Quarterly report pursuant to Section 13 or 15(d)

Nature of Operations and Summary of Significant Accounting Policies

v3.23.3
Nature of Operations and Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2023
Accounting Policies [Abstract]  
Nature of Operations and Summary of Significant Accounting Policies Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
These unaudited financial statements represent the condensed consolidated financial statements of The Joint Corp. (“The Joint”), which includes its variable interest entities (“VIEs”), and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC (collectively, the “Company”). The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles (“GAAP). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated interim financial statements should be read in conjunction with The Joint Corp. and Subsidiary and Affiliates consolidated financial statements and the notes thereto as set forth in The Joint’s Amended and Restated Form 10-K as of and for the year ended December 31, 2022, filed with the SEC on [September 13, 2023] (“Form 10-K/A”), which included all disclosures required by GAAP. The results of operations for the periods ended June 30, 2023 and 2022 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the three and six-month periods ended June 30, 2023 and 2022 is unaudited.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other (expenses) income that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue, accounting for leases, and accounting for income taxes, see Note 1, “Nature of Operations and Summary of Significant Accounting Policies.”
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of The Joint and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC, which was dormant for all periods presented. The Company consolidates VIEs in which the Company is the primary beneficiary in accordance with Accounting Standards Codification 810, Consolidations (“ASC 810”). Non-controlling interests represent third-party equity ownership interests in VIEs. All significant inter-affiliate accounts and transactions between The Joint and its VIEs have been eliminated in consolidation.
Comprehensive Income
Net income was the same as comprehensive income for the three and six months ended June 30, 2023 and 2022.
Restatement of Previously Issued Interim Consolidated Financial Statements (Unaudited and Restated)
Subsequent to the issuance of the Company's consolidated financial statements as of and for the year ended December 31, 2022, included in the Form 10-K filed with the SEC on March 10, 2023, the following errors were identified:
The Company has historically recorded the re-acquired Regional Developer Rights as an intangible asset and amortized the re-acquired Regional Developer Rights over the contractual terms under the RD Agreement remaining at the time of the re-acquisition. The Company has concluded that this treatment was incorrect in accordance with U.S. GAAP. The Company should not have capitalized the re-acquired Regional Developer Rights but instead should have recognized the full cost of the re-acquisition as an expense in the respective period.
The Company has historically recorded the upfront fee paid by the regional developer as a deferred liability, which was then recognized ratably to revenue as the regional developer performed various service obligations. However, the Company concluded that the deferred liability should be ratably recognized against cost of revenue as an offset against future commissions instead of revenue.
The Company has historically charged the VIEs a management fee for the benefit of the Company providing non-clinical administrative services needed by the professional corporation chiropractic practice. The economic compensation or profitability resulting from an intercompany transaction between two or more parties is based on each party’s relative contribution to the economic activity under analysis. The standalone professional corporations have not historically been profitable from an income tax perspective and are fully valuing their deferred tax assets and related attributes for ASC 740 purposes. The professional corporations' earned annual losses were not consistent with their function, risk, and asset profile for transfer pricing. As such, the Company has estimated transfer pricing adjustments which were computed based on assumed targets of profitability. The resulting operating profit, after incorporating estimated transfer pricing adjustments, were further used as a means for computing overall potential tax exposure and correlative benefit.
The Company assessed the impact of these errors on its previously issued interim financial statements and determined them to be quantitatively and qualitatively material to the period ending June 30, 2022 based on its analysis of Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. These errors have been corrected in the consolidated balance sheets as of December 31, 2022 and 2021 and the consolidated income statements, statements of changes in stockholders’ equity, and statements of cash flows for the years then ended.
The following table summarizes the effect of the errors on the Company’s consolidated balance sheet as of June 30, 2022:
June 30,
2022
June 30,
2022
As Previously Reported
Adjustments
As Restated
Intangible assets, net $ 9,114,701  $ (2,356,584) $ 6,758,117 
Deferred tax assets 9,116,248  3,202,634  12,318,882 
Total assets 86,235,794  846,050  87,081,844 
Current liabilities:
Deferred franchise and regional development fee revenue, current portion 2,981,534  (2,981,534) — 
Deferred franchise fee revenue, current portion —  2,393,993  2,393,993 
Upfront regional developer fees, current portion —  587,541  587,541 
Other current liabilities 558,250  49,022  607,272 
Total current liabilities 20,238,810  49,022  20,287,832 
Deferred franchise and regional development fee revenue, net of current portion 15,447,554  (15,447,554) — 
Deferred franchise fee revenue, net of current portion —  13,584,091  13,584,091 
Upfront regional developer fees, net of current portion —  1,863,463  1,863,463 
Other liabilities 27,230  1,064,565  1,091,795 
Total liabilities 55,752,399  1,113,587  56,865,986 
Accumulated deficit (13,380,196) (267,537) (13,647,733)
Total The Joint Corp. stockholders' equity 30,458,395  (267,537) 30,190,858 
Total equity 30,483,395  (267,537) 30,215,858 
Total liabilities and stockholders' equity 86,235,794  846,050  87,081,844 
The following table summarizes the effect of the errors on the Company’s consolidated income statement for the three and six months ended June 30, 2022:
As Previously Reported Adjustments As Restated
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
Revenues:
Regional developer fees $ 169,953  $ 371,740  $ (169,953) $ (371,740) $ —  $ — 
Total revenues 25,057,318  47,495,856  (169,953) (371,740) 24,887,365  47,124,116 
Cost of revenues:
Franchise and regional developer cost of revenues 2,074,889  4,077,701  (169,953) (371,740) 1,904,936  3,705,961 
Total cost of revenues 2,427,045  4,739,816  (169,953) (371,740) 2,257,092  4,368,076 
Depreciation and amortization 1,700,476  3,329,653  (238,606) (531,126) 1,461,870  2,798,527 
General and administrative expenses 16,528,022  31,906,644  2,042,279  2,197,082  18,570,301  34,103,726 
Total selling, general and administrative expenses 22,068,222  42,363,509  1,803,673  1,665,956  23,871,895  44,029,465 
Income from operations 473,207  296,782  (1,803,673) (1,665,956) (1,330,466) (1,369,174)
Income before income tax expense (benefit) 453,921  261,348  (1,803,673) (1,665,956) (1,349,752) (1,404,608)
Income tax expense (benefit) 109,179  122,403  (587,063) (659,363) (477,884) (536,960)
Net income (loss) 344,742  138,945  (1,216,610) (1,006,593) (871,868) (867,648)
Earnings per share:
Basic earnings (loss) per share $ 0.02  $ 0.01  $ (0.08) $ (0.07) $ (0.06) $ (0.06)
Diluted earnings (loss) per share $ 0.02  $ 0.01  $ (0.08) $ (0.07) $ (0.06) $ (0.06)
The following table summarizes the effect of the errors on the Company’s consolidated statements of stockholders' equity as of June 30, 2022, March 31, 2022 and December 31, 2021:
Accumulated
Deficit
Total The Joint Corp. stockholder's equity
Total Equity
Balances, December 31, 2021 (as previously reported)
$ (13,519,142) $ 29,544,627  $ 29,569,627 
Adjustment due to cumulative error correction
739,057  739,057  739,057 
Balances, December 31, 2021 (as restated) $ (12,780,085) $ 30,283,684  $ 30,308,684 
Balances, March 31, 2022 (as previously reported)
$ (13,724,938) $ 29,709,412  $ 29,734,412 
Adjustment due to cumulative error correction
949,073  949,073  949,073 
Balances, March 31, 2022 $ (12,775,865) $ 30,658,485  $ 30,683,485 
Balances, June 30, 2022 (as previously reported)
$ (13,380,196) $ 30,458,395  $ 30,483,395 
Adjustment due to cumulative error correction
(267,537) (267,537) (267,537)
Balances, June 30, 2022 (as restated)
$ (13,647,733) $ 30,190,858  $ 30,215,858 

The following table summarizes the effect of the errors on the Company’s consolidated statement of cash flows for the six-month period ended June 30, 2022:
Six Months Ended June 30,
2022
Six Months Ended June 30,
2022
As Previously Reported Adjustments As Restated
Cash flows from operating activities:
Net income (loss) $ 138,945  (1,006,593) $ (867,648)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 3,329,653  (531,126) 2,798,527 
Deferred income taxes 72,386  (904,469) (832,083)
Changes in operating assets and liabilities:
Upfront regional developer fees —  (824,658) (824,658)
Deferred revenue 492,473  371,740  864,213 
Other liabilities 404,329  245,106  649,435 
Net cash provided by (used in) operating activities 1,465,160  (2,650,000) (1,184,840)
Cash flows from investing activities:
Reacquisition and termination of regional developer rights (2,650,000) 2,650,000  — 
Net cash used in investing activities (11,414,961) 2,650,000  (8,764,961)
Decrease in cash (9,876,748) —  (9,876,748)
Correction of Immaterial Error
During the second quarter of 2023, the Company identified immaterial errors related to the first quarter of 2023 in the following: (i) the accounting for upfront regional developer fees as revenue as opposed to a reduction of cost of revenue, and (ii) the accounting for uncertain tax positions related to the Joint and VIEs transfer pricing calculation for income tax purposes.

The table below sets forth the impact of the revision on the previously issued consolidated balance sheet for the interim period ended March 31, 2023.
March 31, 2023
As Previously (i)
Reported Adjustments As Adjusted
ASSETS
Intangible assets, net 11,905,176  (1,914,106) 9,991,070 
Deferred tax assets 7,708,323  3,486,439  11,194,762 
Total assets $ 98,050,712  $ 1,572,333  $ 99,623,045 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred franchise and regional development fee revenue, current portion 2,978,937  (2,978,937) — 
Deferred franchise fee revenue, current portion
—  2,487,795  2,487,795 
Upfront regional developer fees, current portion —  491,142  491,142 
Other current liabilities 494,250  98,043  592,293 
Total current liabilities 24,969,858  98,043  25,067,901 
Deferred franchise and regional development fee revenue, net of current portion 15,682,833  (15,682,833) — 
Deferred franchise fee revenue, net of current portion —  14,233,564  14,233,564 
Upfront regional developer fees, net of current portion
—  1,449,270  1,449,270 
Other liabilities 27,230  1,260,649  1,287,879 
Total liabilities 62,948,315  1,358,693  64,307,008 
Stockholders' equity:
Accumulated deficit (10,040,856) 213,640  (9,827,216)
Total The Joint Corp. stockholders' equity 35,077,397  213,640  35,291,037 
Total equity 35,102,397  213,640  35,316,037 
Total liabilities and stockholders' equity $ 98,050,712  $ 1,572,333  $ 99,623,045 


The table below sets forth the impact of the revision on the previously issued consolidated income statement for the interim period ended March 31, 2023.
Three Months Ended March, 31 2023 Three Months Ended March, 31 2023
As Previously Reported
Adjustments
As Adjusted
Revenues:
Regional developer fees $ 149,478  $ (149,478) $ — 
Total revenues 28,450,298  (149,478) 28,300,820 
Cost of revenues:
Franchise and regional developer cost of revenues 2,290,313  (149,478) 2,140,835 
Total cost of revenues 2,624,163  (149,478) 2,474,685 
Depreciation and amortization 2,342,544  (127,489) 2,215,055 
General and administrative expenses 19,936,115  102,361  20,038,476 
Total selling, general and administrative expenses 26,438,903  (25,128) 26,413,775 
Loss from operations (678,237) 25,128  (653,109)
Income before income tax expense (benefit) 3,142,925  25,128  3,168,053 
Income tax expense 841,889  —  841,889 
Net income $ 2,301,036  $ 25,128  $ 2,326,164 
Earnings per share:
Basic earnings per share $ 0.16  $ —  $ 0.16 
Diluted earnings per share $ 0.15  $ 0.01  $ 0.16 
Nature of Operations
The Joint Corp., a Delaware corporation, was formed on March 10, 2010 for the principal purpose of franchising and developing chiropractic clinics, selling regional developer rights, supporting the operations of franchised chiropractic clinics, and operating and managing corporate chiropractic clinics at locations throughout the United States of America. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.
The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three and six months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
Six Months Ended
June 30,
Franchised clinics: 2023 2022 2023 2022
Clinics open at beginning of period 740  636  712  610 
Opened during the period 23  31  52  58 
Sold during the period (3) (4) (3) (4)
Closed during the period (4) (1) (5) (2)
Clinics in operation at the end of the period 756  662  756  662 
Three Months Ended
June 30,
Six Months Ended
June 30,
Company-owned or managed clinics: 2023 2022 2023 2022
Clinics open at beginning of period 130  100  126  96 
Opened during the period
Acquired during the period
Closed during the period (2) —  (2) — 
Clinics in operation at the end of the period 134  107  134  107 
Total clinics in operation at the end of the period 890  769  890  769 
Clinic licenses sold but not yet developed 171  229  171  229 
Licenses for future clinics subject to executed letters of intent 43  41  43  41 
Variable Interest Entities
Certain states prohibit the “corporate practice of chiropractic,” which restricts business corporations from practicing chiropractic care by exercising control over clinical decisions by chiropractic doctors. In states which prohibit the corporate practice of chiropractic, the Company typically enters into long-term management agreements with professional corporations (“PCs”) that are owned by licensed chiropractic doctors, which, in turn, employ or contract with doctors who provide professional chiropractic care in its clinics. Under these management agreements with PCs, the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice. The Company has entered into such management agreements with four PCs, including one in New Jersey, in connection with the opening of company-managed clinics in April 2023. If an entity is deemed to be the primary beneficiary of a VIE, the entity is required to consolidate the VIE in its financial statements. An entity is deemed to be the primary beneficiary of a VIE if it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb the majority of losses of the VIE or the right to receive the majority of benefits from the VIE. In accordance with relevant accounting guidance, these PCs were determined to be VIEs as fees paid by the PCs to the Company as its management service provider are considered variable interests because the fees do not meet all the following criteria: 1) The fees are compensation for services provided and are commensurate with the level of effort required to provide those services; 2) The decision maker or service provider does not hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s
expected losses or receive more than an insignificant amount of the VIE’s expected residual returns; and 3) The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. Additionally, the Company has determined that it has the ability to direct the activities that most significantly impact the performance of these PCs and has an obligation to absorb losses or receive benefits which could potentially be significant to the PCs. Accordingly, the PCs are VIEs for which the Company is the primary beneficiary and are consolidated by the Company.
VIE total revenue and general and administrative expenses for the three and six months ended June 30, 2023 and 2022 were as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
2023 2022 2023 2022
(as restated) (as restated)
Revenues $ 10,426,826  $ 8,480,265  $ 20,309,117  $ 16,283,304 
General and administrative expenses 4,491,638  3,720,307  9,088,906  7,133,208 
The carrying amount of the VIEs’ assets and liabilities was immaterial as of June 30, 2023 and December 31, 2022, except for their payroll liability balances and amounts collected in advance for membership and wellness packages, which are recorded as deferred revenue. The VIEs’ payroll liability and deferred revenue from company managed clinics balances as of June 30, 2023 and December 31, 2022 were as follows:
June 30,
2023
December 31,
2022
Payroll liabilities $ 621,735  $ 586,960 
Deferred revenue from company managed clinics $ 4,985,654  $ 4,702,044 
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less at date of purchase to be cash equivalents. The Company continually monitors its positions with, and credit quality of, the financial institutions with which it invests. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has invested substantially all its cash in short-term bank deposits. The Company had no cash equivalents as of June 30, 2023 and December 31, 2022.
Restricted Cash
Restricted cash relates to cash that franchisees and company-owned or managed clinics contribute to the Company’s National Marketing Fund and cash that franchisees provide to various voluntary regional Co-Op Marketing Funds. Cash contributed by franchisees to the National Marketing Fund is to be used in accordance with the Company’s Franchise Disclosure Document with a focus on regional and national marketing and advertising. While such cash balance is not legally segregated and restricted as to withdrawal or usage, the Company's accounting policy is to classify these funds as restricted cash.
Accounts Receivable
Accounts receivable primarily represents amounts due from franchisees for royalty fees. The Company records an allowance for credit losses as a reduction to its accounts receivables for amounts that the Company does not expect to recover. An allowance for credit losses is determined through assessments of collectability based on historical trends, the financial condition of the Company’s franchisees, including any known or anticipated bankruptcies, and an evaluation of current economic conditions, as well as the
Company’s expectations of conditions in the future. Actual losses ultimately could differ materially in the near term from the amounts estimated in determining the allowance. As of June 30, 2023 and December 31, 2022, the Company had an allowance for doubtful accounts of $0.
Property and Equipment
Property and equipment are stated at cost or for property acquired as part of franchise acquisitions at fair value at the date of closing. Depreciation is computed using the straight-line method over estimated useful lives, which is generally three to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred; major renewals and improvements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. The losses on disposed of or retired property or equipment were recorded in net loss on disposition or impairment of $144,345 and $209,815 for the three and six months ended June 30, 2023, respectively. The losses on disposed of or retired property or equipment were recorded in net loss on disposition or impairment of $88,844 and $95,749 for the three and six months ended June 30, 2022, respectively.
Leases
The Company leases property and equipment under operating and finance leases. The Company leases its corporate office space and the space for each of the company-owned or managed clinics in the portfolio. The Company recognizes a right-of-use ("ROU") asset and lease liability for all leases. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and, as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. When available, the Company uses the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of its leases. In such cases, the Company estimates its incremental borrowing rate as the interest rate it would pay to borrow an amount equal to the lease payments over a similar term, with similar collateral as in the lease, and in a similar economic environment. The Company estimates these rates using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company’s estimated creditworthiness.

For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. Pre-opening costs are recorded as incurred in general and administrative expenses. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred and are also included in general and administrative expenses on the accompanying consolidated income statements.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets are recoverable. The Company records an impairment loss when the carrying amount of the asset is not recoverable and exceeds its fair value. During the three and six months ended June 30, 2022, the Company recorded a noncash impairment loss of $60,580 in connection with reporting the long-lived assets held for sale at two company-managed clinics at the lower of their carrying value or fair value as of June 30, 2022.
In connection with the planned sale of a company-managed clinic, the Company reclassified $159,472 of property and equipment and $116,451 of ROU assets to Assets held for sale, and reclassified $148,846 of ROU liability and $6,776 of deferred revenue from company clinics to Liabilities to be disposed of, in the consolidated balance sheet as of June 30, 2023. Long-lived assets that meet the held for sale criteria are reported at the lower of their carrying value or fair value, less estimated costs to sell. As a result, the
Company recorded a valuation allowance of $60,201 to adjust the carrying value of the disposal group to fair value less cost to sell during the three and six months ended June 30, 2023.
Revenue Recognition
The Company generates revenue primarily through its company-owned and managed clinics and through royalties, franchise fees, advertising fund contributions, IT related income and computer software fees from its franchisees.
Revenues from Company-Owned or Managed Clinics. The Company earns revenues from clinics that it owns and operates or manages throughout the United States. Revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing. Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed. Any unused visits associated with monthly memberships are recognized on a month-to-month basis. The Company recognizes a contract liability (or a deferred revenue liability) related to the prepaid treatment plans for which the Company has an ongoing performance obligation. The Company derecognizes this contract liability, and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. If the Company determines that it is not subject to unclaimed property laws for the portion of wellness package that it does not expect to be redeemed (referred to as “breakage”) then it recognizes breakage revenue in proportion to the pattern of exercised rights by the patient.
Royalties and Advertising Fund Revenue. The Company collects royalties from its franchisees, as stipulated in the franchise agreement, equal to 7% of gross sales and a marketing and advertising fee currently equal to 2% of gross sales. Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the term of the franchise agreement. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which generally requires a reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price). Franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to the Company’s performance obligation under the franchise agreement, and therefore, such royalties are recognized as franchisee clinic level sales occur. Royalties are collected semi-monthly, two working days after each sales period has ended.
Franchise Fees. The Company requires the entire non-refundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of ten years. Initial franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement. The Company’s services under the franchise agreement include training of franchisees and staff, site selection, construction/vendor management and ongoing operations support. The Company provides no financing to franchisees and offers no guarantees on their behalf. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation. Renewal franchise fees, as well as transfer fees, are also recognized as revenue on a straight-line basis over the term of the respective franchise agreement.
Software Fees. The Company collects a monthly fee from its franchisees for use of its proprietary chiropractic software, computer support, and internet services support. These fees are recognized ratably on a straight-line basis over the term of the respective franchise agreement.
Capitalized Sales Commissions. Sales commissions earned by the regional developers and the Company’s sales force are considered incremental and recoverable costs of obtaining a franchise agreement with a franchisee. These costs are deferred and then amortized as the respective franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement.
Regional Developer Fees
The Company has a regional developer program where regional developers are granted an exclusive geographical territory and commit to a minimum development obligation within that defined territory. Regional developer fees paid to the Company are non-refundable and are amortized on a straight-line basis over the term of the regional developer agreement and recognized as a decrease to franchise cost of revenues.
In addition, regional developers receive fees which are funded by the initial franchise fees collected from franchisees upon the sale of franchises within their exclusive geographical territory and a royalty of 3% of sales generated by franchised clinics in their exclusive geographical territory. Initial fees related to the sale of franchises within their exclusive geographical territory are initially deferred as deferred franchise costs and are recognized as an expense in franchise cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise agreement. Royalties of 3% of sales generated by franchised clinics in their regions are also recognized as franchise cost of revenues as franchisee clinic level sales occur. This 3% fee is funded by the 7% royalties collected from the franchisees in their regions. Certain regional developer agreements result in the regional developer acquiring the rights to existing royalty streams from clinics already open in the respective territory. In those instances, the revenue associated from the sale of the royalty stream is recognized over the remaining life of the respective franchise agreements. The Company did not enter into any new regional developer agreements during the six months ended June 30, 2023 and 2022.
Advertising Costs
Advertising costs are advertising and marketing expenses incurred by the Company, primarily through advertising funds. The Company expenses production costs of commercial advertising upon first airing and expenses the costs of communicating the advertising in the period in which the advertising occurs. Advertising expenses were $1,977,678 and $3,578,291 for the three and six months ended June 30, 2023, respectively. Advertising expenses were $1,104,156 and $2,318,568 for the three and six months ended June 30, 2022, respectively.
Income Taxes
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date pre-tax income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected pre-tax income for the year and permanent differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
Earnings per Common Share
Basic earnings per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by giving effect to all potentially dilutive common shares including restricted stock and stock options.
Three Months Ended
June 30,
Six Months Ended
June 30,
2023 2022 2023 2022
(as restated) (as restated)
Net (loss) income $ (320,489) $ (871,868) $ 2,005,675  $ (867,648)
Weighted average common shares outstanding - basic 14,684,035  14,475,825  14,625,435  14,454,738 
Effect of dilutive securities:
Unvested restricted stock and stock options 268,328  366,991  282,158  432,500 
Weighted average common shares outstanding - diluted 14,952,363  14,842,816  14,907,593  14,887,238 
Basic (loss) earnings per share $ (0.02) $ (0.06) $ 0.14  $ (0.06)
Diluted (loss) earnings per share $ (0.02) $ (0.06) $ 0.13  $ (0.06)
The following common stock equivalents were excluded from the computation of diluted earnings (loss) per share for the periods presented because including them would have been antidilutive:
Three Months Ended
June 30,
Six Months Ended
June 30,
Weighted average dilutive securities: 2023 2022 2023 2022
Restricted stocks —  —  —  — 
Stock options 87,983  43,120  90,953  42,064 
Stock-Based Compensation
The Company accounts for share-based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. The Company determines the estimated grant-date fair value of restricted shares using the closing price on the date of the grant and the grant-date fair value of stock options using the Black-Scholes-Merton model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. The Company recognizes compensation costs ratably over the period of service using the straight-line method. Forfeitures are estimated based on historical and forecasted turnover, which is approximately 5%.
Loss Contingencies
ASC Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect of litigation and other claims. The Company records an accrual for a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably estimated. When the reasonable estimate of the potential loss is within a range of amounts, the minimum of the range of potential loss is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Moreover, even if an accrual is not required, the Company provides additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more than
remote) that the outcomes of such litigation and other claims include potential material adverse impacts on the Company. Legal costs to be incurred in connection with a loss contingency are expensed as such costs are incurred.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Items subject to significant estimates and assumptions include the allowance for credit losses, loss contingencies, share-based compensations, useful lives and realizability of long-lived assets, deferred revenue and revenue recognition related to breakage, deferred franchise costs, calculation of ROU assets and liabilities related to leases, realizability of deferred tax assets, impairment of goodwill, intangible assets, other long-lived assets, and purchase price allocations and related valuations.
Recent Accounting Pronouncements Adopted and Not Yet Adopted

The Company reviewed newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements upon future adoption.