| Restatement of Previously Issued Annual Consolidated Financial Statements for the Fiscal Years Ended December 31, 2022 and December 31, 2021 |
Restatement of Previously Issued Annual Consolidated Financial Statements for the Fiscal Years Ended December 31, 2022 and December 31, 2021 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 financial statements and determined them to be quantitatively and qualitatively material to 2022 and 2021 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 accompanying 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 December 31, 2022:
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December 31,
2022 |
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December 31,
2022 |
|
As Previously Reported |
|
Adjustments |
|
As Restated |
| Intangible assets, net |
$ |
12,867,529 |
|
|
$ |
(1,939,234) |
|
|
$ |
10,928,295 |
|
Deferred tax assets |
8,441,713 |
|
|
3,486,439 |
|
|
11,928,152 |
|
| Total assets |
91,943,172 |
|
|
1,547,205 |
|
|
93,490,377 |
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| Current liabilities: |
|
|
|
|
|
| Deferred franchise and regional development fee revenue, current portion |
2,955,851 |
|
|
(2,955,851) |
|
|
— |
|
Deferred franchise fee revenue, current portion |
— |
|
|
2,468,601 |
|
|
2,468,601 |
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Upfront regional developer fees, current portion |
— |
|
|
487,250 |
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|
487,250 |
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Other current liabilities |
499,250 |
|
|
98,044 |
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|
597,294 |
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| Total current liabilities |
23,118,973 |
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|
98,044 |
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|
23,217,017 |
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| Deferred franchise and regional development fee revenue, net of current portion |
15,661,412 |
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|
(15,661,412) |
|
|
— |
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Deferred franchise fee revenue, net of current portion |
— |
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|
14,161,134 |
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|
14,161,134 |
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Upfront regional developer fees, net of current portion |
— |
|
|
1,500,278 |
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|
1,500,278 |
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Other liabilities |
27,230 |
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|
1,260,649 |
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|
1,287,879 |
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| Total liabilities |
59,543,841 |
|
|
1,358,693 |
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|
60,902,534 |
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| Accumulated deficit |
(12,341,892) |
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|
188,512 |
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|
(12,153,380) |
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| Total The Joint Corp. stockholders' equity |
32,374,331 |
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|
188,512 |
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|
32,562,843 |
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| Total equity |
32,399,331 |
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|
188,512 |
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|
32,587,843 |
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| Total liabilities and stockholders' equity |
91,943,172 |
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|
1,547,205 |
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|
93,490,377 |
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The following table summarizes the effect of the errors on the Company’s consolidated income statement for the year ended December 31, 2022:
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Year Ended December 31,
2022
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Year Ended December 31,
2022
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As Previously Reported |
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Adjustments |
|
As Restated |
| Revenues: |
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| Regional developer fees |
$ |
659,099 |
|
|
$ |
(659,099) |
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|
$ |
— |
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| Total revenues |
101,911,409 |
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(659,099) |
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|
101,252,310 |
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| Cost of revenues: |
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| Franchise and regional developer cost of revenues |
8,462,503 |
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(659,099) |
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|
7,803,404 |
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| Total cost of revenues |
9,830,162 |
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|
(659,099) |
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|
9,171,063 |
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| Depreciation and amortization |
7,643,980 |
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(997,358) |
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6,646,622 |
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| General and administrative expenses |
67,987,482 |
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|
2,245,965 |
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70,233,447 |
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| Total selling, general and administrative expenses |
89,594,171 |
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|
1,248,607 |
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|
90,842,778 |
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| Income from operations |
2,076,861 |
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|
(1,248,607) |
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|
828,254 |
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| Income before income tax expense (benefit) |
1,943,760 |
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|
(1,248,607) |
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|
695,153 |
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| Income tax expense (benefit) |
766,510 |
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|
(698,062) |
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|
68,448 |
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| Net income |
1,177,250 |
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|
(550,545) |
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|
626,705 |
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| Earnings per share: |
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| Basic earnings per share |
$ |
0.08 |
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$ |
(0.04) |
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$ |
0.04 |
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| Diluted earnings per share |
$ |
0.08 |
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|
$ |
(0.04) |
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$ |
0.04 |
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The following table summarizes the effect of the errors on the Company’s consolidated statements of stockholders' equity as of December 31, 2022, December 31, 2021, and December 31, 2020:
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Accumulated
Deficit |
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Total The Joint Corp. stockholder's equity |
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Total Equity |
12/31/2020 (as previously reported) |
(20,094,912) |
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|
21,126,152 |
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|
21,126,252 |
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Adjustment due to cumulative error correction |
(250,220) |
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|
(250,220) |
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|
(250,220) |
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12/31/2020 (as restated) |
(20,345,132) |
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|
20,875,932 |
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|
20,876,032 |
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12/31/2021 (as previously reported) |
(13,519,142) |
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|
29,544,627 |
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|
29,569,627 |
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Adjustment due to cumulative error correction |
739,057 |
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|
739,057 |
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|
739,057 |
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12/31/2021 (as restated) |
(12,780,085) |
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30,283,684 |
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30,308,684 |
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12/31/2022 (as previously reported) |
(12,341,892) |
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|
32,374,331 |
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|
32,399,331 |
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Adjustment due to cumulative error correction |
188,512 |
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|
188,512 |
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|
188,512 |
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12/31/2022 (as restated) |
(12,153,380) |
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|
32,562,843 |
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|
32,587,843 |
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The following table summarizes the effect of the errors on the Company’s consolidated statement of cash flows for the year ended December 31, 2022:
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Year Ended December 31,
2022
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Year Ended December 31,
2022
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As Previously Reported |
|
Adjustments |
|
As Restated |
| Cash flows from operating activities: |
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| Net income |
$ |
1,177,250 |
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|
(550,545) |
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$ |
626,705 |
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| Adjustments to reconcile net income to net cash provided by operating activities: |
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|
|
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| Depreciation and amortization |
7,643,980 |
|
|
(997,358) |
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|
6,646,622 |
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| Deferred income taxes |
746,921 |
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(1,188,274) |
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|
(441,353) |
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| Changes in operating assets and liabilities: |
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Upfront regional developer fees |
— |
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(1,288,134) |
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|
(1,288,134) |
| Deferred revenue |
2,230,041 |
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|
659,098 |
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2,889,139 |
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Other liabilities |
409,938 |
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|
490,213 |
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|
900,151 |
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| Net cash provided by operating activities |
11,084,584 |
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(2,875,000) |
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|
8,209,584 |
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| Cash flows from investing activities: |
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| Reacquisition and termination of regional developer rights |
(2,875,000) |
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|
2,875,000 |
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— |
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| Net cash used in investing activities |
(20,775,115) |
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|
2,875,000 |
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|
(17,900,115) |
|
Decrease in cash |
(9,361,921) |
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|
— |
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|
(9,361,921) |
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The following table summarizes the effect of the errors on the Company’s consolidated balance sheet as of December 31, 2021:
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December 31,
2021 |
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|
December 31,
2021 |
|
As Previously Reported |
|
Adjustments |
|
As Restated |
| Intangible assets, net |
5,403,390 |
|
|
(690,627) |
|
|
4,712,763 |
|
Deferred tax assets |
9,188,634 |
|
|
2,298,165 |
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|
11,486,799 |
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| Total assets |
85,454,209 |
|
|
1,607,538 |
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|
87,061,747 |
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| Current liabilities: |
|
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|
|
|
| Deferred franchise and regional development fee revenue, current portion |
3,191,892 |
|
|
(3,191,892) |
|
|
— |
|
Deferred franchise fee revenue, current portion |
— |
|
|
2,421,721 |
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|
2,421,721 |
|
Upfront regional developer fees, current portion |
— |
|
|
770,171 |
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|
770,171 |
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Other current liabilities |
539,500 |
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|
— |
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|
539,500 |
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| Total current liabilities |
21,438,399 |
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|
— |
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|
21,438,399 |
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| Deferred franchise and regional development fee revenue, net of current portion |
15,458,921 |
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|
(15,458,921) |
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|
— |
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Deferred franchise fee revenue, net of current portion |
— |
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|
12,953,430 |
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|
12,953,430 |
|
Upfront regional developer fees, net of current portion |
— |
|
|
2,505,491 |
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|
2,505,491 |
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Other liabilities |
27,230 |
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|
868,481 |
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|
895,711 |
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| Total liabilities |
55,884,582 |
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|
868,481 |
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|
56,753,063 |
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| Accumulated deficit |
(13,519,142) |
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|
739,057 |
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|
(12,780,085) |
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| Total The Joint Corp. stockholders' equity |
29,544,627 |
|
|
739,057 |
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|
30,283,684 |
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| Total equity |
29,569,627 |
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|
739,057 |
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|
30,308,684 |
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| Total liabilities and stockholders' equity |
85,454,209 |
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|
1,607,538 |
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|
87,061,747 |
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The following table summarizes the effect of the errors on the Company’s consolidated income statement for the year ended December 31, 2021:
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Year Ended December 31, 2021 |
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|
Year Ended December 31, 2021 |
|
As Previously Reported |
|
Adjustments |
|
As Restated |
| Revenues: |
|
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|
|
|
| Regional developer fees |
848,640 |
|
|
(848,640) |
|
|
— |
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| Total revenues |
80,859,653 |
|
|
(848,640) |
|
|
80,011,013 |
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| Cost of revenues: |
|
|
|
|
|
| Franchise and regional developer cost of revenues |
7,408,125 |
|
|
(848,639) |
|
|
6,559,486 |
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| Total cost of revenues |
8,513,777 |
|
|
(848,639) |
|
|
7,665,138 |
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| Depreciation and amortization |
6,088,947 |
|
|
(2,167,060) |
|
|
3,921,887 |
|
| General and administrative expenses |
49,453,305 |
|
|
1,393,513 |
|
|
50,846,818 |
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| Total selling, general and administrative expenses |
66,966,668 |
|
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(773,547) |
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|
66,193,121 |
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| Income from operations |
5,352,419 |
|
|
773,546 |
|
|
6,125,965 |
|
| Income before income tax expense (benefit) |
5,282,541 |
|
|
773,546 |
|
|
6,056,087 |
|
Income tax (benefit) |
(1,293,229) |
|
|
(215,731) |
|
|
(1,508,960) |
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| Net income |
6,575,770 |
|
|
989,277 |
|
|
7,565,047 |
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| Earnings per share: |
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|
| Basic earnings per share |
$ |
0.46 |
|
|
$ |
0.07 |
|
|
$ |
0.53 |
|
| Diluted earnings per share |
$ |
0.44 |
|
|
$ |
0.07 |
|
|
$ |
0.51 |
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The following table summarizes the effect of the errors on the Company’s consolidated statement of cash flows for the year ended December 31, 2021:
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|
Year Ended December 31, 2021 |
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|
Year Ended December 31, 2021 |
|
As Previously Reported |
|
Adjustments |
|
As Restated |
| Cash flows from operating activities: |
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|
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| Net income |
$ |
6,575,770 |
|
|
989,277 |
|
|
$ |
7,565,047 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
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|
|
|
| Depreciation and amortization |
6,088,947 |
|
|
(2,167,060) |
|
|
3,921,887 |
|
Deferred income taxes |
(1,247,199) |
|
|
(530,958) |
|
|
(1,778,157) |
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| Changes in operating assets and liabilities: |
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|
|
|
Upfront regional developer fees |
— |
|
|
(572,944) |
|
|
(572,944) |
|
| Deferred revenue |
3,624,944 |
|
|
537,265 |
|
|
4,162,209 |
|
Other liabilities |
1,059,507 |
|
|
355,720 |
|
|
1,415,227 |
|
| Net cash provided by operating activities |
15,232,780 |
|
|
(1,388,700) |
|
|
13,844,080 |
|
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|
|
|
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| Cash flows from investing activities: |
|
|
|
|
|
| Reacquisition and termination of regional developer rights |
(1,388,700) |
|
|
1,388,700 |
|
|
— |
|
| Net cash used in investing activities |
(14,143,369) |
|
|
1,388,700 |
|
|
(12,754,669) |
|
Decrease in cash |
(907,291) |
|
|
— |
|
|
(907,291) |
|
|