INVESTOR PRESENTATION | SEPTEMBER 2017 IMPORTANT PRESENTATION - - PowerPoint PPT Presentation

INVESTOR PRESENTATION | SEPTEMBER 2017

DESERT HOPE ALUMNI

IMPORTANT PRESENTATION INFORMATION

Notice to Investors

We use market data and industry forecasts and projections throughout this presentation, including data from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there can be no assurance that any of the forecasts or projections will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently investigated or verified this information. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements contained in this presentation.

Forward-Looking Statements

Some of the statements made in this presentation constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements reflect our current views with respect to future events and performance. In some cases you can identify forward-looking statements by terminology such as “may,” “might, “will,” “should,” “could” or the negative thereof. Generally, the words “anticipate,” “believe,” “continues,” “expect,” “intend,” “estimate,” “project,” “plan” and similar expressions identify forward-looking statements. In particular, statements about our pipeline, industry growth opportunities, disclosure of key performance indicators, business growth strategy and financial guidance in this presentation are forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks, uncertainties and

• ther factors, many of which are outside of our control, which could cause our actual results, performance or achievements to differ materially from any results,

performance or achievements expressed or implied by such forward-looking statements. For additional discussion of risks, uncertainties and other factors, see the section titled “Risk Factors” in our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (the "SEC"). These risks, uncertainties and other factors include, without limitation: (i) the ability to consummate and realize the benefits of the proposed acquisition; (ii) uncertainties regarding the timing of the closing of the acquisition; (iii) the failure or inability of either AAC or AdCare to satisfy closing conditions or obtain approvals necessary to close the transaction; (iv) unexpected costs or delays associated with efforts to obtain the regulatory or other approvals necessary to close the transaction; (v) unexpected difficulties and expenditures in connection with integration programs; (vi) risks and uncertainties in litigation or investigative proceedings, whether or not related to the transaction; (vii) the availability of financing; (viii) incurrence of additional debt in connection with the transaction, as well as other risks discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K, and other filings with the Securities and Exchange Commission. As a result of these factors, we cannot assure you that the forward-looking statements in this release will prove to be accurate. Investors should not place undue reliance upon forward looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These forward-looking statements are made only as of the date

• f this presentation. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to

any such statements to reflect future events or developments.

2

PRESENTERS

• Founder and CEO of Foundations Recovery Network
• At Foundations, opened notable treatment facilities including the Canyon in

Malibu, La Paloma in Memphis and Michael’s House in Palm Springs

• Started Moments of Change & Lifestyle Intervention, two of the leading

national industry conferences

• Author of Believable Hope
• 20+ years industry experience
• Founder and Managing Member of Private Capital Securities, a boutique

investment banking firm

• Former Vice President at Piper Jaffray and Fixed Income Specialist with

Stephens Inc.

• Co-founder and CEO of four communications companies including Igaea, an

international VoIP Company

• 23+ years management experience
• Former auditor with Ernst & Young LLP, a national public accounting firm
• Served multiple large for profit healthcare clients in Nashville, TN and Atlanta, GA

including Fortune 100

• Experience across a variety of corporate transactions, including public offerings of

securities and mergers and acquisitions

• 17+ years industry experience

Michael T. Cartwright

Chairman Chief Executive Officer

Kirk R. Manz

Chief Financial Officer

Andrew W. McWilliams

Chief Accounting Officer

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TRANSACTION OVERVIEW

> On September 13, 2017, AAC signed a definitive agreement to acquire AdCare for $85 million, or 6.9x

6/30/17 LTM pro forma adjusted EBITDA including $3.9 million of estimated synergies


> AdCare, Inc. (“AdCare”) is a leading provider of treatment for substance abuse and related behavioral

conditions in the Northeast

• 6/30/17 LTM revenue and pro forma adjusted EBITDA of $51mm and $8.5mm, respectively
• Provides further diversification by payor, service offering and geography

> The transaction is anticipated to be financed through:

• $65 million incremental First Lien Term Loan
• $10 million Seller Note
• $5 million of restricted shares in AAC Holdings, Inc. (issued at closing)
• $7 million cash from balance sheet

> Pro-forma for the acquisition and financing, AAC will have a projected net leverage of 4.1x, based on

pro forma adjusted EBITDA of $66 million(1)

> Transaction is expected to close 1H 2018 subject to regulatory approvals and customary closing

conditions

4

(1) AEBITDA represents a non-GAAP financial measure. For the reconciliation to net income (loss), the corresponding GAAP financial measure, see the Appendix.

ADCARE ACQUISITION RATIONALE

> Leading provider of treatment for substance abuse and related behavioral conditions in the Northeast

• 30+ year operating history with exceptional management team and well-developed marketing and referral channels

> Payor diversification

• Expands AAC payor mix to include government payors (i.e. Medicare and Medicaid) at similar residential ADRs to AAC average
• Increases in-network payor mix
• Lowers DSOs (AdCare DSO’s were 32 days for their fiscal year ending 9/30/16)

> Service line diversification

• Reduces AAC’s 2017E diagnostic revenue mix from 16% to 13% (AdCare has no material diagnostic revenue)
• Expands AAC hospital inpatient revenue from 6% to 13% and standalone outpatient revenue from 8% to 9% (pro forma)

> Geographic diversification

• Further penetration of Northeast markets with addition of Massachusetts and expansion in Rhode Island

> Attractive cost and revenue synergy opportunities

• Identified $2.8 million of cost savings synergies expected to be realized in 12 months plus another $1.1 million in anticipated

revenue synergies expected to be realized in the second year

• Ability to leverage combined sales and marketing effort and broader service offering to treat a larger patient population


5

ADCARE: LEADING NEW ENGLAND PROVIDER

> Operates one inpatient hospital, one residential treatment facility and seven outpatient centers across Massachusetts and Rhode Island

• 2016 ADC of 142 with over 115,000 outpatient visits


> Also provides a range of treatment services to correctional institutions through AdCare Criminal Justice Services (“ACJS”) with 12 contracts across the Northeast
 
 > LTM 6/30/17 revenue and adjusted EBITDA of $51 million and $8.5 million(1), respectively

• Expected cost saving and revenue synergies represent an additional $3.9 million of AEBITDA


> Payor mix: 59% Medicare, 22% commercial, 19% Medicaid (18% commercially managed, 1% traditional)

6

(1) AEBITDA represents a non-GAAP financial measure. For the reconciliation to net income (loss), the corresponding GAAP financial measure, see the Appendix.

ADCARE GEOGRAPHIC FOOTPRINT

7

Year

• pened

2016 visits 1 Worcester 1986 54,607 2 Quincy 2003 16,751 3 West Springfield 2005 16,292 4 Boston 1989 13,223 5 North Dartmouth 1993 13,000 6 Warwick 2000 11,527 7 North Kingstown 2015 2,666 Facility location All Inpatient and outpatient Programs are Joint Commission Accredited

Location: Worcester, MA Levels of care: Medically managed detoxification, rehabilitation, and acute residential Operational beds: 110 Total beds: 114 Inpatient facilities Worcester Hospital (A) Facility locations Outpatient facilities Location: North Kingstown, RI Levels of care: Detoxification, residential Operational beds: 46 Total beds: 52

Rhode Island Residential (B)

3 1 A 6 7 B 4 2 5 Inpatient facilities Outpatient facilities

ADCARE FACILITY & PROGRAM OVERVIEW

Facility Type Inpatient Hospital Inpatient Residential Outpatient Correctional Facilities Levels of Care Medically Managed Detoxification, Rehab, Acute Residential Detoxification, Residential Day Treatment, IOP, OP, Continuing Care Education and Group Counseling Patient Population Male/Female Adults Male/Female Adults Male/Female Adults Male/Female Adults 2016 Net Revenue $30.8 million $5.5 million $9.8 million $5.5 million Capacity 


(effective beds/total beds)

110/114 46/52 N/A N/A 2016 Average Daily Census (ADC) 105 Patients (95%) 36(1) Residents (66.7%) >115,000 Visits N/A

(1)North Kingstown ADC in Q4 2016 is 38.

Worcester, MA North Kingstown, RI Outpatient Offices AdCare Criminal 
 Justice Services

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2014 2015 2016 LTM 6/30/17

$8.5 $9.0 $9.8 $8.9 $51 $52 $51 $47

Net Revenue AEBITDA 2014 2015 2016 LTM 6/30/17 121,275 126,830 117,799 118,345

ADCARE OPERATING / FINANCIAL PERFORMANCE

($ in millions)

Inpatient/Residential ADC Outpatient Visits Total Net Revenue / AEBITDA(1)

2014 2015 2016 LTM 6/30/17 Inpatient/Residential ADC Occupancy 92% 91% 90% 93% 144 142 131 108 93% 90% 91% 92%

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$2.8 AAC Cost Synergies

(1)

(1) AEBITDA represents a non-GAAP financial measure. For the reconciliation to net income (loss), the corresponding GAAP financial measure, see the Appendix.

PAYOR MIX DIVERSIFICATION

> AdCare transaction materially diversifies AAC’s payor mix

• Out-of-network payor mix is reduced by from 77% to 65%
• Achieves 80% of AAC’s target government payor mix


Individual 7% Out-of-Network 77% In-Network 16%

AAC

Government 15% Individual 5% Out-of-Network 40% In-Network 40%

TARGET DEC 31, 2019

Medicare 59% Medicaid 19% In-Network 22%

ADCARE

Government 12% Individual 6% Out-of-Network 65% In-Network 17%

PROFORMA

+ =

1H 2017 data

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Other 10% Outpatient 18% Residential 11% Hospital 61%

SERVICE LINE DIVERSIFICATION

> AdCare transaction materially diversifies AAC’s revenue mix

• More than doubles AAC’s hospital related revenue
• AdCare’s lack of diagnostic revenue reduces diagnostic services as a % of total revenue


Other 3% Diagnostic 16% Outpatient 8% Residential 67% Hospital 6%

AAC

PROJECTED DEC 31, 2019

ADCARE PROFORMA

+ =

Other 4% Diagnostic 13% Outpatient 9% Residential 60% Hospital 14% Other 6% Diagnostic 10% Outpatient 10% Residential 58% Hospital 16% 1H 2017 data

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GEOGRAPHIC DIVERSIFICATION

Laguna Treatment Hospital Desert Hope SDTC Greenhouse Headquarters Oxford River Oaks Recovery First Recovery First Ft. Lauderdale Sunrise House Ringwood* * Pending Solutions Recovery Townsend Sagenex Labs Addiction Labs Residential Treatment Center Hospital Detox Facility Outpatient Facility Laboratory CSRI Sober Living Beds

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SALES AND MARKETING STRENGTH

13

AAC Call Center

30,000 +

Monthly Calls AdCare Call Center

4,000 +

Monthly Calls

Map of over 30,000 ACC alumni Significant embedded demand for AdCare facilities Geographic and payor mix diversification allows greater leverage of combined marketing efforts

+ =

Pro Forma Call Center

34,000 +

Monthly Calls

PRO FORMA BUSINESS OVERVIEW LTM AS OF 6/30/17

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Facilities ADC Occupancy ADR Residential Clinics Visits ARV Outpatient Geographic Expansion Diagnostic EBITDA Contribution (2017E) Commercial Government Individual Payor Mix Out-of-network mix

Pro Forma

11 2 13 (+18%) 824 144 968 (+17%) 78% 92% 83% (+6%) $703 $698 $702 (+0%) 63,129 121,275 184,404 (+192%) 18 7 25 (+39%) $359 $76 $173 (-21%) 8 states 2 states 9 states (+25%) 22%

• 20% (-9%)

93% 22% 82% (-12%)

• 78%

12% ( -%) 7%

• 6% (-14%)

77%

• 65% (-16%)

Admissions Length of stay 12,560 6,074(1) 18,634 (+48%) 27 7 20 (-26%)

(1) Includes admissions for AdCare Hospital of Worcester only.

Data based on LTM 6/30/2017

OVERVIEW OF SYNERGY OPPORTUNITIES

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> $2.8 million of cost synergies expected to be realized in first twelve months > Additional $1.1 million of revenue synergies expected to be driven by incremental census growth

Salaries & wages Facility & lab Marketing Revenue synergies

• Existing AdCare shareholder salaries
• Other employee compensation and expenses
• Facility related expenses
• Diagnostic and lab expense
• Marketing expenses

$0.7mm $0.4mm $1.1mm $2.8mm $1.1mm $3.9mm

• Projected profit from incremental census growth at AdCare

Rhode Island facility

Total cost synergies Total synergies

Other

• Professional services fees
• Private company expenses
• Other expenses

$0.5mm

Note: Totals may not sum due to rounding

TRANSACTION SUMMARY

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Sources and uses

($ in millions)

Pro forma capitalization

Note: Please refer to Appendix for a reconciliation of Pro Forma Adjusted EBITDA. (1) Pro forma for $25mm sale leaseback at 8.75% effective lease rate used to repay existing revolver balance. LTM 6/30/17 Pro Forma Adjusted EBITDA reduced by $2.2mm of pro forma rent expense.

Sources Uses Incremental TLB $65 AdCare purchase price $85 Seller Note 10 Estimated fees and expenses 2 New Equity 5 Cash from balance sheet 7 Total sources $87 Total uses $87

($ in millions)

Pro forma 6/30/2017 Adjustments Pro forma for AdCare

Cash and cash equivalents $21 ($7) $14 Revolving Credit Facility – – – Term Loan B 210 65 275 Capital leases 1 – 1 Total secured debt $211 $65 $276 Seller Note – $10 $10 Total debt $211 $75 $286 Net debt $190 $82 $272 LTM 6/30/17 Pro Forma Adjusted EBITDA $55 $11 $66 Credit statistics: Secured debt / EBITDA 3.9x 4.2x Total debt / EBITDA 3.9x 4.4x Net debt / EBITDA 3.5x 4.1x (AAC restricted stock issued to seller)

(1)

APPENDIX: NON-GAAP FINANCIAL MEASURES

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Adjusted EBITDA and Adjusted Pro Forma Adjusted EBITDA (herein collectively referred to as "Non-GAAP Disclosures") are “non-GAAP financial measures” as defined under the rules and regulations promulgated by the U.S. Securities and Exchange Commission. Management believes the Non-GAAP Disclosures provide investors with additional meaningful financial information that should be considered when assessing our underlying business performance and trends. We believe the Non- GAAP Disclosures also enhance investors’ ability to compare period-to-period financial results. The Non-GAAP Disclosures should not be considered as measures of financial performance under U.S. generally accepted accounting principles ("GAAP"). The items excluded from the Non-GAAP Disclosures are significant components in understanding and assessing our financial performance and should not be considered as an alternative to net income (loss) or other financial statement items presented in the condensed consolidated financial statements. Because the Non-GAAP Disclosures are not a measure determined in accordance with GAAP, the Non- GAAP Disclosures may not be comparable to other similarly titled measures of other companies. Management defines Adjusted EBITDA as net income (loss) adjusted for interest expense, income tax expense (benefit), depreciation and amortization expense, stock-based compensation and related tax reimbursements, litigation settlement and California matter related expenses, reorganization expense, acquisition-related expenses (which includes professional services for accounting, legal, valuation services and licensing expenses), de novo start-up and other expense, facility closure

• perating losses and expenses (associated with The Academy and FitRx), employee severance expense, loss on extinguishment of debt, loss on hedging obligations,

gain on contingent consideration associated with our acquisition of Townsend, and bargain purchase gain associated with our acquisition of Sunrise House in the fourth quarter of 2015. Management defines Pro Forma Adjusted EBITDA as net income (loss) adjusted for interest expense, income tax expense (benefit), depreciation and amortization expense, stock-based compensation and related tax reimbursements, litigation settlement and California matter related expenses, reorganization expense, acquisition-related expenses (which includes professional services for accounting, legal, valuation services and licensing expenses), de novo start-up and other expense, facility closure operating losses and expenses (associated with The Academy and FitRx), employee severance expense, loss on extinguishment of debt, loss

• n hedging obligations, gain on contingent consideration associated with our acquisition of Townsend, bargain purchase gain associated with our acquisition of

Sunrise House in the fourth quarter of 2015, additional rent from the sale and leaseback transaction that occurred in July 2017 as if the transaction occurred at the beginning of the applicable trailing twelve month period, pro forma effect of workforce adjustment that was completed in February 2017 as if the workforce reduction

• ccurred at the beginning of the applicable trailing twelve month period, pro forma run-rate adjustment for the Solutions acquisition that was completed in May

2017 as if the acquisition occurred at the beginning of the applicable trailing twelve month period, AdCare adjusted EBITDA for the applicable trailing twelve month period (which includes AdCare net income adjusted for interest expense, income tax expense, depreciation and amortization expense, de novo start-up and other expense, and transaction related expenses), and cost synergies currently expected to be realized from the operations of AdCare as if the cost synergies were realized at the beginning of the applicable trailing twelve month period.

RECONCILIATION OF AEBITDA

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($ in thousands)

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 LTM 3/31/2017 LTM 6/30/2017 Net income (loss) $871 $1,099 $1,492 $6,366 $8,341 ($5,741) ($7,116) ($9,856) Add: Interest expense 337 980 1,390 1,872 3,607 8,175 9,207 9,852 Add: Income tax expense (benefit) 652 1,148 615 2,555 4,780 (1,220) (1,765) (894) Add: Depreciation and amorization 195 1,288 3,003 4,662 7,837 17,686 19,240 20,073 Add: Stock-based compensation and related tax reimbursements – 2,408 1,649 3,030 5,757 8,823 8,322 8,237 Add: Litigation settlement and California matter related expenses – – 2,588 487 5,446 8,690 6,524 5,615 Add: Reorginization expense – – 821 1,176 – – Add: Acquisition-related expenses – 150 – 845 3,801 3,252 2,664 1,408 Add: De novo facility start-up and other expense – 95 – 99 3,369 8,663 11,155 10,840 Add: Facility closure operating losses/expenses – – – – 3,114 771 771 404 Add: Employee severance expense – – – – – – 743 789 Add: Loss on extinguishment of debt – – – – – – – 5,435 Less: Loss on Hedging Obligations – – – – – – – (20) Less: Gain on contingent consideration – – – – – (1,350) (1,350) – Less: Bargain purchase gain – – – – (1,775) – – – Adjusted EBITDA (compliance) $2,055 $7,168 $11,558 $21,092 $44,277 $47,749 $48,395 $51,883 Less: Additional rent from Sale and Leaseback transaction (2,188) (2,188) Add: Pro forma effect of workforce adjustment (completed in February 2017) 6,965 4,812 Add: Pro forma run-rate adjustment for Solutions acquisition (completed in May 2016) 713 – Add: AdCare adjusted EBITDA – 8,487 Add: AdCare cost synergies – 2,751 Pro-forma Adjusted EBITDA $53,886 $65,746

(1)Excludes $1.1mm of estimate revenue synergies (1)

VALUABLE REAL ESTATE & SIGNIFICANT COLLATERAL

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> Gross real estate cost basis of approximately $129mm > Accounts receivables net of allowances, of $96.5mm as of 6/30/17

Real Estate Cost Basis

Grand Total Laguna $ 20.80 River Oaks $ 20.00 Greenhouse $ 19.60 Oxford $ 17.70 Desert Hope $ 14.80 Ringwood $ 13.70 Sunrise House $ 7.60 Recovery First $ 1.40 AdCare real estate $ 13.70

Total Real Estate Collateral Cost Basis

$ 129.30

Accounts Receivables, Net of Allowances (AAC only)

$ 96.50

Total Real Estate and Receivables Collateral

$ 225.80

PROJECTED CAPACITY OVERVIEW

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Beds Anticipated Facility 8/31/17 Pending State Levels of Care Property Type Availability Desert Hope 148 NV DTX, RTC, PHP , IOP Owned De novo Greenhouse 130 TX DTX, RTC, PHP , IOP Owned De novo San Diego “SDTC” 36 CA DTX, RTC, PHP , IOP Leased Original Recovery First 56 FL DTX, RTC, PHP , IOP Owned/Leased Acquired Recovery First - Ft. Lauderdale East 83 FL PHP . IOP Leased De Novo Oxford Treatment Center 124 MS DTX, RTC, PHP , IOP Owned Acquired Sunrise House 110 NJ DTX, RTC, PHP , IOP Owned Acquired River Oaks 162 FL DTX, RTC, PHP , IOP Owned De Novo Laguna Treatment Hospital 93 CA DTX, RTC, PHP , IOP Owned De Novo Ringwood 150 NJ DTX, RTC, PHP , IOP Owned De Novo 2018 Townsend Treatment Center 32 LA DTX, RTC, PHP , IOP Leased Acquired Townsend New Orleans 36 LA DTX, RTC, PHP , IOP Leased De Novo 4Q 2017 Solutions Treatment Center 80 NV DTX, RTC, PHP , IOP Leased Acquired Las Vegas Sober Living 138 NV N/A Leased Acquired Arlington Sober Living 80 75 TX N/A Leased Acquired 2018 Oxford Sober Living 72 MS N/A Owned/Leased De Novo AdCare - Worcester 114 MA DTX, RTC, PHP Owned Acquired 2018 AdCare - North Kingstown 52 RI DTX, RTC Owned Acquired 2018 Total 1,344 427

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