to develop a strong national brand. The substantial investments we have made at a corporate level contribute to our operational efficiencies and provide us flexibility to place clients at a variety of our facilities in order to optimize care that best fits both the clients’ clinical needs and their insurance benefits.

 

 

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Our Industry

Addiction is a chronic disease that affects brain function and behavior. Substance abuse, specifically the abuse of drugs and alcohol, is one of the most common and serious forms of addiction. If left untreated, substance abuse can lead to a variety of destructive social conditions such as problems at home or work, violence, crime and even death. According to the National Institute on Drug Abuse, or NIDA, the total societal cost of substance abuse in the United States is estimated to be over $600 billion annually. The 2012 National Survey on Drug Use and Health estimates that approximately 23.1 million people aged 12 or older needed treatment for a drug or alcohol use problem in the United States in 2012, of which only 2.5 million, or 10.8% of those needing treatment, received treatment at a specialty facility. The mental health and substance abuse treatment industry is expected to continue to expand as a result of a combination of factors, including increased awareness and de-stigmatization of substance abuse treatment and recent healthcare reform improving access to care, particularly for young adults now able to access their parents’ insurance. According to a 2008 report by the Substance Abuse and Mental Health Services Administration, or SAMHSA, annual spending on treatment for substance abuse in the United States is expected to grow to $35 billion in 2014.

The National Comorbidity Survey reports that up to 65% of adults with substance abuse addiction also have a co-occurring mental health disorder, defined by SAMHSA as at least one major mental health disorder, such as depression, bipolar disorder and schizophrenia, occurring concurrently with substance abuse. According to the Disease Management and Health Outcomes Journal, integrating treatment for both substance abuse and a co-occurring mental health disorder is believed to result in significantly better outcomes.

In addition to strong industry growth dynamics, the substance abuse treatment sector has several favorable attributes that differentiate it from other healthcare services sectors. Of particular note, as a result of the nature of substance abuse treatment, clients have more control in deciding when to seek treatment and who to select as their treatment provider. Also, clients are typically not limited to their local geographic area in selecting a treatment facility. As a result, providers are able to market and advertise directly to potential clients and their families on a national level.

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and will allow us to successfully operate and grow our business:

 

    Leading substance abuse treatment platform. We believe we are a leading provider of substance abuse treatment services based on the scale and nationwide reach of our platform, quality of our facilities and breadth of our treatment capabilities. We believe we offer one of the largest for-profit fully licensed programs to treat drug and alcohol addiction regardless of stage or severity. In addition, we believe our commitment to quality and customer service, as well as our dedication to clinical excellence, results in improved client retention, an important factor in ensuring clients receive the care they need.

 

    Comprehensive addiction treatment programs with co-occurring mental health disorder treatment capabilities. Our clinical staff is trained to deploy a research-based treatment program with a structured curriculum, particularly focused on identifying and addressing the needs of clients with co-occurring mental health disorders. Given that up to 65% of adults with substance abuse addiction are estimated to also have at least one co-occurring mental health disorder, we believe our medical and clinical staff’s ability to identify and treat both disorders is critical in helping clients achieve sobriety. We believe our ability to address these complex conditions enhances our reputation with clients, their families and other referral sources.

 

 

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    Proven ability to develop de novo treatment facilities. We have a successful track record of identifying suitable de novo sites, securing properties, overseeing the licensing and development of facilities and integrating de novo centers into our broader platform. We have successfully transformed acquired properties, such as a luxury spa and an assisted living facility, into substance abuse treatment facilities. We believe our skill and experience in executing our de novo development strategy provides us with a competitive advantage in quickly and cost-effectively developing substance abuse treatment facilities and enrolling clients.

 

    Multi-faceted sales and marketing program. Our national sales and marketing program provides a competitive advantage compared to treatment facilities that primarily target local geographic areas and use fewer marketing channels to attract clients. Our national team of 36 professional sales representatives develops and maintains relationships with key referral sources such as hospitals, other treatment facilities, employers, alumni and employee assistance programs. In addition, our team of over 60 centralized, trained call center treatment consultants provides coverage and support 24 hours a day, seven days a week. Our coordinated approach across multiple channels and our ability to serve clients from our varied facilities across the United States allows us to reach a broad audience of potential clients and build a nationally recognized brand.

 

    Attractive payor mix and diversified client base . We have generated revenues solely from commercial payors and our clients with no reimbursement from government healthcare payment programs such as Medicare and Medicaid, which are typically subject to lower reimbursement rates. The relationships we have developed with our referral sources enhance our interactions with payors and help us achieve our attractive reimbursement profile. For the year ended December 31, 2013 and the six months ended June 30, 2014, approximately 90% of our revenues were reimbursable by commercial payors, including amounts paid by such payors to clients, with the remaining portion of our revenues payable directly by our clients. No single payor in 2013 or the first half of 2014 accounted for more than 12.3% and 14.5% of our revenue reimbursements, respectively.

 

    Strong financial performance and attractive returns on invested capital . We have achieved strong financial performance in terms of recent growth and profitability. Our revenues for the year ended December 31, 2013 were $115.7 million, representing a 75.3% increase over $66.0 million in 2012. We have demonstrated the ability to generate attractive returns on investment with our de novo development strategy. Each of our two de novo developments, Greenhouse and Desert Hope, which added 218 total beds on a combined basis, was profitable within its first year of operation.

 

    Experienced management team with track record of success . Our senior management team, with an average of over 15 years of experience in the healthcare industry, has significant experience developing, operating and growing a variety of behavioral health treatment facilities. We believe the combination of our management team’s skills and experiences provides us with an advantage in developing high quality de novo treatment facilities and quickly integrating them into our broader platform.

Our Growth Strategy

We have developed our company and the American Addiction Centers national brand through substantial investment in our facilities, our clinical expertise, our professional staff and our national sales and marketing program. We seek to extend our position as a leading provider of treatment for drug and alcohol addiction by executing the following growth strategies:

 

    Improve census at existing facilities by increasing our client leads through our multi-faceted sales and marketing program.

 

 

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    Expand capacity at existing residential facilities by selectively increasing our number of residential beds, expanding our clinical facility space and hiring additional clinical staff to enable us to provide services to additional clients. In July 2014, we completed the expansion of our Greenhouse facility to add 60 inpatient beds, all of which are licensed for detoxification.

 

    Pursue de novo development of residential facilities built on the success of two full-service residential treatment facilities that we developed in the past two years: Greenhouse, a former luxury spa in Dallas, Texas, and Desert Hope, a former assisted living facility in Las Vegas, Nevada.

 

    Opportunistically pursue treatment facility acquisitions to expand and diversify our geographic presence and service offerings.

 

    Expand outpatient operations to complement our broader network of residential treatment facilities and further enhance our brand and our ability to provide a more comprehensive suite of services across the spectrum of care.

 

    Target complementary growth opportunities, including providing pharmacy and laboratory services, expanding licensure of existing facilities, treating other mental health and wellness disorders and expanding other ancillary services.

Our Substance Abuse Treatment Facilities

The following table presents information, as of June 30, 2014, about our network of substance abuse treatment facilities, including current facilities, facilities under development and properties under contract:

 

Facility Name (1)

  

Location

   Capacity
(beds)
    First Clients
Served
 

Treatment
Certifications (2)

   Real Property
Leased /
Owned

Desert Hope

   Las Vegas, NV      148      2013   DTX, RTC, PHP, IOP    Owned

Greenhouse

  

Grand Prairie, TX

(Dallas area)

     130 (3)     2012   DTX, RTC, PHP, IOP    Owned

Forterus

   Temecula, CA      76      2004   DTX, RTC, PHP, IOP    Leased

Singer Island

   West Palm Beach, FL      65      2012   PHP, IOP    Leased

San Diego Addiction Treatment Center

   San Diego, CA      36      2010   DTX, RTC, PHP, IOP    Leased

The Academy

   West Palm Beach, FL      12      2012   PHP, IOP    Leased

TBD

  

Riverview, FL

(Tampa area)

     164 (4)     Under

Development (4)

  DTX, RTC, PHP, IOP (4)    Owned

TBD

  

Arlington, TX

(Dallas area)

     n/a      Under
Development (5)
  PHP, IOP (5)    Owned

TBD

   Las Vegas, NV      n/a      Under
Development (6)
  PHP, IOP (6)    Owned

TBD

   Ringwood, NJ (New York City area)      150 (7)     Under

Contract (7)

  DTX, RTC, PHP, IOP (7)    n/a

 

(1) Excluded from this table is our non-substance abuse treatment facility, FitRx, which is a 20-bed leased facility located in Brentwood, Tennessee that provides outpatient treatment services for men and women who struggle with obesity-related behavioral disorders.

(2) DTX: Detoxification; RTC: Residential Treatment; PHP: Partial Hospitalization; IOP: Intensive Outpatient.

(3) This figure includes 60 additional beds as a result of the Greenhouse expansion completed in July 2014, with respect to which we received licensure in July 2014.

(4) Reflects our current expectations with respect to this facility, on which we began construction in May 2014 and target opening in the second half of 2015.

 

 

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(5) In March 2014, we acquired an approximately 20,000 square foot property in Arlington, Texas. We began construction of an outpatient treatment facility at this location in July 2014, and we are targeting opening this facility in the first half of 2015. The facility will provide treatment services and additional programming space for our Greenhouse facility. Treatment certifications reflect our expectations.

(6) In May 2014, we acquired an approximately 20,000 square foot property in Las Vegas, Nevada. We began construction of an outpatient treatment facility at this location in July 2014, and we are targeting opening this facility by the end of 2014. The facility will provide treatment services and additional programming space for our Desert Hope facility. Treatment certifications reflect our expectations.

(7) We entered into a purchase agreement to acquire a 96 acre property located fewer than 50 miles from New York City, subject to the satisfaction of certain closing conditions and the arrangement of financing. We anticipate beginning construction of a residential treatment facility at this location by early 2015, and we are targeting opening this facility in 2016 with approximately 150 beds. Treatment certifications reflect our expectations.

Risks Related to Our Business

Our business is subject to a number of risks that you should understand before making an investment decision. These risks, which are discussed more fully in “Risk Factors” following this prospectus summary, include the following:

 

    We currently operate a limited number of treatment facilities. Our revenues, profitability and cash flows could be materially adversely affected if we are unable to operate certain key treatment facilities, our corporate office or our laboratory facility.

 

    We rely on our multi-faceted sales and marketing program to continuously attract and enroll clients to our network of facilities. Any disruption in our national sales and marketing program would have a material adverse effect on our business, financial condition and results of operations.

 

    We derive a significant portion of our revenues from providing services to clients covered by third-party payors who could reduce their reimbursement rates or otherwise restrain our ability to obtain, or provide services to, clients. This risk is heightened because we are generally an “out-of-network” provider.

 

    An increase in uninsured and underinsured clients or the deterioration in the collectability of the accounts of such clients could have a material adverse effect on our business, financial condition and results of operations.

 

    If we overestimate the reimbursement amounts that payors will pay us for services performed, it would increase our revenue adjustments, which could have a material adverse effect on our revenues, profitability and cash flows and lead to significant shifts in our results of operations from quarter to quarter that may make it difficult to project long-term performance.

 

    We will need additional financing to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.

 

    Our business may face significant risks with respect to future de novo expansion, including the time and costs of identifying new geographic markets, the ability to obtain necessary licensure and other zoning or regulatory approvals and significant start-up costs including advertising, marketing and the costs of providing equipment, furnishings, supplies and other capital resources.

 

    Our acquisition strategy exposes us to a variety of operational and financial risks, which may have a material adverse effect on our business, financial condition and results of operations.

 

    Our ability to maintain census and, to a lesser extent, the average length of stay of our clients is dependent on a number of factors outside of our control, and if we are unable to maintain census, or if we experience a significant decrease in average length of stay, our business, results of operations and cash flows could be materially adversely affected.

 

 

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    If we fail to comply with the extensive laws and government regulations impacting our industry, we could suffer penalties, be the subject of federal and state investigations and potential claims and legal actions by clients, employees and others or be required to make significant changes to our operations, which may reduce our revenues, increase our costs and have a material adverse effect on our business, financial condition and results of operations.

 

    Our directors, executive officers and principal stockholders and their respective affiliates will continue to have substantial control over the company after this offering and could delay or prevent a change in corporate control.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates was $700.0 million or more as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that may otherwise be applicable to public companies. These provisions include:

 

    only two years of audited consolidated financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    reduced disclosure about our executive compensation arrangements;

 

    no requirement that we hold non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

    exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We have taken advantage of some of these reduced requirements and may continue to do so for so long as we remain an emerging growth company, and thus the information we provide stockholders may be less than what you might receive from other public companies in which you hold shares.

Reorganization Transactions

AAC Holdings, Inc. was incorporated as a Nevada corporation on February 12, 2014 for the purpose of acquiring all of the common stock of American Addiction Centers, Inc. and to engage in certain reorganization transactions, as described below. In April 2014, Holdings completed the following transactions:

 

    a voluntary private share exchange with certain stockholders of AAC, whereby holders representing 93.6% of the outstanding shares of common stock of AAC exchanged their shares on a one-for-one basis for shares of Holdings common stock, which we refer to as the Private Share Exchange;

 

   

substantially concurrent with the Private Share Exchange, the acquisition of all of the outstanding common membership interests of Behavioral Healthcare Realty, LLC, or BHR, an entity controlled by related parties, which owns all the outstanding equity interests of Concorde Real Estate, LLC, Greenhouse Real Estate, LLC and The Academy Real Estate, LLC, which entities own the Desert Hope,

 

 

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Greenhouse and Riverview, Florida properties, respectively, in exchange for $3.0 million in cash, the assumption of a $1.8 million term loan and 521,999 shares of Holdings common stock, representing 5.2% of our outstanding common stock as of June 30, 2014, which we refer to as the BHR Acquisition; and

 

    substantially concurrent with the Private Share Exchange and BHR Acquisition, the acquisition of all of the outstanding membership interests of Clinical Revenue Management Services, LLC, or CRMS, an entity controlled by related parties, which provides client billing and collection services for AAC, in exchange for $0.5 million in cash and 149,144 shares of Holdings common stock, representing 1.5% of our outstanding common stock as of June 30, 2014, which we refer to as the CRMS Acquisition.

As a result of the foregoing transactions, which are collectively referred to as the “Reorganization Transactions,” Holdings owns (i) 93.6% of the outstanding common stock of AAC (98.0% after giving effect to the surrender and cancellation of 444,434 shares of AAC common stock in connection with the settlement of certain litigation, which shares we expect to cancel immediately subsequent to this offering as described in the section entitled “Business—Legal Proceedings”), (ii) 100% of the outstanding common membership interests in BHR, which represents 100% of the voting rights in BHR, and (iii) 100% of the outstanding membership interests in CRMS. To help fund or facilitate the Reorganization Transactions, the following additional financing transactions were undertaken in 2014 prior to or in connection with the Reorganization Transactions: (i) AAC sold 471,843 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 the 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. For additional information related to the Reorganization Transactions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

Subsequent to this offering, we expect to conduct a subsidiary short-form merger with AAC whereby the legacy holders who did not participate in the Private Share Exchange would be entitled to receive Holdings shares on a one-for-one basis. Upon the completion of the short-form merger, Holdings would own 100% of AAC. No assurance can be given that the subsequent short-form merger will occur in a timely manner or at all.

Corporate Information

AAC Holdings, Inc. is a Nevada corporation. Our principal executive offices are located at 115 East Park Drive, Second Floor, Brentwood, Tennessee 37027, and our telephone number is (615) 732-1231. Our website address is www.americanaddictioncenters.com . The information contained on, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock. We have included our website address in this prospectus solely as an inactive textual reference.

 

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock to be outstanding immediately after this offering

             shares

 

Option to purchase additional shares

We have granted the underwriters a 30-day option to purchase up to an additional              shares of our common stock to cover over-allotments, if any.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $         million assuming a public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus). We intend to use the net proceeds to repay approximately $         million of outstanding indebtedness, to pay $7.3 million in connection with the settlement of certain litigation as described in the section entitled “Business—Legal Proceedings” and the remaining approximately $         million of net proceeds for working capital and other general corporate purposes, which may include the financing of future potential acquisitions and de novo facility developments. See “Use of Proceeds.”

 

Dividend policy

We do not anticipate paying dividends on our common stock for the foreseeable future. See “Dividend Policy.”

 

Risk factors

For a discussion of certain factors you should consider before making an investment, see “Risk Factors.”

 

New York Stock Exchange symbol

“AAC”

 

Directed share program

At our request, the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers and certain of our employees. See “Underwriting.”

The number of shares of common stock to be outstanding immediately after this offering is based on the number of shares outstanding as of                     , 2014, plus the issuance of             shares of common stock in this offering and excludes (i) 1,000,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, or the 2014 Plan, which we have adopted in connection with this offering and (ii) 186,452 shares of common stock, which we plan to issue in connection with the subsidiary short-form merger with AAC subsequent to this offering.

Except as otherwise noted, all information in this prospectus:

 

    assumes no exercise of the underwriters’ over-allotment option;

 

    gives effect to a             -for-1 stock split effected on                     , 2014; and

 

    gives effect to the surrender and cancellation of 444,434 shares of AAC common stock in connection with the settlement of certain litigation as described in the section entitled “Business—Legal Proceedings,” which shares we expect to cancel immediately subsequent to this offering.

 

 

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA

The following tables present our summary historical and pro forma consolidated financial and operating data as of the dates and for the periods indicated. Holdings was formed as a Nevada corporation on February 12, 2014, and acquired 93.6% of the outstanding shares of common stock of AAC on April 15, 2014 in connection with the Reorganization Transactions, and Holdings therefore controls AAC. Prior to the completion of the Reorganization Transactions, Holdings had not engaged in any business or other activities except in connection with its formation. Accordingly, all financial and operating data herein relating to periods prior to the completion of the Reorganization Transactions is that of AAC and its consolidated subsidiaries and is referred to herein as “our” historical financial and operating data.

The summary consolidated financial data as of and for the years ended December 31, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data for the year ended December 31, 2011 are derived from our audited consolidated financial statements not included in this prospectus. The summary consolidated financial data as of June 30, 2014 and for the six months ended June 30, 2013 and 2014 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The results for the six months ended June 30, 2013 and the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the entire year. The following summary consolidated financial data should be read together with our audited consolidated financial statements, unaudited condensed consolidated financial statements and accompanying notes and information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The summary unaudited pro forma financial and other data for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014 have been adjusted to give effect to this offering and our intended use of proceeds from this offering and, in the case of the unaudited pro forma consolidated income statement data, certain other transactions as described in the section titled “Unaudited Pro Forma Consolidated Financial Statements” included elsewhere in this prospectus. Specifically, the “Pro Forma as Adjusted” columns in the summary unaudited pro forma consolidated income statement and other data give effect to the Reorganization Transactions, the related financing transactions and this offering and our intended use of proceeds therefrom as described in “Use of Proceeds,” in each case for the year ended December 31, 2013 and for the six months ended June 30, 2014. The “Pro Forma as Adjusted” columns do not include the effects of the CRMS Acquisition prior to the April 15, 2014 acquisition date, as CRMS’s only revenue stream is payments from us, and CRMS no longer has revenues subsequent to the completion of the CRMS Acquisition. Accordingly, CRMS does not meet the definition of a business under Regulation S-X Rule 11-01(d), and this transaction is not permitted to be included in the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. This data is subject and gives effect to the assumptions and adjustments described in the notes accompanying the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma financial data is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the transactions and this offering been consummated on the dates indicated and does not purport to be indicative of financial condition data or results of operations as of any future date or for any future period.

 

 

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                Year Ended
December 31, 2013
    Six
Months
Ended
June 30,
2013
Actual

(unaudited)
    Six Months Ended
June 30, 2014
 
                Actual     Pro Forma
as Adjusted
      Actual
(unaudited)
    Pro Forma
as Adjusted
 
                       
    Year Ended
December 31,
           
    2011     2012            
    (in thousands, except for share and per share amounts)  

Income Statement Data:

             

Revenues

  $ 28,275      $ 66,035      $ 115,741      $                   $ 59,331      $ 59,203      $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Salaries, wages and benefits

    9,171        25,680        46,856          21,732        24,124     

Advertising and marketing

    4,915        8,667        13,493          6,588        7,079     

Professional fees

    1,636        5,430        10,277          4,706        4,895     

Client related services

    5,791        8,389        7,986          3,567        5,211     

Other operating expenses

    2,448        6,384        11,615          6,213        5,551     

Rentals and leases

    1,196        3,614        4,634          2,772        940     

Provision for doubtful accounts

    1,063        3,344        10,950          4,820        6,288     

Litigation settlement (1)

                  2,588          2,500        240     

Restructuring (2)

                  806          551            

Depreciation and amortization

    195        1,288        3,003          1,399        2,228     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,415        62,796        112,208          54,848        56,556     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    1,860        3,239        3,533          4,483        2,647     

Interest expense

    337        980        1,390          784        705     

Other (income) expense, net

           12        36          (27     15     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    1,523        2,247        2,107          3,726        1,927     

Income tax expense

    652        1,148        615          1,745        859     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    871        1,099        1,492          1,981        1,068     

Less: net loss (income) attributable to noncontrolling interest (3)

           405        (706       (343     668     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AAC Holdings, Inc. stockholders

    871        1,504        786          1,638        1,736     

Deemed contribution—redemption of Series B Preferred Stock

                  1,000          1,000            

BHR Series A Preferred Unit dividend

                                  (203  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to AAC Holdings, Inc. common stockholders

  $ 871      $ 1,504      $ 1,786      $        $ 2,638      $ 1,533      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to common stockholders (4) :

             

Basic

  $ 0.20      $ 0.19      $ 0.20      $        $ 0.30      $ 0.16      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.20      $ 0.19      $ 0.20      $        $ 0.30      $ 0.16      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

             

Basic

    4,287,131        7,770,359        8,819,062          8,671,942        9,510,427     

Diluted

    4,314,051        7,869,017        9,096,660          8,734,934        9,544,420     

Other Financial Information:

             

Adjusted EBITDA (5) (6)

  $ 2,055      $ 7,168      $ 11,558      $        $ 9,580      $ 7,832      $     

 

 

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     As of December 31,      As of June 30, 2014  
        Actual
(unaudited)
     Pro Forma
as
Adjusted (7)
 
         2012              2013            
     (in thousands)  
                             

Balance Sheet Data:

           

Cash and cash equivalents

   $ 740       $ 2,012       $ 2,382       $                

Working capital

     3,190         1,220         3,729      

Total assets

     53,598         81,638         93,752      

Total debt, including current portion

     25,222         43,075         46,794      

Total mezzanine equity (including noncontrolling interest) (8)

     11,613         11,842         7,835      

Total stockholders’ equity (including noncontrolling interest) (9)

     4,678         11,883         26,497      

 

     Year Ended
December 31,
     Six Months
Ended June 30,
 
     2012      2013      2013      2014  

Operating Metrics: (unaudited):

           

Average daily census (10)

     238         339         365         375   

Average daily revenue (11)

   $ 759       $ 935       $ 898       $ 872   

Average net daily revenue (12)

   $ 722       $ 847       $ 825       $ 780   

New admissions (13)

     2,934         4,053         2,174         2,177   

Bed count at end of period (14)

     338         431         420         427   

 

(1) We recorded a $2.5 million reserve in the second quarter of 2013 in connection with a consolidated wage and hour class action claim. We made a payment of $2.6 million in the second quarter of 2014 to settle the matter. For additional discussion of this litigation settlement, see Note 16 to our audited financial statements included elsewhere in this prospectus.

(2) During the first half of 2013, management adopted restructuring plans to centralize our call centers and to close the Leading Edge facility. As a result, aggregate restructuring and exit charges of $0.8 million were recognized in 2013, of which $0.6 million was recognized in the six months ended June 30, 2013. We did not recognize any restructuring expenses during 2012 as expenses related to the corporate relocation were not significant.

(3) Represents the net income attributable to the stockholders of AAC that did not exchange their shares for Holdings common stock for the period from April 15, 2014 to June 30, 2014, the net income (loss) attributable to the noncontrolling interest in BHR (for 2012, 2013 and through the acquisition date of April 15, 2014) and the Professional Groups (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs”) (for 2013 and the six month period ended June 30, 2014) and the net income (loss) in the Pro Forma as Adjusted columns of the Professional Groups.

(4) After giving effect to the subsidiary short-form merger with AAC that we expect to complete subsequent to this offering, pro forma basic and diluted earnings per share attributable to common stockholders would be              and             , respectively, based on pro forma basic and diluted weighted-average shares outstanding of                      and                     , respectively.

 

 

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(5) Adjusted EBITDA is a “non-GAAP financial measure” as defined under the rules and regulations promulgated by the U.S. Securities and Exchange Commission or SEC. We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization expense, income tax expense, stock-based compensation and related tax reimbursements, litigation settlement and restructuring charges and acquisition related de novo startup expenses, which includes professional services for accounting, legal and valuation services related to the acquisitions and legal and licensing expenses related to de novo projects. Adjusted EBITDA, as presented in this prospectus, is considered a supplemental measure of our performance and is not required by, or presented in accordance with, generally accepted accounting principles in the United States or GAAP. Adjusted EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. We have included information concerning Adjusted EBITDA in this prospectus because we believe that such information is used by certain investors as a measure of a company’s historical performance. We believe this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of issuers of equity securities, many of which present EBITDA and Adjusted EBITDA when reporting their results. Because Adjusted EBITDA is not determined in accordance with GAAP, it is subject to varying calculations and may not be comparable to the Adjusted EBITDA (or similarly titled measures) of other companies. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

 

                Year Ended
December 31, 2013
    Six
Months
Ended
June 30,
         2013        
Actual
(unaudited)
    Six Months Ended
June 30, 2014
 
    Year Ended
December 31,
          Pro Forma
as Adjusted
      Actual
(unaudited)
    Pro Forma
as Adjusted
 
    2011     2012     Actual          
    (in thousands)  

Net Income

  $ 871      $ 1,099      $ 1,492      $                   $ 1,981      $ 1,068      $                

Non-GAAP Adjustments:

             

Interest expense

    337        980        1,390          784        705     

Depreciation and amortization

    195        1,288        3,003          1,399        2,228     

Income tax expense

    652        1,148        615          1,745        859     

Stock-based compensation and related tax reimbursements

           2,408        1,649          605        1,776     

Litigation settlement

                  2,588          2,500        240     

Restructuring

                  806          551            

Acquisition related and de novo start-up expenses

           245        15          15        956     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 2,055      $ 7,168      $ 11,558      $                   $ 9,580      $ 7,832      $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(6) The Adjusted EBITDA amounts in the “Pro Forma as Adjusted” columns do not include the effects of the CRMS Acquisition prior to the April 15, 2014 acquisition date, as CRMS’s only revenue stream is payments from us, and CRMS no longer has revenues subsequent to the completion of the CRMS Acquisition. Accordingly, CRMS does not meet the definition of a business under Regulation S-X Rule 11-01(d), and this transaction is not permitted to be included in the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. However, if we had given effect to the CRMS Acquisition as if it had been completed on January 1, 2013, the CRMS Acquisition would have been slightly accretive to Adjusted EBITDA in both the year ended December 31, 2013 and the six months ended June 30, 2014.

(7) Reflects the issuance of             shares of Holdings common stock at the initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) and the estimated net proceeds of $             and a use of a portion of the proceeds to repay approximately $             million of outstanding indebtedness and to pay $7.3 million in connection with the settlement of certain litigation as described in the section entitled “Business—Legal Proceedings.” Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(8) For additional discussion of mezzanine equity and noncontrolling interest, see Note 11 to our audited financial statements included elsewhere in this prospectus.

(9) Noncontrolling interest represents the equity of BHR (through April 15, 2014) and the Professional Groups (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs”) that we do not own as well as the outstanding shares of AAC common stock that were not exchanged for shares of Holdings common stock.

(10) Includes client census at all of our owned or leased inpatient facilities, including FitRx, as well as beds obtained through contractual arrangements to meet demand exceeding capacity. For additional information about contracted beds, see “Revenues” under Note 3 to our audited financial statements included elsewhere in this prospectus.

 

 

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(11) Average daily revenue is calculated as total revenues during the period divided by the product of the number of days in the period multiplied by average daily census.

(12) Average net daily revenue is calculated as total revenues less provision for doubtful accounts during the period dividend by the product of the number of days in the period multiplied by average daily census.

(13) Includes total client admissions for the period presented.

(14) Bed count at end of period includes all beds at owned and leased inpatient facilities, including FitRx, but excludes contracted beds as of December 31, 2012. We did not have any contracted beds as of any other period presented. Bed count at the end of the 2012 period includes 70 beds at our former Leading Edge facility, which was closed in the second quarter of 2013. For additional information regarding the closure of the Leading Edge facility, see Note 13 to our audited financial statements included elsewhere in this prospectus. In the first quarter of 2014, we added two beds at the FitRx facility to accommodate increased client census and eliminated six beds at The Academy facility as a result of an expired housing lease. In addition, the Greenhouse expansion, completed in July 2014, added 60 beds, all of which are licensed for detoxification.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors discussed below, as well as the other information presented in this prospectus, in evaluating us, our business and an investment in our common stock. If any of the matters highlighted by the following risks actually occur, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. See “Special Note Regarding Forward-Looking Statements.”

Risks Related to Our Business

Our revenues, profitability and cash flows could be materially adversely affected if we are unable to operate certain key treatment facilities, our corporate office or our laboratory facility.

We derive a significant portion of our revenues from three treatment facilities located in California, Nevada and Texas. These treatment facilities accounted for 76.5% of our total revenues in 2013 and 81.5% for the six months ended June 30, 2014. It is likely that a small number of facilities will continue to contribute a significant portion of our total revenues in any given year for the foreseeable future. Additionally, we have a centralized corporate office that houses our accounting, billing and collections, information technology, marketing and call center departments and a high complexity laboratory facility that conducts quantitative drug testing and other laboratory services. If any event occurs that would result in a complete or partial shutdown of any of these facilities or our centralized corporate office or laboratory, including, without limitation, any material changes in legislative, regulatory, economic, environmental or competitive conditions in these states or natural disasters such as hurricanes, earthquakes, tornadoes or floods or prolonged airline disruptions for any reason, such event could lead to decreased revenues and/or higher operating costs, which could have a material adverse effect on our revenues, profitability and cash flows.

We rely on our multi-faceted sales and marketing program to continuously attract and enroll clients to our network of facilities. Any disruption in our national sales and marketing program would have a material adverse effect on our business, financial condition and results of operations.

We believe our national sales and marketing program provides us with a competitive advantage compared to treatment facilities that primarily target local geographic areas and use fewer marketing channels to attract clients. If any disruption occurs in our national sales and marketing program for any reason or if we are unable to effectively attract and enroll new clients to our network of facilities, our ability to maintain census could be adversely affected, which would have a material adverse effect on our business, financial condition and results of operations.

In addition, our ability to grow or even to maintain our existing level of business depends significantly on our ability to establish and maintain close working and referral relationships with hospitals, other treatment facilities, employers, alumni, employee assistance programs and other referral sources. We have no binding commitments with any of these referral sources. We may not be able to maintain our existing referral relationships or develop and maintain new relationships in existing or new markets. If we lose existing relationships with our referral sources, the number of people to whom we provide services may decline, which may adversely affect our revenues. Also, if we fail to develop new referral relationships, our growth may be restrained.

We derive a significant portion of our revenues from providing services to clients covered by third-party payors who could reduce their reimbursement rates or otherwise restrain our ability to obtain, or provide services to, clients. This risk is heightened because we are generally an “out-of-network” provider.

Managed care organizations and other third-party payors pay for the services that we provide to many of our clients. For 2013 and the six months ended June 30, 2014, approximately 90% of our revenues were reimbursable by third-party payors, including amounts paid by such payors to clients, with the remaining portion payable directly by our clients. If any of these third-party payors reduce their reimbursement rates or elect not to cover some or all of our services, our business, financial condition and results of operations may decline.

 

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In addition to limiting the amounts payors will pay for the services we provide to their members, controls imposed by third-party payors designed to reduce admissions and the length of stay for clients, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a client by third-party payors. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill clients. Efforts to impose more stringent cost controls are expected to continue. Although we are unable to predict the effect these controls and changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on our business, financial condition and results of operations.

Changes to government healthcare programs, principally Medicare and Medicaid, have resulted in limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcare services in recent years. In particular, recent governmental measures to regulate clinical laboratory services have resulted in reduced prices, added costs and decreased test utilization. Although we do not currently bill Medicare or any other government healthcare program for our laboratory or other substance abuse treatment services, there is a risk that third-party commercial payors may implement similar changes. If the rates paid or the scope of laboratory or other substance abuse treatment services covered by third-party commercial payors are reduced, our business, financial condition and results of operations could be materially adversely affected.

We are considered an “out-of-network” provider with respect to the vast majority of third-party payors, and, therefore, we bill our full charges for services covered by such third-party payors. Third-party payors will generally attempt to limit use of out-of-network providers by requiring clients to pay higher copayment and/or deductible amounts for out-of-network care. Additionally, third-party payors have become increasingly aggressive in attempting to minimize the use of out-of-network providers by disregarding the assignment of payment from clients to out-of-network providers (i.e., sending payments to clients instead of out-of-network providers), capping out-of-network benefits payable to clients, waiving out-of-pocket payment amounts and initiating litigation against out-of-network providers for interference with contractual relationships, insurance fraud and violation of state licensing and consumer protection laws. If third-party payors impose further restrictions on out-of-network providers, our revenues could be threatened, forcing our facilities to participate with third-party payors and accept lower reimbursement rates compared to our historic reimbursement rates.

Third-party payors also are entering into sole source contracts with some healthcare providers, which could effectively limit our pool of potential clients. Moreover, third-party payors are beginning to carve out specific services, including substance abuse treatment services, and establish small, specialized networks of providers for such services at fixed reimbursement rates. Continued growth in the use of carve-out arrangements could materially adversely affect our business to the extent we are not selected to participate in such smaller specialized networks or if the reimbursement rate is not adequate to cover the cost of providing the service.

An increase in uninsured and underinsured clients or the deterioration in the collectability of the accounts of such clients could have a material adverse effect on our business, financial condition and results of operations.

Collection of receivables from third-party payors and clients is critical to our operating performance. Our primary collection risks are (i) the risk of overestimating our net revenues at the time of billing that may result in us receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that clients will fail to remit insurance payments to us when the commercial insurance company pays out-of-network claims directly to the client, (iv) resource and capacity constraints that may prevent us from handling the volume of billing and collection issues in a timely manner and (v) the risk of non-payment from uninsured clients. Additionally, our ability to hire and retain experienced personnel also affects our ability to bill and collect accounts in a timely manner. 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

 

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percentages applied to the accounts receivable aging categories. At December 31, 2013 and June 30, 2014, our allowance for doubtful accounts represented approximately 35.2% and 39.2%, respectively, of our accounts receivable balance as of such date, with three and two commercial payors each representing in excess of 10% of the accounts receivable balance as of December 31, 2013 and June 30, 2014, respectively. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions that might ultimately affect the collectability of the client accounts and make adjustments to our allowances as warranted. Significant changes in business office operations, payor mix or economic conditions, including changes resulting from implementation of the Affordable Care Act, could affect our collection of accounts receivable, cash flows and results of operations. In addition, increased client concentration in states that permit commercial insurance companies to pay out-of-network claims directly to the client instead of us, such as California and Nevada, will adversely affect our collection of receivables. If we experience unexpected increases in the growth of uninsured and underinsured clients or in our provision for doubtful accounts or unexpected changes in reimbursement rates by third-party payors, it could have a material adverse effect on our business, financial condition and results of operations.

If we overestimate the reimbursement amounts that payors will pay us for services performed, it would increase our revenue adjustments, which could have a material adverse effect on our revenues, profitability and cash flows and lead to significant shifts in our results of operations from quarter to quarter that may make it difficult to project long-term performance.

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. Through December 31, 2013, our expected realization was determined by management after taking into account historical collections received from the commercial payors since our inception compared to the gross client charges billed. Beginning in January 2014, we enhanced the methodology related to our net realizable value to more quickly react to potential changes in reimbursements by facility, by type of service and by payor. As a result, management adjusted the expected realization discount, on a per facility basis, to reflect a twelve-month historical analysis of reimbursement data by facility in addition to considering the type of services provided, the payors and the gross client charge rates by facility. This adjustment resulted in a decrease in our expected realization for the first half of 2014. Although we are unable to quantify the future effects of this change in methodology, we currently anticipate this adjustment will decrease our expected realization and net realizable value of revenues over the remainder of 2014.

During the six months ended June 30, 2014, we experienced a decline in our collection rates as expressed as a percentage of gross client charges. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of Six Months ended June 30, 2014 to Six Months ended June 30, 2013—Revenues.” A significant or sustained decrease in our collection rates could have a material adverse effect on our operating results. There is no assurance that we will be able to maintain or improve historical collection rates in future reporting periods.

Estimates of net realizable value are subject to significant judgment and approximation by management. It is possible that actual results could differ from the historical estimates management has used to help determine the net realizable value of revenues. If our actual collections either exceed or are less than the net realizable value estimates, we will record a revenue adjustment, either positive or negative, for the difference between our estimate of the receivable and the amount actually collected in the reporting period in which the collection occurred. A significant negative revenue adjustment could have a material adverse effect on our revenues, profitability and cash flows in the reporting period in which such adjustment is recorded. In addition, if we record a significant revenue adjustment, either positive or negative, in any given reporting period, it may lead to significant shifts in our results from operations from quarter to quarter, which may limit our ability to make accurate long-term predictions about our future performance.

 

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Certain third-party payors account for a significant portion of our revenues, and the reduction of reimbursement rates by any such payor could have a material adverse effect on our revenues, profitability and cash flows.

For the year ended December 31, 2013, approximately 12.3% of our revenue reimbursements came from Blue Cross Blue Shield of California, 12.1% came from Aetna, and 10.3% came from United Behavioral Health. No other payor accounted for more than 10% of our revenue reimbursements for the year ended December 31, 2013. For the six months ended June 30, 2014, approximately 14.5% of our revenue reimbursements came from Anthem Blue Cross Blue Shield of Colorado, 12.5% came from Blue Cross Blue Shield of California, 12.3% came from Aetna and 10.4% came from Blue Cross Blue Shield of Texas. No other payor accounted for more than 10% of our revenue reimbursements for the six months ended June 30, 2014. If any of these or other third-party payors reduce their reimbursement rates for the services we provide, our revenues, profitability and cash flows could be materially adversely affected.

Our level of indebtedness could adversely affect our ability to meet our obligations under our indebtedness, react to changes in the economy or our industry and to raise additional capital to fund our operations.

As of June 30, 2014, we had total debt of $46.8 million outstanding, including $13.0 million of indebtedness with respect to our revolving line of credit that we intend to pay down with the net proceeds from this offering. We have historically relied on debt financing to fund our real estate development and our operating cash flow requirements, and we expect such debt financing needs to continue. A summary of the material terms of our indebtedness can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our level of indebtedness could have important consequences to our stockholders. For example, it could:

 

    make it more difficult for us to satisfy our obligations with respect to our indebtedness, resulting in possible defaults on, and acceleration of, such indebtedness;

 

    increase our vulnerability to general adverse economic and industry conditions;

 

    require us to dedicate a substantial portion of our cash flows from operations to payments on indebtedness, thereby reducing the availability of such cash flows to fund working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business;

 

    limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business;

 

    limit our ability to make material acquisitions or take advantage of business opportunities that may arise; and

 

    place us at a potential competitive disadvantage compared to our competitors that have less debt.

Our operating flexibility is limited in significant respects by the restrictive covenants in our amended and restated credit facility, and we have breached such covenants in the past and may be unable to comply with such covenants in the future.

Our Second Amended and Restated Credit Facility (the “Credit Facility”) imposes restrictions that could impede our ability to enter into certain corporate transactions, as well as increases our vulnerability to adverse economic and industry conditions, by limiting our flexibility in planning for, and reacting to, changes in our business and industry. These restrictions limit our and our subsidiaries’ ability to, among other things:

 

    incur or guarantee additional debt;

 

    pay dividends on our capital stock or redeem, repurchase, retire or otherwise acquire any of our capital stock;

 

    make certain capital expenditures;

 

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    enter into leases;

 

    make certain payments or investments;

 

    create liens on our assets;

 

    make any substantial change in the nature of our business as it is currently conducted; and

 

    merge or consolidate with other companies or transfer all or substantially all of our assets.

In addition, our Credit Facility requires us to meet certain financial covenants. The restrictions may prevent us from taking actions that we believe would be in the best interests of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. Our Credit Facility also contains cross-default provisions that apply to loans made pursuant to the Credit Facility and to any other material indebtedness we may have. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. Our ability to comply with these covenants in future periods will largely depend on our ability to successfully implement our overall business strategy. In April 2014, in connection with the amendment and restatement of our prior credit facility, we received waivers from previous periods of noncompliance with certain financial covenants and other negative covenants under that prior credit facility. We cannot assure you that we will be granted any further waivers or amendments to the Credit Facility if for any reason we are unable to comply with the terms of the Credit Facility in the future. The breach of any of these covenants or restrictions could result in a default under the Credit Facility, which could result in the acceleration of our debt. In the event of an acceleration of debt, we could be forced to apply all available cash flows to repay such debt and could be forced into bankruptcy or liquidation.

We will need additional financing to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.

As of June 30, 2014, we had $3.7 million of working capital. Our acquisition and de novo development strategies will require substantial additional capital. We will consider raising additional funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. However, there can be no assurance that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and our stockholders may experience additional dilution in net book value per share.

Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in our industry, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, we may be required to decrease the pace of, or eliminate, our acquisition strategy and potentially reduce or even cease operations.

Our business may face significant risks with respect to future de novo expansion, including the time and costs of identifying new geographic markets, the ability to obtain necessary licensure and other zoning or regulatory approvals and significant start-up costs including advertising, marketing and the costs of providing equipment, furnishings, supplies and other capital resources.

As part of our growth strategy, we intend to develop new substance abuse treatment facilities in existing and new markets, either by building a new facility from the ground up or acquiring an existing facility with an alternative use and repurposing it as a substance abuse treatment facility. Such de novo expansion involves significant risks, including, but not limited to, the following:

 

    identifying locations in suitable geographic markets can be a lengthy and costly process;

 

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    a change in existing comprehensive zoning plans or zoning regulations that imposes additional restrictions on use or requirements could impact our expansion into otherwise suitable geographic markets;

 

    the de novo facility may require significant advertising and marketing expenditures to attract clients;

 

    we will need to provide each de novo facility with the appropriate equipment, furnishings, materials, supplies and other capital resources;

 

    our ability to obtain licensure, obtain accreditation, establish relationships with healthcare providers in the community and delays or difficulty in installing our operating and information systems;

 

    the time and costs of evaluating new markets, hiring experienced local physicians, management and staff and opening new facilities, and the time lags between these activities and the generation of sufficient revenues to support the costs of the expansion; and

 

    our ability to finance de novo expansion and possible dilution to our existing stockholders if our common stock is used as consideration.

As a result of these risks, there can be no assurance that a de novo treatment facility will become profitable.

Our acquisition strategy exposes us to a variety of operational and financial risks, which may have a material adverse effect on our business, financial condition and results of operations.

A principal element of our business strategy is to grow by acquiring other companies and assets in the mental health and substance abuse treatment industry. We evaluate potential acquisition opportunities consistent with the normal course of our business. Our ability to complete acquisitions is subject to a number of risks and variables, including our ability to negotiate mutually agreeable terms with the counterparties and our ability to finance the purchase price. We may not be successful in identifying and consummating suitable acquisitions, which may impede our growth and negatively affect our results of operations and may also require a significant amount of management resources. In addition, growth, especially rapid growth, through acquisitions exposes us to a variety of operational and financial risks. We summarize the most significant of these risks below.

Integration risks . We must integrate our acquisitions with our existing operations. This process includes the integration of the various components of our business and of the businesses we have acquired or may acquire in the future, including the following:

 

    physicians and employees who are not familiar with our operations;
    regulatory compliance programs; and
    disparate operating, information and record keeping systems and technology platforms.

The integration of acquisitions with our operations could be expensive, require significant attention from management, may impose substantial demands on our operations or other projects and may impose challenges on the combined business including, without limitation, consistencies in business standards, procedures, policies and business cultures.

Benefits may not materialize . When evaluating potential acquisition targets, we identify potential synergies and cost savings that we expect to realize upon the successful completion of the acquisition and the integration of the related operations. We may, however, be unable to achieve or may otherwise never realize the expected benefits. If we do not achieve our expected results, it may adversely impact our results of operations.

Assumptions of unknown liabilities. Facilities that we acquire may have unknown or contingent liabilities, including, without limitation, liabilities for failure to comply with healthcare laws and regulations. Although we typically attempt to exclude significant liabilities from our acquisition transactions and seek indemnification from the sellers of such facilities for at least a portion of these matters, we may experience diffi-

 

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culty enforcing those indemnification obligations, or we may incur material liabilities for the past activities of acquired facilities. Such liabilities and related legal or other costs and/or resulting damage to a facility’s reputation could negatively impact our business.

Competing for acquisitions. We face competition for acquisition candidates primarily from other for-profit healthcare companies as well as from not-for-profit entities. Some of our competitors have greater resources than we do. As a result, we may pay more to acquire a target business or may agree to less favorable deal terms than we would have otherwise. Also, suitable acquisitions may not be accomplished due to unfavorable terms. Further, the cost of an acquisition could result in a dilutive effect on our results of operations, depending on various factors, including the amount paid for an acquired facility, the acquired facility’s results of operations, the fair value of assets acquired and liabilities assumed, effects of subsequent legislation and limits on reimbursement rate increases.

Managing growth. Some of the facilities we have acquired or may acquire in the future may have had significantly lower operating margins than the facilities we operated prior to the time of our acquisition thereof or had operating losses prior to such acquisition. If we fail to improve the operating margins of the facilities we acquire, operate such facilities profitably or effectively integrate the operations of acquired facilities, our results of operations could be negatively impacted.

Our ability to maintain census and the average length of stay of our clients is dependent on a number of factors outside of our control, and if we are unable to maintain census, or if we experience a significant decrease in average length of stay, our business, results of operations and cash flows could be materially adversely affected.

Our revenues are directly impacted by our ability to maintain census and, to a lesser extent, the average length of stay of our clients. These metrics are dependent on a variety of factors, many of which are outside of our control, including the effectiveness of our sales and marketing efforts, our referral relationships, our staffing levels and facility capacity, the extent to which third-party payors require preadmission authorization or utilization review controls, competition in the industry and the decisions of our clients to seek and commit to treatment. A significant decrease in census or, to a lesser extent, average length of stay could materially adversely affect our revenues, profitability and cash flows due to lower reimbursements received and the additional resources required to collect accounts receivable and to maintain our existing level of business.

Given the client-driven nature of the substance abuse treatment sector, our business is dependent on clients seeking and committing to treatment. Although increased awareness and de-stigmatization of substance abuse treatment in recent years has resulted in more people seeking treatment, the decision of each client to seek treatment is ultimately discretionary. In addition, even after the initial decision to seek treatment is made, our adult clients may decide at any time to discontinue treatment and leave our facilities against the advice of our physicians and other treatment professionals. For this reason, among others, average length of stay can vary among periods without correlating to the overall operating performance of our business, and as a result, management does not view average length of stay as a key metric with respect to our operating performance. However, if clients or potential clients decide not to seek treatment or discontinue treatment early, census and average length of stay could decrease and, as a result, our business, financial condition and results of operations could be adversely affected.

As a provider of treatment services, we are subject to governmental investigations and potential claims and legal actions by clients, employees and others, which may increase our costs and have a material adverse effect on our business, financial condition and results of operations.

Given the addiction and mental health of clients and the services provided, the substance abuse treatment industry is heavily regulated by governmental agencies and involves significant risk of liability. We and others in our industry are exposed to the risk of governmental investigations and lawsuits or other claims against us and our

 

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physicians and professionals arising out of our day to day business operations, including, without limitation, client treatment at our facilities and relationships with healthcare providers that may refer clients to us. Addressing any investigations, lawsuits or other claims may distract management and divert resources. Fines, restrictions and penalties imposed as a result of an investigation or a successful lawsuit or claim that is not covered by, or is in excess of, our insurance coverage may increase our costs and reduce our profitability. Our insurance premiums have increased year over year, and insurance coverage may not be available at a reasonable cost, especially given the significant increase in insurance premiums generally experienced in the healthcare industry.

We are also subject to potential medical malpractice lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large claims as well as significant defense costs. We cannot predict the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. All professional and general liability insurance we purchase is subject to policy limitations. We believe that, based on our past experience, our insurance coverage is adequate considering the claims arising from the operation of our facilities. While we continuously monitor our coverage, our ultimate liability for professional and general liability claims could change materially from our current estimates. If such policy limitations should be partially or fully exhausted in the future or if payments of claims exceed our estimates or are not covered by our insurance, it could have a material adverse effect on our financial condition and results of operations.

We operate in a highly competitive industry, and competition may lead to declines in client volumes and an increase in labor costs, which could have a material adverse effect on our business, financial condition and results of operations.

The substance abuse treatment industry is highly competitive, and competition among substance abuse treatment providers (including behavioral healthcare facilities) for clients has intensified in recent years. There are other behavioral healthcare facilities that provide substance abuse and other mental health treatment services comparable to at least some of those offered by our facilities in each of the geographical areas in which we operate. Some of our competitors are owned by tax-supported governmental agencies or by nonprofit corporations and may have certain financial advantages not available to us, including endowments, charitable contributions, tax-exempt financing and exemptions from sales, property and income taxes. If our competitors are better able to attract clients, expand services or obtain favorable participation agreements at their facilities, we may experience a decline in client volume, and it could have a material adverse effect on our business, financial condition and results of operations.

Our operations depend on the efforts, abilities and experience of our management team, physicians and medical support personnel, including our nurses, mental health technicians, therapists and counselors. We compete with other healthcare providers in recruiting and retaining qualified management, nurses and other support personnel responsible for the daily operations of our facilities.

The nationwide shortage of nurses and other medical support personnel has been a significant operating issue facing us and other healthcare providers. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel or require us to hire more expensive temporary or contract personnel. In addition, certain of our facilities are required to maintain specified nurse-staffing levels. To the extent we cannot meet those levels, we may be required to limit the services provided by these facilities, which could have a corresponding adverse effect on our net operating revenues.

Increased labor union activity is another factor that could adversely affect our labor costs. Although we are not aware of any union organizing activity at any of our facilities, we are unable to predict whether any such activity will take place in the future. To the extent that a portion of our employee base unionizes, it is possible that our labor costs could increase materially.

We cannot predict the degree to which we will be affected by the future availability or cost of attracting and retaining talented medical support staff. If our general labor and related expenses increase, we may not be able to raise our rates correspondingly. Our failure to either recruit and retain qualified management, nurses and

 

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other medical support personnel or control our labor costs could have a material adverse effect on our business, financial condition and results of operations.

We depend heavily on key management personnel, and the departure of one or more of our key executives or a significant portion of our local facility management personnel or sales force could have a material adverse effect on our business, financial condition and results of operations.

The expertise and efforts of our key executives, including our chief executive officer, president, chief operating officer, chief financial officer and general counsel, and other key members of our facility management personnel and sales staff are critical to the success of our business. We do not currently have employment agreements or non-competition covenants with any of our key executives. The loss of the services of one or more of our key executives or of a significant portion of our facility management personnel or sales staff could significantly undermine our management expertise and our ability to provide efficient, quality healthcare services at our facilities. Furthermore, if one or more of our key executives were to terminate employment with us and engage in a competing business, we would be subject to increased competition, which could have a material adverse effect on our business, financial condition and results of operations.

Failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, could have a material adverse effect on our business.

Historically, as a privately-held company, we were not required to maintain internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404 of Sarbanes-Oxley. As a public company, we will be required to meet these standards in the course of preparing our consolidated financial statements. If we are unable to maintain effective internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our Credit Facility. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in our financial statements is also likely to suffer if we report a material weakness in our internal control over financial reporting. In addition, we will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404 of Sarbanes-Oxley, including increased auditing and legal fees.

A cyber security incident could cause a violation of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, breach of client privacy or other negative impacts.

A cyber-attack that bypasses our information technology (“IT”) security systems causing an IT security breach, loss of individually identifiable health information or other data subject to privacy laws, loss of proprietary business information or a material disruption of our IT business systems, could have a material adverse impact on our business, financial condition and results of operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss or misappropriation of individually identifiable health information, other confidential data or proprietary business information.

Failure to adequately protect our trademarks and any other proprietary rights could have a material adverse effect on our business, financial condition and results of operations.

We maintain a trademark portfolio that we consider to be of significant importance to our business. If the actions we take to establish and protect our trademarks and other proprietary rights are not adequate to prevent imitation of our services by others or to prevent others from seeking to block sales of our services as an alleged violation of their trademarks and proprietary rights, it may be necessary for us to initiate or enter into litigation in the future to enforce our trademark rights or to defend ourselves against claimed infringement of the rights of others. Any legal proceedings could result in an adverse determination that could have a material adverse effect on our business, financial condition and results of operations.

 

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Risks Related to Regulatory Matters

If we fail to comply with the extensive laws and government regulations impacting our industry, we could suffer penalties, be the subject of federal and state investigations or be required to make significant changes to our operations, which may reduce our revenues, increase our costs and have a material adverse effect on our business, financial condition and results of operations.

Healthcare service providers are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

 

    licensure, certification and accreditation of substance abuse treatment services;

 

    Clinical Laboratory Improvement Amendments (“CLIA”) certification and state licensure of laboratory services;

 

    handling, administration and distribution of controlled substances;

 

    necessity and adequacy of care, quality of services, and qualifications of professional and support personnel;

 

    referrals of clients and permissible relationships with physicians and other referral sources;

 

    billings for reimbursement from commercial payors;

 

    consumer protection issues and billing and collection of client-owed accounts issues;

 

    privacy and security issues associated with health-related information, client personal information and medical records, including their use and disclosure, client notices, adequate security safeguards and the handling of breaches, complaints and accounting for disclosures;

 

    physical plant planning, construction of new facilities and expansion of existing facilities;

 

    activities regarding competitors;

 

    state corporate practice of medicine, fee-splitting, self-referral and kickback prohibitions; and

 

    claim submission and collections, including penalties for the submission of, or causing the submission of, false, fraudulent or misleading claims.

Failure to comply with these laws and regulations could result in the imposition of significant civil or criminal penalties, loss of license or certification or require us to change our operations, which may have a material adverse effect on our business, financial condition and results of operations. Both federal and state government agencies as well as commercial payors have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations.

We endeavor to comply with all applicable legal and regulatory requirements, however, there is no guarantee that we will be able to adhere to all of the complex government regulations that apply to our business. In this regard, we seek to structure all of our relationships with physicians to comply with applicable anti-kickback laws, physician self-referral laws, and state corporate practice of medicine prohibitions. We monitor these laws and implement changes as necessary. However, the laws and regulations in these areas are complex and often subject to varying interpretations. For example, if an enforcement agency were to challenge the compensation paid under our contracts with professional physician groups, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse effect as a result of a challenge to these arrangements.

We may be required to spend substantial amounts to comply with legislative and regulatory initiatives relating to privacy and security of client health information.

There are currently numerous legislative and regulatory initiatives at the federal and state levels addressing client privacy and security concerns. In particular, federal regulations issued under the Drug Abuse Pre-

 

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vention, Treatment and Rehabilitation Act of 1979 strictly restrict the disclosure of client identifiable information related to substance abuse and apply to any of our facilities that receive any federal assistance, which is interpreted broadly to include facilities licensed, certified or registered by a federal agency. In addition, the federal privacy and security regulations issued under HIPAA require our facilities to comply with extensive administrative requirements on the use and disclosure of individually identifiable health information (known as “protected health information”) and require covered entities, which include most healthcare providers, to implement and maintain administrative, physical and technical safeguards to protect the security of such information. Additional security requirements apply to electronic protected health information. These regulations also provide clients with substantive rights with respect to their health information and impose substantial administrative obligations on our facilities, including the requirement to enter into written agreements with contractors to whom our programs disclose protected health information. In 2013, the U.S. Department of Health and Human Services, or HHS, published revisions to the HIPAA privacy and security regulations which require our facilities to take additional compliance measures, including revising and entering into new contractor agreements and implementing procedures to comply with more onerous standards related to notifying individuals, HHS and, in some cases, the media of breaches involving unsecured protected health information. These regulations also implemented a number of provisions that gave HHS greater enforcement authority. Violations of the HIPAA privacy and security regulations may result in significant civil and criminal penalties and data breaches and other HIPAA violations may give rise to class action lawsuits by affected clients under state law.

Our programs remain subject to any privacy-related federal or state laws that are more restrictive than the HIPAA privacy and security regulations. These laws vary by state and could impose additional requirements and penalties. For example, some states impose strict restrictions on the use and disclosure of health information pertaining to mental health or substance abuse. Further, most states have enacted laws and regulations that require us to notify affected individuals in the event of a data breach involving individually identifiable information. In addition, the Federal Trade Commission may use its consumer protection authority to initiate enforcement actions in response to data breaches.

As public attention is drawn to issues related to the privacy and security of medical and other personal information, federal and state authorities may increase enforcement efforts, seek to impose harsher penalties as well as revise and expand laws or enact new laws concerning these topics. Compliance with current as well as any newly established provisions or interpretations of existing requirements will require us to expend significant resources. Increased focus on privacy and security issues by enforcement authorities may increase the overall risk that our substance abuse treatment facilities may be found lacking under federal and state privacy and security laws and regulations.

Our treatment facilities operate in an environment of increasing state and federal enforcement activity and private litigation targeted at healthcare providers.

Both federal and state government agencies have heightened and coordinated their civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies and various segments of the healthcare industry. These investigations relate to a wide variety of topics, including relationships with physicians, billing practices and use of controlled substances. The Affordable Care Act included an additional $350 million of federal funding over 10 years to fight healthcare fraud, waste and abuse, including $40 million for federal fiscal year 2014. From time to time, the Office of Inspector General and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Although we do not currently bill Medicare or any other federal healthcare program for substance abuse treatment services, there is a risk that specific investigation initiatives could be expanded to include our treatment facilities. In addition, increased government enforcement activities, even if not directed towards our treatment facilities, also increase the risk that our facilities, physicians and other clinicians furnishing services in our facilities, or our executives and directors, could become named as defendants in private litigation such as state or federal false claims act cases or consumer protection cases, or could become the subject of complaints at the various state and federal agencies that have jurisdiction over our operations. Any governmental investigations,

 

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private litigation or other legal proceedings involving any of our facilities, our executives or our directors, even if we ultimately prevail, could result in significant expense and could adversely affect our reputation. In addition, we may be required to make changes in our laboratory or other substance abuse treatment services as a result of an adverse determination in any governmental enforcement action, private litigation or other legal proceeding, which could materially adversely affect our business and results of operations.

Changes to federal, state and local regulations, as well as different or new interpretations of existing regulations, could adversely affect our operations and profitability.

Because our treatment programs and operations are regulated at federal, state and local levels, we could be affected by different regulatory changes in different regional markets. Increases in the costs of regulatory compliance and the risks of noncompliance may increase our operating costs, and we may not be able to recover these increased costs, which may adversely affect our results of operations and profitability.

Also, because many of the current laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our treatment facilities, equipment, personnel, services or capital expenditure programs. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could adversely affect our business, operating results and overall reputation in the marketplace.

In addition, federal, state and local regulations may be enacted that impose additional requirements on our facilities, such as the 2013 changes to the HIPAA privacy and security regulations. Adoption of legislation or the creation of new regulations affecting our facilities could increase our operating costs, restrain our growth, limit us from taking advantage of opportunities presented and could have a material adverse effect on our business, financial condition and results of operations. Adverse changes in existing comprehensive zoning plans or zoning regulations that impose additional restrictions on the use or requirements with respect to our facilities may affect our ability to operate our existing facilities or acquire new facilities, which may adversely affect our results of operations and profitability.

We are subject to uncertainties regarding the impact of the Affordable Care Act and related payment reform efforts, which represent a significant change to the healthcare industry.

The Affordable Care Act provides for increased access to coverage for healthcare and seeks to reduce healthcare-related expenses. Overall, the expansion of health insurance coverage under the Affordable Care Act, most of which went into effect on January 1, 2014, is expected to be beneficial to the substance abuse treatment industry. Beginning January 1, 2014, health insurers are prohibited from denying coverage to individuals because of preexisting conditions. Further, all new small group and individual market health plans are required to cover ten essential health benefit categories, which include substance abuse addiction and mental health disorder services. Likewise, as of January 1, 2014, small group and individual market plans are required to comply with the requirements of the Mental Health Parity and Addiction Equity Act of 2008. According to HHS estimates published in February 2013, these changes are expected to expand coverage for substance abuse addiction treatment and mental health disorders treatment for another 62.5 million Americans.

The expansion of commercial insurance for substance abuse treatment services under the Affordable Care Act may result in a higher demand for services from all providers. This may bring new competitors to the market, some of which may be better capitalized and have greater market penetration than we do. Further, we expect increased demand for substance abuse treatment services to also increase the demand for case managers, therapists, medical technicians and others with clinical expertise in substance abuse treatment, which may make it both more difficult to adequately staff our substance abuse treatment facilities and could significantly increase our costs in delivering treatment, which may adversely affect both our operations and profitability.

 

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One of the many impacts of the Affordable Care Act has been a dramatic increase in payment reform efforts by federal and state government payors as well as commercial payors. These efforts take many forms including the growth of accountable care organizations (“ACOs”), pay-for-performance bonus arrangements, partial capitation arrangements and the bundling of services into a single payment. The end result of these efforts is that more risk of the overall cost of care is being transferred to providers. As institutional providers and their affiliated physicians assume more risk for the cost of care, we expect more services to be furnished within provider networks formed to accept these types of payment reform. Our ability to compete and retain our traditional sources of clients may be adversely affected by our exclusion from such networks or our inability to be included in such networks.

We cannot predict the impact the implementation of the Affordable Care Act and related rulemaking and regulations may have on our business, results of operations, cash flow, capital resources and liquidity or whether we will be able to adapt successfully to the changes required by the Affordable Care Act.

Change of ownership or change of control requirements imposed by state and federal licensure and certification agencies as well as third-party payors may limit our ability to timely realize opportunities, adversely affect our licenses and certifications, interrupt our cash flows and adversely affect our profitability.

State licensure laws and many federal healthcare programs (where applicable) impose a number of obligations on healthcare providers undergoing a change of ownership or change of control transaction. These requirements may require new license applications as well as notices given a fixed number of days prior to the closing of affected transactions. These provisions require us to be proactive when considering both internal restructuring, such as this offering and the Reorganization Transactions (as described in the section entitled “Prospectus Summary—Reorganization Transactions”), as well as acquisitions of third-party targets. Failure to provide such notices or to submit required paperwork can adversely affect licensure on a going forward basis, can subject the parties to penalties and can adversely affect our ability to operate our facilities.

Many third-party payor agreements, including government payor programs, also have change of ownership or change of control provisions. Such provisions generally include a prior notice provision as well as require the consent of the payor in order to continue the terms of the payor agreement. A failure to abide by the terms of such provisions can result in a breach of the underlying third-party payor agreement. Further, abiding by the terms of such provisions may reopen pricing negotiations with third-party payors where the provider currently has favorable reimbursement terms as compared to the market. Currently, we have very few third-party payor agreements; however, as substance abuse treatment coverage and payment reform initiatives continue to expand, these types of provisions could have a significant impact on our ability to realize opportunities as well as adversely affect our cash flows and profitability.

We could face risks associated with, or arising out of, environmental, health and safety laws and regulations.

We are subject to various federal, state and local laws and regulations that:

 

    regulate certain activities and operations that may have environmental or health and safety effects, such as the generation, handling and disposal of medical wastes;

 

    impose liability for costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site or other releases of hazardous materials or regulated substances; and

 

    regulate workplace safety.

Compliance with these laws and regulations could increase our costs of operation. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position or cash flows. We could be responsible for the investigation and remediation of environmental conditions at currently or formerly operated or leased sites, as well as for associated liabilities, including liabilities for natural resource damages, third-party property damage or personal injury resulting from lawsuits that could be brought by the government or private litigants relating to our operations, the operations of

 

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our facilities or the land on which our facilities are located. We may be subject to these liabilities regardless of whether we lease or own the facility, and regardless of whether such environmental conditions were created by us or by a prior owner or tenant, or by a third-party or a neighboring facility whose operations may have affected such facility or land, because liability for contamination under certain environmental laws can be imposed on current or past owners or operators of a site without regard to fault. We cannot assure you that environmental conditions relating to our prior, existing or future sites or those of predecessor companies whose liabilities we may have assumed or acquired will not have a material adverse effect on our business.

State efforts to regulate the construction or expansion of healthcare facilities could impair our ability to operate and expand our facilities.

The construction of new healthcare facilities, the expansion of existing facilities, the transfer or change of ownership of existing facilities and the addition of new beds, services or equipment may be subject to state laws that require prior approval by state regulatory agencies under certificate of need laws. These laws generally require that a state agency determine the public need for construction or acquisition of facilities or the addition of new services. Review of certificates of need and other healthcare planning initiatives may be lengthy and may require public hearings. Violations of these state laws may result in the imposition of civil sanctions or revocation of a facility’s license. We currently do not operate facilities in any states where a certificate of need is required to be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered. States in which we now or may in the future operate may require certificates of need under certain circumstances not currently applicable to us or may impose standards and other health planning requirements upon us. Our failure to obtain any necessary state approval could:

 

    result in our inability to acquire a targeted facility, complete a desired expansion or make a desired replacement; or

 

    result in the revocation of a facility’s license or impose civil or criminal penalties on us,

any of which could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to obtain required regulatory, zoning or other required approvals for renovations and expansions, our growth may be restrained and our operating results may be adversely affected. In the past, we have not experienced any material adverse effects from such requirements, but we cannot predict the future impact of these changes upon our operations.

Risks Related to Our Organization and Structure

We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay dividends, if any.

AAC Holdings, Inc. is a holding company with nominal net worth. We do not have any assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our direct operating subsidiary, AAC. As a result, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers to us from our subsidiaries, including AAC. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. In addition, our subsidiaries, including our direct operating subsidiary, AAC, are separate and distinct legal entities and have no obligation to make any funds available to us.

 

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Our directors, executive officers and principal stockholders and their respective affiliates will continue to have substantial control over the company after this offering and could delay or prevent a change in corporate control.

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately     % of our outstanding common stock. In addition, Michael T. Cartwright, our Chairman and Chief Executive Officer, and his affiliates will own approximately     % of our common stock, and Jerrod N. Menz, our President, and his affiliates will own approximately     % of our common stock. As a result, these stockholders, acting together, will continue to have substantial control over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, will continue to have significant influence over the management and affairs of our company. Accordingly, this concentration of ownership may have the effect of:

 

    delaying, deferring or preventing a change in corporate control;

 

    impeding a merger, consolidation, takeover or other business combination involving us; or

 

    discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Anti-takeover provisions in our articles of incorporation, bylaws and Nevada law could prevent or delay a change in control of our company.

Provisions in our articles of incorporation and amended and restated bylaws, which we refer to as our bylaws, which bylaws will become effective upon the closing of this offering, may discourage, delay or prevent a merger, acquisition or change of control. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions:

 

    permit our Board of Directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;

 

    provide that the authorized number of directors may be changed only by resolution of the Board of Directors;

 

    provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

    provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner and also specify requirements as to the form and content of a stockholder’s notice;

 

    provide that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders;

 

    do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose); and

 

    provide that special meetings of our stockholders may be called only by the chairman of the Board of Directors, our Chief Executive Officer and the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors or the holders of a majority of the outstanding shares of voting stock.

 

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We may be subject to additional risks and uncertainties as a result of the Reorganization Transactions, including risks related to whether a short-form merger is completed in a timely manner, or at all, following the completion of this offering.

Prior to this offering, Holdings engaged in a voluntary private share exchange with certain stockholders of AAC, whereby holders representing 93.6% of the outstanding shares of common stock of AAC exchanged their shares on a one-for-one basis for shares of Holdings common stock. We refer to this transaction as the Private Share Exchange. Subsequent to this offering, Holdings expects to conduct a subsidiary short-form merger with AAC whereby the remaining legacy holders who did not participate in the Private Share Exchange would be entitled to receive Holdings shares on a one-for-one basis. We currently expect to register this short-form merger on a Form S-4 registration statement to be filed with the SEC after consummation of this offering. Consummation of the short-form merger may be delayed or prevented by a number of factors outside our control. If the short-form merger is not completed in a timely manner, or at all, a significant minority interest in AAC will be held by third parties, which may affect the manner in which we conduct our business.

The lack of public company experience of our management team could adversely impact our ability to comply with the reporting requirements of U.S. securities laws.

Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the SEC, the New York Stock Exchange, or the NYSE, or Sarbanes-Oxley, which would apply to us after this offering. In addition, prior to the completion of this offering, we have been a private company with limited accounting personnel and other related resources, and we have only recently hired accounting personnel with SEC reporting experience. Despite recent reforms made possible by the JOBS Act, compliance with the securities laws and regulations, as well as the requirements of the NYSE, will occupy a significant amount of time of our management and will significantly increase our legal, accounting and other expenses, particularly after we no longer qualify as an “emerging growth company.” Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such increased legal, regulatory compliance and reporting requirements, including establishing and maintaining internal controls over financial reporting. Any such deficiencies, weaknesses or lack of compliance could have a material adverse effect on our ability to comply with the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, which is necessary to maintain our public company status. If we were to fail to fulfill any of these public company reporting obligations, our ability to continue as a U.S. public company would be in jeopardy, in which event you could lose your entire investment in our company.

We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined under the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period or if the market value of our common stock held by non-affiliates meets or exceeds $700 million as of any June 30th before that time, in which case we would no longer be an emerging growth company as of the following December 31st. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

 

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Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period for implementing new or revised accounting standards and, therefore, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

Risks Related to this Offering

Market volatility may cause our stock price and the value of your investment to decline.

The initial public offering price for our common stock was determined through negotiations between the underwriters and us. The initial public offering price may vary from the market price of our common stock after the closing of this offering. Investors may not be able to sell their common stock at or above the initial public offering price.

We expect that the price of our common stock will fluctuate substantially as the market price for our common stock after this offering will be affected by a number of factors including:

 

    changes in policies affecting third-party coverage and reimbursement in the United States;

 

    our ability to achieve market success;

 

    actual or anticipated variations in our results of operations or those of our competitors;

 

    announcements of new services, innovations or product advancements by us or our competitors;

 

    sales of common stock or other securities by us or our stockholders in the future;

 

    additions or departures of key management personnel;

 

    trading volume of our common stock;

 

    developments in our industry; and

 

    general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.

In addition, the stock prices of many companies in the healthcare industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. We expect our stock price to be similarly volatile. These broad market fluctuations may continue and could harm our stock price. Following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Class action securities litigation, if instituted against us, could result in substantial costs and a diversion of our management resources, which could have a material adverse effect on our business, financial condition and results of operations.

Securities analysts may not initiate coverage for our common stock or may issue negative reports, and this may have a negative impact on the market price of our common stock.

Securities analysts may elect not to provide research coverage of our common stock after the completion of this offering. The lack of research coverage may adversely affect the market price of our common stock. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business, and our failure to achieve analyst earnings estimates. It may be difficult for companies such as ours, with smaller market capitalizations, to attract securities analysts that will cover our common stock. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

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We have not paid dividends in the past and do not expect to pay dividends in the future.

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business, and therefore, we do not anticipate paying cash dividends in the foreseeable future. Any future determination related to the payment of dividends will be made at the discretion of our Board of Directors and will depend on, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors may deem relevant. In addition, as a holding company, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including AAC. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. Our subsidiaries, including our direct operating subsidiary, AAC, are separate and distinct legal entities and have no obligation to make any funds available to us. Additionally, the terms of our Credit Facility impose restrictions on our ability to declare and pay dividends. If we do not pay dividends, a return on your investment will only occur if our stock price appreciates.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that they may occur, may depress the market price of our common stock.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that substantial sales may be made, could cause the market price of our common stock to decline. The lock-up agreements to be delivered by our executive officers, directors and certain of our stockholders provide that the underwriters, acting jointly and in their discretion, may release those parties, at any time, or from time to time, and without notice, from their obligation not to dispose of shares of common stock for a period of 180 days after the date of this prospectus. The underwriters do not have any pre-established conditions to waiving the terms of the lock-up agreements, and any decision by them to waive those conditions would depend on a number of factors, which may include market conditions, the performance of the common stock in the market and our financial condition at that time.

Based on the number of shares of common stock outstanding as of                     , 2014, upon completion of this offering,             shares of our common stock will be outstanding. All of the shares sold in this offering will be freely transferable unless held by an affiliate of ours. The lock-up agreements between the underwriters and our directors, executive officers and those stockholders participating in the Private Share Exchange and directed share program will expire 180 days after the date of this prospectus, at which time all of the shares of our common stock will be freely transferable subject to compliance with the provisions of Rule 144. See “Shares Eligible for Future Sale—Lock-up Agreements.” Our affiliates must comply with the volume, manner of sale, holding period and other limitations of Rule 144. As restrictions on resale end, the market price could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. Any substantial sale of common stock pursuant to any resale registration statements or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

We intend to file a registration statement on Form S-8 to register the 1,000,000 shares reserved for issuance under our 2014 Equity Incentive Plan. The registration statement will become effective when filed, and, subject to applicable lock-up agreements, if any, these shares may be resold without restriction in the public marketplace. For a more detailed description, please see the section of this prospectus entitled “Shares Eligible for Future Sale—Equity Incentive Plans.”

We intend to file a registration statement on Form S-4 to register the 186,452 shares that we expect to issue pursuant to our short-form merger with AAC following the completion of this offering, whereby the remaining legacy holders who did not participate in the Private Share Exchange would be entitled to receive Holdings shares on a one-for-one basis. When the registration statement is declared effective by the SEC, subject to applicable lock-up agreements, if any, these shares may be resold without restriction in the public marketplace. For a more detailed description, please see the section of this prospectus entitled “Shares Eligible for Future Sale—Short-Form Merger.”

 

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New investors in our common stock will experience immediate and substantial dilution after this offering.

If you purchase shares of our common stock in this offering, you will experience immediate dilution of $             per share, based on the mid-point of the range on the cover of this prospectus, because the price that you pay will be substantially greater than the adjusted pro forma net tangible book value per share of common stock that you acquire. This dilution is due in large part to the fact that many of our earlier investors paid substantially less than the price of the shares being sold in this offering when they purchased their shares of our capital stock. In addition, in the future we may decide to convert our operating company into a limited liability company and use common units in our operating company as currency to acquire facility properties, which could result in stockholder dilution or limit our ability to sell such properties, which could have a material adverse effect on us. See the section entitled “Dilution” in this prospectus for a more detailed description of this dilution.

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on the NYSE; however, an active trading market for our shares may never develop or be sustained following this offering. Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make statements in this prospectus that are forward-looking statements within the meaning of the federal securities laws. Some of the statements under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. Likewise, our pro forma financial statements and anticipated market conditions and results of operations are forward-looking statements. 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. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include, without limitation:

 

    our inability to operate certain key treatment facilities or our corporate office;

 

    our reliance on our sales and marketing program to continuously attract and enroll clients to our network of facilities;

 

    our dependence on payments by third-party payors with whom we are considered an “out-of-network” provider;

 

    the impact of an increase in uninsured and underinsured clients or the deterioration in the collectability of the accounts of such clients;

 

    a reduction in reimbursement rates by certain third-party payors that account for a significant portion of our revenues;

 

    our failure to successfully achieve growth through acquisitions and de novo expansions;

 

    the impact of governmental regulations on our operations and potential governmental investigations and claims or lawsuits or other claims brought against us by others;

 

    the impact of competition and its potential effect on census volume and the availability or cost of attracting and retaining talented medical support staff;

 

    our failure to obtain necessary outside financing on favorable terms or at all;

 

    our ability to meet our debt obligations and the impact of the restrictive covenants in our Credit Facility;

 

    our dependence on key management personnel;

 

    our failure to comply with extensive laws and government regulations impacting our industry;

 

    the impact of legislative and regulatory initiatives relating to privacy and security of client health information and standards for electronic transactions;

 

    the impact of recent healthcare reform;

 

    the impact of state efforts to regulate the construction or expansion of healthcare facilities on our ability to operate and expand our operations;

 

    the fact that our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering;

 

    the fact that we have not previously been required to comply with regulatory requirements applicable to publicly-traded companies;

 

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    the impact of market volatility and the initiation or lack of security analyst coverage on the market price of our common stock;

 

    general economic conditions; and

 

    the other risks described under the heading “Risk Factors.”

The factors identified above should not be construed as an exhaustive list of factors that could affect our future results and should be read in conjunction with the other cautionary statements that are included in this prospectus. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future about which we cannot be certain.

As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We do not undertake to update any of the forward-looking statements after the date of this prospectus except to the extent required by applicable securities laws.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of              shares of common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The principal reasons for this offering are to increase our available cash resources, increase awareness of our company in the marketplace and create a public market for our common stock.

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, as applicable, our expected net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $         million, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds to repay approximately $         million of outstanding indebtedness, consisting of the outstanding balance of approximately $         million on our revolving line of credit and an outstanding balance of approximately $1.7 million on a term loan that we assumed and refinanced in connection with the BHR Acquisition. We also intend to use $7.3 million of the net proceeds from this offering to pay the amount owed in connection with the settlement of certain litigation as described in the section entitled “Business—Legal Proceedings.” We intend to use the remaining approximately $         million of net proceeds for working capital and other general corporate purposes, which may include the financing of future potential acquisitions and de novo facility developments, although we have no current specific plans for the remaining portion of the net proceeds as of the date of this prospectus.

The amounts and timing of the use of the remaining approximately $         million of net proceeds will vary depending on the amount of cash generated by our operations, competitive and industry developments, market opportunities and the rate of growth, if any, of our business. Accordingly, we will have significant discretion and flexibility in applying the remaining portion of the net proceeds. Pending the above uses, we plan to invest the remaining net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

As of June 30, 2014, the interest rate on our revolving line of credit, which is available for general corporate purposes and matures on April 1, 2015, was 3.15%. As of June 30, 2014, the interest rate under the term loan, which matures on April 15, 2015, was 5.0%. The original proceeds from the term loan were used to repay a loan of a BHR subsidiary, Greenhouse Real Estate, LLC.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our Board of Directors and will depend on, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors may deem relevant. In addition, as a holding company, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including AAC. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. Our subsidiaries, including our direct operating subsidiary, AAC, are separate and distinct legal entities and have no obligation to make any funds available to us. Additionally, the terms of our Credit Facility impose restrictions on our ability to declare and pay dividends. If we do not pay dividends, a return on your investment will only occur if our stock price appreciates.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of June 30, 2014:

 

    on an actual basis; and

 

    on a pro forma as adjusted basis to give effect to the sale of             shares of our common stock in this offering by us at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) and the application of the net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, to repay approximately $             million of outstanding indebtedness and to pay $7.3 million in connection with the settlement of certain litigation.

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Historical and Pro Forma Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2014  
     Actual
(unaudited)
     Pro Forma
as Adjusted (1)
 
     (amounts in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 2,382       $                
  

 

 

    

 

 

 

Debt, including current portion:

     

Real estate debt

   $ 26,752       $     

Subordinated notes payable (non-related party)

     697      

Other non-related party debt

     2,128      

Related party debt

     4,167      

Revolving line of credit

     13,050      
  

 

 

    

 

 

 

Total long term debt, including current portion

     46,794      
  

 

 

    

 

 

 

Total mezzanine equity (including noncontrolling interest) (2)

     7,835      
  

 

 

    

 

 

 

Stockholders’ equity (including noncontrolling interest):

     

AAC Holdings, Inc. common stock, $0.001 par value per share, 70,000,000 shares authorized, 9,975,885 shares issued and outstanding, actual; and              shares issued and outstanding, pro forma as adjusted

     10      

AAC Holdings, Inc. common stock subscribed, net of subscription receivable of $8

     92      

Additional paid-in capital

     22,413      

Retained earnings

     3,893      

Noncontrolling interest (3)

     89      
  

 

 

    

 

 

 

Total stockholders’ equity (including noncontrolling interest)

     26,497      
  

 

 

    

 

 

 

Total capitalization

   $ 83,508       $     
  

 

 

    

 

 

 

 

(1) A $1.00 increase or decrease in the assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents and total stockholders’ equity by approximately $     million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(2) The actual column for total mezzanine equity includes 37,174 shares of AAC common stock that were not exchanged for shares of Holdings common stock and are classified as noncontrolling interest within mezzanine equity. For additional discussion of mezzanine equity, see Note 11 to our audited financial statements included elsewhere in this prospectus.

(3) Noncontrolling interest represents the equity of the Professional Groups (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs”) that we do not own as well as 593,712 shares of AAC common stock that were not exchanged for shares of Holdings common stock and are classified in permanent equity.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our historical net tangible book value of our common stock as of June 30, 2014 was $8.6 million, or $0.86 per share, based on the 9,975,885 shares of common stock issued and outstanding as of June 30, 2014. Historical net tangible book value per share is determined by dividing the number of shares of common stock outstanding as of June 30, 2014 into our total net tangible assets (total assets less intangible assets) less total liabilities and noncontrolling interest.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock offered by us in this offering at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2014 would have been approximately $             million, or approximately $             per share of common stock. This represents an immediate increase in as adjusted net tangible book value of $             per share to existing stockholders, and an immediate dilution of $             per share to investors participating in this offering.

The following table illustrates this per share dilution to investors participating in this offering:

 

Assumed initial public offering price per share

   $     

Historical net tangible book value per share as of June 30, 2014

     0.86   

Increase in pro forma as adjusted net tangible book value per share attributable to this offering

  

Pro forma as adjusted net tangible book value per share after this offering

  
  

 

 

 

Dilution per share to new investors in this offering

   $     
  

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, our as adjusted net tangible book value per share after this offering by $             and the dilution in pro forma as adjusted net tangible book value to investors participating in this offering by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full to purchase              additional shares of common stock in this offering, our as adjusted net tangible book value per share after this offering would be $             per share, the increase in the net tangible book value per share to existing stockholders would be $             per share and the dilution to investors participating in this offering would be $             per share.

 

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The following table summarizes, as of June 30, 2014, the differences between the number of shares of common stock purchased from us by officers, directors and affiliated persons during the past five years (“Existing Stockholders”) and by new investors participating in this offering, the total consideration and the average price per share paid to us by Existing Stockholders and by investors participating in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus):

 

     Shares Purchased     Total
Consideration
    Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing Stockholders

               $                             $                

New Investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $           100.0   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, total consideration paid to us by investors participating in this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ over-allotment option. If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by Existing Stockholders will be reduced to     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to             , or     % of the total number of shares of common stock to be outstanding after this offering.

The number of shares in the table above excludes, as of June 30, 2014, 1,000,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, which we have adopted in connection with this offering, and 186,452 shares of common stock that we plan to issue in connection with the subsidiary short-form merger with AAC subsequent to this offering.

We may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that new options are issued under our equity incentive plans or we issue additional shares of common stock, other equity securities or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

Holdings was formed in the first quarter of 2014 and completed the Reorganization Transactions in April 2014, which included the Private Share Exchange, the BHR Acquisition and the CRMS Acquisition. As a result of the Reorganization Transactions, Holdings owns (i) 93.6% of the outstanding common stock of AAC, (ii) 100% of the outstanding common membership interests in BHR, which represents 100% of the voting rights in BHR, and (iii) 100% of the outstanding membership interests in CRMS. To help fund or facilitate the Reorganization Transactions, the following additional financing transactions were undertaken in 2014 prior to or in connection with the Reorganization Transactions: (i) AAC sold 471,843 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 to certain accredited investors in January and February 2014 with net proceeds of $0.4 million, (iii) BHR redeemed all of the outstanding 36.5 Series A Preferred Units from certain accredited investors in April 2014 and (iv) BHR sold 160 new Series A Preferred Units to an accredited investor in April 2014 with net proceeds of $7.8 million. The Reorganization Transactions and the financing transactions that occurred through June 2014 are reflected in our consolidated financial statements as of and for the six months ended June 30, 2014 and are reflected as pro forma adjustments in the unaudited pro forma consolidated statement of income for the year ended December 31, 2013. For additional information related to the Reorganization Transactions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

The following unaudited pro forma consolidated balance sheet as of June 30, 2014 gives effect to this offering and the application of the net proceeds therefrom to repay approximately $             million of outstanding indebtedness and to pay $7.3 million in connection with the settlement of certain litigation as if each had been consummated on June 30, 2014. The following unaudited pro forma consolidated statement of income for the year ended December 31, 2013 gives effect to (i) the consolidation of Greenhouse Real Estate, LLC, (ii) the Reorganization Transactions and the financing transactions related to the Reorganization Transactions and (iii) this offering and our intended use of proceeds therefrom described in “Use of Proceeds,” as if each had been consummated on January 1, 2013. It does not include (i) any adjustments for Concorde Real Estate, LLC, a subsidiary of BHR, as its results of operations are included in the historical financial results for the entire year, (ii) any adjustments for The Academy Real Estate, LLC, a subsidiary of BHR, as its results of operations are included in the historical financial results for the entire period of existence during 2013 and (iii) the effect of the acquisition of the membership interests in CRMS prior to the April 15, 2014 acquisition date as CRMS does not meet the definition of a business under applicable regulations. The following unaudited pro forma condensed consolidated statement of income for the six months ended June 30, 2014 also gives effect to the (i) Reorganization Transactions and the financing transactions related to the Reorganization Transactions and (ii) this offering and our intended use of proceeds therefrom described in “Use of Proceeds,” as if each had been consummated on January 1, 2013. It does not include (i) any adjustments for Greenhouse Real Estate, LLC, Concorde Real Estate, LLC and The Academy Real Estate, LLC, each of which is a subsidiary of BHR, as their results of operations are included in the historical financial results for the entire six months and (ii) the effect of the acquisition of the membership interests of CRMS as CRMS does not meet the definition of a business under applicable regulations. The notes to the unaudited pro forma consolidated financial statements describe the pro forma amounts and adjustments presented.

The pro forma adjustments reflecting the completion of the BHR Acquisition are based upon accounting for the acquisition of BHR as an acquisition of additional ownership interests in a variable interest entity that does not result in a change of control of that subsidiary, as BHR was already being consolidated as a variable interest entity in accordance with ASC 810 (Consolidation) and upon the assumptions set forth in the notes included in this section. These unaudited pro forma consolidated financial statements should be read in conjunction with the accompanying notes. The pro forma statements are primarily based on, and should also be read in conjunction with, (i) our audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2013, (ii) our unaudited condensed consolidated financial statements and accompanying notes as of and for the six months ended June 30, 2014 and (iii) Greenhouse Real Estate, LLC’s Historical Statement of Revenues and Certain Direct Operating Expenses for the period from January 1, 2013 to October 7, 2013, all of which are included elsewhere in this prospectus.

 

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The unaudited pro forma consolidated financial statements are presented for informational purposes only and do not reflect future events that may occur after the foregoing transactions or any operating efficiencies or inefficiencies that may result from the transactions. Therefore, the unaudited pro forma consolidated financial statements are not necessarily indicative of results that would have been achieved had the businesses been consolidated during the period presented or the results that we will experience after the transactions are consummated. In addition, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are preliminary and have been made solely for purposes of developing these unaudited pro forma consolidated financial statements. Actual results could differ, perhaps materially, from these estimates and assumptions.

 

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2013

 

    AAC
Holdings,
Inc. 
     Greenhouse 
Real Estate,
LLC for the
Period
January 1,
2013 to
October 7,
2013
    Pro Forma
 Adjustments 
        Pro Forma         This
 Offering 
        AAC
 Holdings, Inc. 
Pro Forma as
Adjusted
 
    (in thousands, except share and per share amounts)  

Income Statement Data:

                 

Revenues

  $ 115,741      $ 1,265      $ (1,265   (a)   $ 115,741        $                     $     

Operating expenses:

                 

Salaries, wages and benefits

    46,856                        46,856           

Advertising and marketing

    13,493                        13,493           

Professional fees

    10,277        13                 10,290           

Client related services

    7,986                        7,986           

Other operating expenses

    11,615                        11,615           

Rentals and leases

    4,634               (1,265   (a)     3,369           

Provision for doubtful accounts

    10,950                        10,950           

Litigation settlement

    2,588                        2,588           

Restructuring

    806                        806           

Depreciation and amortization

    3,003        125        65      (b)     3,193           
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total operating expenses

    112,208        138        (1,200       111,146           
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income (loss) from operations

    3,533        1,127        (65       4,595           

Interest expense

    1,390        388        87      (c)     1,865          (j)  
                (k)  

Other expense, net

    36                        36           
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income (loss) before income tax expense

    2,107        739        (152       2,694           

Income tax expense

    615               211      (d)     1,325          (l)  
        499      (e)          
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss)

    1,492        739        (862       1,369           

Less: net (income) loss attributable to noncontrolling interest

    (706     (739     2,093      (f)     563           
        (85   (g)          
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income attributable to AAC Holdings, Inc.

    786               1,146          1,932           

Deemed contribution – redemption of Series B Preferred Stock

    1,000                        1,000           

Less: BHR Series A Preferred Unit dividend

                  (960   (h)     (960        
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income available to AAC Holdings, Inc. common stockholders

  $ 1,786      $      $ 186        $ 1,972        $          $     
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Earnings per share:

                 

Basic

  $ 0.20      $      $        $ 0.21        $          $                    
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Diluted

  $ 0.20      $      $        $ 0.21        $          $     
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Weighted-average shares outstanding:

                 

Basic

    8,819,062               357,617      (i)     9,176,679          (m)  

Diluted

    9,096,660               357,617      (i)     9,454,277          (m)  

See accompanying notes to unaudited pro forma consolidated financial statements.

 

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2014

 

    AAC
Holdings,
Inc.
    Pro Forma
Adjustments
          Pro
Forma
    This
Offering
          AAC
Holdings, Inc.
Pro Forma as
Adjusted
 
    (in thousands, except share and per share amounts)  

Income Statement Data:

             

Revenues

  $ 59,203               $ 59,203      $                     $                

Operating expenses:

             

Salaries, wages and benefits

    24,124                 24,124         

Advertising and marketing

    7,079                 7,079         

Professional fees

    4,895                 4,895         

Client related services

    5,211                 5,211         

Other operating expenses

    5,551                 5,551         

Rentals and leases

    940                 940         

Provision for doubtful accounts

    6,288                 6,288         

Litigation settlement

    240                 240         

Depreciation and amortization

    2,228                 2,228         
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total operating expenses

    56,556                 56,556         
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income from operations

    2,647                 2,647         

Interest expense

    705                 705          (g  
              (h  

Other expense, net

    15                 15         
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income before income tax expense

    1,927                 1,927         

Income tax expense (benefit)

    859        (23     (a     961          (i  
      125        (b        
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income

    1,068        102          966         

Less: net (income) loss attributable to noncontrolling interest

    668        346        (c )       949         
      (65     (d        
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income attributable to AAC Holdings, Inc. stockholders

    1,736        179          1,915         

Less: BHR Series A Preferred Unit dividend

    (203     (277     (e     (480      
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income available to AAC Holdings, Inc. common stockholders

  $ 1,533      $ (98     $ 1,435      $          $     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Earnings per share:

             

Basic

  $ 0.16      $        $ 0.15      $          $                
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Diluted

  $ 0.16      $        $ 0.15      $          $                
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Weighted-average shares outstanding:

             

Basic

    9,510,427        252,149        (f     9,762,576          (j  

Diluted

    9,544,420        252,149        (f     9,796,569          (j  

See accompanying notes to unaudited pro forma consolidated financial statements.

 

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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF JUNE 30, 2014

 

     AAC
Holdings,
Inc.
     This
Offering
    AAC
Holdings, Inc.
Pro Forma as
Adjusted
 
     (in thousands)   

Assets

  

Current assets:

       

Cash and cash equivalents

   $ 2,382       $              (aa)    $                

Accounts receivable, net of allowances

     26,635        

Notes and other receivables—related party

     488        

Prepaid expenses and other current assets

     3,375        
  

 

 

    

 

 

   

 

 

 

Total current assets

     32,880        

Property and equipment, net

     44,311        

Goodwill

     12,702        

Intangible assets, net

     3,209        

Other assets

     650        
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 93,752       $        $     
  

 

 

    

 

 

   

 

 

 

Liabilities, mezzanine equity and stockholders’ equity

       

Current liabilities:

       

Accounts payable

   $ 2,853       $        $     

Accrued liabilities

     8,086        

Current portion of deferred tax liabilities

     15        

Current portion of long-term debt

     17,406        

Current portion of long-term debt—related party

     791        
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     29,151        

Deferred tax liabilities

     1,585        

Long-term debt, net of current portion

     25,221        

Long-term debt—related party, net of current portion

     3,376        

Other long-term liabilities

     87        
  

 

 

    

 

 

   

 

 

 

Total liabilities

     59,420        

Mezzanine equity including noncontrolling interest

       

Noncontrolling interest—American Addiction Centers, Inc. common stock

     53        

Noncontrolling interest—BHR Series A Preferred Units

     7,782        
  

 

 

    

 

 

   

 

 

 

Total mezzanine equity including noncontrolling interest

     7,835        

Stockholders’ equity including noncontrolling interest

       

Common stock AAC Holdings, Inc.

     10                  (aa)   

Common stock subscribed, net of subscription receivable AAC Holdings, Inc.

     92        

Additional paid-in capital

     22,413                  (aa)   

Retained earnings

     3,893        

Noncontrolling interest

     89        
  

 

 

    

 

 

   

 

 

 

Total stockholders’ equity including noncontrolling interest

     26,497        
  

 

 

    

 

 

   

 

 

 

Total liabilities, mezzanine equity and stockholders equity

   $ 93,752       $        $     
  

 

 

    

 

 

   

 

 

 

See accompanying notes to unaudited pro forma consolidated financial statements.

 

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NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated statement of income and unaudited pro forma consolidated balance sheet do not include any adjustments for the following:

 

    Concorde Real Estate, LLC, a subsidiary of BHR, as its results of operations are included in the historical financial results for the entire year as it has been consolidated as a variable interest entity (“VIE”) since June 27, 2012.

 

    The Academy Real Estate, LLC, a subsidiary of BHR, as its results of operations are included in the historical financial results for the entire period of its existence during 2013.

 

    The effects of the CRMS Acquisition as CRMS’s only revenue stream is with AAC and upon completion of the acquisition CRMS will no longer have revenues. Accordingly, CRMS does not meet the definition of a business under Regulation S-X Rule 11-01(d).

Additionally, Greenhouse Real Estate, LLC, a subsidiary of BHR, is not included in the historical balance sheet as of June 30, 2014 and in the historical results of operations for the six months ended June 30, 2014 as we have consolidated it as an VIE since October 8, 2013.

Note 1—Unaudited Pro Forma Consolidated Statement of Income Adjustments for the Year Ended December 31, 2013

The unaudited pro forma consolidated statement of income for the year ended December 31, 2013 gives effect to the adjustments described below relating to the initial VIE consolidation of Greenhouse Real Estate, LLC, a subsidiary of BHR, accounted for as a business combination, and the Reorganization Transactions, the financing transactions related to the Reorganization Transactions and this offering and the use of proceeds therefrom as described in “Use of Proceeds,” as if each had been consummated on January 1, 2013.

 

  (a) Reflects the elimination of historical rental revenues received by Greenhouse Real Estate, LLC and paid by the Company.

 

  (b) Reflects additional depreciation expense for the period from January 1 to October 7, 2013 attributable to recording the assets of Greenhouse Real Estate, LLC at fair value on October 8, 2013, the date on which Greenhouse Real Estate, LLC became a consolidated VIE.

 

  (c) Reflects additional interest expense related to the $1.8 million term loan, which bears interest at 5.0% per annum, assumed and refinanced by us in connection with the BHR Acquisition from the individuals who collectively owned 100% of the common membership interests of BHR prior to the BHR Acquisition. Our Credit Facility requires us to repay this loan in full with proceeds from this offering (see adjustment (j) below).

 

  (d) Reflects the estimated income tax expense, at an effective income tax rate of 36.0%, on (i) Greenhouse Real Estate, LLC income for the period from January 1, 2013 through October 7, 2013, (ii) the pro forma adjustments related to Greenhouse Real Estate, LLC for the period from January 1, 2013 through October 7, 2013 as set forth in adjustments (a) through (c) above and (iii) the pro forma adjustment related to the income attributable to shares of AAC common stock that were not exchanged for shares of Holdings common stock in the Private Share Exchange and classified in mezzanine equity. The historical results of Greenhouse Real Estate, LLC do not include a provision for income tax expense as the LLC is a flow-through entity for tax purposes and AAC was not a member of the LLC.

 

  (e) Reflects the estimated income tax expense, at an income tax rate of 36.0%, on $1.4 million of net income of the BHR subsidiaries included in the historical results of AAC. The historical results of BHR do not include a provision for income tax expense as BHR is a flow-through entity for tax purposes and AAC was not a member of BHR.

 

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  (f) Reflects the elimination of the noncontrolling interest as a result of the BHR Acquisition. The Series A Preferred Unit holder does not have any rights to the income of BHR other than the payment of the 12% per annum preferred return. The net loss (income) attributable to noncontrolling interest in the “Pro Forma” column represents the net loss of the professional groups with which our treatment facilities have management services arrangements. For additional information related to these professional groups, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs” included elsewhere in this prospectus.

 

  (g) Reflects the income attributable to shares of AAC common stock that were not exchanged for Holdings common stock and classified in mezzanine equity.

 

  (h) Reflects the $960,000 dividend with respect to the 12% per annum preferred return on the outstanding Series A Preferred Units that were issued by BHR on April 15, 2014 to BNY Alcentra Group Holdings, Inc.

 

  (i) Reflects (i) the sale of 471,843 shares of AAC common stock to certain accredited investors from February through April 2014, (ii) the issuance of 521,999 shares of Holdings common stock in connection with the BHR Acquisition and (iii) the deduction of the 636,225 shares of AAC common stock not exchanged for Holdings shares in the Private Share Exchange as discussed in Note 3 to the unaudited condensed consolidated financial statements.

 

  (j) Reflects the elimination of the historical interest expense on our Credit Facility for 2013. The outstanding balance of the revolving line will be paid down with proceeds from this offering.

 

  (k) Reflects the elimination of the pro forma interest expense on the $1.8 million term loan with a financial institution assumed in connection with the BHR Acquisition that will be repaid in full with proceeds from this offering.

 

  (l) Reflects the estimated tax impact of the elimination of interest expense as described in (j) and (k) above.

 

  (m) Reflects the sale of              shares of Holdings common stock in connection with this offering.

Note 2—Unaudited Pro Forma Consolidated Statement of Income Adjustments for the Six Months Ended June 30, 2014

The unaudited pro forma consolidated statement of income for the six months ended June 30, 2014 gives effect to the adjustments described below relating to the Reorganization Transactions, the financing transactions related to the Reorganization Transactions and this offering and the use of proceeds therefrom as described in “Use of Proceeds,” as if each had been consummated on January 1, 2013.

 

  (a) Reflects the estimated income tax benefit, at an effective income tax rate of 36.0%, on the pro forma adjustment related to the income attributable to shares of AAC common stock that were not exchanged for shares of Holdings common stock in the Private Share Exchange and classified in mezzanine equity.

 

  (b) Reflects the estimated income tax expense, at an income tax rate of 36.0%, on $0.3 million of net income of the BHR subsidiaries for the period from January 1, 2014 to April 15, 2014 included in the historical results of AAC. The historical results of BHR do not include a provision for income tax expense as BHR is a flow-through entity for tax purposes and AAC was not a member of BHR prior to completion of the BHR Acquisition on April 15, 2014.

 

  (c)

Reflects the elimination of the income attributable to the noncontrolling interest for the period from January 1, 2014 to April 15, 2014 as a result of the BHR Acquisition. The Series A Preferred Unit holder does not have any rights to the income of BHR other than the payment of the 12% per annum preferred return. The net loss (income) attributable to noncontrolling interest in

 

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  the “Pro Forma” and “AAC Holdings, Inc. Pro Forma as Adjusted” columns represent the net loss of the professional groups with which our treatment facilities have management services arrangements. For additional information related to these professional groups, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs” included elsewhere in this prospectus.

 

  (d) Reflects the income attributable to the shares of AAC common stock that were not exchanged for shares of Holdings common stock in the Private Share Exchange and classified in mezzanine equity.

 

  (e) Reflects the $480,000 dividend for the six months ended June 30, 2014 with respect to the 12% per annum preferred return on the outstanding Series A Preferred Units that were issued by BHR on April 15, 2014 to BNY Alcentra Group Holdings, Inc.

 

  (f) Reflects (i) the addition of 82,176 shares of common stock to fully reflect the sale of 143,017 shares of AAC common stock to certain accredited investors in April 2014 as outstanding for the entire six months ended June 30, 2014 (60,841 shares were included in the historical column of the weighted-average shares outstanding), (ii) the addition of 105,510 shares of common stock to fully reflect the 328,826 shares of AAC common stock sold to certain accredited investors in February and March 2014 as outstanding for the entire six months ended June 30, 2014 (223,316 shares were included in the historical column of the weighted-average shares outstanding), (iii) the addition of 299,933 shares of common stock to fully reflect the issuance of 521,999 shares of common stock in connection with the BHR Acquisition as outstanding for the entire six months ended June 30, 2014 (222,066 shares were included in the historical column of the weighted-average shares outstanding) and (iv) the deduction of 235,470 shares of common stock to fully reflect the deduction of the 636,225 shares of AAC common stock not exchanged for Holdings shares in the Private Share Exchange as discussed in Note 3 to the unaudited condensed consolidated financial statements (400,755 shares were deducted in the historical column of the weighted-average shares outstanding).

 

  (g) Reflects the elimination of the historical interest expense on our Credit Facility for 2014. The outstanding balance of the revolving line will be paid down with proceeds from this offering.

 

  (h) Reflects the elimination of the pro forma interest expense on the $1.8 million term loan with a financial institution assumed in connection with the BHR Acquisition that will be repaid in full with proceeds from this offering.

 

  (i) Reflects the estimated tax impact of the elimination of interest expense as described in (g) and (h) above.

 

  (j) Reflects the sale of              shares of Holdings common stock in connection with this offering.

Note 3—Unaudited Pro Forma Consolidated Balance Sheet Adjustment as of June 30, 2014

The unaudited pro forma consolidated balance sheet as of June 30, 2014 gives effect to this offering and our intended use of proceeds therefrom as described in “Use of Proceeds” as if each had occurred on June 30, 2014:

 

  (aa) Reflects the issuance of             shares of Holdings common stock at the initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and the estimated net proceeds of $         and a use of a portion of the proceeds to repay $         million of outstanding indebtedness and to pay $7.3 million in connection with the settlement of certain litigation. The recording of the proceeds also reflects the reclassification of offering expenses of $         out of prepaid and other current assets.

 

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SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED

FINANCIAL AND OPERATING DATA

The following tables present our selected historical and pro forma consolidated financial and operating data as of the dates and for the periods indicated. Holdings was formed as a Nevada corporation on February 12, 2014, and acquired 93.6% of the outstanding shares of common stock of AAC on April 15, 2014 in connection with the Reorganization Transactions, and Holdings therefore controls AAC. Prior to the completion of the Reorganization Transactions, Holdings had not engaged in any business or other activities except in connection with its formation. Accordingly, all financial and operating data herein relating to periods prior to the completion of the Reorganization Transactions is that of AAC and its consolidated subsidiaries and is referred to herein as “our” historical financial and operating data.

The selected consolidated financial data as of and for the years ended December 31, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data for the year ended December 31, 2011 are derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated financial data as of June 30, 2014 and for the six months ended June 30, 2013 and 2014 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The following selected consolidated financial data should be read together with our audited consolidated financial statements, unaudited condensed consolidated financial statements and accompanying notes and information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. In the opinion of management, the interim financial data set forth below include all adjustments, consisting of normal recurring accruals, necessary to fairly present our financial position. Our historical results are not necessarily indicative of results that may be expected in the future. See Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information regarding the BHR Acquisition and the CRMS Acquisition and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the anticipated impact the BHR Acquisition and the CRMS Acquisition will have on our future results of operations and financial position.

The selected unaudited pro forma financial and other data for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014 have been adjusted to give effect to this offering and our intended use of proceeds from this offering and, in the case of the unaudited pro forma consolidated income statement data, certain other transactions as described in the section titled “Unaudited Pro Forma Consolidated Financial Statements” included elsewhere in this prospectus. Specifically, the “Pro Forma as Adjusted” columns in the selected unaudited pro forma consolidated income statement and other data give effect to the Reorganization Transactions, the related financing transactions and this offering and our intended use of proceeds therefrom as described in “Use of Proceeds,” in each case for the year ended December 31, 2013 and for the six months ended June 30, 2014. This data is subject and gives effect to the assumptions and adjustments described in the notes accompanying the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The selected unaudited pro forma financial data is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the transactions and this offering been consummated on the dates indicated, and does not purport to be indicative of financial condition data or results of operations as of any future date or for any future period.

 

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                Year Ended
December 31, 2013
    Six Months
Ended

June 30,
        2013        

Actual
(unaudited)
    Six Months Ended
June 30, 2014
 
    Year Ended December 31,           Pro Forma
as Adjusted
      Actual
(unaudited)
    Pro Forma
as Adjusted
 
            2011                     2012             Actual          
    (in thousands, except for share and per share amounts)  

Income Statement Data:

             

Revenues

  $ 28,275      $ 66,035      $ 115,741      $                   $ 59,331      $ 59,203      $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Salaries, wages and benefits

    9,171        25,680        46,856          21,732        24,124     

Advertising and marketing

    4,915        8,667        13,493          6,588        7,079     

Professional fees

    1,636        5,430        10,277          4,706        4,895     

Client related services

    5,791        8,389        7,986          3,567        5,211     

Other operating expenses

    2,448        6,384        11,615          6,213        5,551     

Rentals and leases

    1,196        3,614        4,634          2,772        940     

Provision for doubtful accounts

    1,063        3,344        10,950          4,820        6,288     

Litigation settlement (1)

                  2,588          2,500        240     

Restructuring (2)

                  806          551            

Depreciation and amortization

    195        1,288        3,003          1,399        2,228     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    26,415        62,796        112,208          54,848        56,556     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    1,860        3,239        3,533          4,483        2,647     

Interest expense

    337        980        1,390          784        705     

Other (income) expense, net

           12        36          (27     15     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    1,523        2,247        2,107          3,726        1,927     

Income tax expense

    652        1,148        615          1,745        859     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    871        1,099        1,492          1,981        1,068     

Less: net loss (income) attributable to noncontrolling interest (3)

           405        (706       (343     668     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AAC Holdings, Inc. stockholders

    871        1,504        786          1,638        1,736     

Deemed contribution—redemption of Series B Preferred Stock

                  1,000          1,000            

BHR Series A Preferred Unit dividend

                                  (203  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to AAC Holdings, Inc. common stockholders

  $ 871      $ 1,504      $ 1,786      $        $ 2,638      $ 1,533      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to common stockholders (4):

             

Basic

  $ 0.20      $ 0.19      $ 0.20      $        $ 0.30      $ 0.16      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.20      $ 0.19      $ 0.20      $        $ 0.30      $ 0.16      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

             

Basic

    4,287,131        7,770,359        8,819,062          8,671,942        9,510,427     

Diluted

    4,314,051        7,869,017        9,096,660          8,734,934        9,544,420     

Other Financial Information:

             

Adjusted EBITDA (5)

  $ 2,055      $ 7,168      $ 11,558      $        $ 9,580      $ 7,832      $     

 

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                As of June 30, 2014  
    As of December 31,     Actual
(unaudited)
    Pro Forma
as Adjusted (6)
 
       2012           2013         
    (in thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

  $ 740      $ 2,012      $ 2,382      $                

Working capital

    3,190        1,220        3,729     

Total assets

    53,598        81,638        93,752     

Total debt, including current portion

    25,222        43,075        46,794     

Total mezzanine equity (including noncontrolling
interest) (7)

    11,613        11,842        7,835     

Total stockholders’ equity (including noncontrolling
interest) (8)

    4,678        11,883        26,497     

 

     Year Ended
December 31,
     Six Months Ended
June 30
 
     2012      2013          2013              2014      

Operating Metrics (unaudited):

           

Average daily census (9)

     238         339         365         375   

Average daily revenue (10)

   $ 759       $ 935       $ 898       $ 872   

Average net daily revenue (11)

   $ 722       $ 847       $ 825       $ 780   

New admissions (12)

     2,934         4,053         2,174         2,177   

Bed count at end of period (13)

     338         431         420         427   

 

(1) We recorded a $2.5 million reserve in the second quarter of 2013 in connection with a consolidated wage and hour class action claim. We made a payment of $2.6 million in the second quarter of 2014 to settle the matter. For additional discussion of this litigation settlement, see Note 16 to our audited financial statements included elsewhere in this prospectus.

 

(2) During the first half of 2013, management adopted restructuring plans to centralize our call centers and to close the Leading Edge facility. As a result, aggregate restructuring and exit charges of $0.8 million were recognized in 2013, of which $0.6 million was recognized in the six months ended June 30, 2013. We did not recognize any restructuring expenses during 2012 as expenses related to the corporate relocation were not significant.

 

(3) Represents the net income attributable to the stockholders of AAC that did not exchange their shares for Holdings common stock for the period from April 15, 2014 to June 30, 2014, the net income (loss) attributable to the noncontrolling interest in BHR (for 2012, 2013 and through the acquisition date of April 15, 2014) and the Professional Groups (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs” ) (for 2013 and the six month period ended June 30, 2014) and the net income (loss) in the Pro Forma as Adjusted columns of the Professional Groups.

 

(4) After giving effect to the subsidiary short-form merger with AAC that we expect to complete subsequent to this offering, pro forma basic and diluted earnings per share attributable to common stockholders would be              and             , respectively, based on pro forma basic and diluted weighted-average shares outstanding of                      and                     , respectively.

 

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(5) Adjusted EBITDA is a “non-GAAP financial measure” as defined under the rules and regulations promulgated by the SEC. We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization expense, income tax expense, stock-based compensation and related tax reimbursements, litigation settlement and restructuring charges and acquisition related de novo startup expenses, which includes professional services for accounting, legal and valuation services related to the acquisitions and legal and licensing expenses related to de novo projects. Adjusted EBITDA, as presented in this prospectus, is considered a supplemental measure of our performance and is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. We have included information concerning Adjusted EBITDA in this prospectus because we believe that such information is used by certain investors as a measure of a company’s historical performance. We believe this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of issuers of equity securities, many of which present EBITDA and Adjusted EBITDA when reporting their results. Because Adjusted EBITDA is not determined in accordance with GAAP, it is subject to varying calculations and may not be comparable to the Adjusted EBITDA (or similarly titled measures) of other companies. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

 

                Year Ended
December 31, 2013
    Six Months
Ended

June 30,
        2013         
Actual
(unaudited)
    Six Months Ended
June 30, 2014
 
    Year Ended December 31,           Pro Forma
as Adjusted
      Actual
(unaudited)
    Pro Forma
as Adjusted
 
        2011             2012         Actual          
    (in thousands)  

Net Income

  $ 871      $ 1,099      $ 1,492      $                   $ 1,981      $ 1,068      $                

Non-GAAP Adjustments:

             

Interest expense

    337        980        1,390          784        705     

Depreciation and amortization

    195        1,288        3,003          1,399        2,228     

Income tax expense

    652        1,148        615          1,745        859     

Stock-based compensation and related tax reimbursements

           2,408        1,649          605        1,776     

Litigation settlement

                  2,588          2,500        240     

Restructuring

                  806          551            

Acquisition related and
de novo start-up expenses

           245        15          15        956     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 2,055      $ 7,168      $ 11,558      $                   $ 9,580      $ 7,832      $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(6) Reflects the issuance of              shares of Holdings common stock at the initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and the estimated net proceeds of $         and a use of a portion of the proceeds to repay approximately $         million of outstanding indebtedness and to pay $7.3 million in connection with the settlement of certain litigation as described in the section entitled “Business—Legal Proceedings.” Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(7) For additional discussion of mezzanine equity and noncontrolling interest, see Note 11 to our audited financial statements included elsewhere in this prospectus.

 

(8) Noncontrolling interest represents the equity of BHR (through April 15, 2014) and the Professional Groups (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidation of VIEs”) that we do not own as well as the outstanding shares of AAC common stock that were not exchanged for shares of Holdings common stock.

 

(9) Includes client census at all of our owned or leased inpatient facilities, including FitRx, as well as beds obtained through contractual arrangements to meet demand exceeding capacity. For additional information about contracted beds, see “Revenues” under Note 3 to our audited financial statements included elsewhere in this prospectus.

 

(10) Average daily revenue is calculated as total revenues during the period divided by the product of the number of days in the period multiplied by average daily census.

 

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(11) Average net daily revenue is calculated as total revenues less provision for doubtful accounts during the period divided by the product of the number of days in the period multiplied by average daily census.

 

(12) Includes total client admissions for the period presented.

 

(13) Bed count at end of period includes all beds at owned and leased inpatient facilities, including FitRx, but excludes contracted beds as of December 31, 2012. We did not have any contracted beds as of any other period presented. Bed count at the end of the 2012 period includes 70 beds at our former Leading Edge facility, which was closed in the second quarter of 2013. For additional information regarding the closure of the Leading Edge facility, see Note 13 to our audited financial statements included elsewhere in this prospectus. In the first quarter of 2014, we added two beds at the FitRx facility to accommodate increased client census and eliminated six beds at The Academy facility as a result of an expired housing lease. In addition, the Greenhouse expansion, completed in July 2014, added 60 beds, all of which are licensed for detoxification.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

General . We believe we are a leading provider of inpatient substance abuse treatment services for individuals with drug and alcohol addiction. As of July 31, 2014, we operated six substance abuse treatment facilities located throughout the United States, focused on delivering effective clinical care and treatment solutions across our 467 beds, which included 338 licensed detoxification beds. We are currently developing three facilities and have an additional property under contract that we plan to develop into a new facility. The majority of our 715 employees 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.

De Novo Facilities . We have completed two successful de novo development projects. In March 2012, we opened Greenhouse in a suburb of Dallas, Texas, which initially provided us with 70 licensed residential and detoxification beds. In January 2013, we opened Desert Hope in Las Vegas, Nevada, which provided us with 148 licensed residential and detoxification beds. We refer to these two development projects as the “De Novo Facilities.” Both facilities were extensively renovated and remodeled to convert them into high quality inpatient treatment centers, and each achieved profitability in its first year of operation. We believe we were able to quickly increase census at our De Novo Facilities through increased sales and marketing efforts prior to each facility opening. As a result of the BHR Acquisition in April 2014, we acquired ownership of the real estate properties on which the De Novo Facilities operate. The effect of the BHR Acquisition is reflected under “Unaudited Pro Forma Consolidated Financial Statements.”

TSN Facilities . On August 31, 2012, we acquired the outpatient treatment operations of Singer Island (65 beds in West Palm Beach, Florida), The Academy (12 beds in West Palm Beach, Florida) and Leading Edge (70 beds in Trenton, New Jersey) (collectively, the “TSN Facilities”), for an aggregate purchase price of $14.6 million (collectively, the “TSN Acquisition”). In connection with the TSN Acquisition, we issued 888,868 shares of AAC common stock (662,452 unrestricted shares and 226,416 restricted shares at a fair value of $6.27 per share), valued collectively at $5.6 million; paid cash of $2.5 million from proceeds received from bank financing; and issued $6.5 million of subordinated notes to the sellers to fund the acquisition. The purchase agreement includes provisions that contemplate a potential purchase price adjustment at the August 2015 maturity of the subordinated notes issued to the sellers. If certain operational performance metrics are not achieved during the three-year term of the subordinated notes, we may withhold up to $1.5 million of the $4.0 million balloon payment at maturity with respect to the subordinated notes and cause the forfeiture of up to 226,416 restricted shares of AAC common stock. However, pursuant to the terms of the Federal Settlement (as later defined) among AAC, AJG Solutions, Inc. and James D. Bevell (a seller in the TSN Acquisition), which is contingent upon the closing of this offering, the parties have agreed to resolve all outstanding disputes among the parties, which includes the dismissal of certain litigation against Mr. Bevell in exchange for, among other items, full and final satisfaction of all obligations to Mr. Bevell under the TSN Acquisition purchase agreement. For additional information, see the section entitled “Business—Legal Proceedings.” The TSN Acquisition provided us with a professional sales force and a referral network of hospitals, other treatment facilities, employers, alumni, and employee assistance

 

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programs, along with established internet sites and toll free numbers. Collectively, these sales channels have contributed to an increase in our average monthly admissions of 96 clients from September 2012 through June 2014. The Leading Edge facility was later closed by management in the second quarter of 2013 because management determined the amenities and service offerings at the facility were inconsistent with our long-term strategy and brand.

Corporate Relocation . In 2012, we moved our corporate offices to Brentwood, Tennessee from Temecula, California. In 2012, we also opened a centralized call center; staffed our marketing department to transition outsourced marketing activities in-house; expanded our accounting and finance department to accommodate the financial reporting needs of a more mature, seasoned company; and added human resource, IT and operations personnel to meet the demands of our rapid growth.

Recent Developments. In April 2014, we completed the Reorganization Transactions in preparation for this offering. These included the Private Share Exchange, BHR Acquisition and CRMS Acquisition. BHR owns all the outstanding equity interests of Concorde Real Estate, LLC, Greenhouse Real Estate, LLC and The Academy Real Estate, LLC, which entities own the Desert Hope, Greenhouse and Riverview, Florida properties, respectively, and CRMS provides our client billing and collection services. For additional information related to the Reorganization Transactions, see Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In May 2014, we completed the purchase of an approximately 20,000 square foot property in Las Vegas, Nevada for $2.0 million. We paid $1.9 million at closing and a $0.1 million deposit was applied to the purchase price. In July 2014, we began construction of an outpatient treatment facility at this location.

Subsequent to this offering, we expect to conduct a subsidiary short-form merger with AAC whereby the remaining legacy holders of AAC common stock who did not participate in the Private Share Exchange would be entitled to receive Holdings shares on a one-for-one basis. Upon completion of the short-form merger, Holdings would own 100% of AAC. No assurance can be given that the short-form merger will occur in a timely manner or at all.

Anticipated Obligations and Requirements with Becoming a Public Company . As a public company, we expect that we will incur significant additional costs and expenses such as increased legal and audit fees, professional fees, directors’ and officers’ insurance costs, expenses related to compliance with Sarbanes-Oxley regulations and other annual costs of doing business as a public company, including hiring additional personnel and expanding our administrative functions.

Revenues . Our revenues primarily consist of service charges related to providing addiction treatment and other ancillary services associated with serving our clients, such as 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 year ended December 31, 2013 and the six months ended June 30, 2014, approximately 90% of our 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 year ended December 31, 2013 and the six months ended June 30, 2014, no single payor accounted for more than 12.3% and 14.5% of our revenue reimbursements, respectively. For the six months ended June 30, 2014, we estimate that revenues derived from partial hospitalization and intensive outpatient treatment services accounted for approximately 45% of our commercial payor revenues, detoxification and residential treatment services accounted for approximately 29% of our commercial payor revenues and point-of-care drug testing, quantitative laboratory services, professional groups and other ancillary services accounted for approximately 26% of our commercial payor revenues.

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

 

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by adjusting gross client charges using our expected realization and applying this discount to gross client charges. Through December 31, 2013, our expected realization was determined by management after taking into account historical collections received from the commercial payors since our inception compared to the gross client charges billed. Beginning in January 2014, we enhanced our methodology related to our net realizable value to more quickly react to potential changes in reimbursements by facility, by type of service and by payor. As a result, management adjusted the expected realization discount, on a per facility basis, to reflect a twelve-month historical analysis of reimbursement data by facility in addition to considering the type of services provided, the payors and the gross client charge rates by facility.

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.

Operating Expenses. Our operating expenses are primarily impacted by eight 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; and depreciation and amortization.

 

    Salaries, wages and benefits. We employ a variety of staff related to providing client care including case managers, therapists, medical technicians, housekeepers, cooks and drivers, among others. Our clinical salaries, wages and benefits expense is largely driven by the total number of beds in our facilities and our average daily census. We also employ a professional sales force and staff a centralized call center. Our corporate staff includes accounting, billing and finance professionals, marketing and human resource personnel, IT staff and senior management.

 

    Advertising and marketing. We promote our treatment facilities through a variety of channels including television advertising, internet search engines and Yellow Page advertising, among others. While we do not compensate our referral sources for client referrals, we do have arrangements with multiple marketing channels that we pay on a performance basis (i.e., pay per click or pay per inbound call). We also host and attend industry conferences. Our advertising and marketing efforts and expense is largely driven by the total number of available beds in our facilities.

 

    Professional fees . Professional fees consist of various professional services used to support primarily corporate related functions. These services include client billings and collections, accounting related fees for financial statement audits and tax preparation and legal fees for, among other matters, employment, compliance and general corporate matters. These fees also consist of information technology, consulting, payroll fees and national medical director fees.

 

    Client related services . Client related services consist of physician and medical services as well as client meals, pharmacy, travel, and various other expenses associated with client treatment, including the cost of contractual arrangements for the treatment of clients where the demand for services exceed our capacity. Client related services are significantly influenced by our average daily census.

 

    Other operating expenses. Other operating expenses consists primarily of utilities, insurance, telecom, travel and repairs and maintenance expenses, and is significantly influenced by the total number of beds in our facilities and our average daily census.

 

    Rentals and leases. Rentals and leases mainly consist of properties under various equipment and operating leases, which includes space required to perform client services and space for administrative facilities.

 

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    Provision for doubtful accounts . The provision for doubtful accounts represents the expense associated with management’s best estimate of accounts receivable that could become uncollectible in the future. We establish our provision for doubtful accounts based on the aging of the receivables, 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 June 30, 2014, 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 on a quarterly basis, 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. 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.

 

    Depreciation and amortization. Depreciation and amortization represents the ratable use of our capitalized property and equipment, including assets under capital leases, over the estimated useful lives of the assets, and amortizable intangible assets, which mainly consist of trademark-related intangibles and non-compete agreements.

Key Drivers of Our Results of Operations . Our results of operations and financial condition are affected by numerous factors, including those described above under “Risk Factors” and elsewhere in this prospectus and those described below:

 

    Average Daily Census . We refer to the average number of clients to whom we are providing services on a daily basis over a specific period as our “average daily census.” Our revenues are directly impacted by our average daily census, which fluctuates based on the effectiveness of our sales and marketing efforts, total number of beds, the number of client admissions and discharges in a period, average length of stay, and the ratio of clinical staff to clients.

 

    Average Daily Revenue and Average Net Daily Revenue . Our average daily revenue is a per census metric equal to our total revenues for a period divided by our average daily census for the same period divided by the number of days in the period. Our average net daily revenue is a per census metric equal to our total revenues less provision for doubtful accounts for a period divided by our average daily census for the same period divided by the number of days in the period. The key drivers of average daily revenue and average net daily revenue include the mix of services and level of care that we provide to our clients during the period and payor mix. We provide a broad continuum of services including detoxification, residential treatment, partial hospitalization and intensive outpatient care, with detoxification resulting in the highest daily charges and intensive outpatient care resulting in the lowest daily charges. We also generate revenues from laboratory and other ancillary services associated with serving our clients. We tend to experience higher margins from our urinalysis testing services, which are conducted both on-site at all of our treatment facilities and at our centralized laboratory facility in Brentwood, Tennessee, than we do from other ancillary services.

 

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    Billed Days . We refer to billed days as the number of days in a given period for which we charged a commercial payor for the category of services provided. Detoxification and residential treatment levels of care feature higher per day gross client charges than partial hospitalization and intensive outpatient levels of care but also require greater levels of more highly trained medical staff. For the six months ended June 30, 2014, detoxification and residential treatment services accounted for 27% of total billed days, and partial hospitalization and intensive outpatient services accounted for the remaining 73% of total billed days. For the fiscal year ended December 31, 2013, detoxification and residential treatment services accounted for 23% of total billed days, and partial hospitalization and intensive outpatient services accounted for the remaining 77% of total billed days. As described elsewhere in this prospectus, average length of stay can vary among periods without correlating to the overall operating performance of our business and, as a result, management does not view average length of stay as a key metric with respect to our operating performance. Rather, management views average billed days for the levels of care as a more meaningful metric to investors because it refers to the number of days in a given period for which we billed for the category of services provided. For example, in any given week, clients receiving partial hospitalization and intensive outpatient services might only qualify for five or three days, respectively, of reimbursable services during a seven day calendar period, which results in fewer billed days (e.g., five or three days, respectively) than the average length of stay (e.g., seven days) for partial hospitalization and intensive outpatient services during the same weekly period. The following table presents, for the six months ended June 30, 2014, 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:

 

     Average
Length of
Stay
     Average
Billed Days
 

Detoxification and residential treatment services

     7         7   

Partial hospitalization and intensive outpatient services

     26         16   

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 34 days and 34 days, respectively.

 

    Expense Management. Our profitability is directly impacted by our ability to manage our expenses, most notably salaries, wages and benefits and advertising and marketing costs, and to adjust accordingly based upon our capacity.

 

    Billing and Collections. Our revenues and cash flow are directly impacted by our ability to properly verify our clients’ insurance benefits, obtain authorization for levels of care, properly submit insurance claims and manage collections.

 

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Results of Operations

Comparison of Six Months ended June 30, 2014 to Six Months ended June 30, 2013

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

 

    Six Months Ended June 30,     Six Month over Six Month
Increase (Decrease)
 
    2013 (unaudited)     2014 (unaudited)    
        Amount             %             Amount             %             Amount             %      

Revenues

  $ 59,331        100.0      $ 59,203        100.0      $ (128     (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

           

Salaries, wages and benefits

    21,732        36.6        24,124        40.7        2,392        11.0   

Advertising and marketing

    6,588        11.1        7,079        12.0        491        7.5   

Professional fees

    4,706        7.9        4,895        8.3        189        4.0   

Client related services

    3,567        6.0        5,211        8.8        1,644        46.1   

Other operating expenses

    6,213        10.5        5,551        9.4        (662     (10.7

Rentals and leases

    2,772        4.7        940        1.6        (1,832     (66.1

Provision for doubtful accounts

    4,820        8.1        6,288        10.6        1,468        30.5   

Litigation settlement

    2,500        4.2        240        0.4        (2,260     (90.4

Restructuring

    551        0.9                      (551     (100.0

Depreciation and amortization

    1,399        2.4        2,228        3.8        829        59.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    54,848        92.4        56,556        95.5        1,708        3.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    4,483        7.6        2,647        4.5        (1,836     (41.0

Interest expense

    784        1.3        705        1.2        (79     (10.1

Other (income) expense, net

    (27     0.0        15        0.0        42        n/m   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    3,726        6.3        1,927        3.3        (1,799     (48.3

Income tax expense

    1,745        2.9        859        1.5        (886     (50.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1,981        3.3      $ 1,068        1.8      $ (913     (46.1

Less: net loss (income) attributable to noncontrolling interest

    (343     (0.6     668        1.1        1,011        n/m   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AAC Holdings, Inc. stockholders

  $ 1,638        2.8      $ 1,736        2.9      $ 98        6.0   

Deemed contribution — redemption of Series B Preferred Stock

    1,000        1.7               0.0        (1,000       

BHR Series A Preferred Units dividend

                  (203     (0.0     (203     n/m   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to AAC Holdings, Inc. common stockholders

  $ 2,638        4.4      $ 1,533        2.6      $ (1,105     (41.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

n/m — not meaningful

Revenues

Revenues decreased $0.1 million, or 0.2%, to $59.2 million for the six months ended June 30, 2014 from $59.3 million for the six months ended June 30, 2013. Revenues were positively impacted by an increase in average daily census to 375 for the six months ended June 30, 2014 from 365 for the six months ended June 30, 2013, or 2.7%, and an increase in revenues derived from point-of-care drug testing, quantitative laboratory services, professional groups and other ancillary services. These increases were offset by a decrease in average daily revenue to $872 for the six months ended June 30, 2014 from $898 for the six months ended June 30, 2013, or 2.9%. The increase in average daily census was driven by the expansion of both our outside sales force and our national advertising program. The increase in point-of-care drug testing, quantitative laboratory services, professional groups and other ancillary services was primarily driven by the opening of our laboratory in Brentwood,

 

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Tennessee in September 2013 and the consolidation of the Professional Groups in October 2013. The decrease in average daily revenue was primarily the result of a decline in our collection percentage as expressed as a percentage of gross client charges. This decline was principally driven by lower than estimated collections for Desert Hope for which we had limited operating history and a new commercial network agreement and, to a lesser extent, laboratory revenues for which we had limited operating history. We have since instituted further clinical placement review procedures with respect to Desert Hope to ensure maximum program benefits through the participating commercial network programs, and we have improved our laboratory billing practices by adding primary diagnosis codes and enhancing patient claim information. While we believe these actions should improve collection percentages, there can be no assurances that we will be able to maintain or improve historical collection rates in future reporting periods.

In addition, as previously disclosed, through December 31, 2013, our expected realization was determined by management after taking into account historical collections received from the commercial payors since our inception compared to the gross client charges billed. Beginning in January 2014, we enhanced our methodology related to our net realizable value to more quickly react to potential changes in reimbursements by facility, by type of service and by payor. As a result, management adjusted the expected realization discount, on a per facility basis, to reflect a twelve-month historical analysis of reimbursement data by facility in addition to considering the type of services provided, the payors and the gross client charge rates by facility. This adjustment resulted in a decrease in our expected realization for the first six months of 2014. Although we are unable to quantify the future effects of this change in methodology, we currently anticipate this adjustment will decrease our expected realization and net realizable value of revenues over the remainder of 2014.

Salaries, Wages and Benefits

Salaries, wages and benefits increased $2.4 million, or 11.0%, to $24.1 million for the six months ended June 30, 2014 from $21.7 million for the six months ended June 30, 2013. As a percentage of revenues, salaries, wages and benefits were 40.7% of revenues for the six months ended June 30, 2014 compared to 36.6% of revenues for the six months ended June 30, 2013. The increase was primarily related to the impact of stock compensation expense for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 relating to the vesting of equity award grants under our 2007 Stock Incentive Plan. Our Chief Operating Officer commenced employment in February 2013 and our General Counsel and Secretary commenced employment in December 2013. Accordingly, our salaries, wages and benefits for the six months ended June 30, 2014 included their salaries for the entire period of 2014. In addition, salaries, wages and benefits for the six months ended June 30, 2014 increased $0.6 million for discretionary bonuses.

The increase was also impacted by the addition of staff in connection with the CRMS Acquisition in April 2014. As a result of the CRMS Acquisition, we expect the increase in headcount with the addition of CRMS personnel will contribute approximately $1.1 million in additional salaries, wages and benefits expense for the second half of 2014. In addition, we expect the opening of the Greenhouse expansion in July 2014 will contribute $0.2 million in additional salaries, wages and benefits expense for the period in 2014 subsequent to the completion of the expansion.

Advertising and Marketing

Advertising and marketing expenses increased $0.5 million, or 7.5%, to $7.1 million for the six months ended June 30, 2014 from $6.6 million for the six months ended June 30, 2013. As a percentage of revenues, advertising and marketing expenses were 12.0% of revenues for the six months ended June 30, 2014 compared to 11.1% of revenues for the six months ended June 30, 2013. The increase was primarily driven by the expansion of our national advertising program, an increased emphasis on internet advertising campaigns and marketing efforts targeted at increasing census in anticipation of our Greenhouse facility expansion, which was completed in July 2014.

 

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Professional Fees

Professional fees increased $0.2 million, or 4.0%, to $4.9 million for the six months ended June 30, 2014 from $4.7 million for the six months ended June 30, 2013. As a percentage of revenues, professional fees were 8.3% of revenues for the six months ended June 30, 2014 compared to 7.9% of revenues for the six months ended June 30, 2013. The increase was primarily due to the engagement of temporary accounting professionals in connection with the preparation for this offering and related non-capitalized costs.

Client Related Services

Client related services expenses increased $1.6 million, or 46.1%, to $5.2 million for the six months ended June 30, 2014 from $3.6 million for the six months ended June 30, 2013. As a percentage of revenues, client related services expenses were 8.8% of revenues for the six months ended June 30, 2014 compared to 6.0% of revenues for the six months ended June 30, 2013. The increase was primarily related to increases in clinician fees paid to the Professional Groups due to greater census in detoxification and residential beds which require greater numbers of more highly qualified medical staff. Detoxification and residential treatment services accounted for 27% of total billed days for the six months ended June 30, 2014 compared to 18% of total billed days for the six months ended June 30, 2013.

Other Operating Expenses

Other operating expenses decreased $0.7 million, or 10.7%, to $5.6 million for the six months ended June 30, 2014 from $6.2 million for the six months ended June 30, 2013. As a percentage of revenues, other operating expenses were 9.4% of revenues for the six months ended June 30, 2014 compared to 10.5% of revenues for the six months ended June 30, 2013. The decrease was primarily attributable to the closure of the Leading Edge facility in June 2013.

Rentals and Leases

Rentals and leases decreased $1.8 million, or 66.1%, to $0.9 million for the six months ended June 30, 2014 from $2.8 million for the six months ended June 30, 2013. As a percentage of revenues, rentals and leases were 1.6% of revenues for the six months ended June 30, 2014 compared to 4.7% of revenues for the six months ended June 30, 2013. The decrease was primarily related to a $0.7 million reduction in rent expense resulting from the consolidation of Greenhouse Real Estate, LLC effective October 8, 2013, a $0.5 million reduction related to the closure of the Leading Edge facility in June 2013, a $0.5 million reduction related to a change in lease arrangements at the Singer Island facility and a $0.1 million reduction related to the closure of the California and Florida call centers.

We expect to continue to experience a reduction in rent expense for the remainder of 2014 of $1.1 million related to the acquisition of Greenhouse Real Estate, LLC, partially offset by a $0.1 million increase in rent expense for the remainder of 2014 as a result of the CRMS Acquisition.

Provision for Doubtful Accounts

The provision for doubtful accounts increased $1.5 million, or 30.5%, to $6.3 million for the six months ended June 30, 2014 from $4.8 million for the six months ended June 30, 2013. As a percentage of revenues, the provision for doubtful accounts was 10.6% of revenues for the six months ended June 30, 2014 compared to 8.1% of revenues for the six months ended June 30, 2013. Our provision for doubtful accounts is directly impacted by the aging of our receivables, and accounts receivable aged over 180 days increased by $7.4 million to $18.3 million as of June 30, 2014 from $11.0 million as of June 30, 2013. The increase of accounts receivable aged over 180 days was driven by the increase in total revenues from California and Nevada. In these states, two large commercial payors directly reimburse clients instead of remitting payments to us, which requires greater collections efforts, extends payment times and reduces recovery amounts.

 

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As previously described, we establish our provision for doubtful accounts based on the aging of receivables, 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. 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. The impact of reducing the reserve percentages was approximately $1.5 million in the second quarter of 2014.

The following table presents a summary of our aging of accounts receivable as of June 30, 2013 and 2014:

 

     Current     30-180
Days
    Over 180
Days
    Total  

June 30, 2013

     19.8     47.5     32.7     100.0

June 30, 2014

     23.4     35.4     41.2     100.0

Our days sales outstanding as of June 30, 2013 and 2014 were 72 and 81, respectively.

Litigation Settlement

Litigation settlement expense decreased $2.3 million, or 90.4%, to $0.2 million for the six months ended June 30, 2014 from $2.5 million for the six months ended June 30, 2013. As a percentage of revenues, litigation settlement expense was 0.4% of revenues for the six months ended June 30, 2014 compared to 4.2% of revenues for the six months ended June 30, 2013. The decrease was primarily the result of lower settlements in the six months ended June 30, 2014 as compared to the $2.5 million settlement of the wage and hour class action claim during the six months ended June 30, 2013.

Restructuring

Restructuring expenses for the six months ended June 30, 2013 were $0.6 million. During the first half of 2013, management adopted restructuring plans to centralize our call centers and to close the Leading Edge facility acquired in the TSN Acquisition. As a result, aggregate restructuring and exit charges of $0.6 million were recognized in the first half of 2013. No restructuring expenses were recognized for the six months ended June 30, 2014.

The Leading Edge facility was closed in June 2013. Management elected to close the facility because the amenities and the service offerings at the facility were inconsistent with our long-term strategy. During the transition period leading up to closing, clients that would have been candidates for the Leading Edge facility were referred to other treatment facilities, primarily Desert Hope. As a result of the facility closure, we recorded restructuring and exit charges of $0.5 million in the six months ended June 30, 2013. These charges consisted of $0.2 million of payroll, severance and employee related costs and facility exit costs related to ongoing lease obligations of approximately $0.3 million.

Two call centers were closed in the third quarter of 2013 and were consolidated with the existing call center at our headquarters in Brentwood, Tennessee to create a centralized call center. The call center operations were centralized in order to manage costs more effectively and optimize the call center’s view of client services, thus streamlining the placement of clients to treatment facilities. Restructuring expenses related to centralizing the call centers totaled $0.1 million in the six months ended June 30, 2013 related to severance and relocation costs.

 

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Depreciation and Amortization

Depreciation and amortization expense increased $0.8 million, or 59.3%, to $2.2 million for the six months ended June 30, 2014 from $1.4 million for the six months ended June 30, 2013. As a percentage of revenues, depreciation and amortization expense was 3.8% of revenues for the six months ended June 30, 2014 compared to 2.4% of revenues for the six months ended June 30, 2013. The increase was primarily the result of the consolidation of Greenhouse Real Estate, LLC in October 2013. The increase in depreciation and amortization expense was also attributable to additions of property and equipment in the last nine months of 2013 and the six months ended June 30, 2014.

We expect to record an additional $0.2 million in depreciation expense during the remainder of 2014 related to a full year consolidation of Greenhouse Real Estate, LLC plus an additional $0.1 million in depreciation expense associated with the opening of the Greenhouse expansion in July 2014.

Interest Expense

Interest expense decreased slightly to $0.7 million for the six months ended June 30, 2014 compared to $0.8 million for the six months ended June 30, 2013. As a percentage of revenues, interest expense was 1.2% of revenues for the six months ended June 30, 2014 compared to 1.3% of revenues for the six months ended June 30, 2013. We expect to incur approximately $0.2 million in additional interest expense for the remainder of 2014 related to the consolidation of Greenhouse Real Estate, LLC and the construction financing related to the Greenhouse expansion, which was completed in July 2014.

Other (Income) Expense

Other expense was $15,000 for the six months ended June 30, 2014 compared to other income of $27,000 for the six months ended June 30, 2013.

Income Tax Expense

For the six months ended June 30, 2014, income tax expense was $0.9 million, reflecting an effective tax rate of 44.6%, compared to $1.7 million, reflecting an effective tax rate of 46.8%, for the six months ended June 30, 2013. As a percentage of revenue, income tax expense was 1.5% of revenues for the six months ended June 30, 2014 compared to 2.9% of revenues for the six months ended June 30, 2013. The decreases in income tax expense and the effective tax rate for the six months ended June 30, 2014 were primarily attributable to a decrease in the valuation allowances related to net losses of the Professional Groups and to our forecasted net taxable income.

Net Loss (Income) Attributable to Noncontrolling Interest

For the six months ended June 30, 2014, net loss attributable to noncontrolling interest was $0.7 million compared to net income attributable to noncontrolling interest of $0.3 million for the six months ended June 30, 2013, representing a $1.0 million decrease. This decrease was primarily the result of the consolidation of Greenhouse Real Estate, LLC effective October 8, 2013 and the consolidation of the Professional Groups effective October 1, 2013.

 

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Comparison of Year ended December 31, 2013 to Year ended December 31, 2012

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

 

     Year Ended December 31,              
     2012      2013     Year over Year
  Increase (Decrease)  
 
     Amount      %      Amount     %     Amount     %  

Revenues

   $ 66,035         100.0       $ 115,741        100.0      $ 49,706        75.3   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

              

Salaries, wages and benefits

     25,680         38.9         46,856        40.5        21,176        82.5   

Advertising and marketing

     8,667         13.1         13,493        11.7        4,826        55.7   

Professional fees

     5,430         8.2         10,277        8.9        4,847        89.3   

Client related services

     8,389         12.7         7,986        6.9        (403     (4.8

Other operating expenses

     6,384         9.7         11,615        10.0        5,231        81.9   

Rentals and leases

     3,614         5.5         4,634        4.0        1,020        28.2   

Provision for doubtful accounts

     3,344         5.1         10,950        9.5        7,606        227.5   

Litigation settlement

                     2,588        2.2        2,588          

Restructuring

                     806        0.7        806          

Depreciation and amortization

     1,288         1.9         3,003        2.6        1,715        133.2   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     62,796         95.1         112,208        97.0        49,412        78.7   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     3,239         4.9         3,533        3.0        294        9.1   

Interest expense

     980         1.5         1,390        1.2        410        41.8   

Other expense, net

     12         0.0         36        0.0        24        200.0   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     2,247         3.4         2,107        1.8        (140     (6.2

Income tax expense

     1,148         1.7         615        0.5        (533     (46.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,099         1.7       $ 1,492        1.3      $ 393        35.8   

Less: net loss (income) attributable to noncontrolling interest

     405         0.6         (706     (0.6     1,111        n/m   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AAC Holdings, Inc.

   $ 1,504         2.3       $ 786        0.7      $ (718     (47.7
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Deemed contribution — redemption of Series B Preferred Stock

                     1,000        0.8        1,000          
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to AAC Holdings, Inc. common stockholders

   $ 1,504         2.3       $ 1,786        1.5      $ 282        18.8   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

n/m = not meaningful

Revenues

Revenues increased $49.7 million, or 75.3%, to $115.7 million for the year ended December 31, 2013 from $66.0 million for the year ended December 31, 2012. The increase resulted primarily from our average daily census increasing to 339 in 2013 from 238 in 2012, or 42.4%, and average daily revenue increasing to $935 in 2013 from $759 in 2012, or 23.2%. This growth was attributable to opening the De Novo Facilities as well as added capacity from the TSN Facilities.

Revenues generated from our De Novo Facilities were $52.9 million in 2013 compared to $13.8 million in 2012. The substantial increase was the result of the opening dates of the new facilities. The 70-bed Greenhouse facility started accepting clients in March 2012, and the 148-bed Desert Hope facility opened in January 2013. In addition, the TSN Facilities generated revenues of $24.1 million in 2013 compared to $11.0 million in 2012. The year-over-year increase with respect to the TSN Facilities was the result of a full year of revenues recorded dur-

 

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ing 2013, while 2012 only included a relatively short partial year with respect to these facilities. The additional sales channels provided by the TSN Acquisition also contributed to the revenue increase by improving our average daily census. The increases in revenues were offset by a $3.5 million decrease at other existing facilities.

As previously noted, we closed one of the TSN Facilities (Leading Edge) in the second quarter of 2013; however, our other facilities were able to absorb the majority of the closed facility’s clients, resulting in an insignificant loss of consolidated revenues.

Salaries, Wages and Benefits

Salaries, wages and benefits increased $21.2 million, or 82.5%, to $46.9 million for the year ended December 31, 2013 from $25.7 million for the year ended December 31, 2012. As a percentage of revenues, salaries, wages and benefits were 40.5% of revenues for the year ended December 31, 2013 compared to 38.9% of revenues for the year ended December 31, 2012. The increase was primarily related to (i) the addition of 208 employees in connection with the TSN Acquisition and 97 employees in conjunction with the opening of Desert Hope in January 2013 and (ii) an increase in our corporate staff, including the expansion of our sales force and call center. In addition, our total number of employees has grown to 629 at December 31, 2013 from 231 at the beginning of 2012. In addition, salaries, wages and benefits expense for the year ended December 31, 2013 included $3.5 million of discretionary bonuses of cash and stock in December 2013 to our executive officers, of which $2.5 million was paid or granted as of December 31, 2013 and $1.0 million is included in accrued liabilities on the consolidated balance sheet at December 31, 2013.

As a result of the CRMS Acquisition in April 2014, we expect that salaries, wages and benefits will increase by approximately $1.5 million in 2014 with the addition of 31 personnel. In addition, we expect salaries, wages and benefits will increase approximately $0.2 million in 2014 related to the opening of the Greenhouse expansion in July 2014.

Advertising and Marketing

Advertising and marketing expenses increased $4.8 million, or 55.7%, to $13.5 million for the year ended December 31, 2013 from $8.7 million for the year ended December 31, 2012. As a percentage of revenues, advertising and marketing expenses were 11.7% of revenues for the year ended December 31, 2013 compared to 13.1% of revenues for the year ended December 31, 2012. The year-over-year increase was primarily driven by the expansion of our national advertising program, particularly targeted television advertising, in connection with the opening of the De Novo Facilities and the TSN Acquisition. A heightened emphasis on internet advertising campaigns also contributed to the increase in advertising expense.

Professional Fees

Professional fees increased $4.8 million, or 89.3%, to $10.3 million for the year ended December 31, 2013 from $5.4 million for the year ended December 31, 2012. As a percentage of revenues, professional fees were 8.9% of revenues for the year ended December 31, 2013 compared to 8.2% of revenues for the year ended December 31, 2012. The increase was primarily due to an increase in service fees for outsourced medical billing and collections. Our demand for these services significantly increased in mid-2012 and again in early 2013 proportional with revenues generated from the opening and ramp-up of the De Novo Facilities and the addition of the TSN Facilities. The increase was also attributable to an increase in legal fees incurred in connection with the wage and hour class action lawsuit and settlement discussed below.

During 2013, all of our medical billing and collections were transitioned to a single billing service, CRMS. The transition from other third party billers in 2013 combined with the CRMS Acquisition is expected to result in a reduction in customer billing and collection fees of approximately $2.9 million in 2014.

 

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Client Related Services

Client related services expenses decreased $0.4 million, or 4.8%, to $8.0 million for the year ended December 31, 2013 from $8.4 million for the year ended December 31, 2012. As a percentage of revenues, client related services expenses were 6.9% of revenues for the year ended December 31, 2013 compared to 12.7% of revenues for the year ended December 31, 2012. The decrease was primarily related to greater reliance in 2012 on subcontracted services to accommodate clients exceeding the Company’s capacity. The opening of the De Novo Facilities and the addition of the TSN Facilities substantially decreased the need for these subcontracted services, resulting in a decrease of subcontracted services expenses to $0.8 million in 2013 from $5.4 million in 2012. However, the decrease in subcontracted services expenses was partially offset by additional client related expenses attributable to the 70-bed Greenhouse facility that started accepting clients in March 2012, the 148-bed Desert Hope facility that opened in January 2013, a full year of expenses for the TSN Facilities and additional expenses at existing facilities.

Other Operating Expenses

Other operating expenses increased $5.2 million, or 81.9%, to $11.6 million for the year ended December 31, 2013 from $6.4 million for the year ended December 31, 2012. As a percentage of revenues, other operating expenses were 10.0% of revenues for the year ended December 31, 2013 compared to 9.7% of revenues for the year ended December 31, 2012. The increase was the result of additional operating expenses associated with the opening of Greenhouse in March 2012 and Desert Hope in January 2013 and the addition of the TSN Facilities in August 2012. Other operating expenses as a percentage of revenues was relatively unchanged, as these expenses typically correlate with the number of beds in our facilities. We expect other operating expenses will increase approximately $0.4 million in 2014 as a result of the CRMS Acquisition.

Rentals and Leases

Rentals and leases increased $1.0 million, or 28.2%, to $4.6 million for the year ended December 31, 2013 from $3.6 million for the year ended December 31, 2012. As a percentage of revenues, rentals and leases declined to 4.0% of revenues for the year ended December 31, 2013 compared to 5.5% of revenues for the year ended December 31, 2012. The year-over-year dollar increase was primarily related to the TSN Acquisition, as we did not begin paying rent on the TSN Facilities until September 2012. A full year of rent for the TSN Facilities (excluding rent for the Leading Edge facility after its closure in June 2013) is included in rentals and leases for 2013. All rent transactions with the real estate entities consolidated as variable interest entities are eliminated effective from June 27, 2012 for Concorde Real Estate, LLC and October 8, 2013 for Greenhouse Real Estate, LLC, with minimal year-over-year impact to expense. We expect to experience a reduction in rent expense in 2014 of approximately $2.0 million related to consolidating Greenhouse Real Estate, LLC for an entire year and expect rent expense will increase by $0.1 million with the acquisition of CRMS.

Provision for Doubtful Accounts

The provision for doubtful accounts increased $7.6 million, or 227.5%, to $11.0 million for the year ended December 31, 2013 from $3.3 million for the year ended December 31, 2012. As a percentage of revenues, the provision for doubtful accounts was 9.5% of revenues for the year ended December 31, 2013 compared to 5.1% of revenues for the year ended December 31, 2012. Our provision for doubtful accounts is directly impacted by the aging of our receivables, and accounts receivable aged over 120 days increased by $8.7 million to $19.0 million as of December 31, 2013 from $10.3 million as of December 31, 2012. The increase of accounts receivable aged at over 120 days was driven by the significant growth in revenues in 2013, which increased receivables as a whole across all aging periods; transition issues encountered when our billing and collection functions were combined from multiple providers to CRMS during 2013; payment delays normally associated with the opening of new facilities, such as Desert Hope in January 2013, due to being an out-of-network provider with a limited operating history; and the increase of total revenues from California and Nevada where two large commercial payors in these markets pay their portion directly to the client instead of us, which requires greater collections efforts, extends payment times and reduces recovery amounts. As a result of the foregoing factors, our provision for doubtful accounts reflects a higher reserve percentage due to uncertainty of collecting these accounts.

 

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The following table presents a summary of our aging of accounts receivable as of December 31, 2012 and 2013:

 

     Current     30-120
Days
    Over 120
Days
    Total  

December 31, 2012

     23.5     39.4     37.1     100.0

December 31, 2013

     22.8     28.8     48.4     100.0

Our days sales outstanding as of December 31, 2012 and 2013 were 115 and 77, respectively. The improvement in days sales outstanding from 2012 to 2013 was primarily the result of consolidation of our billing and collections processing from three companies to one.

Litigation Settlement

Litigation settlement expenses for the year ended December 31, 2013 were $2.6 million. In September 2012, a wage and hour class-action claim was filed against us in the State of California. In March 2013, an amended complaint alleging additional wage and hour violations was filed against us in the same court, and the two claims were subsequently consolidated into a class action. In June 2013, the parties agreed to settle the substantive claims for $2.6 million during mediation. Once the settlement amount became probable, we recorded a $2.5 million reserve in the second quarter of 2013 for this matter. The reserve is reflected in accrued liabilities as of December 31, 2013. On April 9, 2014 and following court approval, we settled this matter with a payment of $2.6 million. We did not record any litigation settlement expenses for the year ended December 31, 2012.

Restructuring

Restructuring expenses for the year ended December 31, 2013 were $0.8 million. During the first half of 2013, management adopted restructuring plans to centralize our call centers and to close the Leading Edge facility acquired in the TSN Acquisition. As a result, aggregate restructuring and exit charges of $0.8 million were recognized in 2013. We did not recognize any restructuring expenses during 2012 as expenses related to the corporate headquarters relocation were not significant.

The Leading Edge facility was closed in June 2013. Management elected to close the facility because the amenities and the service offerings at the facility were inconsistent with our long-term strategy. During the transition period leading up to closing, clients that would have been candidates for the Leading Edge facility were referred to other treatment facilities, primarily Desert Hope. As a result of the facility closure, we recorded restructuring and exit charges of $0.5 million. These charges consisted of $0.2 million of payroll, severance and employee related costs and facility exit costs related to ongoing lease obligations of $0.3 million. We estimate that approximately $0.3 million of aggregate cash payments related to lease obligations will be made from 2014 through January 2017 as the related leases expire.

Two call centers were closed in the third quarter of 2013 and were consolidated with the existing call center at our headquarters in Brentwood, Tennessee to create a centralized call center. The call center operations were centralized in order to manage costs more effectively and optimize the call center’s view of client services, thus streamlining the placement of clients to treatment facilities. Restructuring expenses related to centralizing the call centers totaled $0.3 million in 2013, which included $0.1 million related to payroll, severance and other employee related costs, $0.1 million related to relocation costs and $0.1 million of facility exit costs related to ongoing lease obligations (net of approximately $0.1 million in sublease income). We estimate that approximately $0.2 million of aggregate cash payments related to this lease obligation will be made from 2014 through October 2015 as the related lease expires.

 

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Depreciation and Amortization

Depreciation and amortization expense increased $1.7 million, or 133.2%, to $3.0 million for the year ended December 31, 2013 from $1.3 million for the year ended December 31, 2012. As a percentage of revenues, depreciation and amortization expense was 2.6% of revenues for the year ended December 31, 2013 compared to 1.9% of revenues for the year ended December 31, 2012. The increase was primarily the result of a full year of expense in 2013 related to the TSN Facilities, combined with depreciation expense associated with Desert Hope, which we began recording in January 2013 when that facility was opened, and to a lesser extent, depreciation related to the consolidation of Greenhouse in October 2013. The increase in depreciation and amortization expense was also attributable to additions of property and equipment during 2013 of $14.1 million, including capital lease obligations of $1.2 million. Also contributing to the increase was the addition of depreciable assets associated with the expansion of our call center.

We expect to record an additional $0.2 million in depreciation expense during 2014 related to a full year consolidation of the existing Greenhouse facility plus an additional $0.1 million in depreciation expense associated with the opening of the Greenhouse expansion in July 2014.

Interest Expense

Interest expense increased $0.4 million, or 41.8%, to $1.4 million for the year ended December 31, 2013 from $1.0 million for the year ended December 31, 2012. As a percentage of revenues, interest expense was 1.2% of revenues for the year ended December 31, 2013 compared to 1.5% of revenues for the year ended December 31, 2012. The year-over-year dollar increase was associated with $17.9 million in net additional borrowings in 2013 to fund growth and acquisitions, including $14.2 million in additional VIE debt and $1.0 million in new capital leases. We expect interest expense to increase approximately $0.3 million in 2014 related to the consolidation of Greenhouse and the construction financing for the Greenhouse expansion, which was completed in July 2014.

Income Tax Expense

For the year ended December 31, 2013, income tax expense was $0.6 million, reflecting an effective tax rate of 29.2%, compared to $1.1 million, reflecting an effective tax rate of 51.1%, for the year ended December 31, 2012. As a percentage of revenue, income tax expense was 0.5% of revenues for the year ended December 31, 2013 compared to 1.7% of revenues for the year ended December 31, 2012. Our effective tax rate on income applicable to AAC was 54.8% in 2013 compared to 44.3% in 2012. The increase in the effective tax rate on income applicable to AAC was primarily due to an increase in non-deductible expenses, an increase in the valuation allowance and the recognition of uncertain tax positions. The reduction in our overall effective tax rate was primarily attributable to additional income that is not taxable to us from various VIEs that we are consolidating in our results of operations, partially offset by increases in non-deductible expenses and an increase in the valuation allowance. Other items affecting our overall tax rate include the release of previously established valuation allowances, a reduction to our apportioned state income tax rate and various adjustments arising from amended tax returns filed during 2013.

Net Loss (Income) Attributable to Noncontrolling Interest

For the year ended December 31, 2013, net income attributable to noncontrolling interest was $0.7 million compared to a net loss attributable to noncontrolling interest of $0.4 million for the year ended December 31, 2012, representing a $1.1 million, or 274.3%, increase. This increase is principally a result of the consolidation of Concorde Real Estate for all twelve months in 2013, compared to the period from June 27, 2012 through December 31, 2012, and the consolidation of Greenhouse Real Estate from October 8, 2013 through December 31, 2013.

 

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Quarterly Results of Operations

The following tables set forth unaudited quarterly condensed consolidated statements of operations data for the last two fiscal years and the six months ended June 30, 2014. We have prepared the statement of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes and the unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future quarters or for a full year.

 

    Three Months Ended  
    Mar. 31,
2012
    June 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    June 30,
2013
    Sept. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    June 30,
2014
 
    (dollars in thousands, except average daily revenue and average net daily revenue)  

Revenues

  $ 10,173      $ 12,220      $ 16,616      $ 27,026      $ 29,004      $ 30,327      $ 28,350      $ 28,060      $ 30,083      $ 29,120   

Operating expenses

    10,064        11,490        13,698        27,544        25,092        29,756 (7)       26,471        30,889 (8)       28,231        28,325   

Income (loss) before income tax expense

    (1     553        2,716        (1,021     3,504        222        1,382        (3,001     1,456        471   

Net income (loss)

    (3     311        1,494        (703     2,126        (145     1,479        (1,968     841        227   

Adjusted EBITDA (1)

    259        1,053        3,286        2,570        4,933        4,647        3,059        (1,081     3,592        4,240   

Operating Metrics:

                   

Average daily census (2)

    206        176        232        337        368        361        318        309        371        379   

Average daily revenue (3)

  $ 549      $ 763      $ 778      $ 872      $ 876      $ 920      $ 969      $ 987      $ 901      $ 844   

Average net daily revenue (4)

  $ 516      $ 725      $ 765      $ 813      $ 809      $ 844      $ 866      $ 877      $ 776      $ 783   

New admissions (5)

    695        604        674        961        1,097        1,077        935        944        1,065        1,112   

Bed count at end of period (6)

    194        194        338        338        486        420        431        431        427        427   

 

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(1) Adjusted EBITDA is a “non-GAAP financial measure” as defined under the rules and regulations promulgated by the SEC. We define Adjusted EBITDA as net income adjusted for interest expense, depreciation and amortization expense, income tax expense, stock-based compensation and related tax reimbursements, litigation settlement and restructuring charges and acquisition related de novo startup expenses, which includes professional services for accounting, legal and valuation services related to the acquisitions and legal and licensing expenses related to de novo projects. Adjusted EBITDA, as presented in this prospectus, is considered a supplemental measure of our performance and is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. We have included information concerning Adjusted EBITDA in this prospectus because we believe that such information is used by certain investors as a measure of a company’s historical performance. We believe this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of issuers of equity securities, many of which present EBITDA and Adjusted EBITDA when reporting their results. Because Adjusted EBITDA is not determined in accordance with GAAP, it is subject to varying calculations and may not be comparable to the Adjusted EBITDA (or similarly titled measures) of other companies. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

 

    Three Months Ended  
    Mar. 31,
2012
    June 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    June 30,
2013
    Sept. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    June 30,
2014
 
    (dollars in thousands)  

Net income (loss)

  $ (3   $ 311      $ 1,494      $ (703   $ 2,126      $ (145   $ 1,479      $ (1,968   $ 841      $ 227   

Non-GAAP Adjustments:

                   

Interest expense

    110        172        211        487        446        338        375        231        354        351   

Depreciation and amortization

    132        243        266        647        665        734        729        875        1,077        1,151   

Income tax expense (benefit)

    2        242        1,222        (318     1,378        367        (97     (1,033     615        244   

Stock-based compensation and related tax reimbursements

                         2,408        303        302        318        726        705        1,071   

Litigation settlement

                                       2,500               88               240   

Restructuring

                                       551        255