Acquisition and Assets Held for Sale |
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| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition and Assets Held for Sale | Acquisitions and Assets Held for Sale 2023 Acquisition
On May 22, 2023, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the sellers three operating franchised clinics in California (the “CA Clinics Purchase”). As of the acquisition date, the Company operates the franchises as company-managed clinics. The total purchase price for the transaction was $1,188,764 to the seller (of which $109,767 is to be paid in the fourth quarter of 2023), less $28,997 of net deferred revenue, resulting in total purchase consideration of $1,159,767.
Based on the terms of the purchase agreement, the CA Clinics Purchase has been treated as an asset purchase under GAAP as there were no outputs or processes to generate outputs acquired as part of these transactions. Under an asset purchase, assets are recognized based on their cost to the acquiring entity. Cost is allocated to the individual assets acquired or liabilities assumed based on their relative fair values and does not give rise to goodwill.
The allocation of the total purchase price of the CA Clinics Purchase was as follows:
2022 Acquisitions
On May 19, 2022, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the seller four operating franchises in Arizona (the "May 19th Acquisition"). The Company operates the franchises as company-owned clinics. The total purchase price for the transaction was $5,761,256, less $70,484 of net deferred revenue, resulting in total purchase consideration of $5,690,772.
On July 5, 2022, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the seller one operating franchise in Arizona (collectively, including the May 19th Acquisition, the “AZ Clinics Purchase”). The Company operates the franchise as a company-owned clinic. The total purchase price for the transaction was $1,205,667, less $13,241 of net deferred revenue, resulting in total purchase consideration of $1,192,426.
Based on the terms of the purchase agreements, the AZ Clinics Purchase has been treated as a business combination under U.S. GAAP using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
The allocation of the total purchase price of the AZ Clinics Purchase was as follows:
Intangible assets in the table above consist of re-acquired franchise rights of $2,892,100 amortized over estimated useful lives of approximately to eight years and customer relationships of $797,000 amortized over estimated useful lives of to three years. The fair value of re-acquired franchise rights are estimated using the multi-period excess earnings method. The multi-period excess earnings method model estimates revenues and cash flows derived from the primary asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as assembled workforce and working capital that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the primary asset acquired, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. Customer relationships are also calculated using the multi-period excess earnings method.
The valuation method involved the use of significant estimates and assumptions primarily related to forecasted revenue growth rates, gross margin, contributory asset charges, customer attrition rates and market-participant discount rates. These measures are based on significant Level 3 inputs not observable in the market. Key assumptions developed based on the Company's historical experience, future projections and comparable market data include future cash flows, long-term growth rates, attrition rates and discount rates.
Goodwill represents the excess of the purchase consideration over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included synergies and benefits expected to be gained from leveraging the Company’s existing operations and infrastructures, as well as the expected associated revenue and cash flow projections. Goodwill has been allocated to the Company’s Corporate Clinics segment based on such expected benefits. Goodwill related to the acquisition is expected to be deductible for income tax purposes over 15 years. The Company completed the purchase price allocation during the fourth quarter of 2022.
On July 29, 2022, the Company entered into Asset and Franchise Purchase Agreements under which the Company repurchased from the sellers three operating franchises in North Carolina (the “NC Clinics Purchase”). The Company operates the franchises as company-managed clinics. The total purchase price for the transactions was $1,317,312, less $31,647 of net deferred revenue, resulting in total purchase consideration of $1,285,665.
Based on the terms of the purchase agreement, the NC Clinics Purchase has been treated as asset purchases under U.S. GAAP as there were no outputs or processes to generate outputs acquired as part of this transaction. Under an asset purchase, assets are recognized based on their cost to the acquiring entity. Cost is allocated to the individual assets acquired or liabilities assumed based on their relative fair values and does not give rise to goodwill.
The allocation of the purchase price for the NC Clinics Purchase was as follows:
Intangible assets in the table above consist of re-acquired franchise rights of $546,033 amortized over estimated useful lives of approximately to four years, customer relationships of $426,489 amortized over estimated useful lives of approximately to four years and assembled workforce of $327,085 amortized over an estimated useful life of two years.
Pro Forma Results of Operations (Unaudited)
The following table summarizes selected unaudited pro forma consolidated income statements for the three and nine months ended September 30, 2023 and 2022 for the 2023 and 2022 acquisitions, as if the CA Clinics Purchase in 2023 and the NC Clinics Purchase in 2022 (which have been accounted for as an asset purchase) and the AZ Clinics Purchase in 2022 (which have been accounted for as a business combination) had all been completed on January 1, 2022.
The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the purchases had taken place on January 1, 2022 or of results that may occur in the future. For 2022, this information includes actual data recorded in the Company’s consolidated financial statements for the period subsequent to the date of the acquisition.
The Company’s condensed consolidated income statements for the three and nine months ended September 30, 2023 include net revenue and net income, excluding corporate clinic segment overhead costs, of the acquired California clinics as follows:
Assets Held for Sale
In June 2023, the Company entered into negotiations to sell one of its company-managed clinics in California to a franchisee for a total of $0.1 million. The Company executed an LOI with the buyer in October 2023 and the sale is expected to close before the end of 2023, subject to the execution of the purchase agreement and other customary closing conditions contained in the purchase agreement. This transaction did not represent a major strategic shift for the Company, and, therefore, it does not meet the criteria to be classified as a discontinued operation. As a result, the results of this clinic will continue to be reported in the Company’s operating results and in its Corporate Clinics segment until the sale is finalized. Effective with the designation as held for sale in June 2023, the Company discontinued recording depreciation on property and equipment, net and amortization of ROU assets for the clinic as required by GAAP. The Company also separately classified the related assets and liabilities of the clinics as held for sale in its September 30, 2023 condensed consolidated balance sheet.
During Q3 2023, the Company committed to a plan to sell specific corporate owned or managed clinics making up under 10% the corporate clinic portfolio with an estimated fair value of $1.6 million. The clinics are in varying stages of sales negotiations with all of them expected to close within one year. The clinics identified to commit to sell during Q3 2023 did not represent a major strategic shift and therefore, they do not meet the criteria to be classified as a discontinued operation. As a result, the results of these clinics will continue to be reported in the Company’s operating results and in its Corporate Clinics segment until the sales are each finalized. Effective with the designation as held for sale in September 2023, the Company discontinued recording depreciation on property and equipment, net, amortization of intangible assets, net and amortization of ROU assets for the clinics as required by GAAP. The Company also separately classified the related assets and liabilities of the clinics as held for sale in its September 30, 2023 condensed consolidated balance sheet.
Long-lived assets that meet the criteria for the held for sale designation are reported at the lower of their carrying value or fair value less estimated cost to sell. As a result of its evaluation of the recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales prices or the clinics fair values, the Company recorded an estimated loss on disposal of $756,228 and $816,429 during the three and nine months ended September 30, 2023 as Net loss on disposition or impairment in its condensed consolidated income statement and a valuation allowance included in assets held for sale on its condensed consolidated balance sheet.
The principal components of the held for sale assets and liabilities as of September 30, 2023 were as follows:
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