Quarterly report pursuant to Section 13 or 15(d)

Note 2 - Acquisitions

v3.5.0.2
Note 2 - Acquisitions
 9 Months Ended
Sep. 30, 2016
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
Note 2:      Acquisitions
 
Franchises acquired during 2016
 
During the nine months ended September 30, 2016, 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 six developed franchises and one undeveloped franchise throughout California and New Mexico for an aggregate purchase price of $1,025,000, subject to certain adjustments, consisting of cash of $839,000 and notes payable of $186,000. The Company is operating the six developed franchises as company-owned or managed clinics and has terminated the undeveloped clinic license. At the time these transactions were consummated, the Company carried
a deferred revenue balance of $29,000, representing franchise fees collected upon the execution of the franchise agreements, and deferred franchise costs of $1,450, related to an undeveloped franchise.  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 $997,450 was accounted for as consideration paid for the acquired franchises.
 
The Company incurred approximately $64,000 of transaction costs related to these acquisitions for the nine months ended September 30, 2016, which are included in general and administrative expenses in the accompanying statements of operations.
 
Purchase Price Allocation
 
The following summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed during 2016 as of the acquisition date:
 
Property and equipment   $ 293,014  
Intangible assets     339,000  
Favorable leases     140,728  
Goodwill     269,780  
Total assets acquired     1,042,522  
Deferred membership revenue     (45,072 )
Net purchase price   $ 997,450  
 
Intangible assets in the table above consist of reacquired franchise rights of $181,000 and customer relationships of $158,000, and will be amortized over their estimated useful lives ranging from six to eight years and two years, respectively.
 
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. 
 
Franchises acquired during 2015
 
During the year ended December 31, 2015, the Company 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 franchises 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 franchises and seven undeveloped franchises 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. The following summarizes the aggregate fair values of the assets acquired and liabilities assumed during 2015 as of the acquisition date:
 
Property and equipment   $ 1,450,333  
Intangible assets     1,947,000  
Favorable leases     528,075  
Goodwill     1,899,449  
Total assets acquired     5,824,857  
Unfavorable leases     (74,927 )
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 $1,449,000 and customer relationships of $498,000, and will be amortized over their estimated useful lives ranging from six to eight years and two years, respectively.
 
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 three and nine months ended September 30, 2016 and 2015 as if the acquisitions in 2016 had been completed on January 1, 2015.
 
    Pro Forma for the Three Months Ended   Pro Forma for the Nine Months Ended
    September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015
Revenues, net     5,503,590       4,609,455       14,723,514       12,276,203  
Net loss     (2,614,518 )     (2,172,039 )     (9,475,157 )     (6,431,788 )
 
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 2015 and 2016 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 2016, this information includes actual data recorded in the Company’s financial statements for the period subsequent to the date of the acquisitions. The Company’s consolidated statement of operations for the three months ended September 30, 2016 includes net revenue and net income of approximately $2.1 million and $0.1 million, respectively, attributable to the acquisitions. The Company’s consolidated statement of operations for the nine months ended September 30, 2016 includes net revenue and net income of approximately $5.6 million and $0.5 million, respectively, attributable to the acquisitions.
 
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, 2015, together with the consequential tax impacts.