Annual report pursuant to Section 13 and 15(d)

Note 2 - Acquisitions

v3.3.1.900
Note 2 - Acquisitions
 12 Months Ended
Dec. 31, 2015
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
Note 2:      Acquisitions
 
Franchises acquired during 2014
 
During 2014, the Company acquired substantially all the assets and certain liabilities of six franchises including franchises that manage four clinics operating in Los Angeles County, for a purchase price of $900,000 which was paid in cash. The Company is operating four of the acquired franchises as managed company clinics and has terminated the two remaining franchises. On January 1, 2015, the Company acquired an additional three undeveloped franchises.  This resulted in a net deferred revenue adjustment of $41,100 to the net purchase price.  No additional consideration was paid on January 1, 2015. The remaining $858,900 was accounted for as the total consideration paid for the acquired franchises.
 
The purchase price allocation for these acquisitions is complete. The following summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:
 
Property and equipment   $ 297,630  
Intangible assets     153,000  
Goodwill     636,104  
Total assets acquired     1,086,734  
Unfavorable leases     (227,834 )
Net assets acquired   $ 858,900  
 
Intangible assets consist of reacquired franchise rights of $81,000 and customer relationships of $72,000 and will be amortized over their estimated useful lives of seven years and two years, respectively.
 
Unfavorable leases consist of leases with rents that are in excess of market value. This liability will be amortized over the lives of the associated leases.
 
Goodwill recorded in connection with this acquisition was attributable to the workforce of the clinics and synergies expected to arise from cost savings opportunities. All of the recorded goodwill is tax-deductible.
 
The Company has retrospectively adjusted the consolidated balance sheet as of December 31, 2014 related to adjustments to the purchase price allocation of the above acquisition.  The impacts are adjustments to deferred franchise costs, goodwill and deferred revenue, with no changes to total net assets.  There were no impacts on the consolidated statements of operations or cash flows for any prior periods as a result of these adjustments.  The balance sheet impacts are as follows:
 
    December 31, 2014
    As reported   As revised
         
Deferred franchise costs - current portion   $ 668,700     $ 622,800  
Goodwill   $ 677,204     $ 636,104  
Deferred revenue - current portion   $ 2,044,500     $ 1,957,500  
 
 
Franchises acquired during 2015
 
During the year ended December 31, 2015, the Company continued to execute its growth strategy and entered into a series of unrelated transactions with existing franchisees to re-acquire an aggregate of 24 developed and 35 undeveloped franchises throughout Arizona, California, and New York for an aggregate purchase price of $5,725,875, subject to certain adjustments, consisting of cash of $4,925,525 and notes payable of $800,350. Of the 24 developed franchises, the Company is operating 22 as company-owned or managed clinics and has closed the remaining two clinics. The 35 undeveloped franchises have been terminated and the Company may relocate them. At the time these transactions were consummated, the Company carried
a deferred revenue balance of $1,005,500, representing franchise fees collected upon the execution of the franchise agreements, and deferred franchise costs of $493,500, related to undeveloped franchises.  The Company accounted for the franchise rights associated with the undeveloped franchise as a cancellation, and the respective deferred revenue and deferred franchise costs were netted against the aggregate purchase price.  The remaining $5,213,875 was accounted for as consideration paid for the acquired franchises.
  
Additionally, in January 2015, in connection with the default by a franchisee under its franchise agreement, the Company assumed substantially all of the assets of a clinic in Tempe, Arizona in exchange for $25,000.  The Company has accounted for this as a business combination.  The Company completed its valuation of the fair value of the assets acquired, including intangible assets, in September 2015. Because the net assets acquired exceeded the consideration paid, the Company recognized a bargain purchase gain of $233,804 during the year ended December 31, 2015.
 
The Company also recognized a bargain purchase gain of $27,343 related to the acquisition of two developed clinics and seven undeveloped units in San Diego, California. Total bargain purchase gain for the year ended December 31, 2015 was $261,147.
 
The Company incurred $393,069 of transaction costs related to these acquisitions for the year ended December 31, 2015 which are included in general and administrative expenses in the accompanying statements of operations.
 
Purchase Price Allocation
 
The purchase price allocations for these acquisitions are complete with the exception of the acquisition completed on December 29, 2015. For that transaction the balances are preliminary and subject to further adjustment upon finalization of the opening balance sheet. The following summarizes the aggregate fair values of the assets acquired and liabilities assumed during 2015 as of the acquisition date:
 
Property and equipment   $ 1,504,169  
Intangible assets     1,942,180  
Favorable leases     521,825  
Goodwill     1,830,833  
Total assets acquired     5,799,007  
Unfavorable leases     (49,077 )
Deferred membership revenue     (106,908 )
Net assets acquired     5,643,022  
Deferred tax liability     (168,000 )
Bargain purchase gain     (261,147 )
Net purchase price   $ 5,213,875  
 
Intangible assets in the table above consist of reacquired franchise rights of $1,458,667 and customer relationships of $483,514, and will be amortized over their estimated useful lives ranging from six to eight years and two years, respectively.
 
The estimates of the fair value of the assets or rights acquired and liabilities assumed at the date of the applicable acquisition are subject to adjustment during the measurement period (up to one year from the particular acquisition date). The primary areas of the accounting for the acquisitions that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired, residual goodwill and any related tax impact. The fair value of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, it evaluates any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the revised estimated values of those assets or liabilities as of that date. The effect of measurement period adjustments to the estimated fair value is reflected as if the adjustments had been completed on the acquisition date. The impact of all changes that do not qualify as measurement period adjustments are included in current period earnings. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could be subject to a possible impairment of the intangible assets or goodwill, or require acceleration of the amortization expense of intangible assets in subsequent periods. During the year ended December 31, 2015, the Company made certain measurement period adjustments related to several acquisitions consummated during the year. Property and equipment was decreased by $128,900, intangible assets increased by $317,959, favorable leases increased by $455,279, deferred membership revenue increased by $10,393, deferred tax liability increased by $168,000 and bargain purchase gain decreased by $123,067 with the resulting offset to goodwill of $609,798.
  
Goodwill recorded in connection with these acquisitions was attributable to the workforce of the clinics and synergies expected to arise from cost savings opportunities. All of the recorded goodwill is tax-deductible. 
 
Pro Forma Results of Operations (Unaudited)
 
The following table summarizes selected unaudited pro forma condensed consolidated statements of operations data for the years ended December 31, 2015 and 2014 as if the acquisitions had been completed on January 1, 2014.
 
    Pro Forma for the Year
Ended December 31,
    2015   2014
Revenues, net   $ 15,083,156     $ 10,566,763  
Net loss   $ (9,927,271 )   $ (4,518,553 )
 
This selected unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisitions had been completed on that date. Moreover, this information is not indicative of what the Company’s future operating results will be. The information for 2014 and 2015 prior to the acquisitions is included based on prior accounting records maintained by the acquired companies. In some cases, accounting policies differed materially from accounting policies adopted by the Company following the acquisitions. For 2015, this information includes actual data recorded in its financial statements for the period subsequent to the date of the acquisitions. The Company’s consolidated statement of operations for the year ended December 31, 2015 includes net revenue and net loss of $3,651,139 and $(3,443,459), respectively, attributable to the 2015 acquisitions. As the 2014 acquisition occurred on the last day of the period, there were no net revenues or income attributable to the acquisition.
 
The pro forma amounts included in the table above reflect the application of accounting policies and adjustment of the results of the clinics to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, 2014, together with the consequential tax impacts.