JOINT Corp 10-Q for FY2023 Q1
JOINT Corp (JYNT)
10-Q
2023-05-05
For: 2023-03-31
View Original
Added on
April 11, 2026
About this 10-Q
JOINT Corp filed this 10-Q on May 5, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $28.45M
- up 26.8% from $22.44M a year earlier
- Net income
- $2.3M
- compared with a net loss of $205.8K a year earlier
- Diluted EPS
- $0.15
- compared with -$0.01 a year earlier
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 March 31, 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)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
(Address of principal executive offices) | (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 | ||||||
The | ||||||||
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 | ☐ | |||||||||||
| ☑ | 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 May 1, 2023, the registrant had 14,678,848 shares of Common Stock ($0.001 par value) outstanding.
THE JOINT CORP.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO. | ||||||||
Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022 | ||||||||
Condensed Consolidated Income Statements for the Three Months Ended March 31, 2023 and 2022 (unaudited) | ||||||||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited) | ||||||||
| 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)
| March 31, 2023 | December 31, 2022 | ||||||||||
ASSETS | (unaudited) | ||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash | |||||||||||
Accounts receivable, net | |||||||||||
| Deferred franchise and regional development costs, current portion | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Total current assets | |||||||||||
Property and equipment, net | |||||||||||
Operating lease right-of-use asset | |||||||||||
| Deferred franchise and regional development costs, net of current portion | |||||||||||
Intangible assets, net | |||||||||||
Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
Deposits and other assets | |||||||||||
| Total assets | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses | |||||||||||
Co-op funds liability | |||||||||||
Payroll liabilities ($ | |||||||||||
| Operating lease liability, current portion | |||||||||||
| Finance lease liability, current portion | |||||||||||
| Deferred franchise and regional developer fee revenue, current portion | |||||||||||
Deferred revenue from company clinics ($ | |||||||||||
Other current liabilities | |||||||||||
Total current liabilities | |||||||||||
| Operating lease liability, net of current portion | |||||||||||
| Finance lease liability, net of current portion | |||||||||||
| Debt under the Credit Agreement | |||||||||||
Deferred franchise and regional developer fee revenue, net of current portion | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies | |||||||||||
Stockholders' equity: | |||||||||||
Series A preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Additional paid-in capital | |||||||||||
Treasury stock | ( | ( | |||||||||
Accumulated deficit | ( | ( | |||||||||
Total The Joint Corp. stockholders' equity | |||||||||||
Non-controlling Interest | |||||||||||
Total equity | |||||||||||
Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues: | |||||||||||
Revenues from company-owned or managed clinics | $ | $ | |||||||||
| Royalty fees | |||||||||||
| Franchise fees | |||||||||||
| Advertising fund revenue | |||||||||||
| Software fees | |||||||||||
| Regional developer fees | |||||||||||
| Other revenues | |||||||||||
| Total revenues | |||||||||||
| Cost of revenues: | |||||||||||
| Franchise and regional development cost of revenues | |||||||||||
| IT cost of revenues | |||||||||||
| Total cost of revenues | |||||||||||
| Selling and marketing expenses | |||||||||||
| Depreciation and amortization | |||||||||||
| General and administrative expenses | |||||||||||
Total selling, general and administrative expenses | |||||||||||
| Net loss on disposition or impairment | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense), net | ( | ||||||||||
| Income (loss) before income tax benefit | ( | ||||||||||
| Income tax expense | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Earnings (loss) per share: | |||||||||||
| Basic earnings (loss) per share | $ | $ | ( | ||||||||
| Diluted earnings (loss) per share | $ | $ | ( | ||||||||
| Basic weighted average shares | |||||||||||
| Diluted weighted average shares | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
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 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2023 (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| 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, 2021, as revised | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2022, as revised (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Net loss on disposition or impairment (non-cash portion) | |||||||||||
| Net franchise fees recognized upon termination of franchise agreements | ( | ||||||||||
| Deferred income taxes | ( | ||||||||||
| Stock based compensation expense | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Deferred franchise costs | ( | ( | |||||||||
| Deposits and other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses | ( | ||||||||||
| Payroll liabilities | ( | ||||||||||
| Deferred revenue | |||||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Reacquisition and termination of regional developer rights | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments of finance lease obligation | ( | ( | |||||||||
| Purchases of treasury stock under employee stock plans | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | March 31, 2023 | March 31, 2022 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| $ | $ | ||||||||||
4
Supplemental cash flow disclosures:
The following table represents supplemental cash flow disclosures and non-cash investing and financing activities:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net cash paid for (refunded): | |||||||||||||||||||||||
| Interest | $ | $ | |||||||||||||||||||||
| Income taxes | $ | ( | $ | ||||||||||||||||||||
| Non-cash investing and financing activity: | |||||||||||||||||||||||
| Unpaid purchases of property and equipment | $ | $ | |||||||||||||||||||||
| Non-cash investment in reacquisition of regional developer rights | $ | $ | |||||||||||||||||||||
| Stock Option Proceeds Receivable | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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 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, which included all disclosures required by U.S. GAAP. The results of operations for the periods ended March 31, 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 periods ended March 31, 2023 and 2022 is unaudited.
Comprehensive Income
Net income was the same as comprehensive income for the three months ended March 31, 2023 and 2022, respectively.
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.
6
The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| Franchised clinics: | 2023 | 2022 | |||||||||||||||||||||
| Clinics open at beginning of period | |||||||||||||||||||||||
| Opened during the period | |||||||||||||||||||||||
| Sold during the period | |||||||||||||||||||||||
| Closed during the period | ( | ( | |||||||||||||||||||||
| Clinics in operation at the end of the period | |||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| Company-owned or managed clinics: | 2023 | 2022 | |||||||||||||||||||||
| Clinics open at beginning of period | |||||||||||||||||||||||
| Opened during the period | |||||||||||||||||||||||
| Acquired during the period | |||||||||||||||||||||||
| Closed during the period | |||||||||||||||||||||||
| Clinics in operation at the end of the period | |||||||||||||||||||||||
| Total clinics in operation at the end of the period | |||||||||||||||||||||||
| Clinic licenses sold but not yet developed | |||||||||||||||||||||||
| Future clinic licenses subject to executed letters of intent | |||||||||||||||||||||||
The VIEs’ total revenue and payroll and related expenses for the three months ended March 31, 2023 were $9.9 million and $4.2 million, respectively. The VIE’s total revenue and payroll and related expenses for the three months ended March 31, 2022 were $7.8 million and $3.1 million, respectively.
7
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 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. The losses on disposed or retired property or equipment were recorded in net loss on disposition or impairment of $65,469 and $6,906 for the three months ended March 31, 2023 and 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.
8
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). 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
9
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 3 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 three months ended March 31, 2023.
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.
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.
(Loss) Earnings per Common Share
Basic (loss) earnings per common share is computed by dividing the net (loss) income by the weighted-average number of common shares outstanding during the period. Diluted (loss) earnings per common share is computed by giving effect to all potentially dilutive common shares including restricted stock and stock options.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net (loss) income | $ | $ | ( | ||||||||||||||||||||
| Weighted average common shares outstanding - basic | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Unvested restricted stock and stock options | |||||||||||||||||||||||
| Weighted average common shares outstanding - diluted | |||||||||||||||||||||||
| Basic (loss) earnings per share | $ | $ | ( | ||||||||||||||||||||
| Diluted (loss) earnings per share | $ | $ | ( | ||||||||||||||||||||
10
The following common stock equivalents were excluded from the computation of diluted (loss) earnings per share for the periods presented because including them would have been antidilutive:
| Three Months Ended March 31, | |||||||||||||||||||||||
| Weighted average dilutive securities: | 2023 | 2022 | |||||||||||||||||||||
| Restricted stocks | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
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
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The Company currently franchises its concept across 40 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 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
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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 months ended March 31, 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 March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenue recognized at a point in time | $ | $ | |||||||||
| Revenue recognized over time | |||||||||||
| Balance at Total Revenue | $ | $ | |||||||||
Rollforward of Contract Liabilities and Contract Assets
Changes in the Company's contract liability for deferred franchise and regional development fees during the three months ended March 31, 2023 were as follows:
| Deferred Revenue short and long-term | |||||
| Balance at December 31, 2022 | $ | ||||
| Revenue recognized that was included in the contract liability at the beginning of the year | ( | ||||
| Net increase during the three months ended March 31, 2023 | |||||
| Balance at March 31, 2023 | $ | ||||
The Company's deferred franchise and development costs represent capitalized sales commissions. Changes during the three months ended March 31, 2023 were as follows:
| Deferred Franchise and Development Costs short and long-term | |||||
| Balance at December 31, 2022 | $ | ||||
| Recognized as cost of revenue during the three months ended March 31, 2023 | ( | ||||
| Net increase during the three months ended March 31, 2023 | |||||
| Balance at March 31, 2023 | $ | ||||
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| Contract liabilities expected to be recognized in | Amount | ||||
| 2023 (remainder) | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 3: Property and Equipment
Property and equipment consist of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Office and computer equipment | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Software developed | |||||||||||
| Finance lease assets | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Construction in progress | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense was $1,270,260 and $879,127 for the three months ended March 31, 2023 and 2022, respectively.
Amortization expense related to finance lease assets was $7,570 and $21,797 for the three months ended March 31, 2023 and 2022, respectively.
Note 4: Fair Value Measurements
The Company’s financial instruments include cash, restricted cash, accounts receivable, accounts payable, accrued expenses and debt under the Credit Agreement. The carrying amounts of its financial instruments approximate their fair value due to their short maturities. The carrying value of the Company’s debt under the Credit Agreement approximates fair value due to its interest rate being calculated from observable quoted prices for similar instruments, which is considered a Level 2 fair value measurement.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1: Observable inputs such as quoted prices in active markets;
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Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
As of March 31, 2023 and December 31, 2022, the Company did not have any financial instruments that were measured on a recurring basis as Level 1, 2 or 3.
The Company’s non-financial assets, which primarily consist of goodwill, intangible assets, property, plant and equipment, and operating lease right-of-use assets, are not required to be measured at fair value on a recurring basis, and instead are reported at their carrying amount. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable (and at least annually for goodwill), non-financial assets are assessed for impairment. If the fair value is determined to be lower than the carrying amount, an impairment charge is recorded to write down the asset to its fair value, which is considered Level 3 within the fair value hierarchy.
Note 5: Intangible Assets
On March 18, 2022, the Company entered into an agreement under which the Company repurchased the right to develop franchises in various counties in New Jersey. The total consideration for the transaction was $0.3 million. The Company carried a deferred revenue balance associated with this transaction of $0.1 million, representing the unrecognized fee collected upon the execution of the regional developer agreement. The Company accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price. The Company recognized the net amount of $0.2 million as reacquired development rights on March 18, 2022, which is amortized over the remaining original contract period of approximately 5.5 years.
Intangible assets consist of the following:
| As of March 31, 2023 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||
| Reacquired franchise rights | $ | $ | ( | $ | |||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Reacquired development rights | ( | ||||||||||||||||
| Assembled workforce | ( | ||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||
| As of December 31, 2022 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||
| Reacquired franchise rights | $ | $ | ( | $ | |||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Reacquired development rights | ( | ||||||||||||||||
| Assembled workforce | ( | ||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||
Amortization expense related to the Company’s intangible assets was $1,064,714 and $728,252 for the three months ended March 31, 2023 and 2022, respectively.
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| Amount | |||||
| 2023 (remainder) | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 6: Debt
Credit Agreement
On February 28, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”), with JPMorgan Chase Bank, N.A., individually, and as Administrative Agent and Issuing Bank (“JPMorgan Chase” or the “Lender”). The Credit Agreement provided for senior secured credit facilities (the "Credit Facilities") in the amount of $7,500,000 , including a $2,000,000 revolver (the "Revolver") and $5,500,000 development line of credit (the "Line of Credit"). The Revolver included amounts available for letters of credit of up to $1,000,000 and an uncommitted additional amount of $2,500,000 . All outstanding principal and interest on the Revolver were due on February 28, 2022.
On February 28, 2022, the Company entered into an amendment to its Credit Facilities (as amended, the “2022 Credit Facility”) with the Lender. Under the 2022 Credit Facility, the Revolver increased to $20,000,000 (from $2,000,000 ), the portion of the Revolver available for letters of credit increased to $5,000,000 (from $1,000,000 ), the uncommitted additional amount increased to $30,000,000 (from $2,500,000 ) and the developmental line of credit of $5,500,000 was terminated. The Revolver will be used for working capital needs, general corporate purposes and for acquisitions, development and capital improvement uses. At the option of the Company, borrowings under the 2022 Credit Facility bear interest at: (i) the adjusted SOFR rate, plus 0.10 %, plus 1.75 %, payable on the last day of the selected interest period of one, three or six months, and on the three-month anniversary of the beginning of any six-month interest period, if applicable; or (ii) an Alternative Base Rate (ABR), plus 1.00 %, payable monthly. The ABR is the greatest of: (A) the prime rate (as published by the Wall Street Journal), (B) the Federal Reserve Bank of New York rate, plus 0.5 %, and (C) the adjusted one-month term SOFR rate. Amounts outstanding under the Revolver on February 28, 2022 continued to bear interest at the rate selected under the Credit Facilities prior to the amendment until the last day of the interest period in effect, at which time, if not repaid, the amounts outstanding under the Revolver will bear interest at the 2022 Credit Facility rate. As a result of this refinance, $2,000,000 of current maturity of long-term debt was reclassified to long-term as of December 31, 2021. The 2022 Credit Facility will terminate and all principal and interest will become due and payable on the fifth anniversary of the amendment (February 28, 2027).
The Credit Facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; and certain fundamental changes such as a merger or sale of substantially all assets (as further defined in the Credit Facilities). The Credit Facilities require the Company to comply with customary affirmative, negative and financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the Credit Facilities. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable. The Credit Facilities are collateralized by substantially all of the Company’s assets, including the assets in the Company’s company-owned or managed clinics. The interest rate on funds borrowed under the Revolver as of March 31, 2023 was 6.4 %. As of March 31, 2023, the Company was in compliance with all applicable financial and non-financial covenants under the Credit Agreement, and $2,000,000 remains outstanding as of March 31, 2023.
Note 7: Stock-Based Compensation
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price, the term of the award, the periods of restriction, the number of shares to which the award pertains, and such other terms and conditions as the plan committee determines. Awards granted under the 2014 Plan are classified as equity awards, which are recorded in stockholders’ equity in the Company’s consolidated balance sheets. Through March 31, 2023, the Company has granted under the 2014 Plan (i) non-qualified stock options; (ii) incentive stock options; and (iii) restricted stock. There were no stock appreciation rights and restricted stock units granted under the 2014 Plan as of March 31, 2023.
Stock Options
The Company’s closing price on the date of grant is the basis of fair value of its common stock used in determining the value of share-based awards. To the extent the value of the Company’s share-based awards involves a measure of volatility, the Company uses available historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term. The Company uses the simplified method to calculate the expected term of stock option grants to employees as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. Accordingly, the expected life of the options granted is based on the average of the vesting term, which is generally four years and the contractual term, which is generally ten years . The Company will continue to evaluate the appropriateness of utilizing such method. The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. Forfeitures are estimated based on historical and forecasted turnover, which is approximately 5 %.
The Company did not grant options during the three months ended March 31, 2023 and March 31, 2022.
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||||||
| Outstanding at December 31, 2022 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | ( | ||||||||||||||||
| Cancelled | ( | ||||||||||||||||
| Expired | ( | ||||||||||||||||
| Outstanding at March 31, 2023 | $ | ||||||||||||||||
| Exercisable at March 31, 2023 | $ | ||||||||||||||||
For the three months ended March 31, 2023 and 2022, stock-based compensation expense for stock options was $64,882 and $171,003 , respectively.
Restricted Stock
Restricted stocks granted to employees generally vest in four equal annual installments. Restricted stocks granted to non-employee directors typically vest in full one year after the date of grant.
The information below summarizes the restricted stock activity for the three months ended March 31, 2023:
| Restricted Stock Awards | Shares | Weighted Average Grant-Date Fair Value per Award | ||||||||||||
| Non-vested at December 31, 2022 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | |||||||||||||
| Cancelled | ( | |||||||||||||
| Non-vested at March 31, 2023 | $ | |||||||||||||
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Note 8: Income Taxes
Note 9: Commitments and Contingencies
Leases
The table below summarizes the components of lease expense and income statement location for the three months ended March 31, 2023 and 2022:
| Line Item in the Company’s Condensed Consolidated Income Statements | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |||||||||||||||
| Finance lease costs: | |||||||||||||||||
| Amortization of assets | Depreciation and amortization | $ | $ | ||||||||||||||
| Interest on lease liabilities | Other income (expense), net | ||||||||||||||||
| Total finance lease costs | |||||||||||||||||
| Operating lease costs | General and administrative expenses | ||||||||||||||||
| Total lease costs | $ | $ | |||||||||||||||
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Supplemental information and balance sheet location related to leases is as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Operating Leases: | |||||||||||
| Operating lease right-of -use asset | $ | $ | |||||||||
| Operating lease liability - current portion | $ | $ | |||||||||
| Operating lease liability - net of current portion | |||||||||||
| Total operating lease liability | $ | $ | |||||||||
| Finance Leases: | |||||||||||
| Property and equipment, at cost | $ | $ | |||||||||
| Less accumulated amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
| Finance lease liability - current portion | |||||||||||
| Finance lease liability - net of current portion | |||||||||||
| Total finance lease liabilities | $ | $ | |||||||||
| Weighted average remaining lease term (in years): | |||||||||||
| Operating leases | |||||||||||
| Finance lease | |||||||||||
| Weighted average discount rate: | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
Supplemental cash flow information related to leases is as follows:
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||
| Cash paid for amounts included in measurement of liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Operating cash flows from finance leases | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Non-cash transactions: ROU assets obtained in exchange for lease liabilities | |||||||||||
| Operating lease | $ | $ | |||||||||
| Finance lease | |||||||||||
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| Operating Leases | Finance Lease | ||||||||||
| 2023 (remainder) | $ | $ | |||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | $ | $ | |||||||||
| Less: Imputed interest | ( | ( | |||||||||
| Total lease obligations | |||||||||||
| Less: Current obligations | ( | ( | |||||||||
| Long-term lease obligation | $ | $ | |||||||||
During the first quarter of 2023, the Company entered into various operating leases that have not yet commenced for spaces to be used by the Company’s new corporate clinics. These leases are expected to result in additional ROU assets and liabilities of approximately $0.6 million. These leases are expected to commence during the second and the third quarter of 2023, with lease terms of to ten years .
Litigation
Note 10: Segment Reporting
An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”) to evaluate performance and make operating decisions. The Company has identified its CODM as the Chief Executive Officer.
The Company has two operating business segments and one non-operating business segment. The Corporate Clinics segment is composed of the operating activities of the company-owned or managed clinics. As of March 31, 2023, the Company operated or managed 130 clinics under this segment. The Franchise Operations segment is composed of the operating activities of the franchise business unit. As of March 31, 2023, the franchise system consisted of 740 clinics in operation. Corporate is a non-operating segment that develops and implements strategic initiatives and supports the Company’s two operating business segments by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, legal and human resources. Corporate also provides the necessary administrative functions to support the Company as a publicly-traded company. A portion of the expenses incurred by Corporate are allocated to the operating segments.
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| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| Revenues: | 2023 | 2022 | |||||||||||||||||||||
| Corporate clinics | $ | $ | |||||||||||||||||||||
| Franchise operations | |||||||||||||||||||||||
| Total revenues | $ | $ | |||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Corporate clinics | |||||||||||||||||||||||
| Franchise operations | |||||||||||||||||||||||
| Corporate administration | |||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | |||||||||||||||||||||
| Segment operating (loss) income: | |||||||||||||||||||||||
| Corporate clinics | $ | ( | $ | ( | |||||||||||||||||||
| Franchise operations | |||||||||||||||||||||||
| Total segment operating income | $ | $ | |||||||||||||||||||||
| Reconciliation of total segment operating income to consolidated earnings before income taxes: | |||||||||||||||||||||||
| Total segment operating income | $ | $ | |||||||||||||||||||||
| Unallocated corporate | ( | ( | |||||||||||||||||||||
| Consolidated (loss) from operations | ( | ( | |||||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| (Loss) income before income tax benefit | $ | $ | ( | ||||||||||||||||||||
| Segment assets: | March 31, 2023 | December 31, 2022 | |||||||||
| Corporate clinics | $ | $ | |||||||||
| Franchise operations | |||||||||||
| Total segment assets | |||||||||||
| Unallocated cash and cash equivalents and restricted cash | |||||||||||
| Unallocated property and equipment | |||||||||||
| Other unallocated assets | |||||||||||
| Total assets | $ | $ | |||||||||
Note 11: Employee Retention Credit
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American Rescue Plan Act of 2021, enacted on March 11, 2021, further extended the employee retention credit through December 31, 2021.
In October 2022, the Company filed an application with the IRS for the ERC. Employers are eligible for the credit if they experienced full or partial suspension or modification of operations during any calendar quarter because of governmental orders due to the pandemic or a significant decline in gross receipts based on a comparison of quarterly revenue results for 2020 and/or 2021 with the comparable quarter in 2019. The Company’s ERC application was equal to 70% of qualified wages paid to employees during the period from January 1, 2021 to June 30, 2021 for a maximum quarterly credit of $7,000 per employee. In March 2023, the Company received notice and refunds from the IRS related to the overpayment of Federal Employment Tax plus interest in the amount of $4.8 million related to the ERC application. The $4.8 million ERC is subject to a 20 % consulting fee. The Company's eligibility remains subject to audit by the IRS for a period of five years.
Since there are no generally accepted accounting principles for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS).
Under an IAS 20 analogy, a business entity would recognize the employee retention credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received.
We have accounted for the $3.9 million employee retention credits, net of the consulting fee, in the first quarter of 2023 as other income on the Statement of Income when the Company was reasonably assured that the Company met all requirements of the ERC and the grant would be received. The ERC refund is not taxable; however, the credit is subject to expense disallowance rules which increased income tax expense as a discrete item by $922,881 , net of the consulting expense deduction, for the three months ended March 31, 2023.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, especially in this Management’s Discussion and Analysis or MD&A, contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included or incorporated in this Form 10-K could be deemed forward-looking statements, particularly statements about our plans, strategies and prospects under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend,” “seek,” “strive,” or the negative of these terms, “mission,” “goal,” “objective,” or “strategy,” or other comparable terminology. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations as described from time to time in our SEC reports, including those risks outlined under “Risk Factors” which are contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A of this or any subsequent quarterly reports on Form 10-Q. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider the trends, risks and uncertainties described below and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. We undertake no obligation to update or revise publicly any forward-looking statements, other than in accordance with legal and regulatory obligations. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. Some of the important factors
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that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following:
•the nationwide labor shortage has negatively impacted our ability to recruit chiropractors and other qualified personnel, which may limit our growth strategy, and the measures we have taken in response to the labor shortage have reduced our net revenues;
•inflation, exacerbated by COVID-19 and the Ukraine War, has led to increased labor costs and interest rates and may lead to reduced discretionary spending, all of which may negatively impact our business;
•the COVID-19 pandemic has caused significant disruption to our operations and may continue to impact our business, key financial and operating metrics, and results of operations in numerous ways that remain unpredictable; future widespread outbreaks of contagious disease could similarly disrupt our business;
•we may not be able to successfully implement our growth strategy if we or our franchisees are unable to locate and secure appropriate sites for clinic locations, obtain favorable lease terms, and attract patients to our clinics;
•we have limited experience operating company-owned or managed clinics in those geographic areas where we currently have few or no clinics, and we may not be able to duplicate the success of some of our franchisees;
•we may not be able to acquire operating clinics from existing franchisees or develop company-owned or managed clinics on attractive terms;
•short-selling strategies and negative opinions posted on the internet may drive down the market price of our common stock and could result in class action lawsuits;
•we may fail to remediate future material weaknesses in our internal controls over financial reporting or may otherwise be unable to maintain an effective system of internal control over financial reporting, which might negatively impact our ability to accurately report our financial results, prevent fraud, or maintain investor confidence;
•we may fail to successfully design and maintain our proprietary and third-party management information systems or implement new systems;
•we may fail to properly maintain the integrity of our data or to strategically implement, upgrade or consolidate existing information systems;
• franchised clinic acquisitions that we make could disrupt our business and harm our financial condition if we cannot continue their operational success or successfully integrate them;
•we may not be able to continue to sell franchises to qualified franchisees, and our franchisees may not succeed in developing profitable territories and clinics;
•new clinics may not reach the point of profitability, and we may not be able to maintain or improve revenues and franchise fees from existing franchised clinics;
•the chiropractic industry is highly competitive, with many well-established independent competitors, which could prevent us from increasing our market share or result in reduction in our market share;
•state administrative actions and rulings regarding the corporate practice of chiropractic may jeopardize our business model;
•expected new federal regulations and state laws and regulations regarding joint employer responsibility could negatively impact the franchise business model, increasing our potential liability for employment law violations by our franchisees and the likelihood that we may be required to participate in collective bargaining with our franchisees’ employees;
•an increased regulatory focus on the establishment of fair franchise practices could increase our risk of liability in disputes with franchisees and the risk of enforcement actions and penalties;
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•negative publicity or damage to our reputation, which could arise from concerns expressed by opponents of chiropractic and by chiropractors operating under traditional service models, could adversely impact our operations and financial position;
•our IT security systems and those of our third-party service providers (as recently experienced by one of our marketing vendors) may be breached, and we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract and retain patients; and
•legislation, regulations, as well as new medical procedures and techniques, could reduce or eliminate our competitive advantages.
Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission. Any forward-looking statements in this report should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.
Overview
Our principal business is to develop, own, operate, support and manage chiropractic clinics through direct ownership,
management arrangements, franchising and regional developers throughout the United States.
We seek to be the leading provider of chiropractic care in the markets we serve and to become the most recognized brand in our industry through the rapid and focused expansion of chiropractic clinics in key markets throughout North America and potentially abroad.
Key Performance Measures. We receive monthly performance reports from our system and our clinics which include key performance indicators per clinic including gross sales, comparable same-store sales growth, or “Comp Sales,” number of new patients, conversion percentage, and membership attrition. In addition, we review monthly reporting related to system-wide sales, clinic openings, clinic license sales, adjusted EBITDA, and various earnings metrics in the aggregate and per clinic. We believe these indicators provide us with useful data with which to measure our performance and to measure our franchisees’ and clinics’ performance. Comp Sales include the sales from both company-owned or managed clinics and franchised clinics that in each case have been open at least 13 full months and exclude any clinics that have closed. System-wide sales include sales at all clinics, whether operated by us or by franchisees. While franchised clinic sales are not recorded as revenues by us, management believes the information is important in understanding the overall brand’s financial performance, because these sales are the basis on which we calculate and record royalty fees and are indicative of the financial health of the franchisee base. Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, and (gain) loss on disposition or impairment. There was no bargain purchase gain for the three months ended March 31, 2023 and 2022.
Key Clinic Development Trends. As of March 31, 2023, we and our franchisees operated or managed 870 clinics, of which 740 were operated or managed by franchisees and 130 were operated as company-owned or managed clinics. Of the 130 company-owned or managed clinics, 61 were constructed and developed by us, and 69 were acquired from franchisees.
Our current strategy is to grow through the sale and development of additional franchises, build upon our regional developer strategy, and continue to expand our corporate clinic portfolio within clustered locations. The number of franchise licenses sold for the year ended December 31, 2022 was 75, compared with 156 and 121 licenses for the years ended December 31, 2021 and 2020, respectively. We ended the first three months of 2023 with 18 regional developers who were responsible for 71% of the 14 licenses sold during the period. This strong result reflects the power of the regional developer program to accelerate the number of clinics sold, and eventually opened, across the country.
In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned or managed clinics through the accelerated development of greenfield units and the further selective acquisition of existing franchised clinics. We will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other clinics and additional suitability factors. During the quarter ended March 31, 2023, we opened four greenfield clinics.
We believe that The Joint has a sound concept, which was further validated through its resiliency during the pandemic and will benefit from the fundamental changes taking place in the manner in which Americans access chiropractic care and their growing interest in seeking effective, affordable natural solutions for general wellness. These trends join with the preference we have seen
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among chiropractic doctors to reject the insurance-based model to produce a combination that benefits the consumer and the service provider alike. We believe that these forces create an important opportunity to accelerate the growth of our network.
Recent Events
Recent events that may impact our business include unfavorable global economic or political conditions, such as a resurgence of Covid-19, the Ukraine War, labor shortages, and inflation and other cost increases. We anticipate that 2023 will continue to be a volatile macroeconomic environment. As of the date of this Quarterly Report on Form 10-Q, we have not experienced a significant negative impact on our revenues and profitability due to the direct impact of the pandemic. However, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, the severity and duration of the pandemic, the continued availability and effectiveness of vaccines and actions taken by government authorities, including restrictions, laws or regulations, and other third parties in response to the pandemic.
The primary inflationary factor affecting our operations is labor costs. In the fourth quarter of 2021 and in 2022, company-owned or managed clinics were negatively impacted by labor shortages and wage increases, which increased our general and administrative expenses. Further, should we fail to continue to increase our wages competitively in response to increasing wage rates, the quality of our workforce could decline, causing our patient service to suffer. We expect elevated levels of cost inflation to persist in 2023. While we anticipate that these headwinds will be partially mitigated by pricing actions taken in response to inflation, there can be no assurance that we will be able to continue to take such pricing actions. A continued increase in labor costs could have an adverse effect on our operating costs, financial condition and results of operations.
Also, the Ukraine War and the sanctions imposed on Russia in response to this conflict have increased global economic and political uncertainty. In addition, the increase in interest rates and the expectation that interest rates will continue to rise may adversely affect patients' financial conditions, resulting in reduced spending on our services. While the impact of these factors continues to remain uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations. These and other uncertainties with respect to these recent events could result in changes to our current expectations.
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Other Significant Events and/or Recent Developments
For the three months ended March 31, 2023, compared to the prior year period:
•Comp Sales of clinics that have been open for at least 13 full months increased 8%.
•Comp Sales for mature clinics open 48 months or more increased 1%.
•System-wide sales for all clinics open for any amount of time grew 17%.
On March 18, 2022, we entered into an agreement under which we repurchased the right to develop franchises in various counties in New Jersey. The total consideration for the transaction was $0.3 million. We carried a deferred revenue balance associated with this transaction of $0.1 million, representing the unrecognized fee collected upon the execution of the regional developer agreement. We accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price. We recognized the net amount of $0.2 million as reacquired development rights on March 18, 2022, which is amortized over the remaining original contract period of approximately 5.5 years.
On February 28, 2022, we entered into an amendment to our Credit Facilities (as amended, the “2022 Credit Facility”) with the Lender. Under the 2022 Credit Facility, the Revolver increased to $20,000,000 (from $2,000,000), the portion of the Revolver available for letters of credit increased to $5,000,000 (from $1,000,000), the uncommitted additional amount increased to $30,000,000 (from $2,500,000) and the developmental line of credit of $5,500,000 was terminated. The Revolver will be used for working capital needs, general corporate purposes and for acquisitions, development and capital improvement uses.
For the three months ended March 31, 2023, we constructed and developed four new corporate clinics.
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Factors Affecting Our Performance
Our operating results may fluctuate significantly as a result of a variety of factors, including the timing of new clinic sales, openings, closures, markets in which they are contained and related expenses, general economic conditions, cost inflation, labor shortages, consumer confidence in the economy, consumer preferences, competitive factors, and disease epidemics and other health-related concerns, such as a resurgence of COVID-19.
Significant Accounting Polices and Estimates
There were no changes in our significant accounting policies and estimates during the three months ended March 31, 2023 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Results of Operations
The following discussion and analysis of our financial results encompasses our consolidated results and results of our two business segments: Corporate Clinics and Franchise Operations.
Total Revenues - three months ended March 31, 2023 compared with three months ended March 31, 2022
Components of revenues were as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Revenues from company-owned or managed clinics | $ | 17,127,957 | $ | 12,606,999 | $ | 4,520,958 | 35.9 | % | |||||||||||||||
| Royalty fees | 6,866,023 | 6,008,932 | $ | 857,091 | 14.3 | % | |||||||||||||||||
| Franchise fees | 754,425 | 640,965 | $ | 113,460 | 17.7 | % | |||||||||||||||||
| Advertising fund revenue | 1,952,406 | 1,710,717 | $ | 241,689 | 14.1 | % | |||||||||||||||||
| IT related income and software fees | 1,210,005 | 956,998 | $ | 253,007 | 26.4 | % | |||||||||||||||||
| Regional developer fees | 149,478 | 201,787 | $ | (52,309) | (25.9) | % | |||||||||||||||||
| Other revenues | 390,004 | 312,140 | $ | 77,864 | 24.9 | % | |||||||||||||||||
| Total revenues | $ | 28,450,298 | $ | 22,438,538 | $ | 6,011,760 | 26.8 | % | |||||||||||||||
Consolidated Results
Total revenues increased by $6.0 million, primarily due to the continued expansion and revenue growth of our franchise base and the continued revenue growth and expansion of our company-owned or managed clinics portfolio.
Corporate Clinics
Revenues from company-owned or managed clinics increased, primarily due to improved same-store sales growth, as well as due to the expansion of our company-owned or managed clinics portfolio. As of March 31, 2023 and 2022, there were 130 and 100 company-owned or managed clinics in operation, respectively.
Franchise Operations
•Royalty fees and advertising fund revenue increased due to an increase in the number of franchised clinics in operation during the current period, along with continued sales growth in existing franchised clinics. As of March 31, 2023 and 2022, there were 740 and 636 franchised clinics in operation, respectively.
•Franchise fees increased due to the impact of accelerated revenue recognition resulting from the terminated franchise license agreements during the first quarter of 2023. There were no such comparable events during the first quarter of 2022.
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•Software fees revenue increased due to an increase in our franchised clinic base and the related revenue recognition over the term of the franchise agreement, as described in "Revenue Recognition" in Note 1 to our condensed consolidated financial statements included in this report.
•Regional developer fees revenue decreased due to the impact of repurchased regional developer rights during 2022.
•Other revenues primarily consist of merchant income associated with credit card transactions.
| Three Months Ended March 31, | 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Cost of Revenues | 2,624,163 | 2,312,771 | $ | 311,392 | 13.5 | % | ||||||||||||||||||||
For the three months ended March 31, 2023, as compared with the three months ended March 31, 2022, the total cost of revenues increased primarily due to an increase in regional developer royalties of $0.3 million.
Selling and Marketing Expenses
| Three Months Ended March 31, | 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Selling and Marketing Expenses | 4,160,244 | 3,287,488 | $ | 872,756 | 26.5 | % | ||||||||||||||||||||
Selling and marketing expenses increased for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, driven by: (i) an increase in advertising fund expenditures from a larger franchise base, (ii) an increase in local marketing expenditures by the company-owned or managed clinics, and (iii) the timing of the national marketing fund spend.
Depreciation and Amortization Expenses
| Three Months Ended March 31, | 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Depreciation and Amortization Expenses | 2,342,544 | 1,629,176 | $ | 713,368 | 43.8 | % | ||||||||||||||||||||
Depreciation and amortization expenses increased for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, primarily due to the depreciation expenses associated with the continued expansion of our corporate-owned or managed clinics portfolio in 2022 and 2023.
General and Administrative Expenses
| Three Months Ended March 31, | 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| General and Administrative Expenses | 19,936,115 | 15,378,623 | $ | 4,557,492 | 29.6 | % | ||||||||||||||||||||
General and administrative expenses increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to the increases in the following to support continued clinic count and revenue growth in both operating segments: (i) payroll and related expenses of $3.1 million, (ii) general overhead and administrative expenses of $1.0 million, and (iii) utilities and facilities costs of $0.5 million. As a percentage of revenue, general and administrative expenses during the three months ended March 31, 2023 and 2022 were 70% and 69%, respectively.
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(Loss) Income from Operations
| Three Months Ended March 31, | 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| (Loss) Income from Operations | (678,237) | (176,426) | $ | (501,811) | 284.4 | % | ||||||||||||||||||||
Consolidated Results
Consolidated income from operations decreased by $0.5 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to the increased expenses in the corporate clinics and unallocated corporate segments and an increase in advertising fund expenditures discussed below.
Corporate Clinics
Our corporate clinics segment had loss from operations of $0.5 million for the three months ended March 31, 2023, a decrease of $0.1 million compared to loss from operations of $0.4 million for the prior year period. The decrease was primarily due to:
•A $4.6 million increase in operating expenses due to the increases in the following: (i) payroll-related expenses of $2.7 million due to a higher head count to support the expansion of our corporate clinic portfolio and general wage increases to remain competitive in the current labor market, (ii) depreciation and administration expense associated with the expansion of our corporate-owned or managed clinics portfolio in 2022 and 2023 of $1.4 million, (iii) selling and marketing expenses due to increased local marketing expenditures by the company-owned or managed clinics of $0.5 million; partially offset by
•An increase in revenues of $4.5 million from company-owned or managed clinics.
Franchise Operations
Our franchise operations segment had income from operations of $4.6 million for the three months ended March 31, 2023, an increase of $0.2 million compared to income from operations of $4.4 million for the prior year period. This increase was primarily due to:
•An increase of $1.5 million in total revenues; partially offset by
•An increase of $0.3 million in cost of revenues primarily due to an increase in regional developer royalties and
•An increase of $1.0 million in operating expenses, primarily due to an increase of $0.4 million in selling and marketing expenses resulting from a larger franchise base, as well as due to an increase of $0.6 million in payroll-related expenses and travel expenses due to a higher head count to support the expansion of our franchise system and general wage increases to remain competitive in the current labor market.
Unallocated Corporate
Unallocated corporate expenses for the three months ended March 31, 2023 increased by $0.6 million compared to the prior year period, primarily due to the increases in payroll-related expenses of $0.6 million due to a higher head count to support the expansion of both operating segments and general wage increases to remain competitive in the current labor market.
Other Income (Expense), Net
| Three Months Ended March 31, | 2023 | 2022 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Other income (expense), net | 3,821,162 | (16,147) | $ | 3,837,309 | 23,764.8 | % | ||||||||||||||||||||
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Other Income (Expenses), Net increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to the recognition and receipt of the $3.9 million employee retention credits, net of the consulting fee, in the first quarter of 2023.
Non-GAAP Financial Measures
The table below reconciles net (loss) income to Adjusted EBITDA for the three months ended March 31, 2023 and 2022.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Non-GAAP Financial Data: | |||||||||||
| Net (loss) income | $ | 2,301,036 | $ | (205,797) | |||||||
| Net interest expense | 49,725 | 15,859 | |||||||||
| Depreciation and amortization expense | 2,342,544 | 1,629,176 | |||||||||
| Tax expense | 841,889 | 13,224 | |||||||||
| EBITDA | 5,535,194 | 1,452,462 | |||||||||
| Stock compensation expense | 266,210 | 323,556 | |||||||||
| Acquisition related expenses | 39,332 | — | |||||||||
| Loss on disposition or impairment | 65,469 | 6,906 | |||||||||
| Other (income), net | (3,870,887) | — | |||||||||
| Adjusted EBITDA | $ | 2,035,318 | $ | 1,782,924 | |||||||
Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, (gain) loss on disposition or impairment and other income related to the Employee Retention Credit. There was no bargain purchase gain for the three months ended March 31, 2023 and 2022. We have provided Adjusted EBITDA because it is a non-GAAP measure of financial performance commonly used for comparing companies in our industry. You should not consider Adjusted EBITDA as a substitute for operating profit as an indicator of our operating performance or as an alternative to cash flows from operating activities as a measure of liquidity. We may calculate Adjusted EBITDA differently from other companies.
We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other outpatient medical clinics, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same manner.
Liquidity and Capital Resources
As of March 31, 2023, we had unrestricted cash and short-term bank deposits of $14.8 million and $18 million of available capacity under the line of credit. While the pandemic and the Ukraine War create potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our line of credit will be sufficient to fund our anticipated operating and investment needs for at least the next twelve months.
While the interruptions, delays and/or cost increases resulting from the pandemic, political instability or geopolitical tensions, such as the Ukraine War, economic weakness, inflationary pressures or other factors have created uncertainty as to general economic conditions for 2023 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. For the remainder of 2023, we expect to use or redeploy our cash resources to support our business within the context of prevailing market conditions, which, given the ongoing uncertainties described above, could rapidly and materially deteriorate or otherwise change. Our long-term capital requirements, primarily for acquisitions and other corporate initiatives, could be dependent on our ability to access additional funds through the
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debt and/or equity markets. If the equity or debt markets continue to deteriorate or do not improve, including as a result of economic weakness, a resurgence of COVID-19, political unrest or war, including the Ukraine War, or any other reason, it may make any necessary equity or debt financing more difficult to obtain in a timely manner and on favorable terms, if at all, and if obtained, it may be more costly or more dilutive. From time to time, we consider and evaluate transactions related to our portfolio and capital structure, including debt financings, equity issuances, purchases and sales of assets, and other transactions. Given the ongoing uncertainties described above, the levels of our cash flows from operations for 2023 may be impacted. There can be no assurance that we will be able to generate sufficient cash flows or obtain the capital necessary to meet our short and long-term capital requirements.
Analysis of Cash Flows
Net cash provided by operating activities increased by $5.6 million to $6.0 million for the three months ended March 31, 2023, compared to $0.4 million for the three months ended March 31, 2022. The increase was primarily attributable to recognizing the $3.9 million Employee Retention Credit during the three months ended March 31, 2023, an increase in revenue over the prior year period, which was partially offset by an increase in general and administrative expenses over the prior year period.
Net cash used in investing activities was $1.2 million and $1.5 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023, this included purchases of property and equipment of $1.2 million. For the three months ended March 31, 2022, this included purchases of property and equipment of $1.3 million and reacquisition and termination of regional developer rights for $250,000.
Net cash used in financing activities for the three months ended March 31, 2023 was $0.1 million, compared to less than $50,000 for the three months ended March 31, 2022. For the three months ended March 31, 2023, this included proceeds from the exercise of stock options of $0.1 million.
Recent Accounting Pronouncements
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2023 there have been no material changes to the quantitative and qualitative disclosures about market risk appearing in Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving such objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and
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procedures as of March 31, 2023, our management concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, we are a party to litigation from time to time. We maintain insurance to cover certain litigation and claims.
ITEM 1A. RISK FACTORS
We documented our risk factors in Item 1A of Part I of our Form 10-K for the year ended December 31, 2022. There have been no material changes to our risk factors since the filing of that report, except for the addition of the following risk factor:
We maintain cash deposits in banks in excess of federally-insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.
We regularly maintain cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC. Although we did not have any funds in Silicon Valley Bank or other institutions that have been closed, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Registered Securities
None.
ITEM 6. EXHIBITS
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EXHIBIT INDEX
| Exhibit Number | Description of Document | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.16* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32** | ||||||||
| 101.INS | XBRL Instance Document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith
** Furnished herewith, not filed
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THE JOINT CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE JOINT CORP. | ||||||||
| Dated: May 5, 2023 | By: | /s/ Peter D. Holt | ||||||
| Peter D. Holt President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Dated: May 5, 2023 | By: | /s/ Jake Singleton | ||||||
| Jake Singleton Chief Financial Officer (Principal Financial Officer) | ||||||||
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10.16
The Joint Corp.
Executive Short-Term Incentive Plan (STIP)
(Amended March 7, 2023)
Plan Overview
The Joint Corp. (“the Company”) Executive Short-Term Incentive Plan (“Executive STIP”) is an annual bonus plan. The STIP pool earned for each year will be determined based upon the achievement of the Company’s Target EBITDA for that year. Upon achievement of the Target EBITDA for the calendar year, each dollar of EBITDA in excess of Target EBITDA will be credited to a pool, which will be combined with the Non-Executive STIP Pool (the “Combined Pool”) until a maximum Combined Pool is reached in an amount established by the Compensation Committee (the “Combined Pool Maximum”). Except for amounts earned pursuant to the EBITDA Bonus Accelerator described herein, in no event will the amount in the Combined Pool exceed the Combined Pool Maximum.
Eligibility: The CEO and CFO of the Company are eligible to participate in the Executive STIP. Unless otherwise agreed to in writing between the Company and a participant, participants must be actively employed by the Company on the date of payout in order to receive an award under the Executive STIP. The following are the eligible percentages of base salary:
CEO 65%
CFO 50%
Proration: For those participants whose employment with the Company starts during mid-year, their participation in the plan shall be prorated based on the number of days employed during that calendar year divided by 365 days. If the total amount in the STIP Pool is insufficient to award all participants (including the participants in the coinciding Non-Executive STIP) 100% of their STIP award, each participant’s award shall be reduced by his or her pro rata share of the shortfall.
Award: 100% of each individual Executive STIP award is a function of achieving results in excess of the Target EBITDA (defined below). The percentage of achievement of that metric will be the same as the percentage of funding (between 85% and 100%) of the maximum bonus pool. The Company will not fund the Combined Pool and no award will be granted unless the amount to be allocated to the Combined Pool would equal at least 85% of the Combined Pool Maximum (the “Award Threshold”), provided that if the amount allocated to the Combined Pool is less than the Award Threshold, the Board of Directors may in its sole discretion approve and create the Combined Pool under such terms and conditions as the Board of Directors may determine.
STIP awards are expected to be paid following approval by the Compensation Committee of the Board of Directors (the “Compensation Committee”) and completion of the Company’s annual audit. Executive STIP awards will be paid in cash by no later than March 15th of the following year.
EBITDA Bonus Accelerator: If total EBITDA achieved exceeds the Target EBITDA for the year after 100% funding of the STIP Pool discussed above, the Company will fund an additional 25% into the bonus pool (up to a maximum of 125% of the participants’ target STIP) to be allocated
to participants on a pro-rata basis based on their respective eligibility. The STIP Pool plus this additional 25% Bonus Accelerator will represent the Adjusted STIP Pool to be awarded.
Plan Description
Target EBITDA: In connection with the annual budgeting process, the Company will establish an annual budget with corresponding EBITDA that must be approved by the Board of Directors of the Company.
EBITDA Definition: The Company shall prepare a budget on a consistent basis from year to year and apply a consistent definition of EBITDA. The company currently defines EBITDA as net income (loss) before interest expense, income taxes, depreciation, and amortization expenses.
Example of Combined Pool and EBITDA Bonus Accelerator
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Peter D. Holt, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023 of The Joint Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 5, 2023
| /s/ Peter D. Holt | |||||
| Peter D. Holt President and Chief Executive Officer (Principal Executive Officer) | |||||
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Jake Singleton, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023 of The Joint Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 5, 2023
| /s/ Jake Singleton | |||||
| Jake Singleton Chief Financial Officer (Principal Financial Officer) | |||||
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Joint Corp. (the “Company”), for the quarter ended Date: March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, in his or her capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| By: | /s/ Peter D. Holt | |||||||
| Peter D. Holt President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Dated May 5, 2023 | ||||||||
| By: | /s/ Jake Singleton | |||||||
| Jake Singleton Chief Financial Officer (Principal Financial Officer) | ||||||||
| Dated May 5, 2023 | ||||||||