American Addiction Centers (AAC): Addicted to Fraudulent Drug Testing

• According to channel checks, AAC performs urine drug tests 6-12x more than necessary, contributing to outsized margins.

• AAC is already subject to a lawsuit in New Jersey brought by Blue Cross Blue Shield alleging fraudulent drug testing.

• In Florida, where AAC has 51% of their total beds, the FBI has begun raiding addiction centers that appear to be engaging in similar activities as AAC.

• AAC acquired a revenue management company from the CEO and president's spouses and then lowered their provision for doubtful accounts, boosting net income before the IPO.

• A large lock-up will come free at the end of March in four weeks, resulting in the float quadrupling and likely weighing on the share price.

Company: AAC Holdings, Inc.  (NYSE:AAC)

• Market Cap: $710 million

• Price/Earnings: 84x

• Recommendation: Short

• Catalysts: Alleged insurance fraud, expiration of lockup at the end of March

Investment Thesis

AAC Holdings, also known as American Addiction Centers, is likely to fall by at least 50%, as its inappropriate insurance billing scheme comes unraveled. Due diligence reveals that AAC subsidiaries are testing their clients 6-12x more frequently than necessary and are then running unnecessary confirmatory tests which are then billed to insurance companies. Such testing made up most of the 26% of commercial payor revenue attributed to "point-of-care drug testing, quantitative laboratory services, professional groups and other services." Moreover, this contributes to outsized net margins. In fact, it is so profitable that the company will not reveal the margins, and it doesn't really even want to talk about it. The company is already the subject of one lawsuit (in New Jersey) alleging fraudulent billing with respect to excessive urine testing. While AAC has exited New Jersey, the same practices are still going on in other states.

Recent FBI raids on addiction centers in Florida indicate that Florida is the next state which will be cracking down on insurance abuses in drug testing. AAC operates heavily in Florida, representing 51% of their 2014 bed count.

We are now seeing major crackdowns on addiction centers in Florida, prosecuting the exact same type of violations, namely bilking insurance companies with unnecessary and overpriced drug testing.

In this link, a West Palm Beach news station details the FBI raid on a local addiction center (Good Decisions Sober Living), where the FBI hauled away computers and documents in order to prosecute the suspicion of drug testing fraud.

One interviewee notes that he knew something was up when his addiction center made him take drug tests 4 times per week, sending the insurance company the bill for as much as $1,500.

In December, a separate incident in Del Rey Beach was similar. Two recovery centers (Real Recovery and Halfway There) were raided by the FBI, with documents and computers being seized.

What is happening here is obvious. In recent months, there has been a significant increase in supervision by the Florida Association of Recovery Residences, which is trying to crack down on the rampant insurance abuse.

With 26% of AAC's commercial payor revenues (90% of total revenues), AAC stands to lose millions as it loses its ability to over bill insurance companies.

AAC took visible steps ahead of its IPO to potentially manipulate its earnings in order to boost its valuation, while hiding problems such as lawsuits and related party transactions.

All of this should be expected to lead to very heavy selling pressure on the stock when the IPO lockup expires in three weeks, freeing up over 15 million shares for trading and quadrupling the float.

Finally, the company has a checkered past which included patient deaths in its facilities and a stint on the pink sheets, after the company suddenly decided to stop filing its financials with the SEC.

Before getting into the alleged fraudulent drug testing that is currently ongoing, it is important to understand the background of AAC. Fraudulent drug testing will be discussed in detail in Section III.

Section I: Background

AAC Holdings, also known as American Addiction Centers went public last October 1st, at $15 a share and has performed very well, rising more than 100% since the IPO to where it currently trades at $34 a share. AAC has posted excellent numbers with revenues growing from $28 million in 2011 to $116 million in 2013, a CAGR of 102%. In its first quarter as a public company, revenues grew 28% year-over-year and Adjusted EBITDA rose 74% year-over-year.

Despite this torrid growth, AAC has significant issues which could see the stock fall by as much as 50% in the near term. Much of the reason AAC has been able to put up such impressive numbers is the excessive and sometimes fraudulent urinary drug testing that it performs on its patients.

According to discussions with AAC representatives, AAC facilities perform urinary drug tests 2-3x per week versus the industry norm of 1-2x per month. AAC discloses that its average stay is 26. In other words, AAC tests 6-12x more often than is necessary. This is significant because AAC derives between 20-25% of its revenue from drug testing. More importantly, this testing has an outsized effect on the bottom line, because of the massive margins it contributes. While AAC doesn't break out how much testing contributes to the bottom line, one can infer that they carry very high margins.

Blue Cross Blue Shield is already suing one of the companies that AAC acquired in mid-2012 for fraudulent urine drug testing. Blue Cross Blue Shield is AAC's second largest reimbursor, accounting for 13.1% of AAC's revenue. Despite the tiny size of the acquisition, it was able to rack up over $6 million in fraudulent billings. Clearly, the size of the problem within the larger AAC group is, therefore much larger than this level.

AAC can trace its origins to a reverse-merger that quit filing financials with the SEC and was featured in a report on negligence in treatment centers in California. The report highlighted four deaths that occurred at these facilities, before their license was eventually revoked.

With insurance companies cracking down on fraudulent billing and testing practices, AAC will simply not be able to put up the same kind of numbers it has in the past.

This article will review the history of AAC and the people involved with it before examining the company's urine drug testing practices, as well as related party deals and changes to allowance for doubtful accounts.

Section II: History of AAC and Deaths at A Better Tomorrow

AAC has a bit of an interesting history. There are several related companies that have undergone several name changes along with multiple relevant individuals.

In 2004, AAC's current President Jerrod Menz (who controls 5.2 million AAC shares or 24.2% of outstanding shares) founded ABTTC, Inc., which stood for A Better Tomorrow Today. In 2008, Mr. Menz took A Better Tomorrow public through a reverse merger with an OTC shell. The company then changed its name to Forterus, but continued operating its clinics under the A Better Tomorrow name. The company soon stopped filing its financials with the SEC and became a non-reporting company. The operation of the addiction centers was clearly running into major problems, as detailed in a 2012 report prepared for the Senate Rules Committee by the California Senate Office of Oversight and Outcomes. The report highlighted numerous issues at their clinics including four deaths and the eventual revoking of one facility's treatment license.

While the report was meant to highlight the issues with the California Department of Alcohol and Drug regulation of residential programs, it raised some shocking allegations about what happened at A Better Tomorrow facilities.

The report highlights four deaths. Roberta McMinn, who was 68, died at an A Better Tomorrow facility just three days after she was admitted, and according to the report, was unable to walk under her own support when she was admitted. The report alleges:

On the day she died, McMinn was found pale and vomiting in her bed. A worker at the Irongate house called another A Better Tomorrow office for help and changed her shirt, according to interviews with staff members. When the second worker arrived, the two cleaned her up again. They noticed that her skin was turning blue and white, and called 911. The worker from the program's office told investigators he knew CPR, but the state's report does not state that he or anyone else from the program attempted to revive McMinn. It's unclear from the documents how long McMinn had been vomiting and ill before someone called for an ambulance. (Pg. 14,16)

The report goes on to question where she got enough of the anti-depressant to cause the intoxication that contributed to her death, as well as suggesting that any drugs that were in her system at her time of death were taken at A Better Tomorrow. The report also alleges that McMinn was admitted against her will, even though in California, a person has to be declared a danger to themselves or others to be committed to a facility without their permission. Unlabeled medications were found in Ms. McMinn's bag after her death.

In the coroner's report, there was a reference to Ms. McMinn having seen the "facility's psychiatrist", which would suggest that the facility was providing medical care, which is a violation of state law.

The second death occurred when a patient dies on the same day he was admitted, after suffering from a seizure. The report says that A Better Tomorrow never made any attempt for the man to have a medical assessment before his death.

In the third death, the department accused A Better Tomorrow of mischaracterizing the death in the state report. The report reads

The death report stated that the client had been weak but able to function on his own when he arrived at the program, the state's accusation said. Yet, the program's own records reflected that he was incontinent, jaundiced and very weak. Although he told the program that he had suffered from liver disease, the staff did not do a medical assessment, the state's investigation later found. (Pg. 17)

The fourth death occurred when Gary Benefeild flew from his home to A Better Tomorrow center seeking treatment. The next day he was dead on his 53rd birthday. The report found that:

He was coughing and wheezing when he arrived, according to the department's later investigation, which also found the following: His oxygen tank had been emptied at the airport because of flight regulations. Benefield suffered from chronic obstructive pulmonary disease, emphysema and had recently been hospitalized for pneumonia. Despite all this, the program failed to get him an oxygen tank. It also gave him an anti-depressant and an anti-anxiety drug without a prescription and before he had seen Dr. Bumby, listed on the program's website as "an outside medical consultant." It got the drugs from an "extra supply" it kept on hand. Staff members failed to check on Benefield after 12:30 a.m., contrary to its own guidelines, because they were asleep.(Pg. 18)

Finally, this was enough for the commission to suspend the license of the A Better Tomorrow facility. As the report notes, this had no impact on A Better Tomorrow, because the Irongate property had already been closed as the result of a foreclosure and clients had been moved to other A Better Tomorrow facilities.

According to two former employees, the problems continued even after the sanctions. A Better Tomorrow has called these employees disgruntled and pointed out that they were involved in a class action lawsuit over back wages. (Pg. 20)

The issues highlighted in the California Senate Office of Oversight and Outcomes report occurred from 2008 to 2010. Despite the issues, in July 2011, Forterus announced that they were merging with Performance Revolution, LLC. Performance Revolution was located in Brentwood, Tennessee and founded by Michael Cartwright, current AAC Chairman, in 2009. From this merger between a single addiction center in Tennessee and the troubled addiction centers in California, what is now AAC begins to emerge.

It is not totally clear how the company transformed from this small footprint to what it is today, but acquisitions were involved. It's not the acquisitions that I find interesting, but what potentially happened at the addiction centers that could be negative for AAC in the future.

To be clear, AAC's numbers up until this point have been phenomenal. But why have they been phenomenal? AAC might say that they have focused on branding or marketing their centers, but plenty of other addiction centers do the same thing. With only currently just eight addiction centers across the country, scale doesn't make much sense as an argument. I believe that the majority of this growth has to do with excessive and/or fraudulent drug testing.

Section III: Allegedly Fraudulent Drug Testing

In order to understand how fraudulent drug testing works, it is important to understand the two fraudulent components. First, there is Point of Care Testing (BATS:POCT). This is the testing provided in a clinician's office and is typically performed with an inexpensive (less than $50) test. The fraud in POCT testing is simply the fact that clinicians a) test too often and b) bill out this cheap testing to insurance companies at prices as high as $1,200. The profitability on unnecessary testing is massive.

The second component to understand is the "confirmatory testing." In the event that a test registers a negative result, clinicians can then send the test on to a central lab for a "confirmatory test", which is then billed to the insurance company at a price of $1,000-$2,000. The fraud here occurs when clinicians automatically send the tests in for expensive confirmatory tests, even when it is not merited. In this way, the firm can bill as much as $3,200 for a single urine test (combined POCT and confirmatory tests). In fact, this business is so lucrative that AAC has now even opened its own lab in Tennessee, so that it can capture all of the profits from unnecessary confirmatory tests.

AAC does not break out exactly how much revenue comes from drug testing, but they do break down the percent of revenues that come from commercial payors. According to AAC, in 2013, 90% of their revenues came from commercial payors with the balance being paid out of pocket. So it's impossible to know exactly what percentage of revenue comes from drug testing. We can see that 26% of commercial payor revenue comes from POCT and Lab Services.

AAC is currently the subject of this exact type of fraud lawsuit. Horizon Blue Cross Blue Shield of New Jersey vs. Avee Laboratories et al., alleges that the defendants submitted unnecessary and fraudulent drug tests. One of AAC's subsidiaries, Leading Edge, was named as a defendant. The case claims that the defendants began causing others to submit "false and fraudulent claims for unnecessary and ineligible POCT and confirmatory tests." Leading Edge was a relatively small addiction center in New Jersey, which was opened by Treatment Solutions (more on that shortly).

According to the lawsuit, despite its tiny size, Leading Edge fraudulently billed Blue Cross Blue Shield over $6 million in fraudulent claims for urine tests. The suit goes on, saying,

As a result of this scheme, healthcare providers, including Leading Edge Recovery Center and Laurie Deerfield, rendered unnecessary [point-of-care tests]. Despite repeated negative results and the absence of any clinical reason to believe that the results were inaccurate, healthcare providers requested Avee to perform unnecessary confirmatory tests on the same urine samples.

So we can see from the above that Leading Edge was engaged in both types of billing fraud, excessive POCT testing as well as unnecessary confirmatory tests.

The Leading Edge facility became part of AAC on August 31, 2012, when AAC acquired certain assets of AJG Solutions, Inc., which was also known as Treatment Solutions. The company referred to this acquisition as the "TSN Acquisition." AAC closed the Leading Edge Facility in June 2013. According to the S-1, this was because,

The amenities and the service offerings at the facility were inconsistent with the Company's long-term strategy. (Pg. F-33, S-1).

Was shutting down the caught-in-the-act fraud a necessity before launching the IPO?

The lawsuit claims:

To generate unnecessary POCT and confirmatory test, Defendant Avee Laboratories (Avee) published false and deceptive marketing materials and offered unlawful inducements that encouraged Healthcare Providers to perform medically unnecessary POCT and to refer their patients to Avee for unnecessary confirmatory testing. Among other things, Defendant Avee falsely advised Healthcare Providers that they could generate supplemental income by rendering and submitting claims to insurers like Horizon for performing POCT only when the provider also ordered confirmatory testing of the POCT results from a clinical laboratory, like Avee.

As a result of this scheme, Healthcare Providers, including Leading Edge Recovery Center and Laurie Deerfield rendered unnecessary POCT. Despite repeated negative results and the absence of any clinical reason to believe that the negative results were inaccurate, Healthcare Providers requested Avee to perform unnecessary confirmatory tests on the same urine samples.

What's interesting is that this scheme of "unnecessary confirmatory testing" sounds a lot like what AAC recently implemented in their own business model.

In the third quarter of 2013, AAC began operating a lab in Brentwood that did more complex testing. Essentially AAC facilities test the urine samples at their facilities and then send the samples to Brentwood for further and more complex testing. AAC mentions that this is a very high margin business saying,

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. (10-Q pg. 26)

Could it be that the purpose of the Brentwood facility is to facilitate the unnecessary re-testing of urine samples like what was allegedly happening with Leading Edge?

To determine whether or not AAC's drug testing was more frequent than the industry norm, I called both AAC representatives as well as their competitors. What I found was that AAC tests its patients far more frequently than the industry norm, indicating that Leading Edge may not have been an isolated event. More importantly, the only other addiction center that I found that tested as frequently as AAC was also founded by Michael Cartwright.

Here are the results from channel checks with AAC's centers. The results were compiled from phone calls with their main call center as well as various online chats using the chat feature on their websites. The chats usually told me that their centers tested 1-2x per week, while the phone operators told me that their facilities tested 2-3x per week.

Then I did the same thing with all of the competitors that AAC lists. What I found was interesting: their competitors generally could not even give me a number. They didn't even measure urine drug testing on a weekly basis. But what was clear was that, they do not test at anywhere near the same rate as AAC facilities.

It's interesting to note that the only other addiction center that tests as frequently as AAC centers is Foundations Recovery Network, which was also started by AAC CEO Michael Cartwright. According to an article in Treatment Magazine, there are connections between AAC CEO Michael Cartwright and Treatment Solutions.

Sources tell Treatment Magazine that Cartwright's relationship with Treatment Solutions goes back many years to the era in which he was CEO and founder of Foundations Recovery Network, FRN, and to the time seven or eight years ago, when Cartwright sold FRN to Chicago area based private equity interests.

AAC's last disclosure on this Blue Cross lawsuit came in the 10-Q filed November 12, 2014:

The Company is vigorously defending these claims and believes them to be without merit. The company cannot provide any assurance that it will prevail in this matter, nor can it reasonably estimate its potential liability if there is an adverse outcome. (Page 22)

Several analyst reports make it clear that AAC is the only publicly traded addiction center company, and there are few publicly traded companies in this sector to get an idea of how this business should work, what the margins look like, etc.

Forterus, however, did report a few quarters as a public company doing business as an addiction center. The numbers below are from the two quarters Forterus reported as a OTC stock.

That's not a very long time period but it does give us an idea, especially since the Forterus centers are now part of AAC.

The margins at AAC are substantially higher than they were at Forterus. This could be due to scale or better marketing, but certainly potentially fraudulent and/or excessive urine drug testing has a massive impact. Forterus had 200 beds when they merged with Performance Revolution and earlier in 2014 AAC had 467 beds, so the Forterus part of the business was still fairly large. And AAC's revenues are approximately 100% higher than they were at Forterus, so obviously something substantial has changed here.

In its 10-Q, AAC says:

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. (10-Q pg. 26)

This suggests that the urine drug testing revenues that were present may have been the cause of AAC's improved margins and performance.

Is AAC's model built on providing unnecessary services to make the business look better?

Looking at some more details we see that this has occurred in other facets of the business, where AAC or AAC leaders have done things to make themselves and the business look better than it really is.

AAC was already forced to shut down its operations in New Jersey following the fraud lawsuit by Blue Cross Blue Shield, for whatever reason. And now it looks like Florida could be next. The crackdown in Florida will significantly impact AAC, as over 50% of their beds are located in Florida. AAC has 487 beds across the country, with 247 of their 487 beds at their Riverview, Singer Island, and The Academy facilities. AAC also has a large concentration of revenue coming from Blue Cross Blue Shield affiliates. Through the first nine months in 2014, Blue Cross Blue Shield affiliates accounted for 28.3% of revenue.

One more interesting thing that came out of the Blue Cross Blue Shield suit was what happened with one husband and wife team. An article in Treatment Magazine highlighted the following "personnel interconnections" between Avee/Alere, which was the urine testing company in the lawsuit, and AAC.

The article says "Stephanie Bickley has worked as a senior sales and marketing executive at Avee/Alere while her husband, Brendan Bickley, was for years a top Treatment Solutions executive who later went on to work for AAC as the executive in charge of that company's Florida operations."

Treatment Solutions was the company that AAC acquired that ran Leading Edge. It is certainly odd that a husband and wife team were on both sides of the alleged fraud.

The lawsuit hit on August 23, 2013 and according to his LinkedIn Brendan Bickley left AAC in September 2013. What is strange, however, is that Stephanie Bickely was hired by AAC to VP of Sales at Addiction Labs of America, the name of the Brentwood lab. It appears that Ms. Bickley has the relevant experience that they would want at their lab, but unfortunately it is experience in allegedly fraudulent activity.

Section IV: Related Party Revenue Management

In April 2014 AAC acquired Clinical Revenue Management Services, LLC "CRMS" as part of its reorganization transactions. This was an interesting move and served to help inflate AAC's revenue and earnings just ahead of the IPO.

Up until 2012 AAC had outsourced its medical billing and collection processes to third-party providers. In 2012 AAC shifted to using CRMS for their revenue management services. From the S-1:

"In 2012, the Company transitioned its outsourced medical billing and collection process from third-party service providers to Clinical Revenue Management Services, LLC ("CRMS"), an alternative service provider. The two owners and officers of CRMS are the spouses of the CEO and President of the Company. Pursuant to a written service agreement, CRMS is paid (I) the greater of $0.1 million per month or 5.0% of the monthly collected revenues and (ii) 7.0% of the Professional Groups collected revenues." (S-1, F-40)

So the company decides to start using a revenue management company that is owned by the wives of the CEO and President of AAC. It's not hard to imagine how a conflict of interests might arise there. But if they had been operating for a while and had built up a business then one could understand AAC's move. Unfortunately that is not the case.

State of Tennessee records show that CRMS was incorporated in January 2012 and that they have always used the same address. 115 East Park Drive, Suite 200 or Suite 125. AAC is located at 115 East Park Drive on the second floor.

So AAC used a brand new revenue management company that was based in their same building and run by their wives to do revenue management. The companies were obviously very close. In the S-1 they disclose that CRMS leased office space and furniture from AAC in their building in 2013. According to the S-1 CRMS occupied the same office space in 2012 but no rents were charged.

CRMS ran AAC's billing services as a separate company until it was acquired by AAC in April 2014. AAC acquired CRMS for $500k and 149,144 AAC shares for the wives of the AAC President and CEO.

"In connection with the CRMS Acquisition, Holdings acquired 100% of the outstanding membership interests in CRMS, 50% of which were held by Tina F. Cartwright, the spouse of our CEO, and 50% of which were held by Victoria Menz, the spouse of our President, for total consideration of $0.5 million and 149,144 shares of Holdings common stock. Ms. Cartwright received total consideration of $1.3 million, consisting of $250,000 in cash and 74,572 shares of Holdings common stock at a fair value of $13.41 per share. Ms. Menz received total consideration of $1.3 million, consisting of $250,000 in cash and 74,572 shares of Holdings common stock at a fair value of $13.41 per share." (S-1)

According to LinkedIn Tina Cartwright is still running CRMS.

Right after AAC purchased CRMS; they changed their allowance for doubtful accounts. From the 10-Q:

"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." (10-Q, pg. 25)

You can see how drastic this change was by looking at AAC's ratio of Allowance for Doubtful Accounts to Revenue. It is not hard to see when it started falling, right after the CRMS acquisition and when management changed the allowance for doubtful accounts helping boost earnings before the IPO.

For the sake of comparison, one can view what AAC's net income would be if they had kept the provision for doubtful accounts at 13.9%, which is what it was the quarter before the CRMS acquisition.

We can see that if AAC's provision for doubtful accounts were kept at the same rate as it was before the CRMS acquisition then net income would turn negative in the following two quarters before falling to $1.1 million vs. the $3.3 million the AAC reported for Q4.

Even more interesting is that AAC's reported net income in Q4 2014 was taxed at a rate of around 8%. Analysts seem to have modeled a 42% tax rate and AAC has said that they expect their tax rate to increase to between 38%-40% going forward. If we applied the 42% tax rate to Q4 2014 that analysts are modeling then reported net income would fall to $2.03 million. Subtracting the higher provision for doubtful accounts from tax adjusted net income then we would get negative net income of -$0.137 million again.

Could the spouses of AAC CEO Jerrod Menz and AAC Chairman Michael Cartwright really do such a tremendous job in the revenue management business (in which neither of them has any experience in) that the provision for doubtful accounts would fall so sharply?

Providing such a big boost to net income right before the company went public has surely made AAC look more attractive to investors and allowed it to command a higher valuation.

These transactions are clearly deeply troubling. Why would AAC use a revenue management company operated by their spouses and not an arms-length third party? Why change your allowance for doubtful accounts immediately after acquiring CRMS. How could CRMS be doing such a better job at revenue management that management realized they were over-reserving for doubtful accounts? And then why would AAC management turn around and say that their provision for doubtful accounts reflects a "higher reserve percentage due to uncertainty of collecting these accounts?

"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." (S-1, pg. 65)

In the same vein as AAC taking steps to make themselves look better than they are, there appears to be evidence of the CEO of an AAC subsidiary changing where he got his PhD from as well as involvement in a Utah MLM that came under fire from Forbes and other media sources for being a pyramid scheme.

Dr. Ralph E. Carson is the CEO of AAC subsidiary FitRx in Nashville, Tennessee. Here is Dr. Carson's biography from the FitRx website:

"Dr. Ralph E. Carson, RD, Ph.D. | Executive Director, FitRx"

"Dr. Carson has been involved in the clinical treatment of addictions and eating disorders for over 35 years. His unique background in health science and medicine (BS Duke University, BHS Duke University Medical School) coupled with nutrition and exercise (BS Oakwood College, Ph.D. Auburn University) has prepared him to integrate neuropsychobiological intervention and proven psychotherapeutic treatment. Dr. Carson honed his skills in communication and often-complicated science into enjoyable, practical and informative workshops. He has consulted with numerous addiction and eating disorder treatment centers throughout the country and is an in-demand speaker at conferences and workshops. Dr. Carson has also developed several eating disorder programs and corporate wellness programs. He is an active board member of the International Association of Eating Disorder Professionals (IAEDP) and Binge Eating Disorder Association (BEDA). Working with Academy Medical Systems, he developed workshops for professional groups throughout the country on topics such as exercise therapy, sports nutrition and eating disorders. He authored several popular book on nutrition, lifestyle practices, good health and the brain: "Harnessing the Healing Power of Fruits" and the recently published "The Brain Fix: What's the Matter with Your Gray Matter?"

In that biography he claims a PhD in nutrition and exercise medicine from Auburn University. In this screenshot from an old course catalog, however, he shows that he had a PhD from Donsbach University.

Dr. Stephen Barrett has written an excellent overview of Donsbach University at QuackWatch. I will not repeat the entire article here but what it essentially says is that Donsbach University was a non-accredited college that operated through the mail that had a cast of doctors that had run into legal issues on the board.

While not mentioned in his biography, Dr. Carson also with MonaVie, which was a Utah multi-level-marketing scheme that manufactured and distributed fruit based products. You can see Dr. Carson speaking at a MonaVie event here. In fact Dr. Carson co-founded MonaVie and developed its main products, a series of juices that were based on the Acai berry. These juices cost around $120 for four 25 fluid ounce bottles that come in wine-like bottle. According to an article in the Salt Lake Tribune the company made claims that the juice could cure various diseases including cancer, arthritis, and high blood pressure, among other things. The article mentions the court transcripts from a lawsuit brought by Amway against MonaVie:

"The suit also uncovered an internal MonaVie memo by Ralph Carson, the company's chief science officer, who created the original juice. The memo was in response to raised eyebrows about claims being made about the juice. Carson cautioned that the drink was "expensive flavored water. Any claims made are purely hypothetical, unsubstantiated and, quite frankly, bogus," according to a court transcript that quoted an Amway attorney."

Section V: Impending Share Lockup

Like with all recent IPOs there was a 180-day lockup on shares held by AAC insiders from the date of the IPO that prevents management from selling their shares until the lockup is over. Especially in cases when the amount of shares offered in the IPO is low, and the shares becoming free after the IPO is larger, the stock tends to fall as the market is absorbing additional shares. This is exactly the case with AAC.

AAC offered 5 million shares in their IPO on October 1st and the company has 20,673,334 million shares outstanding. The lockup ends 180 days after the final S-1 was filed. "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." (Pg. 32 S-1)

The IPO was on October 1, 2014 meaning that the lockup ends in four weeks on March 30, 2015. It's not just the lockup ending, but the size of the lockup that will weigh on the shares. Approximately 15 million shares will no longer be under the lock-up, quadrupling the float in AAC. This will almost surely weigh on the stock as the market absorbs the excess supply of AAC shares.

Section VI: Summary and Conclusion

AAC has a checkered past. From its stint on the Pink Sheets, the patient deaths at Forterus, alleged insurance fraud at Leading Edge, related party revenue management, to the lowering of the provision for doubtful accounts to make earnings look better before the IPO, there seems to be much wrong here. AAC's net income gains have been juiced by the lowering of provision for doubtful accounts and excessive and unnecessary POCT and confirmatory drug testing have likely aided AAC's margins. The lockup coming at the end of March will weigh heavily on the shares, as the free float will quadruple.

Notes/Disclosure:

I spoke with Investor Relations about the drug testing. I asked about margins on the drug testing and other questions about the lab. I was told that if I just had questions about the lab and testing side of the business, it was going to be a short conversation. I was also told that AAC provides all the metrics that analysts are asking questions about. (The same analysts that took AAC public.) I am short shares of AAC.