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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, 2023
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 September 11, 2023, the registrant had 14,754,553 shares of Common Stock ($0.001 par value) outstanding.
THE JOINT CORP.
FORM 10-Q
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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, 2023 | | December 31, 2022 |
ASSETS | (unaudited) | | (as restated) |
Current assets: | | | |
Cash and cash equivalents | $ | 13,602,515 | | | $ | 9,745,066 | |
Restricted cash | 848,831 | | | 805,351 | |
Accounts receivable, net | 3,534,828 | | | 3,911,272 | |
Deferred franchise and regional development costs, current portion | 1,058,704 | | | 1,054,060 | |
Prepaid expenses and other current assets | 3,306,964 | | | 2,098,359 | |
Assets held for sale | 215,722 | | | — | |
Total current assets | 22,567,564 | | | 17,614,108 | |
Property and equipment, net | 17,627,933 | | | 17,475,152 | |
Operating lease right-of-use asset | 22,641,632 | | | 20,587,199 | |
Deferred franchise and regional development costs, net of current portion | 5,605,760 | | | 5,707,678 | |
Intangible assets, net | 10,050,360 | | | 10,928,295 | |
Goodwill | 8,493,407 | | | 8,493,407 | |
Deferred tax assets | 11,450,998 | | | 11,928,152 | |
Deposits and other assets | 768,943 | | | 756,386 | |
Total assets | $ | 99,206,597 | | | $ | 93,490,377 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 1,576,085 | | | $ | 2,966,589 | |
Accrued expenses | 2,342,744 | | | 1,069,610 | |
Co-op funds liability | 848,832 | | | 805,351 | |
Payroll liabilities ($0.6 million and $0.6 million attributable to VIE) | 2,845,800 | | | 2,030,510 | |
Operating lease liability, current portion | 5,880,954 | | | 5,295,830 | |
Finance lease liability, current portion | 24,956 | | | 24,433 | |
Deferred franchise fee revenue, current portion | 2,503,294 | | | 2,468,601 | |
Deferred revenue from company clinics ($5.0 million and $4.7 million attributable to VIE) | 7,689,448 | | | 7,471,549 | |
Upfront Regional Developer Fees, current portion | 406,965 | | | 487,250 | |
Other current liabilities | 693,427 | | | 597,294 | |
Liabilities to be disposed of | 155,622 | | | — | |
Total current liabilities | 24,968,127 | | | 23,217,017 | |
Operating lease liability, net of current portion | 20,029,654 | | | 18,672,719 | |
Finance lease liability, net of current portion | 50,896 | | | 63,507 | |
Debt under the Credit Agreement | 2,000,000 | | | 2,000,000 | |
Deferred franchise revenue, net of current portion | 14,210,441 | | | 14,161,134 | |
Upfront Regional Developer Fees, net of current portion | 1,183,106 | | | 1,500,278 | |
Other liabilities | 1,287,879 | | | 1,287,879 | |
Total liabilities | 63,730,103 | | | 60,902,534 | |
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, 2023 and December 31, 2022 | — | | | — | |
Common stock, $0.001 par value; 20,000,000 shares authorized, 14,772,520 shares issued and 14,740,485 shares outstanding as of June 30, 2023 and 14,560,353 shares issued and 14,528,487 outstanding as of December 31, 2022 | 14,772 | | | 14,560 | |
Additional paid-in capital | 46,443,706 | | | 45,558,305 | |
Treasury stock 32,035 shares as of June 30, 2023 and 31,866 shares as of December 31, 2022, at cost | (859,279) | | | (856,642) | |
Accumulated deficit | (10,147,705) | | | (12,153,380) | |
Total The Joint Corp. stockholders' equity | 35,451,494 | | | 32,562,843 | |
Non-controlling Interest | 25,000 | | | 25,000 | |
Total equity | 35,476,494 | | | 32,587,843 | |
Total liabilities and stockholders' equity | $ | 99,206,597 | | | $ | 93,490,377 | |
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, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | (as restated) | | | | (as restated) |
Revenues: | | | | | | | |
Revenues from company-owned or managed clinics | $ | 17,802,838 | | | $ | 14,492,972 | | | $ | 34,930,795 | | | $ | 27,099,971 | |
Royalty fees | 7,172,159 | | | 6,411,214 | | | 14,038,182 | | | 12,420,146 | |
Franchise fees | 671,368 | | | 686,886 | | | 1,425,794 | | | 1,327,851 | |
Advertising fund revenue | 2,041,050 | | | 1,825,757 | | | 3,993,455 | | | 3,536,474 | |
Software fees | 1,234,812 | | | 1,099,981 | | | 2,444,817 | | | 2,056,979 | |
Regional developer fees | — | | | — | | | — | | | — | |
Other revenues | 384,957 | | | 370,555 | | | 774,962 | | | 682,695 | |
Total revenues | 29,307,184 | | | 24,887,365 | | | 57,608,005 | | | 47,124,116 | |
Cost of revenues: | | | | | | | |
Franchise and regional development cost of revenues | 2,236,442 | | | 1,904,936 | | | 4,377,277 | | | 3,705,961 | |
IT cost of revenues | 359,070 | | | 352,156 | | | 692,920 | | | 662,115 | |
Total cost of revenues | 2,595,512 | | | 2,257,092 | | | 5,070,197 | | | 4,368,076 | |
Selling and marketing expenses | 4,707,818 | | | 3,839,724 | | | 8,868,062 | | | 7,127,212 | |
Depreciation and amortization | 2,329,267 | | | 1,461,870 | | | 4,544,322 | | | 2,798,527 | |
General and administrative expenses | 19,904,796 | | | 18,570,301 | | | 39,943,272 | | | 34,103,726 | |
Total selling, general and administrative expenses | 26,941,881 | | | 23,871,895 | | | 53,355,656 | | | 44,029,465 | |
Net loss on disposition or impairment | 144,345 | | | 88,844 | | | 209,815 | | | 95,749 | |
Loss from operations | (374,554) | | | (1,330,466) | | | (1,027,663) | | | (1,369,174) | |
Other income (expense), net | (106,520) | | | (19,286) | | | 3,714,642 | | | (35,434) | |
(Loss) income before income tax expense | (481,074) | | | (1,349,752) | | | 2,686,979 | | | (1,404,608) | |
Income tax (benefit) expense | (160,585) | | | (477,884) | | | 681,304 | | | (536,960) | |
Net (loss) income | $ | (320,489) | | | $ | (871,868) | | | $ | 2,005,675 | | | $ | (867,648) | |
Earnings per share: | | | | | | | |
Basic earnings per share | $ | (0.02) | | | $ | (0.06) | | | $ | 0.14 | | | $ | (0.06) | |
Diluted earnings per share | $ | (0.02) | | | $ | (0.06) | | | $ | 0.13 | | | $ | (0.06) | |
Basic weighted average shares | 14,684,035 | | | 14,475,825 | | | 14,625,435 | | | 14,454,738 | |
Diluted weighted average shares | 14,952,363 | | | 14,842,816 | | | 14,907,593 | | | 14,887,238 | |
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, 2022, as restated | 14,560,353 | | | $ | 14,560 | | | $ | 45,558,305 | | | 31,866 | | | $ | (856,642) | | | $ | (12,153,380) | | | $ | 32,562,843 | | | $ | 25,000 | | | $ | 32,587,843 | |
Stock-based compensation expense | — | | | — | | | 266,210 | | | — | | | — | | | — | | | 266,210 | | | — | | | 266,210 | |
Issuance of restricted stock | 95,386 | | | 95 | | | (95) | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 15,621 | | | 16 | | | 138,441 | | | — | | | — | | | — | | | 138,457 | | | — | | | 138,457 | |
Purchases of treasury stock under employee stock plans | — | | | — | | | — | | | 169 | | | (2,637) | | | — | | | (2,637) | | | — | | | (2,637) | |
Net income | — | | | — | | | — | | | — | | | — | | | 2,326,164 | | | 2,326,164 | | | — | | | 2,326,164 | |
Balances, March 31, 2023 as revised (unaudited) | 14,671,360 | | | $ | 14,671 | | | $ | 45,962,861 | | | 32,035 | | | $ | (859,279) | | | $ | (9,827,216) | | | $ | 35,291,037 | | | $ | 25,000 | | | $ | 35,316,037 | |
Stock-based compensation expense | — | | | — | | | 417,017 | | | — | | | — | | | — | | | 417,017 | | | — | | | 417,017 | |
Issuance of restricted stock | 91,158 | | | 91 | | | (91) | | | — | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 10,002 | | | 10 | | | 63,919 | | | — | | | — | | | — | | | 63,929 | | | — | | | 63,929 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (320,489) | | | (320,489) | | | — | | | (320,489) | |
Balances, June 30, 2023 (unaudited) | 14,772,520 | | | $ | 14,772 | | | $ | 46,443,706 | | | 32,035 | | | $ | (859,279) | | | $ | (10,147,705) | | | $ | 35,451,494 | | | $ | 25,000 | | | $ | 35,476,494 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital | | Treasury Stock | | Accumulated Deficit | | Total The Joint Corp. stockholders' equity | | Non-controlling interest | | |
| Shares | | Amount | | | Shares | | Amount | | | | | Total |
| | | | | | | | | | | (as restated) | | (as restated) | | | | (as restated) |
Balances, December 31, 2021, as restated | 14,451,355 | | | $ | 14,450 | | | $ | 43,900,157 | | | 31,643 | | | $ | (850,838) | | | $ | (12,780,085) | | | $ | 30,283,684 | | | $ | 25,000 | | | $ | 30,308,684 | |
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 | — | | | — | | | — | | | — | | | — | | | 4,220 | | | 4,220 | | | — | | | 4,220 | |
Balances, March 31, 2022, (unaudited) | 14,493,049 | | | $ | 14,492 | | | $ | 44,273,294 | | | 31,717 | | | $ | (853,436) | | | $ | (12,775,865) | | | $ | 30,658,485 | | | $ | 25,000 | | | $ | 30,683,485 | |
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 loss | — | | | — | | | — | | | — | | | — | | | (871,868) | | | (871,868) | | | — | | | (871,868) | |
Balances, June 30, 2022, as restated(unaudited) | 14,526,417 | | | $ | 14,526 | | | $ | 44,677,501 | | | 31,717 | | | $ | (853,436) | | | $ | (13,647,733) | | | $ | 30,190,858 | | | $ | 25,000 | | | $ | 30,215,858 | |
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, |
| 2023 | | 2022 |
| | | (as restated) |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 2,005,675 | | | $ | (867,648) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 4,544,322 | | | 2,798,527 | |
Net loss on disposition or impairment | 209,815 | | | 95,749 | |
Net franchise fees recognized upon termination of franchise agreements | (20,050) | | | (15,218) | |
Deferred income taxes | 477,154 | | | (832,083) | |
Stock based compensation expense | 683,227 | | | 663,747 | |
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 376,444 | | | 140,324 | |
Prepaid expenses and other current assets | (1,208,605) | | | (267,159) | |
Deferred franchise costs | 51,268 | | | (193,784) | |
Deposits and other assets | (12,557) | | | (132,379) | |
Accounts payable | (1,440,375) | | | (397,040) | |
Accrued expenses | 1,104,369 | | | (823,079) | |
Payroll liabilities | 815,290 | | | (2,043,788) | |
Deferred revenue | 245,363 | | | 864,213 | |
Upfront regional developer fees | (397,457) | | | (824,658) | |
Other liabilities | 59,259 | | | 649,436 | |
Net cash provided by operating activities | 7,493,142 | | | (1,184,840) | |
| | | |
Cash flows from investing activities: | | | |
Acquisition of AZ clinics | — | | | (5,600,000) | |
Acquisition of CA clinics | (1,050,000) | | | — | |
Purchase of property and equipment | (2,729,875) | | | (3,164,961) | |
Net cash used in investing activities | (3,779,875) | | | (8,764,961) | |
| | | |
Cash flows from financing activities: | | | |
Payments of finance lease obligation | (12,087) | | | (38,022) | |
Purchases of treasury stock under employee stock plans | (2,637) | | | (2,598) | |
Proceeds from exercise of stock options | 202,386 | | | 113,673 | |
Net cash provided by financing activities | 187,662 | | | 73,053 | |
| | | |
Increase (decrease) in cash, cash equivalents and restricted cash | 3,900,929 | | | (9,876,748) | |
Cash, cash equivalents and restricted cash, beginning of period | 10,550,417 | | | 19,912,338 | |
Cash, cash equivalents and restricted cash, end of period | $ | 14,451,346 | | | $ | 10,035,590 | |
| | | |
Reconciliation of cash, cash equivalents and restricted cash: | June 30, 2023 | | June 30, 2022 |
Cash and cash equivalents | $ | 13,602,515 | | | $ | 9,370,611 | |
Restricted cash | 848,831 | | | 664,979 | |
| $ | 14,451,346 | | | $ | 10,035,590 | |
Supplemental cash flow disclosures:
The following table represents supplemental cash flow disclosures and non-cash investing and financing activities:
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2023 | | 2022 | | | | |
Net cash paid for: | | | | | | | |
Interest | $ | 127,481 | | | $ | 23,982 | | | | | |
Income taxes | $ | 59,989 | | | $ | 59,271 | | | | | |
Non-cash investing and financing activity: | | | | | | | |
Unpaid purchases of property and equipment | $ | 79,871 | | | $ | 450,072 | | | | | |
Non-cash investment in acquisition of franchised clinics | $ | 28,997 | | | $ | 70,484 | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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”), 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 | 3 | | | 3 | | | 7 | | | 7 | | | | | |
Acquired during the period | 3 | | | 4 | | | 3 | | | 4 | | | | | |
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.
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 41 states, the District of Columbia and Puerto Rico. 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 a 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.
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, 2023 and 2022. Other revenues primarily consist of preferred vendor royalties associated with franchisees' credit card transactions.
The following table shows the Company's revenues disaggregated according to the timing of transfer of services:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | (as restated) | | | | (as restated) |
Revenue recognized at a point in time | $ | 27,401,004 | | | $ | 23,100,498 | | | $ | 53,737,394 | | | $ | 43,739,286 | |
Revenue recognized over time | 1,906,180 | | | 1,786,867 | | | 3,870,611 | | | 3,384,830 | |
Total Revenues | $ | 29,307,184 | | | $ | 24,887,365 | | | $ | 57,608,005 | | | $ | 47,124,116 | |
Rollforward of Contract Liabilities and Contract Assets
Changes in the Company's contract liability for deferred revenue from company clinics during the six months ended June 30, 2023 were as follows:
| | | | | |
| Deferred Revenue from company clinics |
Balance at December 31, 2022 | $ | 7,471,549 | |
Revenue recognized that was included in the contract liability at the beginning of the year | (5,202,787) | |
Net increase during the six months ended June 30, 2023 | 5,420,686 | |
Balance at June 30, 2023 | $ | 7,689,448 | |
Changes in the Company's contract liability for deferred franchise fees during the six months ended June 30, 2023 were as follows:
| | | | | |
| Deferred Revenue short and long-term |
Balance at December 31, 2022, as restated | $ | 16,629,735 | |
Revenue recognized that was included in the contract liability at the beginning of the year | (1,363,506) | |
Net increase during the six months ended June 30, 2023 | 1,447,506 | |
Balance at June 30, 2023 | $ | 16,713,735 | |
The Company's deferred franchise and development costs represent capitalized sales commissions. Changes during the six months ended June 30, 2023 were as follows:
| | | | | |
| Deferred Franchise and Development Costs short and long-term |
Balance at December 31, 2022 | $ | 6,761,738 | |
Recognized as cost of revenue during the six months ended June 30, 2023 | (490,939) | |
Net increase during the six months ended June 30, 2022 | 393,665 | |
Balance at June 30, 2023 | $ | 6,664,464 | |
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, 2023:
| | | | | |
Contract liabilities expected to be recognized in | Amount |
2023 (remainder) | $ | 1,272,496 | |
2024 | 2,459,511 | |
2025 | 2,322,249 | |
2026 | 2,228,012 | |
2027 | 2,154,886 | |
Thereafter | 6,276,581 | |
Total | $ | 16,713,735 | |
Note 3: Acquisitions and Assets Held for Sale
2023 Acquisition
On May 22, 2023, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the sellers three operating franchised clinics in California (the “CA Clinics Purchase”). As of the acquisition date, the Company operates the franchises as company-managed clinics. The total purchase price for the transactions was $1,188,764 to the seller (of which $109,767 is to be paid in the third quarter of 2023)., less $28,997 of net deferred revenue, resulting in total purchase consideration of $1,159,767.
Based on the terms of the purchase agreement, the CA Clinics Purchase has been treated as an asset purchase under GAAP as there were no outputs or processes to generate outputs acquired as part of these transactions. Under an asset purchase, assets are recognized based on their cost to the acquiring entity. Cost is allocated to the individual assets acquired or liabilities assumed based on their relative fair values and does not give rise to goodwill.
The allocation of the total purchase price of the CA Clinics Purchase was as follows:
| | | | | | | | |
Property and equipment | | $ | 313,995 | |
Operating lease right-of-use asset | | 317,662 | |
Intangible assets | | 1,004,513 | |
Total assets acquired | | 1,636,170 | |
Deferred revenue | | (158,365) | |
Operating lease liability - current portion | | (118,081) | |
Operating lease liability - net of current portion | | (199,957) | |
Net purchase consideration | | $ | 1,159,767 | |
Intangible assets in the table above primarily consist of reacquired franchise rights of $0.7 million amortized over their estimated useful lives of six to seven years, customer relationships of $0.1 million amortized over an estimated useful life of two years, and assembled workforce of $0.2 million amortized over an estimated useful life of two years.
2022 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 was treated as a business combination under 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 estimated useful lives 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.
Pro Forma Results of Operations (Unaudited)
The following table summarizes selected unaudited pro forma consolidated income statements for three and six months ended June 30, 2023 and 2022 for the 2023 and 2022 acquisitions, as if the CA Clinics Purchase (which has been accounted for as an asset purchase) in 2023 and the AZ clinics acquired (which have been accounted for as a business combination) had both been completed on January 1, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | (as restated) | | | | (as restated) |
Revenues, net | | $ | 29,684,349 | | | $ | 25,601,056 | | | $ | 58,346,746 | | | $ | 48,910,697 | |
Net income (loss) | | (304,758) | | | $ | (1,022,274) | | | $ | 1,983,969 | | | $ | (1,196,652) | |
| | $ | 29,379,591 | | | $ | 24,578,782 | | | $ | 60,330,715 | | | $ | 47,714,045 | |
The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the purchases had taken place on January 1, 2022 or of results that may occur in the future. For 2022 and 2023, this information includes actual data recorded in the Company’s consolidated financial statements for the period subsequent to the dates of the respective acquisitions.
The Company’s consolidated income statements for the three and six months ended June 30, 2023 include $168,719 in net revenue and $42,036 in net income, excluding corporate clinics segment overhead costs, of the acquired CA clinics. The
Company’s condensed consolidated income statements for the three and six months ended June 30, 2022 include net revenue and net income of $768,971 and $307,497, respectively, attributable to the AZ Acquisition.
Assets Held for Sale
In June 2023, the Company entered into negotiations to sell one of its company-managed clinics in California to a franchisee for a total of $0.1 million. The sale is expected to close during the third quarter of 2023, subject to the execution of the purchase agreement and other customary closing conditions contained in the purchase agreement. This transaction does not represent a strategic shift for the Company, and, therefore, it does not meet the criteria to be classified as a discontinued operation. As a result, the results of this clinic will continue to be reported in the Company’s operating results and in its Corporate Clinics segment until the sale is finalized. Effective with the designation as held for sale in June 2023, the Company discontinued recording depreciation on property and equipment, net and amortization of ROU assets for the clinic as required by GAAP. The Company also separately classified the related assets and liabilities of the clinics as held for sale in its June 30, 2023 condensed consolidated balance sheet.
Long-lived assets that meet the criteria for the held for sale designation are reported at the lower of their carrying value or fair value less estimated cost to sell. As a result of its evaluation of the recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales price, the Company recorded an estimated loss on disposal of $60,201 during the three and six months ended June 30, 2023 as Net loss on disposition or impairment in its condensed consolidated income statement and a valuation allowance included in assets held for sale on its condensed consolidated balance sheet.
The principal components of the held for sale assets and liabilities as of June 30, 2023 were as follows:
| | | | | |
| June 30, 2023 |
Assets | |
Property and equipment, net | 159,472 | |
Operating lease right-of-use asset | 116,451 | |
Valuation allowance | $ | (60,201) | |
Total assets held for sale | $ | 215,722 | |
| |
Liabilities | |
Operating lease liability, current and non-current | 148,846 | |
Deferred revenue from company clinics | 6,776 | |
Total liabilities to be disposed of | $ | |