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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to _________________
Commission file number: 001-36724
The Joint Corp.
(Exact name of registrant as specified in its charter) | | | | | |
Delaware (State or other jurisdiction of incorporation or organization) | 90-0544160 (IRS Employer Identification No.) |
| | | | | |
16767 N. Perimeter Drive, Suite 110, Scottsdale Arizona (Address of principal executive offices) | 85260 (Zip Code) |
(480) 245-5960
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 Par Value Per Share | JYNT | The NASDAQ Capital Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| | | | | | | | | | | | | | |
Large accelerated filer | ☑ | | Accelerated filer | ☐ |
| | | | |
Non- accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of August 1, 2022, the registrant had 14,495,049 shares of Common Stock ($0.001 par value) outstanding.
THE JOINT CORP.
FORM 10-Q
TABLE OF CONTENTS | | | | | | | | |
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Part II, Items 3, 4, and 5 - Not applicable | |
PART I: FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
ASSETS | (unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 9,370,611 | | | $ | 19,526,119 | |
Restricted cash | 664,979 | | | 386,219 | |
Accounts receivable, net | 3,560,486 | | | 3,700,810 | |
Deferred franchise and regional development costs, current portion | 974,866 | | | 994,587 | |
Prepaid expenses and other current assets | 2,548,924 | | | 2,281,765 | |
Assets held for sale | 587,419 | | | — | |
Total current assets | 17,707,285 | | | 26,889,500 | |
Property and equipment, net | 16,055,493 | | | 14,388,946 | |
Operating lease right-of-use asset | 19,793,363 | | | 18,425,914 | |
Deferred franchise and regional development costs, net of current portion | 5,698,545 | | | 5,505,420 | |
Intangible assets, net | 9,114,701 | | | 5,403,390 | |
Goodwill | 8,050,578 | | | 5,085,203 | |
Deferred tax assets | 9,116,248 | | | 9,188,634 | |
Deposits and other assets | 699,581 | | | 567,202 | |
Total assets | $ | 86,235,794 | | | $ | 85,454,209 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 1,571,823 | | | $ | 1,705,568 | |
Accrued expenses | 1,334,414 | | | 1,809,460 | |
Co-op funds liability | 664,979 | | | 386,219 | |
Payroll liabilities ($0.5 million and $0.4 million attributable to VIE) | 1,862,529 | | | 3,906,317 | |
Operating lease liability, current portion | 4,928,765 | | | 4,613,843 | |
Finance lease liability, current portion | 23,920 | | | 49,855 | |
Deferred franchise and regional developer fee revenue, current portion | 2,981,534 | | | 3,191,892 | |
Deferred revenue from company clinics ($3.6 million and $3.5 million attributable to VIE) | 5,829,652 | | | 5,235,745 | |
Other current liabilities | 558,250 | | | 539,500 | |
Liabilities to be disposed of | 482,944 | | | — | |
Total current liabilities | 20,238,810 | | | 21,438,399 | |
Operating lease liability, net of current portion | 17,962,952 | | | 16,872,093 | |
Finance lease liability, net of current portion | 75,853 | | | 87,939 | |
Debt under the Credit Agreement | 2,000,000 | | | 2,000,000 | |
Deferred franchise and regional developer fee revenue, net of current portion | 15,447,554 | | | 15,458,921 | |
Other liabilities | 27,230 | | | 27,230 | |
Total liabilities | 55,752,399 | | | 55,884,582 | |
Commitments and contingencies | | | |
Stockholders' equity: | | | |
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding, as of June 30, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.001 par value; 20,000,000 shares authorized, 14,526,417 shares issued and 14,494,700 shares outstanding as of June 30, 2022 and 14,451,355 shares issued and 14,419,712 outstanding as of December 31, 2021 | 14,526 | | | 14,450 | |
Additional paid-in capital | 44,677,501 | | | 43,900,157 | |
Treasury stock 31,717 shares as of June 30, 2022 and 31,643 shares as of December 31, 2021, at cost | (853,436) | | | (850,838) | |
Accumulated deficit | (13,380,196) | | | (13,519,142) | |
Total The Joint Corp. stockholders' equity | 30,458,395 | | | 29,544,627 | |
Non-controlling Interest | 25,000 | | | 25,000 | |
Total equity | 30,483,395 | | | 29,569,627 | |
Total liabilities and stockholders' equity | $ | 86,235,794 | | | $ | 85,454,209 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Revenues from company-owned or managed clinics | $ | 14,492,972 | | | $ | 11,433,072 | | | $ | 27,099,971 | | | $ | 20,903,933 | |
Royalty fees | 6,411,214 | | | 5,332,618 | | | 12,420,146 | | | 10,101,862 | |
Franchise fees | 686,886 | | | 623,655 | | | 1,327,851 | | | 1,319,082 | |
Advertising fund revenue | 1,825,757 | | | 1,518,908 | | | 3,536,474 | | | 2,893,650 | |
Software fees | 1,099,981 | | | 786,037 | | | 2,056,979 | | | 1,546,574 | |
Regional developer fees | 169,953 | | | 214,434 | | | 371,740 | | | 432,390 | |
Other revenues | 370,555 | | | 310,074 | | | 682,695 | | | 569,271 | |
Total revenues | 25,057,318 | | | 20,218,798 | | | 47,495,856 | | | 37,766,762 | |
Cost of revenues: | | | | | | | |
Franchise and regional development cost of revenues | 2,074,889 | | | 1,786,833 | | | 4,077,701 | | | 3,411,404 | |
IT cost of revenues | 352,156 | | | 251,705 | | | 662,115 | | | 392,450 | |
Total cost of revenues | 2,427,045 | | | 2,038,538 | | | 4,739,816 | | | 3,803,854 | |
Selling and marketing expenses | 3,839,724 | | | 3,132,715 | | | 7,127,212 | | | 5,622,043 | |
Depreciation and amortization | 1,700,476 | | | 1,443,018 | | | 3,329,653 | | | 2,612,884 | |
General and administrative expenses | 16,528,022 | | | 11,614,444 | | | 31,906,644 | | | 21,701,047 | |
Total selling, general and administrative expenses | 22,068,222 | | | 16,190,177 | | | 42,363,509 | | | 29,935,974 | |
Net loss (gain) on disposition or impairment | 88,844 | | | (44,260) | | | 95,749 | | | 20,508 | |
Income from operations | 473,207 | | | 2,034,343 | | | 296,782 | | | 4,006,426 | |
Other expense, net | (19,286) | | | (16,373) | | | (35,434) | | | (37,909) | |
Income before income tax expense (benefit) | 453,921 | | | 2,017,970 | | | 261,348 | | | 3,968,517 | |
Income tax expense (benefit) | 109,179 | | | (665,992) | | | 122,403 | | | (1,030,140) | |
Net income | $ | 344,742 | | | $ | 2,683,962 | | | $ | 138,945 | | | $ | 4,998,657 | |
Earnings per share: | | | | | | | |
Basic earnings per share | $ | 0.02 | | | $ | 0.19 | | | $ | 0.01 | | | $ | 0.35 | |
Diluted earnings per share | $ | 0.02 | | | $ | 0.18 | | | $ | 0.01 | | | $ | 0.34 | |
Basic weighted average shares | 14,475,825 | | | 14,290,697 | | | 14,454,738 | | | 14,234,929 | |
Diluted weighted average shares | 14,842,816 | | | 14,927,451 | | | 14,887,238 | | | 14,901,863 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital | | Treasury Stock | | Accumulated Deficit | | Total The Joint Corp. stockholders' equity | | Non-controlling interest | | Total |
| Shares | | Amount | Shares | | Amount | |
Balances, December 31, 2021 | 14,451,355 | | | $ | 14,450 | | | $ | 43,900,157 | | | 31,643 | | | $ | (850,838) | | | $ | (13,519,141) | | | $ | 29,544,628 | | | $ | 25,000 | | | $ | 29,569,628 | |
Stock-based compensation expense | — | | | — | | | 323,556 | | | — | | | — | | | — | | | 323,556 | | | — | | | 323,556 | |
Issuance of restricted stock | 36,722 | | | 37 | | | (37) | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 4,972 | | | 5 | | | 49,618 | | | — | | | — | | | — | | | 49,623 | | | — | | | 49,623 | |
Purchases of treasury stock under employee stock plans | — | | | — | | | — | | | 74 | | | (2,598) | | | — | | | (2,598) | | | — | | | (2,598) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (205,797) | | | (205,797) | | | — | | | (205,797) | |
Balances, March 31, 2022 (unaudited) | 14,493,049 | | | $ | 14,492 | | | $ | 44,273,294 | | | 31,717 | | | $ | (853,436) | | | $ | (13,724,938) | | | $ | 29,709,412 | | | $ | 25,000 | | | $ | 29,734,412 | |
Stock-based compensation expense | — | | | — | | | 340,191 | | | — | | | — | | | — | | | 340,191 | | | — | | | 340,191 | |
Issuance of restricted stock | 28,758 | | | 29 | | | (29) | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 4,610 | | | 5 | | | 64,045 | | | — | | | — | | | — | | | 64,050 | | | — | | | 64,050 | |
Net income | — | | | — | | | — | | | — | | | — | | | 344,742 | | | 344,742 | | | — | | | 344,742 | |
Balances, June 30, 2022 (unaudited) | 14,526,417 | | | $ | 14,526 | | | $ | 44,677,501 | | | 31,717 | | | $ | (853,436) | | | $ | (13,380,196) | | | $ | 30,458,395 | | | $ | 25,000 | | | $ | 30,483,395 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital | | Treasury Stock | | Accumulated Deficit | | Total The Joint Corp. stockholders' equity | | Non-controlling interest | | |
| Shares | | Amount | | | Shares | | Amount | | | | | Total |
Balances, December 31, 2020, as revised | 14,174,237 | | | $ | 14,174 | | | $ | 41,350,001 | | | 17,167 | | | $ | (143,111) | | | $ | (20,094,912) | | | $ | 21,126,152 | | | $ | 100 | | | $ | 21,126,252 | |
Stock-based compensation expense | — | | | — | | | 246,494 | | | — | | | — | | | — | | | 246,494 | | | — | | | 246,494 | |
Issuance of restricted stock | 7,879 | | | 8 | | | (8) | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 105,995 | | | 106 | | | 620,670 | | | — | | | — | | | — | | | 620,776 | | | — | | | 620,776 | |
Purchases of treasury stock under employee stock plans | — | | | — | | | — | | | 13,619 | | | (618,154) | | | — | | | (618,154) | | | — | | | (618,154) | |
Net income | — | | | — | | | — | | | — | | | — | | | 2,314,287 | | | 2,314,287 | | | — | | | 2,314,287 | |
Balances, March 31, 2021, as revised (unaudited) | 14,288,111 | | | $ | 14,288 | | | $ | 42,217,157 | | | 30,786 | | | $ | (761,265) | | | $ | (17,780,625) | | | $ | 23,689,555 | | | $ | 100 | | | $ | 23,689,655 | |
Stock-based compensation expense | — | | | — | | | 283,564 | | | — | | | — | | | — | | | 283,564 | | | — | | | 283,564 | |
Issuance of restricted stock | 4,218 | | | 4 | | | (4) | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 113,819 | | | 113 | | | 641,674 | | | — | | | — | | | — | | | 641,787 | | | — | | | 641,787 | |
Net income | — | | | — | | | — | | | — | | | — | | | 2,683,962 | | | 2,683,962 | | | — | | | 2,683,962 | |
Balances, June 30, 2021, as revised (unaudited) | 14,406,148 | | | $ | 14,405 | | | $ | 43,142,391 | | | 30,786 | | | $ | (761,265) | | | $ | (15,096,663) | | | $ | 27,298,868 | | | $ | 100 | | | $ | 27,298,968 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 138,945 | | | $ | 4,998,657 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 3,329,653 | | | 2,612,884 | |
Net loss on disposition or impairment | 95,749 | | | 109,519 | |
Net franchise fees recognized upon termination of franchise agreements | (15,218) | | | (81,196) | |
Deferred income taxes | 72,386 | | | (1,380,631) | |
Stock based compensation expense | 663,747 | | | 530,058 | |
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 140,324 | | | (954,888) | |
Prepaid expenses and other current assets | (267,159) | | | (24,423) | |
Deferred franchise costs | (193,784) | | | (881,891) | |
Deposits and other assets | (132,379) | | | (53,096) | |
Accounts payable | (397,040) | | | (162,524) | |
Accrued expenses | (823,079) | | | 130,609 | |
Payroll liabilities | (2,043,788) | | | 1,848,378 | |
Deferred revenue | 492,473 | | | 1,757,294 | |
Other liabilities | 404,330 | | | 565,779 | |
Net cash provided by operating activities | 1,465,160 | | | 9,014,529 | |
| | | |
Cash flows from investing activities: | | | |
Acquisition of AZ clinics | (5,600,000) | | | (1,925,000) | |
Acquisition of NC clinics | — | | | (2,325,000) | |
Purchase of property and equipment | (3,164,961) | | | (3,238,959) | |
Reacquisition and termination of regional developer rights | (2,650,000) | | | (1,388,700) | |
Net cash used in investing activities | (11,414,961) | | | (8,877,659) | |
| | | |
Cash flows from financing activities: | | | |
Payments of finance lease obligation | (38,022) | | | (38,593) | |
Purchases of treasury stock under employee stock plans | (2,598) | | | (618,154) | |
Proceeds from exercise of stock options | 113,673 | | | 1,262,563 | |
Repayment of debt under the Paycheck Protection Program | — | | | (2,727,970) | |
Net cash provided by (used in) financing activities | 73,053 | | | (2,122,154) | |
| | | |
Decrease in cash, cash equivalents and restricted cash | (9,876,748) | | | (1,985,284) | |
Cash, cash equivalents and restricted cash, beginning of period | 19,912,338 | | | 20,819,629 | |
Cash, cash equivalents and restricted cash, end of period | $ | 10,035,590 | | | $ | 18,834,345 | |
| | | |
Reconciliation of cash, cash equivalents and restricted cash: | June 30, 2022 | | June 30, 2021 |
Cash and cash equivalents | $ | 9,370,611 | | | $ | 18,521,042 | |
Restricted cash | 664,979 | | | 313,303 | |
| $ | 10,035,590 | | | $ | 18,834,345 | |
During the six months ended June 30, 2022 and 2021, cash paid for income taxes was $59,271 and $446,058, respectively. During the six months ended June 30, 2022 and 2021, cash paid for interest was $23,982 and $47,033, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Supplemental disclosure of non-cash activity:
As of June 30, 2022, accounts payable and accrued expenses included property and equipment purchases of $263,295 and $186,777, respectively. As of December 31, 2021, accounts payable and accrued expenses included property and equipment purchases of $158,293, and $152,501, respectively.
In connection with the acquisition of franchised clinics during the six months ended June 30, 2022, the Company acquired $235,558 of property and equipment and intangible assets of $2,983,200, in exchange for $5,761,256 to the seller (of which $161,256 is to be paid in the third quarter of 2022). Additionally, at the time of this transaction, the Company carried net deferred revenue of $70,484, representing net franchise fees collected upon the execution of the franchise agreement. The Company netted this amount against the purchase price of the acquisition.
In connection with the acquisition of franchised clinics during the six months ended June 30, 2021, the Company acquired $528,974 of property and equipment and intangible assets of $3,723,872, in exchange for $4,493,028 in cash to the sellers (of which $243,028 was paid in July 2021). Additionally, at the time of these transactions, the Company carried net deferred revenue of $87,858, representing net franchise fees collected upon the execution of the franchise agreement. The Company netted this amount against the purchase price of the acquisitions.
In connection with the Company’s reacquisition and termination of regional developer rights during the six months ended June 30, 2022, the Company had deferred revenue of $452,918, representing fees collected upon the execution of the regional developer agreement. The Company netted this amount against the aggregate purchase price.
In connection with the Company’s reacquisition and termination of regional developer rights during the six months ended June 30, 2021, the Company had deferred revenue of $35,679, representing fees collected upon the execution of the regional developer agreement. The Company netted this amount against the aggregate purchase price.
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: 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”), 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 interim condensed consolidated 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 U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated 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 Form 10-K for the year ended December 31, 2021, which included all disclosures required by U.S. GAAP. The results of operations for the periods ended June 30, 2022 and 2021 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the periods ended June 30, 2022 and 2021 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 and comprehensive income are the same for the three and six months ended June 30, 2022 and 2021.
Correction of Immaterial Error
During the third and the fourth quarter of 2021, the Company identified immaterial errors in the following: (i) the calculation of deferred revenue related to wellness packages, (ii) the calculation of software fee revenue, and (iii) the calculation of breakage revenue related to wellness packages. Management assessed the materiality of the errors and determined the impact on the Company’s 2020 consolidated financial statements was not material. The December 31, 2020 balance sheet has been revised to correct the errors.
The table below sets forth the impact of the revision on the previously issued consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| As Previously | | (i) | | (ii) | | (iii) | | |
| Reported | | Adjustments | | Adjustments | | Adjustments | | As Adjusted |
ASSETS | | | | | | | | | |
Accounts receivable, net | 1,850,499 | | | — | | | 212,722 | | | — | | | 2,063,221 | |
Total current assets | 25,133,704 | | | — | | | 212,722 | | | — | | | 25,346,426 | |
Deferred tax assets | 8,007,633 | | | 22,153 | | | (44,672) | | | (43,679) | | | 7,941,435 | |
Total assets | $ | 65,732,843 | | | $ | 22,153 | | | $ | 168,050 | | | $ | (43,679) | | | $ | 65,879,367 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Deferred revenue from company clinics | 3,905,200 | | | 296,348 | | | | | (524,993) | | | 3,676,555 | |
Total current liabilities | 18,685,644 | | | 296,348 | | | — | | | (524,993) | | | 18,456,999 | |
Total liabilities | 44,981,760 | | | 296,348 | | | — | | | (524,993) | | | 44,753,115 | |
Stockholders' equity: | | | | | | | | | |
Accumulated deficit | (20,470,081) | | | (274,194) | | | 168,050 | | | 481,314 | | | (20,094,912) | |
Total The Joint Corp. stockholders' equity | 20,750,983 | | | (274,194) | | | 168,050 | | | 481,314 | | | 21,126,152 | |
Total equity | 20,751,083 | | | (274,194) | | | 168,050 | | | 481,314 | | | 21,126,252 | |
Total liabilities and stockholders' equity | $ | 65,732,843 | | | $ | 22,154 | | | $ | 168,050 | | | $ | (43,679) | | | $ | 65,879,367 | |
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, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
Franchised clinics: | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Clinics open at beginning of period | 636 | | | 527 | | | 610 | | | 515 | | | | | |
Opened during the period | 31 | | | 36 | | | 58 | | | 48 | | | | | |
Sold during the period | (4) | | | (8) | | | (4) | | | (8) | | | | | |
Closed during the period | (1) | | | — | | | (2) | | | — | | | | | |
Clinics in operation at the end of the period | 662 | | | 555 | | | 662 | | | 555 | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
Company-owned or managed clinics: | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Clinics open at beginning of period | 100 | | | 65 | | | 96 | | | 64 | | | | | |
Opened during the period | 3 | | | 5 | | | 7 | | | 6 | | | | | |
Acquired during the period | 4 | | | 8 | | | 4 | | | 8 | | | | | |
Closed during the period | — | | | — | | | — | | | — | | | | | |
Clinics in operation at the end of the period | 107 | | | 78 | | | 107 | | | 78 | | | | | |
| | | | | | | | | | | |
Total clinics in operation at the end of the period | 769 | | | 633 | | | 769 | | | 633 | | | | | |
| | | | | | | | | | | |
Clinic licenses sold but not yet developed | 229 | | | 247 | | | 229 | | | 247 | | | | | |
Licenses for future clinics subject to executed letters of intent | 41 | | | 35 | | | 41 | | | 35 | | | | | |
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 two PCs, including one in North Carolina, in connection with the acquisitions on April 1, 2021 and November 1, 2021. An entity deemed to be the primary beneficiary of a VIE 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. Such PCs are 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; 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 have an obligation to absorb losses or receive benefits which could potentially be significant to the PCs. Accordingly, the PCs are variable interest entities for which the Company is the primary beneficiary and are consolidated by the Company. The carrying amount of the VIEs’ assets and liabilities was immaterial as of June 30, 2022, and December 31, 2021, 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 balances as of June 30, 2022, and December 31, 2021 were $0.5
million and $0.4 million, respectively. The VIE's deferred revenue liability balances as of June 30, 2022, and December 31, 2021 were $3.6 million and $3.5 million, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less 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, 2022 and December 31, 2021.
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 represent 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, 2022 and December 31, 2021, the Company had an allowance for doubtful accounts of $0.
Deferred Franchise Costs and Regional Development Costs
Deferred franchise and regional development costs represent commissions that are direct and incremental to the Company and are paid in conjunction with the sale of a franchise license or regional development rights. These costs are recognized as an expense, in franchise and regional development cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise or regional development agreement.
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 life 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.
Capitalized Software
The Company capitalizes certain software development costs, including costs to implement cloud computing arrangements that is a service contract. These capitalized costs are primarily related to software used by clinics for operations and by the Company for the management of operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized as assets in progress until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Software developed is recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, which is generally three to five years. Capitalized implementation costs incurred in connection with a cloud computing arrangement that is a service contract are included in prepaid expenses in the Company’s consolidated balance sheets.
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 consolidated income statements.
Intangible Assets
Intangible assets consist primarily of re-acquired franchise and regional developer rights and customer relationships. The Company amortizes the fair value of re-acquired franchise rights over the remaining contractual terms of the re-acquired franchise rights at the time of the acquisition, which generally range from one to nine years. In the case of regional developer rights, the Company generally amortizes the re-acquired regional developer rights over one to seven years. The fair value of customer relationships is amortized over their estimated useful life of two to four years.
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions of franchises. Goodwill and identifiable intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. As required, the Company performs an annual impairment test of goodwill as of the first day of the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Assets Held for Sale
The Company classifies assets and related liabilities as held for sale when the following criteria are met: when management has committed to a plan to sell the asset, the asset is available for immediate sale, there is an active program to locate a buyer and the sale and transfer of the asset is probable within one year. Assets and liabilities are presented separately on the condensed consolidated balance sheet with a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less costs to sell. Depreciation and amortization for property, plant and equipment, finite-lived intangible assets, and ROU assets are not recorded while these assets are classified as held for sale. Assets held for sale are tested for recoverability each period that they are classified as held for sale.
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 six months ended June 30, 2021, certain operating lease ROU assets related to closed clinics with a total carrying amount of $0.5 million were written down to their fair value of $0.4 million. As a result, the Company recorded a noncash impairment loss of approximately $0.1 million during the six months ended June 30, 2021.
In connection with the planned sale of two company managed clinics to franchisees, the Company reclassified $288,192 of property and equipment and $359,807 of ROU assets to Assets held for sale, and reclassified $428,593 of ROU liability and $54,351 of deferred revenue from company clinics to Liabilities to be disposed of, in the consolidated balance sheet as of June 30, 2022. 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 $60,580 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, 2022.
Advertising Fund
The Company has established an advertising fund for national or regional marketing and advertising of services offered by its clinics. The monthly marketing fee is 2% of clinic sales. The Company segregates the marketing funds collected which are included in restricted cash on its consolidated balance sheets. As amounts are expended from the fund, the Company recognizes a related expense. Such costs are included in selling and marketing expenses on the consolidated income statements.
Co-Op Marketing Funds
Some franchises have established regional Co-Ops for advertising within their local and regional markets. The Company maintains a custodial relationship under which the Co-Op Marketing Funds collected are segregated and used for the purposes specified by the Co-Ops’ officers. The Co-Op Marketing Funds are included in restricted cash on the Company’s consolidated balance sheets.
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 reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price). As the 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, 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.
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 recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to begin upon the execution of the agreement. The Company’s services under regional developer agreements include site selection, grand opening support for the clinics, sales support for identification of qualified franchisees, general operational support and marketing support to advertise for ownership opportunities. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation. 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, 2022 and 2021.
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.
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 $1,104,156 and $2,318,568 for the three and six months ended June 30, 2022, respectively. Advertising expenses were $1,126,561 and $1,977,217 for the three and six months ended June 30, 2021, 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, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Net income | $ | 344,742 | | | $ | 2,683,962 | | | $ | 138,945 | | | $ | 4,998,657 | | | | | |
| | | | | | | | | | | |
Weighted average common shares outstanding - basic | 14,475,825 | | | 14,290,697 | | | 14,454,738 | | | 14,234,929 | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Unvested restricted stock and stock options | 366,991 | | | 636,754 | | | 432,500 | | | 666,934 | | | | | |
Weighted average common shares outstanding - diluted | 14,842,816 | | | 14,927,451 | | | 14,887,238 | | | 14,901,863 | | | | | |
| | | | | | | | | | | |
Basic earnings per share | $ | 0.02 | | | $ | 0.19 | | | $ | 0.01 | | | $ | 0.35 | | | | | |
Diluted earnings per share | $ | 0.02 | | | $ | 0.18 | | | $ | 0.01 | | | $ | 0.34 | | | | | |
The following common stock equivalents were excluded from the computation of diluted earnings 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: | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Restricted stocks | — | | | 1,576 | | | — | | | 792 | | | | | |
Stock options | 43,120 | | | 45,825 | | | 42,064 | | | 30,399 | | | | | |
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%.
Retirement Benefit Plan
Employees of the Company are eligible to participate in a defined contribution retirement plan, the Joint Corp. 401(k) Retirement Plan (“401(k) Plan”), under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, employees may contribute their eligible compensation, not to exceed the annual limits set by the IRS. The 401(k) Plan allows the Company to match participants’ contributions in an amount determined at the sole discretion of the Company.
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
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. The Company adopted Topic 326 on December 31, 2021 and the adoption had no impact on the Company’s consolidated financial statements. The Company reviewed other 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.
Note 2: Revenue Disclosures
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 or in accordance with the Company’s breakage policy as discussed in Note 1, Revenue Recognition.
Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees
The Company currently franchises its concept across 39 states and the District of Columbia. The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement primarily consists of (a) initial franchise fees; (b) continuing franchise fees (royalties); (c) advertising fees; and (d) software fees. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which otherwise requires reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price).
The Company recognizes the primary components of the transaction price as follows:
•Initial and renewal franchise fees, as well as transfer fees, are recognized as revenue ratably on a straight-line basis over the term of the respective franchise agreement commencing with the execution of the franchise, renewal, or transfer agreement. As these fees are typically received in cash at or near the beginning of the contract term, the cash received is initially recorded as a contract liability until recognized as revenue over time.
•The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or, once billed, accounts receivable, on the balance sheet.
•The Company is entitled to a software fee, which is charged monthly. The Company recognizes revenue related to software fees ratably on a straight-line basis over the term of the franchise agreement.
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgment as it is based on either the franchise term or the reported sales of the franchisee, none of which require estimation. The Company believes its franchising arrangements do not contain a significant financing component.
The Company recognizes advertising fees received under franchise agreements as advertising fund revenue.
Regional Developer Fees
The Company currently utilizes regional developers to assist in the development of the brand across certain geographic territories. The arrangement is documented in the form of a regional developer agreement. The arrangement between the Company and the regional developer requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the regional developer, but instead represent a single performance obligation, which is the transfer of the development rights to the defined geographic region. The intellectual property subject to the development rights is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the development rights is to provide the regional developer with access to the brand’s symbolic intellectual property over the term of the agreement. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation.
The transaction price in a standard regional developer arrangement primarily consists of the initial territory fees. The Company recognizes the regional developer fee as revenue ratably on a straight-line basis over the term of the regional developer agreement commencing with the execution of the regional developer agreement. As these fees are typically received in cash at or near the beginning of the term of the regional developer agreement, the cash received is initially recorded as a contract liability until recognized as revenue over time.
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.
Disaggregation of Revenue
The Company believes that the captions contained on the condensed consolidated income statements appropriately reflect the disaggregation of its revenue by major type for the three and six months ended June 30, 2022 and 2021. Other revenues primarily consist of preferred vendor royalties associated with franchisees' credit card transactions.
Rollforward of Contract Liabilities and Contract Assets
Changes in the Company's contract liability for deferred franchise and regional development fees during the six months ended June 30, 2022 were as follows: | | | | | |
| Deferred Revenue short and long-term |
Balance at December 31, 2021 | $ | 18,650,813 | |
Revenue recognized that was included in the contract liability at the beginning of the year | (1,652,449) | |
Net increase during the six months ended June 30, 2022 | 1,430,724 | |
Balance at June 30, 2022 | $ | 18,429,088 | |
The Company's deferred franchise and development costs represent capitalized sales commissions. Changes during the six months ended June 30, 2022 were as follows: | | | | | |
| Deferred Franchise and Development Costs short and long-term |
Balance at December 31, 2021 | $ | 6,500,007 | |
Recognized as cost of revenue during the year | (534,104) | |
Net increase during the six months ended June 30, 2022 | 707,508 | |
Balance at June 30, 2022 | $ | 6,673,411 | |
The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of June 30, 2022: | | | | | |
Contract liabilities expected to be recognized in | Amount |
2022 (remainder) | $ | 1,543,910 | |
2023 | 2,944,520 | |
2024 | 2,534,728 | |
2025 | 2,346,342 | |
2026 | 2,244,847 | |
Thereafter | 6,814,741 | |
Total | $ | 18,429,088 | |
Note 3: Acquisition and Assets Held for Sale
Acquisition
On May 19, 2022, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the seller four operating franchises in Arizona (the “Acquisition”). The Company operates the franchises as company-owned clinics. The total purchase price for the transaction was $5,761,256, less $70,484 of net deferred revenue, resulting in total purchase consideration of $5,690,772. Based on the terms of the purchase agreement, the Acquisition has been treated as a business combination under U.S. GAAP using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
The allocation of the purchase price was as follows:
| | | | | |
Property and equipment | $ | 235,558 | |
Operating lease right-of-use asset | 823,869 | |
Intangible assets | 2,983,200 | |
Total identifiable assets acquired | 4,042,627 | |
Goodwill | 2,965,375 | |
Deferred revenue | (493,060) | |
Operating lease liability - current portion | (107,694) | |
Operating lease liability - net of current portion | (716,476) | |
Net purchase consideration | $ | 5,690,772 | |
Intangible assets in the table above consist of re-acquired franchise rights of $2,422,500 amortized over estimated useful lives of approximately four to eight years and customer relationships of $560,700 amortized over an estimated useful life of two years. The fair value of re-acquired franchise rights are estimated using the multi-period excess earnings method. The multi-period
excess earnings method model estimates revenues and cash flows derived from the primary asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as assembled workforce and working capital that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the primary asset acquired, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. Customer relationships are also calculated using the multi-period excess earnings method.
Goodwill represents the excess of the purchase consideration over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included synergies and benefits expected to be gained from leveraging the Company’s existing operations and infrastructures, as well as the expected associated revenue and cash flow projections. Goodwill has been allocated to the Company’s Corporate Clinics segment based on such expected benefits. Goodwill related to the acquisition is expected to be deductible for income tax purposes over 15 years. The Company expects to finalize the purchase price allocation during the third quarter of 2022.
Pro Forma Results of Operations (Unaudited)
The following table summarizes selected unaudited pro forma consolidated income statements for the three and six months ended June 30, 2022 and 2021 as if the Acquisition had been completed on January 1, 2021.