v3.25.2
BUSINESS COMBINATION
 6 Months Ended
Jun. 30, 2025
Business Combination, Asset Acquisition, Transaction between Entities under Common Control, and Joint Venture Formation [Abstract]  
BUSINESS COMBINATION

NOTE 3 – BUSINESS COMBINATION

 

On June 10, 2025 (“Closing Date”), we acquired the net operating assets of SCN pursuant to an Asset Purchase Agreement (the “SCN Purchase Agreement”). We agreed to purchase the net operating assets and liabilities related to SCN’s sleep testing, diagnostics, and treatment centers (the “Acquisition”). With seven operating locations, SCN is a leader in delivering and promoting sleep wellness and health through its proprietary, non-invasive treatments for obstructive sleep apnea (“OSA”) and is the largest operator of medical sleep centers in the state of Nevada. The Acquisition represents our first major acquisition of a sleep testing center and associated medical sleep practice. We funded the consideration for the Acquisition at closing by issuing a senior, non-convertible, secured term note (the “Note”) to Streeterville Capital, LLC (the “Lender”) in the principal amount of $8.2 million. We also entered into a securities purchase agreement with V-Co Investors 2 LLC, a Wyoming limited liability company and an affiliate of a significant investor in our company (“V-Co 2”), for a private placement of our equity instruments in consideration for total gross proceeds of $3.65 million to support ourselves in connection with the Acquisition and for general working capital purposes.

 

Total consideration for SCN aggregated $8.7 million consisting of $6.0 million in cash consideration, 607,287 shares of unregistered common stock with a fair value of $1.3 million, and contingent “earn out” consideration with an estimated fair value of $1.4 million payable upon the achievement of a financial milestone as specified in the Purchase Agreement. The Company has elected, as an accounting policy, to determine the fair value of equity securities issued in business combinations using the average market price of the Company’s common stock on the acquisition closing date. Management believes this method appropriately reflects the fair value of the consideration transferred and this policy election will be applied consistently to all future business combinations. The fair value of the earn-out was determined using a Monte Carlo simulation of potential outcomes. The earn-out is payable in the form of restricted common stock equal to $1.5 million based on the volume-weighted average price of the Common Stock for the 30 days immediately preceding the date on which such financial milestone is achieved, as determined in accordance with U.S. generally accepted accounting principles. If the financial milestone is not achieved, the contingent consideration will not be paid. The fair value estimates of the net tangible and identifiable intangible assets acquired and liabilities assumed were based on the preliminary valuation of their fair values on the Closing Date. Goodwill recorded from this transaction is attributable to SCN’s technical expertise and strategic operations, which are highly complementary to the Company’s existing business. Identifiable intangible assets of $1.9 million consist primarily of $0.4 million of tradenames to be amortized over 4 years and $1.5 million of referral relationships to be amortized over 8 years. The fair value of the acquired accounts receivable of $0.9 million consists of gross contractual receivables of $5.1 million offset by amounts not expected to be collected of $4.2 million. The goodwill of $5.6 million created by the transaction is deductible for income tax purposes, subject to certain limitations. The accounting for business combinations requires estimates and judgments regarding expectations for future cash flows of the acquired business, and the allocations of those cash flows to identifiable tangible and intangible assets, in determining the assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s best estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.

 

The following table summarizes the estimated fair values of the consideration, the tangible and identifiable intangible assets acquired, and liabilities assumed (in thousands):

 

     
Consideration:    
Cash  $6,000 
Unregistered common stock   1,304 
Contingent earn-out payable   1,400 
Total fair value of consideration transferred  $8,704 
      
Identifiable assets acquired and liabilities assumed:     
Cash  $864 
Accounts receivable   934 
Prepaid expenses and other assets   51 
Property and equipment   1,322 
Operating lease right-of-use assets   2,378 
Intangible assets   1,900 
Operating lease liabilities   

(1,990

)
Liabilities assumed   (2,362)
Net identifiable assets acquired  $

3,097

 
Goodwill   5,607 
Net assets acquired  $8,704 

 

The initial allocation of the purchase price is based upon a preliminary valuation, and accordingly, our estimates and assumptions are subject to change as we obtain additional information during the measurement period. We anticipate finalizing the purchase price allocation within 12 months from the acquisition date. Transaction costs incurred of approximately $0.6 million were related to the acquisition.

 

The following table reflects our unaudited pro forma operating results for the three and six months ended June 30, 2025 and 2024, respectively, which give effect to the acquisition of the SCN as if it had occurred effective January 1, 2024. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective as of the date indicated, nor are they intended to be indicative of results that may occur in the future. The pro forma information does not include the effects of any synergies related to the SCN acquisition or transactions between the entities prior to acquisition. Pro forma earnings during the periods presented were adjusted to include the following adjustments:

 

●Amortization of definite-lived intangible assets recognized at fair value that exceed one year as if acquired January 1, 2024;
   
●Interest expense (including amortization of debt issuance costs) on the Note entered into with the Lender in connection with the acquisition as if the Note was obtained on January 1, 2024. The interest rate assumed for purposes of preparing this pro forma financial information was 9.0% which is the stated fixed rate throughout the term of the Note; and
   
●Given our history of net losses and full valuation allowances, our management estimated an annual effective income tax rate of 0.0%. Accordingly, no income tax adjustments have been recorded resulting from any pro forma adjustments.

 

 

   2025   2024   2025   2024 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2025   2024   2025   2024 
(unaudited)                
Net Revenue  $5,666   $5,849   $11,009   $11,055 
Net Loss  $(5,204)  $(2,012)  $(9,673)  $(5,968)

 

For the period June 11, 2025 through June 30, 2025, revenue and net income attributable to the SCN Acquisition were $0.5 million and $0.1 million, respectively.