November 18, 2017 - 7:06pm EST by
2017 2018
Price: 9.82 EPS 0 0
Shares Out. (in M): 24 P/E 0 0
Market Cap (in $M): 236 P/FCF 0 0
Net Debt (in $M): 211 EBIT 0 0
TEV (in $M): 447 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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AAC Holdings, Inc. (AAC- $9.82) provides inpatient and outpatient substance abuse treatment at 10 residential,18 outpatient and 4 sober living facilities, which are located in 8 states. AAC grew rapidly from $66m in revenue in 2012 to $280m last year through acquisitions and construction of new facilities.


I’ve been following the company periodically since it came up on my short screen last year and Bm25 wrote it up for VIC. After it blew up a year ago, I’ve been waiting and watching. The unexpected announcement on November 9 that the CFO is leaving and a big share sale by the company’s co-founder Jerry Menz on November 10, suggest this may be a good time to revisit AAC as a short. It won’t help the stock when on January 1, 2018 AAC begins the required netting of the provision for bad debts against revenue; using that accounting method for 2017 YTD would have cut the reported revenue growth by 40%. The borrow rate is 1.1% at IB, price target is zero.


Customers and employees describe AAC as a “scam”, “unethical”, “shady”, “a sham”, “smoke and mirrors”, “all about money”, etc. I suspect the accounting is fraudulent, huge gains in average daily revenue in the last two quarters make no sense,  the company has never generated FCF, operating cash flow since 2012 averaged only $5m per year, there are suspect related party transactions, and there are an abnormally large number of LLC and C-corp subsidiaries and VIEs.


For background, in 2015 prosecutors in the California Attorney General’s office unsealed an indictment that accused then-president Menz, other employees and AAC subsidiaries, including Forterus, of murder by way of very poor patient care. AAC’s lawyers knew about the investigation before the IPO, but omitted it in the IPO and subsequent SEC filings until the indictment was unsealed. AAC closed the remaining beds at Forterus in July 2017, saying it was part of their planned reduction of residential beds. Menz resigned from the board effective September 8, 2017 and sold 700k shares on November 10.


Bm25 wrote up AAC for VIC in February last year, highlighting that AAC was excessively charging payors for unnecessary drug testing and calling for drug testing revenue to plummet, which it did. It appeared AAC could go to zero, but the company managed to refinance its debt on 6/30/2017. I think the refi bought limited time. Cash profits are highly likely to remain elusive and leverage at over 4x “adjusted” EBITDA is relatively high and will probably only go higher.  AACs weighted average interest rate on its debt was 8.0% at 9/30/17 and is floating, leaving it very exposed to higher rates. Tangible equity is near zero, which is what the stock is worth - nothing. If the announced acquisition of AdCare closes as planned in 1H08, it may buy management more time.

Accounting and Related Party Transactions

“There is a LOT of hush hush, grey area, and shade in this company in the realm of business ethics.”

Former Employee - Treatment Consultant BD in Brentwood, TN


AAC does two things that by themselves might just raise eyebrows. Put them together with the other facts and you might be suspicious of fraud.


  1. AAC uses a subsidiary, CRMS, for medical billing and collections services. The highly paid “CEO” of tiny CRMS is the wife of AAC’s CEO. Doh.

  2. Vaco Nashville, LLC provides accounting professionals to “bolster” AAC’s accounting department. Vaco is “substantially owned” by an AAC board member.


In its own words from the 2014 proxy, AAC uses CRMS for “outsourced medical billing and collection services to the Company”. Outsourced is an interesting choice of words. CRMS is an AAC subsidiary that it acquired in 2014 (pre-IPO) from Menz’s wife and the CEO’s wife, Tina F. Cartwright. Ms. Cartwright has been the CEO of CRMS since at least 2014. Ms. Cartwright is the spouse of Mr. Cartwright, AAC’s Chairman and CEO. Ms. Cartwright earned compensation (including stock-based compensation) of $524,522 in 2016. Not bad for the “CEO” of a little subsidiary of a small company. We already know that AAC was excessively (fraudulently?) billing payors for drug testing.

AAC’s use of a staffing company like Vaco isn't unusual of course. But why only for the accounting department? And why with a staffing firm owned by a board member? To find an accounting employee, couldn’t AAC pay less than the 25% of the first year’s salary it pays Vaco?  Furthermore, bringing in temporary accountants on an hourly basis would be a good way to keep people in the dark, if that was the goal. From the proxy: “We are party to certain placement agreements with Vaco Nashville, LLC, an entity substantially owned by Vaco. Mr. Bostelman, one of our non-employee directors, is an executive officer and significant owner of Vaco. Vaco Nashville, LLC has provided us accounting professionals to bolster our accounting department and is typically paid 25% of each employee’s first year salary as a placement fee or paid an hourly rate for temporary professional services. We paid aggregate fees to Vaco Nashville, LLC of $154,486 in 2016.” AAC paid aggregate fees to Vaco Nashville, LLC of $352,611 in 2014. Strangely, AAC didn’t disclose a relationship with Vaco in its 2015 proxy.

ADR Vastly Overstated in 2Q and 3Q?


Residential treatment facility revenue is 80% of AAC’s total revenue. AAC discloses 1) the average daily residential census and 2) the average daily residential revenue (ADR). The product of these two figures and the number of days in the period is equal to residential treatment facility revenue for the period. For a fairly diversified business in the medical field, one might expect these figures to be fairly stable.


ADR grew 48% from $624 in 3Q16 to $925 in 3Q17 while census declined 11% and was 8% below management’s 3Q guidance. 2Q’s ADR was up 41% and 1Qs grew 10%. Note that the company was one third finished with 3Q when management provided 3Q census guidance.


One analyst on the 3Q call was perplexed by the drop in residential census and skyrocketing ADR, noting “I’m kind of struggling to understand why the underlying dynamics are just changing so much.”


Management’s explanation for the astronomical growth:  “The increase in average daily residential revenue is primarily related to improved billing and collections activity and an increase in the percentage of client days at higher levels of care at our residential treatment facilities.”


Improved collections had nothing to do with growth in this figure. Collections are not revenue recognized. Management accounts for bad debts separately in opex, not in revenue. Suddenly improved billing by the subsidiary run by the CEO’s wife? Higher levels of care? I see no big changes in the company’s business or industry and management declined to elaborate on the conference call as to what they meant by “higher levels of care”.


Regarding what’s happening in the industry, AAC competitor ACHC saw its U.S. average daily residential revenue increase only 2% y/y to $726 in 3Q and by 2% to $735 in 2Q 2017.


Adding more questions, in the 10Q management writes: “The decrease in advertising and marketing expense was primarily driven by an increase in the number of in-network residential beds, which generally have a lower advertising and marketing expense on a per admission basis than out-of-network residential beds.”


And in the 10-Q we find: “our average daily residential revenue derived from in-network facilities and beds is generally lower than our average daily residential revenue derived from out-of-network facilities and beds”. A higher mix of in-network was the sole reason management cited for its 14% decline in ADR in 2016.


The number of in-network beds increased. Since overall beds declined, we know that the mix of in-network grew, which means lower ADR and in 2016 this factor was so important that it was management’s only cited reason for a 14% decline. With the higher mix of in-network and competitor’s 2% ADR rise, AAC’s ADR growth of 48% in 3Q and 41% in 2Q doesn’t make sense.

No Cash Flow


The use of cash for growth and acquisitions is of course legitimate and something we see all the time with solid companies. However, with frauds this picture is almost always seen:























Acq of equip through capital leases







Free cash flow








Acquisition of subsidiaries with cash







Stock issed for acquisitions







Assumption of debt for acq















Free cash flow incl acquisitions







Here’s another thing often seen with shady accounting. AAC’s DSO is almost 3x that of its competitor ACHC.








Provision for doubtful accounts, % of revenue



Prepaid expenses and other current assets spiked 35%, or $1.6m, from 2Q to 3Q while revenue only increased 2%. I suspect management achieved some of its P&L “cost savings” by capitalizing costs instead of expensing them. There was no explanation given in the 10-Q.


Other assets jumped over 600%, or almost $5m, from 2Q to 3Q. I could not figure out where the company ran this through its cash flow statement. My best guess is that it is a deferred loss on the sale of the land and buildings the company announced in August as part of a sale-leaseback transaction the company used to raise capital. Under GAAP the loss should have been recognized immediately I think. If I’m correct, $5m would be a 17% loss vs the book value of the land and buildings. For obvious reasons, including debt covenants, management would not want to recognize a loss this large. Either way, the accrual of a $5m mysterious asset is not good.


Other Related Party Transactions


In addition to the related party transactions discussed above:


AMC, Inc. (“AMC”), an entity beneficially owned by Mr. Cartwright, our Chairman and Chief Executive Officer, owns an airplane that the Company uses for business purposes in the course of our operations pursuant to a written lease agreement. We pay AMC an hourly rate for use of the airplane as well as fuel and certain maintenance costs. During 2016, we made aggregate payments of $893,195 to AMC.


American Construction & Development, Inc. (“AC&D”), a general construction firm beneficially owned by Jose Orozco, our Vice President of Development, coordinated certain of our development projects in 2015 as a general contractor. We reimbursed AC&D for its direct and indirect costs associated with the development projects it managed for us. During 2015, we made aggregate payments to AC&D of $7.7 million. During 2016, we made aggregate payments to AC&D of $829,090.


Michael Stetar, who serves as our Chief Technology Officer, was hired in December 2010. Mr. Stetar is the brother-in-law of Mr. Menz, a Co-founder, current employee, former President, former member of the Board of Directors and current director nominee. Mr. Stetar earned compensation (including stock-based compensation) of $443,133 in 2016.

Beth Stetar, who is an employee and oversees our Verification of Benefits department, is the sister of Mr. Menz, a Co-founder, current employee, former President, former member of the Board of Directors and current director nominee, and the spouse of Mr. Stetar. Ms. Stetar earned compensation (including stock-based compensation) of $143,192 in 2016.


Revenue Accounting Change Starting 1/1/2018



































Revenues per 606
























Obviously we have to be skeptical of customer and employee reviews. However, many of the positive reviews look fake to me and the negative ones are consistent in their observations, lending them credibility. On Glassdoor, one employee wrote: "Leadership is pathetic requesting staff to write positive reviews.”


Below are some selected reviews. I read the positive ones and did not include them here, so for balance you can find them in the links below. I would read them all, positive and negative, because they give a good sense for some of the business practices, including the admissions process. I tried to note the date and reviewers on the ones I posted below, but I see I missed some. You can find them all here anyway:







And here are articles regarding the NJ strike where you can read more employee comments:





Glassdoor (employee and former employee reviews)


"Leadership is pathetic requesting staff to write positive reviews.”


“it's all about profit for this company and there are many reasons the NJ facility is on strike, plus, the CEO illegally locked out the workers. the nurses, counselors and BHTs care about keeping the clients in treatment because they want clients to get better. Corporate wants to keep clients to get money. just read the news if you want to know what goes on behind closed doors. Very greedy company.” - Former Employee - Counselor in Lafayette, NJ, Jun 5, 2017


This is the most unethical company that I have ever tried to work for. They are certified through the Mississippi State department of mental health but they often lie to the State about the number of patients that each therapist is working with. Often 18 to 25 patients. AAC requires each outpatient center to drug screen patients every time they come to a session. AAC has been sued for this in the past.” - Current Employee,Mental Health Therapist in Oxford, MS,  Mar 20, 2017


“Stuff has changed too quick with this company. Ripping off customers in balanced billing aka. "patient billing". There is a LOT of hush hush, grey area, and shade in this company in the realm of business ethics.” Former Employee - Treatment Consultant BD in Brentwood, TN


“Horrible working conditions. Below average salaries. As employees left, they would never hire a replacement. They expected behavioral technicians to perform nursing jobs so as to not pay for more nurses. They asked Behavioral technicians to move immobile patients, or bathe them. The Behavioral Technicians were left with 18-25 detoxing patients, some who couldn't even walk. Many patients had many other mental issues from schizophrenia to dementia. They never should have been admitted to the facility, we weren't equipped to handle patients like that, but they would keep them until the insurance ran out or their money did. The patients weren't getting anything out of the program. It was really taking advantage of people who were very sick and infringing on patients who wanted the help.” - Former Employee - Behavioral Health Technician in Lafayette, NJ Jan 10, 2017

“Total lack of regard for staff and clients. CEO is condescending, arrogant, narcissistic and overall just a liar. Not sure if he reflects the corporate management style but who would know? They have no involvement with the staff of Greenhouse. There is no system of rewards and fair compensation. You burn out and leave. The turn over rate is astronomical. Colleagues do the best they can in an horrible work environment. There is no admission criteria except financial ability. There are two sides to every story and the company has mastered the art of rationalizing negligence, incompetence, and overall lack of care to justify any constructive criticism. For a multimillion dollar company this company provides no resources for its staff and its clients and everything is done with minimal investment. Growth potential-none. The CEO is just downright abusive and a dictator. As a result of the management style, people have just lost motivation and do the minimum to stay off the radar.” -- Current Employee - Therapist in Dallas, TX Dec 27, 2015


Yelp and Highya


“There was an issue with my insurance being charged numerous times for the same things, which resulted in my insurance declining a fair amount of the claims Desert Hope made(lab work, blood work, doctor visits, etc.)” 1-star Yelp review from  Becca B. 1/8/2017

“I attended Desert Hope in November of 2016. I do not recommend this treatment center unless it is the very last option available for you or your loved one. The case managers will lie to the family's of loved ones to make sure the client stays in Vegas as long as they can charge their insurance. My experience personally was fine. I had a home to go back to and responsibilities to take care of so there wasn't an argument whether I would be able to continue treatment in Vegas, I was thankfully sent home on my 30th day of treatment. However, I witnessed many peer clients that were told they were there for a 30day treatment and when they got there, that was no longer the case. When you call the 1800 number on the phone, they will tell you anything you want to hear to get you or your loved on in the treatment center. I had a roommate here that was told she would be there for a week of detox and then flew in and was forced to stay 30 to 45 days. Its insane. While I was in treatment a 25 year old hung himself. There is a certain Therapist that would threaten her clients that if they tried to change therapists she would do anything in her power to make sure they never leave Vegas. Her name is Tori.  Certain Psychiatrists at this treatment center will put clients on ridiculous amounts of medication which left one lady unable to walk after taking the medication. She was wheel chair bound after taking the medication and the Doctor refused to take her off of it. When she finally rejected the medication she was able to walk again days after. The food is awful, nothing is caffeinated. After 2-3 weeks of in patient treatment, Desert Hope sends clients to "Phase 2" which is located in a very bad location where there are drug dealers just waiting to pounce. Once again, an insurance "must." The CEO of Desert Hope is a money hungry narcissistic asshole. Don't attend this treatment center if you can help it. I recommend The Treatment Center in Lake Worth Florida. Do yourself and your loved ones a favor and don't be manipulated to go to this place and get stuck there. If you do decide to go, I recommend you ask for the Therapist Steven and the Case Manager Bridgette. They are the only people I felt I could trust and that had MY best interest. I felt like they were the only two that wanted to help me. The groups you are forced to attend all day everyday are not taught by addiction specialists but by the hourly "Behavioral Techs." Most of these Techs have no experience with Addiction and have no degree or certificate to even be considered to run these educational groups. It really is a big joke. I am grateful I had a place to collect my thoughts and "get away" for awhile but if anyone I know ever contacts me and asks me where to go if they need treatment, Desert Hope will not be my answer.  If I could give this place one word to describe it I would say SCAM.”  2-star Yelp review from Kaitlyn K. 2/17/2017

BEWARE BEWARE BEWARE. Don't even think about  sending or bringing your loved one to Desert Hope Treatment Center of Las Vegas. It's basically an insurance scam hotel, and I do mean that in the most literal sense "Hotel". Like every review after this one you will see the pattern of how their main focus is getting your money and not doing a single thing but provide a hotel room and billing the life out of your health insurance. They will also try to get any money they can squeeze out of you up front. Our son only spent 9 total days there and this place billed our insurance over $10k and an initial deposit of $2k. In fact they are still trying to bill our insurance 3 months after they discharged our son. Our son provided us details in the daily functions and stated that he was only seen by a counselor and/or doctor/therapist only one time during his entire stay and yet they billed our insurance 16 times indicating he was seen or consulted by various doctors. Our son said there were more drugs going around in the "Hotel" environment than there are in the streets. Habits only continue in there he says. According to our billing records from Blue Cross they stated he was also in lab work almost every 4 hours, which according to our son is not true at all. When we called to get status updates and spoke to the case manager she seemed to know absolutely nothing about our son. After we spoke to him and then back to the case manager she seemed to be talking from a script rather than our son. Our son stated everything they told us was a bunch of bull and didn't do or receive any of the treatment or counseling they said they provided. He said he never met with any of the doctors who billed our insurance. We attached a  photo of the insurance scam.billing and names of each of the fake doctor names they are providing to our insurance to appear legit. BEWARE STAY AWAY FROM THIS PLACE. Desert Hope it is not. More Like Desert Scam.


“It seems clear they want your money and nothing else.”

Background articles on the criminal investigation:





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Bankruptcy? Jailtime?

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