Acquisitions and Assets Held for Sale |
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| Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions 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 pursuant to which the Company repurchased from the sellers three operating franchised clinics in California (the “CA Clinics Purchase”). As of the acquisition date, the Company operated the franchises as company-managed clinics. The total purchase price for the transactions was $1,188,764 to the seller (of which $109,767 was paid in the third 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:
Intangible assets in the table above primarily consisted of reacquired franchise rights of $0.7 million amortized over their estimated useful lives of to seven years, customer relationships of $0.1 million amortized over an estimated useful life of two years, and assembled workforce of $0.2 million amortized over an estimated useful life of two years.
Assets Held for Sale
In 2023, the Company initiated plans to re-franchise the majority of its corporate-owned or managed clinics with plans to retain a small portion of high-performing clinics. In Q3 2024, the Company expanded the re-franchising plan to include additional clinic markets of company-owned and company-managed clinics, marketing the clinics in clusters grouped by proximity to larger private equity firms. The clustered clinics are in varying stages of sales negotiations with approximately 60% of the Company's corporate clinic portfolio expected to close within one year with an estimated fair value of $19.5 million at September 30, 2024. The clinics sold or classified as held for sale at September 30, 2024 under the re-franchise plan did not represent a strategic shift that would have a major effect. 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, 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, 2024 and December 31, 2023 condensed consolidated balance sheets.
As a result of the change in the re-franchising marketing strategy during the three months ended September 30, 2024, there were certain high performing clinics with an estimated value of $13.8 million classified as held for sale at December 31, 2023 that no longer met the criteria to be classified as held for sale as it was no longer probable the clinics will sell within one year. As of September 30, 2024, the Company reclassified $5.3 million from assets held for sale to $1.4 million in property and equipment, net and $3.8 million in operating lease right-of-use assets and reclassified $5.2 million from liabilities to be disposed of to $3.5 million in operating lease liability and $1.7 million in deferred revenue from company clinics. For the three and nine months ended September 30, 2024, the Company recorded a loss of $1.4 million in net loss disposition and impairment on the condensed consolidated income statement to adjust the carrying values of (i) property and equipment, net down to $0.9 million and (ii)
operating lease right-of-use assets down to $3.0 million for any depreciation or other expense that would have been recognized had the asset been continuously classified as held and used as of September 30, 2024.
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 estimated fair values, the Company recorded an estimated loss on disposal of $1.9 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and an estimated loss on disposal of $2.6 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively, in net loss on disposition or impairment in its condensed consolidated income statement.
During the nine months ended September 30, 2024, in connection with the sale of company-owned and managed clinics classified as held for sale as of December 31, 2023 for a combined sales price of $0.4 million, the Company sold $1.0 million assets held for sale, net of a $0.1 million valuation allowance and $0.7 million of liabilities to be disposed of in the condensed consolidated balance sheet as of September 30, 2024. As a result of the sales, the Company recorded a gain of zero and $39,000 in net loss disposition and impairment on the condensed consolidated income statement for the three and nine months ended September 30, 2024, respectively.
The principal components of the held for sale assets and liabilities as of December 31, 2023 and September 30, 2024 were as follows:
The pre-tax income of the clinics designated as held for sale was $1.3 million and $0.9 million for the three months ended September 30, 2024 and 2023, respectively, the results of which exclude the allocation of overhead. The pre-tax income of the clinics designated as held for sale was $3.6 million and $4.0 million for the nine months ended September 30, 2024 and 2023, respectively, the results of which exclude the allocation of overhead.
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