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 September 30, 2024
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)
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 | ☐ | ☑ | ||||||||||||
| Non- accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2024, the registrant had 14,983,609 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 September 30, 2024 (unaudited) and December 31, 2023 | ||||||||
Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited) | ||||||||
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2024 and 2023 (unaudited) | ||||||||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (unaudited) | ||||||||
Forward-Looking Statements
This Quarterly Report on Form 10-Q, especially in the 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 Quarterly Report on Form 10-Q could be deemed forward-looking statements, particularly statements about our plans, strategies and prospects under the heading “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 Quarterly Report on 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 Annual Report on Form 10-K for the year ended December 31, 2023 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 Quarterly Report on 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.
The specific forward-looking statements in this Quarterly Report on Form 10-Q include the following:
•that 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;
•our belief that our monthly performance reports from our system and our clinics 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;
•our plan to re-franchise or sell the majority of our company-owned or managed clinics, which refined strategy will leverage our greatest strength - our capacity to build a franchise - to drive long-term growth for both our franchisees and The Joint as a public company;
•our belief that the strong results with respect to our franchise licenses sold and our regional developers reflects the power of the regional developer program to accelerate the number of clinics sold, and eventually opened across the country;
•our belief that we continue to have a sound business concept 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;
•our belief that these trends join with the preference we have seen among chiropractic doctors to reject the insurance-based model to produce a combination that benefits the consumer and the service provider alike, and our belief that these forces create an important opportunity to accelerate the growth of our network;
•our belief that recent events that may impact our business include unfavorable global economic or political conditions, such as the Ukraine War, the Israel-Gaza conflict, labor shortages, and inflation and other cost increases;
•our anticipation that 2024 will continue to be a volatile macroeconomic environment;
•our belief that we have created a robust framework for the re-franchising effort, organizing clinics into clusters, and generating comprehensive disclosure packets for marketing efficiency, and that we have received significant interest to date from our existing franchisees;
•our goal to generate significant processes that will provide us with value creating capital allocation opportunities, which opportunities could include, but are not limited to, reinvestment in the brand and related marketing, continued investment in our IT platforms, the repurchase of regional development ("RD") territories, and/or a stock repurchase program;
•our belief that 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;
•our belief 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 12 months;
•our belief that 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; and
•our expectation that for the remainder of 2024, 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.
Some of the important factors 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 has led to increased labor costs and interest rates and may lead to reduced discretionary spending, all of which may negatively impact our business;
•we may not be able to successfully implement our growth strategy if 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;
•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 have previously identified material weaknesses in our internal controls over financial reporting and 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 have restated our prior consolidated financial statements, which may lead to additional risks and uncertainties, including loss of investor confidence and negative impacts on our stock price;
•we may fail to properly maintain the integrity of our data or to strategically implement, upgrade or consolidate existing information systems;
•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 and prepayment of chiropractic services 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;
•adverse developments affecting institutions, including bank failures, could adversely affect our liquidity and financial performance;
•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;
•new SEC regulations governing disclosure about risk management, strategy and governance regarding cybersecurity risks and new requirements for reporting of cybersecurity incidents may increase our compliance costs;
•legislation, regulations, as well as new medical procedures and techniques, could reduce or eliminate our competitive advantages; and
•the delayed filing of one of our quarterly reports has made us currently ineligible to use a registration statement on Form S-3 to register the offer and sale of securities, which could adversely affect our ability to raise future capital or complete acquisitions.
Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the SEC. Any forward-looking statements in this Quarterly Report on Form 10-Q should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.
PART I: FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2024 | December 31, 2023 | ||||||||||
| 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 | |||||||||||
| Assets held for sale | |||||||||||
| 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 | $ | $ | |||||||||
| Accounts payable due to related parties (Note 13) | |||||||||||
| Accrued expenses | |||||||||||
| Co-op funds liability | |||||||||||
Payroll liabilities ($ | |||||||||||
| Operating lease liability, current portion | |||||||||||
| Finance lease liability, current portion | |||||||||||
| Deferred franchise fee revenue, current portion | |||||||||||
Deferred revenue from company clinics ($ | |||||||||||
| Upfront regional developer Fees, current portion | |||||||||||
| Other current liabilities | |||||||||||
Liabilities to be disposed of ($ | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liability, net of current portion | |||||||||||
| Finance lease liability, net of current portion | |||||||||||
| Debt under the Credit Agreement | |||||||||||
| Deferred franchise fee revenue, net of current portion | |||||||||||
| Upfront regional developer fees, net of current portion | |||||||||||
1
Other liabilities ($ | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| 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.
2
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
Revenues from company-owned or managed clinics | $ | $ | $ | $ | |||||||||||||||||||
| Royalty fees | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Advertising fund revenue | |||||||||||||||||||||||
| Software 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 expense | ( | ( | ( | ||||||||||||||||||||
| Income tax (benefit) expense | ( | ||||||||||||||||||||||
| Net (loss) income | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic (loss) earnings per share | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Diluted (loss) earnings per share | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Basic weighted average shares | |||||||||||||||||||||||
| Diluted weighted average shares | |||||||||||||||||||||||
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 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, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2024 (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2024 (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, September 30, 2024 (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
4
| 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, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2023, (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2023 (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | $ | — | $ | — | $ | — | $ | — | $ | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | $ | $ | ( | — | $ | — | $ | — | $ | $ | — | $ | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | $ | $ | — | $ | — | $ | — | $ | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock under employee stock plans | — | $ | — | $ | — | $ | ( | $ | — | $ | ( | $ | — | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, September 30, 2023 (unaudited) | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| 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, net of acquisitions: | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Deferred franchise costs | |||||||||||
| Deposits and other assets | ( | ||||||||||
| Assets and liabilities held for sale, net | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses | |||||||||||
| Payroll liabilities | |||||||||||
| Deferred revenue | ( | ( | |||||||||
| Upfront regional developer fees | ( | ( | |||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sale of clinics | |||||||||||
| Acquisition of CA clinics | ( | ||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| 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 | |||||||||||
| Repayment of debt under the Credit Agreement | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Increase 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: | September 30, 2024 | September 30, 2023 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
6
Supplemental cash flow disclosures:
The following table represents supplemental cash flow disclosures and non-cash investing and financing activities:
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net cash paid for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | $ | $ | |||||||||
| Non-cash investing and financing activity: | |||||||||||
| Unpaid purchases of property and equipment | $ | $ | |||||||||
| Non-cash investment in acquisition of franchised clinics | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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 financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles (“GAAP”). Such unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commissions (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated 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 Annual Report on Form 10-K as of and for the year ended December 31, 2023, filed with the SEC on March 8, 2024, which included all disclosures required by GAAP. The results of operations for the periods ended September 30, 2024 and 2023 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the three and nine-month periods ended September 30, 2024 and 2023 is unaudited.
Principles of Consolidation
Comprehensive Income
Net income (loss) was the same as comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023, 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. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.
8
The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Franchised clinics: | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Clinics open at beginning of period | |||||||||||||||||||||||
| Opened during the period | |||||||||||||||||||||||
| Acquired during the period | |||||||||||||||||||||||
| Sold during the period | ( | ||||||||||||||||||||||
| Closed during the period | ( | ( | ( | ( | |||||||||||||||||||
| Clinics in operation at the end of the period | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Company-owned or managed clinics: | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Clinics open at beginning of period | |||||||||||||||||||||||
| Opened during the period | |||||||||||||||||||||||
| Acquired during the period | |||||||||||||||||||||||
| Sold 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 | |||||||||||||||||||||||
Variable Interest Entities
9
VIE total revenue, general and administrative expenses and income tax expense for the three and nine months ended September 30, 2024 and 2023 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
The carrying amount of the VIEs’ assets and liabilities was immaterial as of September 30, 2024 and December 31, 2023, except for the balances as follows:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Deferred tax assets | |||||||||||
| Payroll liabilities | |||||||||||
| Deferred revenue from company managed clinics | |||||||||||
| Liabilities to be disposed of | |||||||||||
| Other liabilities | |||||||||||
Cash and Cash Equivalents
Restricted Cash
Restricted cash relates to cash that franchisees and company-owned or managed clinics contribute to the Company’s National Marketing Fund and cash that franchisees provide to various voluntary regional Co-Op Marketing Funds. Cash contributed by franchisees to the National Marketing Fund is to be used in accordance with the Company’s Franchise Disclosure Document with a focus on regional and national marketing and advertising. While such cash balance is not legally segregated and restricted as to withdrawal or usage, the Company’s accounting policy is to classify these funds as restricted cash.
Accounts Receivable
Property and Equipment
10
in net loss on disposition or impairment of $3,549 and $0.2 million for the three and nine months ended September 30, 2024, respectively. The losses on disposed of or retired property or equipment were recorded in net loss on disposition or impairment of $0.1 million and $0.2 million for the three and nine months ended September 30, 2023, respectively.
Leases
The Company leases property and equipment under operating and finance leases. The Company leases its corporate office space and the space for each of the company-owned or managed clinics in the portfolio. The Company recognizes a right-of-use ("ROU") asset and lease liability for all leases. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and, as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. When available, the Company uses the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of its leases. In such cases, the Company estimates its incremental borrowing rate as the interest rate it would pay to borrow an amount equal to the lease payments over a similar term, with similar collateral as in the lease and in a similar economic environment. The Company estimates these rates using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company’s estimated creditworthiness.
For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. Pre-opening costs are recorded as incurred in general and administrative expenses. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred and are also included in general and administrative expenses on the accompanying condensed consolidated income statements.
During the three and nine months ended September 30, 2024 certain leases were terminated early with the landlord as a result of corporate clinic closures. The net losses to terminate the leases were recorded in net loss on disposition or impairment of $32,775 and $0.4 million for the three and nine months ended September 30, 2024, respectively. No leases were terminated during the nine months ended September 30, 2023.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets are recoverable. The Company records an impairment loss when the carrying amount of the asset is not recoverable and exceeds its fair value.
During the three months ended September 30, 2024, property and equipment, net, and ROU assets related to asset groups determined to not be recoverable were written down from their carrying values to their respective fair values resulting in the following non-cash impairment losses:
| Three Months Ended September 30, 2024 | |||||||||||||||||
| Carrying Value | Fair Value | Net loss on disposition or impairment | |||||||||||||||
| Property and equipment, net | $ | $ | $ | ||||||||||||||
| Operating lease right-of-use asset | |||||||||||||||||
| Total Net loss on disposition or impairment | $ | ||||||||||||||||
During the nine months ended September 30, 2024, property and equipment, net, ROU assets and franchise rights related to asset groups determined to not be recoverable were written down from their carrying values to their respective fair values resulting in the following non-cash impairment losses:
11
| Nine Months Ended September 30, 2024 | |||||||||||||||||
| Carrying Value | Fair Value | Net loss on disposition or impairment | |||||||||||||||
| Property and equipment, net | $ | $ | $ | ||||||||||||||
| Operating lease right-of-use asset | |||||||||||||||||
| Intangible assets, net | $ | $ | |||||||||||||||
| Total Net loss on disposition or impairment | $ | ||||||||||||||||
During the three and nine months ended September 30, 2023, intangible assets related to a clinic planned for closure with a total carrying amount of approximately $0.1 zero 0.1
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net loss on disposition or impairment | $ | $ | $ | $ | |||||||||||||||||||
A valuation allowance of $3.1 million and $0.7 million as of September 30, 2024 and December 31, 2023, respectively, are included in assets held for sale on its condensed consolidated balance sheet.
12
assets down to $3.0
The following table shows a reconciliation of the Company’s impairment losses and disposal gains and losses recorded in net loss on disposition or impairment for the three and nine months ended September 30, 2024 and 2023t:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Impairment on long-lived assets held for use | |||||||||||||||||||||||
| Property and equipment, net | $ | $ | $ | $ | |||||||||||||||||||
| Operating lease right-of-use asset | |||||||||||||||||||||||
| Intangible assets, net | |||||||||||||||||||||||
| Impairment on assets held for sale | |||||||||||||||||||||||
| Assets held for sale | |||||||||||||||||||||||
| Impairment on long-lived assets previously held for sale reclassified as held for use | |||||||||||||||||||||||
| Property and equipment, net | |||||||||||||||||||||||
| Operating lease right-of-use asset | |||||||||||||||||||||||
| Loss on disposal of assets | |||||||||||||||||||||||
| Property and equipment, net | |||||||||||||||||||||||
| Operating lease right-of-use asset | |||||||||||||||||||||||
| Loss (gain) on sale of assets | ( | ||||||||||||||||||||||
| Total Net loss on disposition or impairment | $ | $ | $ | $ | |||||||||||||||||||
Revenue Recognition
The Company generates revenue primarily through its company-owned and managed clinics and through royalties, franchise fees, advertising fund contributions, IT-related income and computer software fees from its franchisees.
Revenues from Company-Owned or Managed Clinics. The Company earns revenues from clinics that it owns and operates or manages throughout the United States. Revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages, which feature discounted pricing as compared with its single-visit pricing. Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed. Any unused visits associated with monthly memberships are recognized on a month-to-month basis. The Company recognizes a contract liability (or a deferred revenue liability) related to the prepaid treatment plans for which the Company has an ongoing performance obligation. The Company derecognizes this contract liability and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. If the Company determines that it is not subject to unclaimed property laws for the portion of wellness package that it does not expect to be redeemed (referred to as “breakage”), then it recognizes breakage revenue in proportion to the pattern of exercised rights by the patient.
Royalties and Advertising Fund Revenue. The Company collects royalties from its franchisees, as stipulated in the franchise agreement, equal to 7 % of gross sales and a marketing and advertising fee currently equal to 2 % of gross sales. Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the term of the franchise agreement. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which generally requires a reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price). Franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to the Company’s performance obligation under the franchise agreement and therefore, such royalties are recognized as franchisee clinic level sales occur. Royalties are collected semi-monthly two working days after each sales period has ended.
Franchise Fees. The Company requires the entire non-refundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of 10 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
13
franchisees and offers no guarantees on their behalf. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation. Renewal franchise fees, as well as transfer fees, are also recognized as revenue on a straight-line basis over the term of the respective franchise agreement.
Software Fees. The Company collects a monthly fee from its franchisees for use of its proprietary chiropractic software, computer support and internet services support. These fees are recognized ratably on a straight-line basis over the term of the respective franchise agreement.
Capitalized Sales Commissions. Sales commissions earned by the regional developers and the Company’s sales force are considered incremental and recoverable costs of obtaining a franchise agreement with a franchisee. These costs are deferred and then amortized as the respective franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement.
Regional Developer Fees
The Company has a regional developer program where regional developers are granted an exclusive geographical territory and commit to a minimum development obligation within that defined territory. Regional developer fees paid to the Company are non-refundable and are amortized on a straight-line basis over the term of the regional developer agreement and recognized as a decrease to franchise cost of revenues.
Regional Developer Rights Contract Termination Costs
Advertising Costs
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 that 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.
14
Earnings (loss) per Common Share
Basic earnings (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed by giving effect to all potentially dilutive common shares including restricted stock and stock options.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| 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 | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
The following common stock equivalents were excluded from the computation of diluted earnings (loss) per share for the periods presented because including them would have been antidilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Weighted average dilutive securities: | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| 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. 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,
15
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, impairment of intangible assets, impairment of other long-lived assets, and purchase price allocations and related valuations.
Recent Accounting Pronouncements Adopted and Not Yet Adopted
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide greater disaggregation within their annual rate reconciliation, including new requirements to present reconciling items on a gross basis in specified categories, disclose both percentages and dollar amounts and disaggregate individual reconciling items by jurisdiction and nature when the effect of the items meet a quantitative threshold. The guidance also requires disaggregating the annual disclosure of income taxes paid, net of refunds received, by federal (national), state and foreign taxes, with separate presentation of individual jurisdictions that meet a quantitative threshold. The guidance is effective for annual periods beginning after December 15, 2024 on a prospective basis, with a retrospective option, and early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within the reported measure(s) of a segment's profit or loss, the amount and composition of any other segment items, the title and position of the CODM and how the CODM uses the reported measure(s) of a segment’s profit or loss to assess performance and decide how to allocate resources. The guidance is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2024, applied retrospectively with early adoption permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures.
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 that 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, Nature of Operations and Summary of Significant Accounting Policies—Revenue Recognition.
Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees
The Company currently franchises its concept across 41 states, the District of Columbia and Puerto Rico. The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement primarily consists of (a) initial franchise fees, (b) continuing franchise fees (royalties), (c) advertising fees, and (d) software fees. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which otherwise requires a reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price).
The Company recognizes the primary components of the transaction price as follows:
•Initial and renewal franchise fees, as well as transfer fees, are recognized as revenue ratably on a straight-line basis over the term of the respective franchise agreement, commencing with the execution of the franchise, renewal or transfer
16
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, the reported sales of the franchisee, or the clinic opening date, none of which require estimation. The Company believes its franchising arrangements do not contain a significant financing component.
The Company recognizes advertising fees received under franchise agreements as advertising fund revenue.
Capitalized Sales Commissions
Sales commissions earned by the regional developers and the Company’s sales force are considered incremental and recoverable costs of obtaining a franchise agreement with a franchisee. These costs are deferred and then amortized as the respective franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement.
Disaggregation of Revenue
The Company believes that the captions contained on the condensed consolidated income statements appropriately reflect the disaggregation of its revenue by major type for the three and nine months ended September 30, 2024 and 2023. 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
Rollforward of Accounts Receivable
Changes in the Company’s accounts receivable, net during the nine months ended September 30, 2024 were as follows:
| Accounts Receivable, Net | |||||
| Balance at December 31, 2022 | $ | ||||
| Balance at December 31, 2023 | $ | ||||
| Cash received against accounts receivable included at the beginning of the year | ( | ||||
| Net increase during the nine months ended September 30, 2024 | |||||
| Balance at September 30, 2024 | $ | ||||
Rollforward of Contract Liabilities and Contract Assets
17
Changes in the Company’s contract liability for deferred revenue from Company clinics during the nine months ended September 30, 2024 were as follows:
| Deferred Revenue from company clinics | |||||
| Balance at December 31, 2022 | $ | ||||
| Balance at December 31, 2023 | $ | ||||
| Revenue recognized that was included in the contract liability at the beginning of the year | ( | ||||
| Net increase during the nine months ended September 30, 2024 | |||||
| Balance at September 30, 2024 | $ | ||||
Changes in the Company’s contract liability for deferred franchise fees during the nine months ended September 30, 2024 were as follows:
| Deferred Revenue short and long-term | |||||
| Balance at December 31, 2022 | $ | ||||
| Balance at December 31, 2023 | $ | ||||
| Revenue recognized that was included in the contract liability at the beginning of the year | ( | ||||
| Net increase during the nine months ended September 30, 2024 | |||||
| Balance at September 30, 2024 | $ | ||||
The Company’s deferred franchise and development costs represent capitalized sales commissions. Changes during the nine months ended September 30, 2024 were as follows:
| Deferred Franchise and Development Costs short and long-term | |||||
| Balance at December 31, 2022 | $ | ||||
| Balance at December 31, 2023 | $ | ||||
| Cost of revenue recognized that was included in the contract asset at the beginning of the year | ( | ||||
| Net increase during the nine months ended September 30, 2024 | |||||
| Balance at September 30, 2024 | $ | ||||
The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of September 30, 2024:
| Contract liabilities expected to be recognized in | Amount | ||||
| 2024 (remainder) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
18
Note 3: Acquisitions and Assets Held for Sale
2023 Acquisition
On May 22, 2023, the Company entered into an Asset and Franchise Purchase Agreement pursuant to which the Company repurchased from the sellers three operating franchised clinics in California (the “CA Clinics Purchase”). As of the acquisition date, the Company operated the franchises as company-managed clinics. The total purchase price for the transactions was $1,188,764 to the seller (of which $109,767 was paid in the third quarter of 2023)., less $28,997 of net deferred revenue, resulting in total purchase consideration of $1,159,767 .
Based on the terms of the purchase agreement, the CA Clinics Purchase has been treated as an asset purchase under GAAP as there were no outputs or processes to generate outputs acquired as part of these transactions. Under an asset purchase, assets are recognized based on their cost to the acquiring entity. Cost is allocated to the individual assets acquired or liabilities assumed based on their relative fair values and does not give rise to goodwill.
The allocation of the total purchase price of the CA Clinics Purchase was as follows:
| Property and equipment | $ | |||||||
| Operating lease right-of-use asset | ||||||||
| Intangible assets | ||||||||
| Total assets acquired | ||||||||
| Deferred revenue | ( | |||||||
| Operating lease liability - current portion | ( | |||||||
| Operating lease liability - net of current portion | ( | |||||||
| Net purchase consideration | $ | |||||||
Intangible assets in the table above primarily consisted of reacquired franchise rights of $0.7 million amortized over their estimated useful lives of to seven years , customer relationships of $0.1 million amortized over an estimated useful life of two years , and assembled workforce of $0.2 million amortized over an estimated useful life of two years .
Assets Held for Sale
In 2023, the Company initiated plans to re-franchise the majority of its corporate-owned or managed clinics with plans to retain a small portion of high-performing clinics. In Q3 2024, the Company expanded the re-franchising plan to include additional clinic markets of company-owned and company-managed clinics, marketing the clinics in clusters grouped by proximity to larger private equity firms. The clustered clinics are in varying stages of sales negotiations with approximately 60 % of the Company's corporate clinic portfolio expected to close within one year with an estimated fair value of $19.5 million at September 30, 2024. The clinics sold or classified as held for sale at September 30, 2024 under the re-franchise plan did not represent a strategic shift that would have a major effect. As a result, the results of these clinics will continue to be reported in the Company’s operating results and in its Corporate Clinics segment until the sales are each finalized. Effective with the designation as held for sale, the Company discontinued recording depreciation on property and equipment, net, amortization of intangible assets, net and amortization of ROU assets for the clinics as required by GAAP. The Company also separately classified the related assets and liabilities of the clinics as held for sale in its September 30, 2024 and December 31, 2023 condensed consolidated balance sheets.
As a result of the change in the re-franchising marketing strategy during the three months ended September 30, 2024, there were certain high performing clinics with an estimated value of $13.8 million classified as held for sale at December 31, 2023 that no longer met the criteria to be classified as held for sale as it was no longer probable the clinics will sell within one year. As of September 30, 2024, the Company reclassified $5.3 million from assets held for sale to $1.4 million in property and equipment, net and $3.8 million in operating lease right-of-use assets and reclassified $5.2 million from liabilities to be disposed of to $3.5 million in operating lease liability and $1.7 million in deferred revenue from company clinics. For the three and nine months ended September 30, 2024, the Company recorded a loss of $1.4 0.9
19
operating lease right-of-use assets down to $3.0
Long-lived assets that meet the criteria for the held for sale designation are reported at the lower of their carrying value or fair value less estimated cost to sell. As a result of its evaluation of the recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales prices or the clinics estimated fair values, the Company recorded an estimated loss on disposal of $1.9 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and an estimated loss on disposal of $2.6 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively, in net loss on disposition or impairment in its condensed consolidated income statement.
During the nine months ended September 30, 2024, in connection with the sale of company-owned and managed clinics classified as held for sale as of December 31, 2023 for a combined sales price of $0.4 million, the Company sold $1.0 million assets held for sale, net of a $0.1 million valuation allowance and $0.7 million of liabilities to be disposed of in the condensed consolidated balance sheet as of September 30, 2024. As a result of the sales, the Company recorded a gain of zero and $39,000 in net loss disposition and impairment on the condensed consolidated income statement for the three and nine months ended September 30, 2024, respectively.
The principal components of the held for sale assets and liabilities as of December 31, 2023 and September 30, 2024 were as follows:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Assets | |||||||||||
Property and equipment, net | $ | $ | |||||||||
| Operating lease right-of-use asset | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Valuation allowance | ( | ( | |||||||||
| Total assets held for sale | $ | $ | |||||||||
| Liabilities | |||||||||||
| Operating lease liability, current and non-current | $ | $ | |||||||||
| Deferred revenue from company clinics | |||||||||||
| Total liabilities to be disposed of | $ | $ | |||||||||
The pre-tax income of the clinics designated as held for sale was $1.3 million and $0.9 million for the three months ended September 30, 2024 and 2023, respectively, the results of which exclude the allocation of overhead. The pre-tax income of the clinics designated as held for sale was $3.6 million and $4.0 million for the nine months ended September 30, 2024 and 2023, respectively, the results of which exclude the allocation of overhead.
20
Note 4: Property and Equipment
Property and equipment consisted of the following, excluding amounts related to properties classified as held for sale:
| September 30, 2024 | December 31, 2023 | ||||||||||
| 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 $0.9 million and $1.4 million for the three months ended September 30, 2024 and 2023, respectively. Depreciation expense was $3.0 million and $4.0 million for the nine months ended September 30, 2024 and 2023, respectively.
Amortization expense related to finance lease assets was $7,570 and $7,570 for the three months ended September 30, 2024 and 2023, respectively. Amortization expense related to finance lease assets was $22,710 and $22,709 for the nine months ended September 30, 2024 and 2023, respectively.
Construction in progress at September 30, 2024 and December 31, 2023 principally related to construction costs for company-owned or managed clinics and to the development of software.
Note 5: Fair Value Measurements
The Company’s financial instruments include cash, restricted cash, accounts receivable, accounts payable, accrued expenses and debt under the Credit Agreement (as defined in Note 7, Debt). The carrying amounts of its financial instruments, except for debt, approximate their fair value due to their short maturities, which is considered a Level 1 fair value measurement. 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;
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 September 30, 2024 and December 31, 2023, 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
21
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.
The assets and liabilities resulting from the Acquisitions (see Note 3, Acquisitions and Assets Held for Sale) were recorded at fair values on a nonrecurring basis and are considered Level 3 within the fair value hierarchy.
Long-lived assets that meet the held for sale criteria are reported at the lower of their carrying value or fair value, less estimated costs to sell. The estimated fair values of the company-owned or managed clinics classified as Held for Sale (see Note 3, Acquisitions and Assets Held for Sale) were recorded at fair values on a nonrecurring basis and are based upon Level 2 inputs, which includes a potential buyer agreed upon selling price or Level 3 inputs, which include the multiple earnings approach using historical financial performance of the clinic and historical acquisition trends based on previous reacquired franchise clinic purchases. The fair value measurement of the assets held for sale was recorded as $2.3 million based upon Level 2 inputs and $17.1 million based upon Level 3 inputs. As a result, the Company maintains a valuation allowance of $3.1 million to adjust the carrying value of the disposal group to fair value less cost to sell as of September 30, 2024.
Long-lived assets classified as held and used where the asset group was not determined to be recoverable are tested for impairment. The asset group was determined to be the clinic level, as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The long-lived assets fair values were determined by the following: Level 1 inputs, which included observable inputs from executed lease termination agreements; Level 2 inputs where available, which included using a valuation multiple (e.g, price per square foot) based on observable prices for comparable long-lived assets; and Level 3 inputs, which included the multiple earnings approach using the Company's historical earnings trend data, comparable historical asset sales by the Company and franchisees that were not exact matches, and (for calculating the fair value of intangible assets specifically) the Company’s historical experience, future projections and comparable market data include future cash flows, long-term growth rates, attrition rates and discount rates.
The carrying values of these asset groups impaired to their fair value during the nine months ended September 30, 2024 included ROU assets of $2.1 million that were written down to $1.7 million determined by Level 1 and Level 2 inputs. The carrying values of these asset groups impaired to their fair value also included property and equipment, net of $2.5 million that were written down to $1.9 million and reacquired rights of $298,510 that were written down to $252,746 both determined by Level 3 inputs discussed above. For the three and nine months ended September 30, 2024, the Company recorded an impairment loss of $0.5 million and $1.1 million, respectively, included in the net loss, disposition and impairment on the condensed consolidated income statement for impairment of long-lived assets classified as held and used where the asset group was not determined to be recoverable.
Note 6: Intangible Assets
In May 2023, the Company recognized $0.7 million, $0.1 million and $0.2 million of reacquired franchise rights, customer relationships and acquired workforce, respectively, from the CA Clinics Purchase (see Note 3, Acquisitions and Assets Held for Sale).
Intangible assets consisted of the following, excluding amounts related to intangible assets classified as held for sale:
| As of September 30, 2024 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||
| Reacquired franchise rights | $ | $ | ( | $ | |||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Assembled workforce | |||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||
22
| As of December 31, 2023 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||
| Reacquired franchise rights | $ | $ | ( | $ | |||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Assembled workforce | ( | ||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||
Amortization expense related to the Company’s intangible assets was $0.3 million and $1.0 million for the three months ended September 30, 2024 and 2023, respectively. Amortization expense was $1.2 million and $2.8 million for the nine months ended September 30, 2024 and 2023, respectively.
At September 30, 2024, no further amortization expense is expected for the remainder of 2024 and subsequent years as a result of the remaining net carrying value of intangible assets being reclassified as assets held for sale.
Note 7: 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 (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 a $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 was 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, which will occur on February 28, 2027. On January 17, 2024, the Company paid down the outstanding balance on its Debt under the Credit Agreement of $2,000,000 .
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. As of September 30, 2024, the Company was in compliance with all applicable financial and non-financial covenants under the Credit Agreement, and there is no outstanding balance as of September 30, 2024.
Note 8: Stock-Based Compensation
23
The Company grants stock-based awards under its Amended and Restated 2014 Incentive Stock Plan (the “2014 Plan”). The shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock. The Company may grant the following types of incentive awards under the 2014 Plan: (i) non-qualified stock options; (ii) incentive stock options; (iii) stock appreciation rights; (iv) restricted stock; and (v) restricted stock units. Each award granted under the 2014 Plan is subject to an award agreement that incorporates, as applicable, the exercise 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 September 30, 2024, 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 September 30, 2024.
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 historically has used the simplified method to calculate the expected term of stock option grants to employees as the Company did 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 and nine months ended September 30, 2024 and 2023.
The information below summarizes the stock option activity for the nine months ended September 30, 2024:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||||||
| Outstanding at December 31, 2023 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | ( | ||||||||||||||||
| Forfeited | ( | ||||||||||||||||
| Expired | ( | ||||||||||||||||
| Outstanding at September 30, 2024 | $ | ||||||||||||||||
| Exercisable at September 30, 2024 | $ | ||||||||||||||||
For the three months ended September 30, 2024 and 2023, stock-based compensation expense for stock options was $38,608 and $85,366 , respectively. For the nine months ended September 30, 2024 and 2023, stock-based compensation expense for stock options was $140,383 and $235,972 , respectively.
Restricted Stock
Restricted stock granted to employees generally vests in four equal annual installments, although on March 5, 2024, the Company granted 29,454 shares of restricted stock as part of a special award to certain executive employees that vest in one installment on the first anniversary of the grant. Restricted stock granted to non-employee directors typically vests in full one year after the date of grant.
The information below summarizes the restricted stock activity for the nine months ended September 30, 2024:
24
| Restricted Stock Awards | Shares | Weighted Average Grant-Date Fair Value per Award | ||||||||||||
| Non-vested at December 31, 2023 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | |||||||||||||
| Forfeited | ( | |||||||||||||
| Non-vested at September 30, 2024 | $ | |||||||||||||
For the three months ended September 30, 2024 and 2023, stock-based compensation expense for restricted stock was $391,642 and $440,703 , respectively. For the nine months ended September 30, 2024 and 2023, stock-based compensation expense for restricted stock was $1,335,327 and $973,324 , respectively.
Note 9: Income Taxes
During the three months ended September 30, 2024 and 2023, the Company recorded income tax expense of $0.1 million and income tax benefit of $0.2 million, respectively. During the nine months ended September 30, 2024 and 2023, the Company recorded income tax expense of $0.4 million and $0.5 million, respectively. The Company’s effective tax rates differ from the federal statutory tax rate for the three months ended September 30, 2024 due to change in valuation allowance. The Company’s effective tax rate differs from the statutory rate for the nine months ended September 30, 2024 primarily due to nondeductible meals and entertainment, change in valuation allowance, and state taxes. The effective tax rate for the three and nine months ended September 30, 2023 differs from the statutory rate primarily due to permanent differences, discrete items and state taxes.
Note 10: Commitments and Contingencies
Leases
The table below summarizes the components of lease expense and income statement location for the three and nine months ended September 30, 2024 and 2023:
| Line Items in the Company's Condensed Consolidated | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
| Income Statements | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | |||||||||||||||||||||||||
25
Supplemental information and balance sheet location related to leases (excluding amounts related to leases classified as held for sale) was as follows:
| September 30, 2024 | December 31, 2023 | ||||||||||
| 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 was as follows:
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | ||||||||||
| 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 | |||||||||||
26
Maturities of lease liabilities as of September 30, 2024 are as follows, excluding amounts related to leases classified as held for sale:
| Operating Leases | Finance Lease | ||||||||||
| 2024 (remainder) | $ | $ | |||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | $ | $ | |||||||||
| Less: Imputed interest | ( | ( | |||||||||
| Total lease obligations | |||||||||||
| Less: Current obligations | ( | ( | |||||||||
| Long-term lease obligation | $ | $ | |||||||||
During the third quarter of 2024, the Company held an operating lease that has not yet commenced for space to be used by the Company’s new corporate clinic. The lease is expected to result in additional ROU assets and liabilities of approximately $0.6 million. This lease is expected to commence during the fourth quarter of 2024, with a lease term of ten years .
Guarantee in Connection with the Sale of the Divested Business
In connection with the sale of a company-managed clinic in 2022, the Company guaranteed one future operating lease commitment assumed by the buyers. The Company is obligated to perform under the guarantee if the buyers fail to perform under the lease agreement at any time during the remainder of the lease agreement, which expires on May 31, 2027. At the date of sale, the undiscounted maximum potential future payments totaled $0.2 million. As of September 30, 2024, the undiscounted remaining lease payments under the agreement totaled $0.1 million. The Company had not recorded a liability with respect to the guarantee obligation as of September 30, 2024, as the Company concluded that payment under the lease guarantee was not probable.
Litigation
In the normal course of business, the Company is party to litigation and claims from time to time. The Company maintains insurance to cover certain litigation and claims.
During Q2 2024, the Company entered into settlement agreements from litigation related to employment matters of $1.5 million that was outside the normal course of business. Additionally, ongoing litigation related to a medical injury claim between a patient ("the Claimant") and the Company filed on September 5, 2023 has progressed to mediation. Although the Company intends to defend the claims vigorously, the Claimant and the Company recently agreed to participate in non-binding mediation of their dispute before a neutral mediator. At this time, the mediation process between the Claimants and the Company is ongoing with a range of possible settlement outcomes between $0.9 million and $6.0 million. As of September 30, 2024, the Company has accrued $0.9
During the three and nine months ended September 30, 2024, the Company incurred litigation expenses, including settlement costs related to employment matters and a medical injury claim that were outside the normal course of business of $0.0 million and $1.5 million, respectively, included as general and administrative expenses on the condensed consolidated income statement.
Note 11: 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.
27
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 September 30, 2024, the Company operated or managed 125 clinics under this segment. The Franchise Operations segment is composed of the operating activities of the franchise business unit. As of September 30, 2024, the franchise system consisted of 838 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.
The following tables present financial information for the Company’s two operating business segments.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Corporate clinics | $ | $ | $ | $ | |||||||||||||||||||
| Franchise operations | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Corporate clinics | $ | $ | $ | $ | |||||||||||||||||||
| Franchise operations | |||||||||||||||||||||||
| Corporate administration | |||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | |||||||||||||||||||
| Segment operating income (loss): | |||||||||||||||||||||||
| Corporate clinics | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Franchise operations | |||||||||||||||||||||||
| Total segment operating income | $ | $ | $ | $ | |||||||||||||||||||
| Reconciliation of total segment operating income to consolidated loss before income taxes: | |||||||||||||||||||||||
| Total segment operating income | $ | $ | $ | $ | |||||||||||||||||||
| Unallocated corporate | ( | ( | ( | ( | |||||||||||||||||||
| Consolidated loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| (Loss) income before income tax expense | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
28
| September 30, 2024 | December 31, 2023 | ||||||||||
| Segment assets: | |||||||||||
| 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 12: Employee Retention Credit
The employee retention credit (“ERC”), as originally enacted through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020, is a refundable credit against certain employment taxes equal to 50% of the qualified wages an eligible employer paid to employees from March 17, 2020 to December 31, 2020. The Disaster Tax Relief Act, enacted on December 27, 2020, extended the ERC for qualified wages paid from January 1, 2021 to June 30, 2021 and the credit was increased to 70% of qualified wages an eligible employer paid to employees during the extended period. The American Rescue Plan Act of 2021, enacted on March 11, 2021, further extended the ERC through December 31, 2021.
In October 2022, the Company filed an application with the Internal Revenue Services (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, the Company determined the appropriate accounting treatment by analogy to other guidance. The Company accounted for the ERC by analogy to International Accounting Standards (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards.
Under an IAS 20 analogy, a business entity would recognize the ERC 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.
The Company accounted for the $3.8 million ERC, net of the consulting fee, for the nine months ended September 30, 2023 as other income on the Statement of Income when the Company was reasonably assured that it 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 $0.9 million, net of the consulting expense deduction, for the nine months ended September 30, 2023.
Note 13: Related Party Transactions
Mr. Jefferson Gramm, Managing Partner of Bandera Partners LLC who is a beneficial holder of more than 5% of our outstanding common stock (approximately 26 % as of September 30, 2024) was appointed to the Board of Directors effective as of January 2, 2024.
29
In December 2020, we sold two franchise licenses at $39,900 and $29,900 each (which reflects the $10,000 multi-unit discount for the second license per the Franchise Disclosure Document) to Marshall Gramm, who is a family member of Mr. Jefferson Gramm. In April 2020 and 2021, we sold two franchise licenses at $39,900 and $29,900 , respectively (which reflects the $10,000 multi-unit discount for the second license per the Franchise Disclosure Document), to a franchisee of which Mr. Jefferson Gramm is a 50 % co-partner in the business.
These transactions involved terms no less favorable to us than those that would have been obtained in the absence of such affiliation. Although we have no way of estimating the aggregate amount of franchise fees, royalties, advertising fund fees, IT related income and computer software fees that these franchisees will pay over the life of the franchise licenses, the franchisees affiliated with Mr. Gramm are subject to such fees under the same terms and conditions as all other franchisees. For the three months ended September 30, 2024 and 2023, these franchisees affiliated with Mr. Gramm paid $34,215 and $31,087 , respectively, for such royalties and other fees. For the nine months ended September 30, 2024 and 2023, these franchisees affiliated with Mr. Gramm paid $102,080 and $89,607 , respectively, for such royalties and other fees.
In October 2020, Mr. Gramm loaned approximately $370,000 to an unaffiliated franchisee that owns and operates one franchise clinic. The loan is not secured by the assets of the business and there are no foreclosure rights. As of September 30, 2024, the remaining balance on the unsecured loan was $270,800 .
As of the three months ended September 30, 2024, as presented on the face of the balance sheet at September 30, 2024, the Company owes Mr. Gramm $375,000 . The payable is a result of professional service costs incurred by the Company and initially paid by Mr. Gramm during the confidential chief executive search. These costs were fully reimbursed to Mr. Gramm on October 31, 2024.
Note 14: Subsequent Events
Resignation of Peter D. Holt
Effective October 10, 2024, Peter D. Holt resigned as Chief Executive Officer of the Company and as a member of the Company's Board of Directors. In connection with Mr. Holt’s resignation, as of October 10, 2024, the Company and Mr. Holt entered into a confidential separation agreement and release of claims. In Q4 2024, the Company recorded an accrual of $0.6 million for payments that will be made as a result of the separation agreement through September 2025.
Appointment of Sanjiv Razdan as President and Chief Executive Officer
Effective October 14, 2024, the Board of Directors of the Company appointed Sanjiv Razdan as President and Chief Executive Officer of the Company and as a member of the Company's Board of Directors.
In connection with Mr. Razdan’s appointment, the Company entered into an employment agreement with Mr. Razdan, effective as of October 14, 2024 (the “Employment Agreement”). Under the terms of the Employment Agreement, Mr. Razdan is entitled to an annual base salary of $550,000 (subject to annual review by the Company’s Board of Directors or a committee thereof). Mr. Razdan is also eligible to participate in the Company’s executive compensation programs, to receive a discretionary annual bonus as determined by the Company’s Board of Directors or a committee thereof, and to receive annual and periodic stock-based compensation awards as determined by the Company’s Board of Directors or a committee thereof. Mr. Razdan is entitled to receive other standard benefits, participation in any group insurance, pension, retirement, vacation, expense reimbursement, relocation program (as applicable), and other plans, programs, and benefits approved by the Company’s Board of Directors or a committee thereof and made available from time to time to other executive employees of the Company, and certain insurance benefits.
Mr. Razdan is entitled to a monthly travel and living allowance of $2,000 and to severance benefits upon certain termination events.
On October 14, 2024, the Company also entered into a Stock Option Agreement and a Restricted Stock Award Agreement with Mr. Razdan providing awards of Stock Options and Restricted Stock Award with an aggregate value of $800,000 on the date of grant. The awards qualify as “inducement grants” under rules of the Nasdaq stock exchange and are in addition to future annual grants that Mr. Razdan may receive under the terms of the Employment Agreement and the Company’s existing 2024 Incentive Stock Plan.
Ongoing litigation
30
On October 22, 2024, the Company entered into mediation on ongoing litigation related to a medical injury claim filed by Claimant on September 5, 2023. Although the Company intends to defend the claims vigorously, the Claimant and the Company agreed to participate in non-binding mediation of their dispute before a neutral mediator. At this time, the mediation process between the Claimants and the Company is ongoing with a range of possible settlement outcomes between $0.9 million and $6.0 million. As of September 30, 2024, the Company has accrued $0.9
Repayment of related party accounts payable
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, 2023 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 for the fiscal year ended December 31, 2023, filed with the SEC on March 8, 2024.
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 that 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 (which includes contract termination costs associated with reacquired regional developer rights), stock-based compensation expense, bargain purchase gain, (gain) loss on disposition or impairment, costs related to restatement filings, restructuring costs, litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business) and other income related to the ERC. There were no costs related to bargain purchase gain for the three and nine months ended September 30, 2024 and 2023.
Key Clinic Development Trends. As of September 30, 2024, we and our franchisees operated or managed 963 clinics, of which 838 were operated or managed by franchisees and 125 were operated as company-owned or managed clinics. Of the 125 company-owned or managed clinics, 58 were constructed and developed by us, and 67 were acquired from franchisees.
Our current strategy is to grow through the sale and development of additional franchises. After evaluating options for improvement, during 2023 the board authorized management to initiate a plan to re-franchise or sell the majority of our company-owned or managed clinics. During Q3 2024, the Company expanded the re-franchising plan to include the full portfolio of company-owned and company-managed clinics, marketing the clinics in clusters grouped by proximity to larger private equity firms. This refined strategy will leverage our greatest strength - our capacity to build a franchise - to drive long-term growth for both our franchisees and The Joint as a public company. We have created a robust framework for the re-franchising effort,
31
organizing clinics into clusters, and generating comprehensive disclosure packets for marketing efficiency. We have given initial preference to existing franchisees and in Q3 2024 have expanded the marketing efforts to larger private equity firms interested in purchasing and operating large market-based clinic clusters and have received significant interest to date in most markets. Our goal will be to generate significant processes that will provide us with value creating capital allocation opportunities. These opportunities could include, but are not limited to, reinvestment in the brand and related marketing, continued investment in our IT platforms, the repurchase of RD territories, and/or a stock repurchase program.
The number of franchise licenses sold for the year ended December 31, 2023 was 55, compared with 75 and 156 licenses for the years ended December 31, 2022 and 2021, respectively. We ended the first nine months in 2024 with 16 regional developers who were responsible for 38% of the 29 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 United States.
We believe that we continue to have a sound business concept 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 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 the Ukraine War, the Israel-Gaza conflict, labor shortages, and inflation and other cost increases. We anticipate that 2024 will continue to be a volatile macroeconomic environment.
The primary inflationary factor affecting our operations is labor costs. In 2023 and 2024, clinics company-owned or managed by us 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. While we anticipate that these continued headwinds will be partially mitigated by pricing actions, 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.
In addition, the increase in interest rates and the expectation that interest rates will continue to remain elevated 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.
Other Significant Events and/or Recent Developments
For the three months ended September 30, 2024, compared to the prior year period:
•System-wide comp sales of clinics that have been open for at least 13 full months increased 4%.
•System-wide comp sales for mature clinics open 48 months or more decreased (2)%.
•System-wide sales for all clinics open for any amount of time increased 8%.
On June 24, 2024, we entered into an agreement pursuant to which we repurchased the right to develop franchises in various counties in Maryland. The total consideration for the transaction was $0.6 million. We carried an upfront regional developer fee liability 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 upfront regional developer fee liability was netted against the aggregate purchase price. We recognized the net amount of $0.5 million as a general and administrative expense for the nine months ended September 30, 2024.
Effective October 10, 2024, Peter D. Holt resigned as Chief Executive Officer of the Company and as a member of the Company's Board of Directors.
32
Effective October 14, 2024, the Board of Directors of the Company appointed Sanjiv Razdan as President and Chief Executive Officer of the Company and as a member of the Company's Board of Directors.
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.
Critical Accounting Estimates
There were no changes in our critical accounting estimates during the nine months ended September 30, 2024 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023.
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 September 30, 2024 Compared with Three Months Ended September 30, 2023
Components of revenues were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Revenues from company-owned or managed clinics | $ | 17,544,658 | $ | 17,882,303 | $ | (337,645) | (1.9) | % | |||||||||||||||
| Royalty fees | 7,870,033 | 7,143,791 | 726,242 | 10.2 | % | ||||||||||||||||||
| Franchise fees | 697,688 | 754,029 | (56,341) | (7.5) | % | ||||||||||||||||||
| Advertising fund revenue | 2,247,663 | 2,050,106 | 197,557 | 9.6 | % | ||||||||||||||||||
| IT related income and software fees | 1,431,321 | 1,301,577 | 129,744 | 10.0 | % | ||||||||||||||||||
| Other revenues | 407,127 | 342,143 | 64,984 | 19.0 | % | ||||||||||||||||||
| Total revenues | $ | 30,198,490 | $ | 29,473,949 | $ | 724,541 | 2.5 | % | |||||||||||||||
Consolidated Results
Total revenues increased by $0.7 million, primarily due to the continued expansion and revenue growth of our franchise base.
Corporate Clinics
Revenues from company-owned or managed clinics decreased, primarily due to the divestitures of our company-owned or managed clinics in 2024. As of September 30, 2024 and 2023, there were 125 and 136 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 September 30, 2024 and 2023, there were 838 and 778 franchised clinics in operation, respectively.
•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 above.
33
•Other revenues primarily consisted of merchant income associated with credit card transactions.
Total Revenues - Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023
Components of revenues were as follows:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Revenues from company-owned or managed clinics | $ | 52,730,898 | $ | 52,813,098 | $ | (82,200) | (0.2) | % | |||||||||||||||
| Royalty fees | 23,303,907 | 21,181,973 | $ | 2,121,934 | 10.0 | % | |||||||||||||||||
| Franchise fees | 2,072,665 | 2,179,822 | $ | (107,157) | (4.9) | % | |||||||||||||||||
| Advertising fund revenue | 6,654,974 | 6,043,563 | $ | 611,411 | 10.1 | % | |||||||||||||||||
| IT related income and software fees | 4,233,133 | 3,746,394 | $ | 486,739 | 13.0 | % | |||||||||||||||||
| Other revenues | 1,185,640 | 1,117,103 | $ | 68,537 | 6.1 | % | |||||||||||||||||
| Total revenues | $ | 90,181,217 | $ | 87,081,953 | $ | 3,099,264 | 3.6 | % | |||||||||||||||
Consolidated Results
Total revenues increased by $3.1 million, primarily due to the continued expansion and revenue growth of our franchise base.
Corporate Clinics
Revenues from company-owned or managed clinics decreased slightly, primarily due to the divestitures of our company-owned or managed clinics in 2024, partially offset by improved same-store sales growth in newer clinics. As of September 30, 2024 and 2023, there were 125 and 136 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 September 30, 2024 and 2023, there were 838 and 778 franchised clinics in operation, respectively.
•Franchise fees decreased due to the impact of accelerated revenue recognition resulting from the terminated franchise license agreements in the current period compared to the prior period.
•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 Note 1, Nature of Operations and Summary of Significant Accounting Policies—Revenue Recognition, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
•Other revenues primarily consist of merchant income associated with credit card transactions.
Cost of Revenues
| Cost of Revenues | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Three Months Ended September 30, | $ | 2,823,267 | $ | 2,604,100 | $ | 219,167 | 8.4 | % | ||||||||||||||||||
| Nine Months Ended September 30, | $ | 8,366,014 | $ | 7,674,296 | $ | 691,718 | 9.0 | % | ||||||||||||||||||
34
For the three months ended September 30, 2024, as compared with the three months ended September 30, 2023, the total cost of revenues increased primarily 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 in regional developer regions. For the nine months ended September 30, 2024, as compared with the nine months ended September 30, 2023, the total cost of revenues increased primarily 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 in regional developer regions.
Selling and Marketing Expenses
| Selling and Marketing Expenses | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Three Months Ended September 30, | $ | 4,762,395 | $ | 4,301,017 | $ | 461,378 | 10.7 | % | ||||||||||||||||||
| Nine Months Ended September 30, | $ | 14,050,343 | $ | 13,169,079 | $ | 881,264 | 6.7 | % | ||||||||||||||||||
For the three months ended September 30, 2024, as compared with the three months ended September 30, 2023, selling and marketing expenses increased due to increase in advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by the company-owned or managed clinics. For the nine months ended September 30, 2024, as compared with the nine months ended September 30, 2023, the selling and marketing expenses increase was driven by the in-person national franchise conference held in 2024 as well as by increased advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by the company-owned or managed clinics.
Depreciation and Amortization Expenses
| Depreciation and Amortization Expenses | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Three Months Ended September 30, | $ | 1,239,233 | $ | 2,349,206 | $ | (1,109,973) | (47.2) | % | ||||||||||||||||||
| Nine Months Ended September 30, | $ | 4,166,952 | $ | 6,893,529 | $ | (2,726,577) | (39.6) | % | ||||||||||||||||||
Depreciation and amortization expenses decreased for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to no depreciation and amortization expenses recorded during the three and nine months ended September 30, 2024 related to the assets held for sale at September 30, 2024.
General and Administrative Expenses
| General and Administrative Expenses | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Three Months Ended September 30, | $ | 20,754,264 | $ | 20,212,750 | $ | 541,514 | 2.7 | % | ||||||||||||||||||
| Nine Months Ended September 30, | $ | 63,588,864 | $ | 60,156,022 | $ | 3,432,842 | 5.7 | % | ||||||||||||||||||
General and administrative expenses increased for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, primarily due (i) an increase in payroll and related expenses of $0.5 million to support continued clinic count and revenue growth in both operating segments and the re-franchising efforts in the corporate clinic segment and (ii) an increase in professional and legal fees of $0.5 million mostly due to the costs incurred from the chief executive search partially offset by (iii) a decrease of $0.5 million utilities and facilities expense due to the discontinuance of amortization expense on ROU assets held for sale. General and administrative expenses increased for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to the litigation expenses, including settlement costs related to employment matters that were outside the normal course of business of $1.5 million, an increase in professional and legal fees of $0.5 million due to the chief executive search, and increases in the following to support continued clinic count and revenue growth in both operating segments and to support the re-franchising efforts in the corporate clinic segment: (i) payroll and related expenses of $2.2 million; (ii) professional and advisory fees of $0.7 million; and (iii) legal and accounting fees of $0.4 million
35
partially offset by a decrease in utilities and facilities expenses in the corporate clinic segment of $1.9 million due to the discontinuance of amortization expense on ROU assets held for sale. As a percentage of revenue, general and administrative expenses during the nine months ended September 30, 2024 and 2023 were 71% and 69%, respectively.
Loss from Operations - Three Months Ended September 30, 2024 Compared with Three Months Ended September 30, 2023
| Three Months Ended September 30, | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Loss from Operations | $ | (3,185,887) | $ | (898,047) | $ | (2,287,840) | 254.8 | % | ||||||||||||||||||
Consolidated Results
Consolidated loss from operations increased by $2.3 million for the three months ended September 30, 2024 compared with the three months ended September 30, 2023, primarily due to the re-franchising efforts in the corporate clinics segment.
Corporate Clinics
Our corporate clinics segment had loss from operations of $2.7 million for the three months ended September 30, 2024, a decrease of $1.8 million compared to loss from operations of $931,366 for the prior year period. The decrease was primarily due to:
•decrease in revenues of $0.3 million from company-owned or managed clinics; plus
•$1.5 million net increase in operating expenses due to the re-franchising efforts with changes in the following: (i) an increase in net loss on disposition or impairment of $2.9 million, (ii) an increase in selling and marketing expenses of $0.2 million, (iii) a decrease in depreciation and amortization expense of $1.1 million, (iv) and a decrease in utilities and facilities expenses of $0.5 million.
Franchise Operations
Our franchise operations segment had income from operations of $5.6 million for the three months ended September 30, 2024, an increase of $0.5 million, compared to income from operations of $5.1 million for the prior year period. This decrease was primarily due to:
•increase of $1.1 million in total revenues; partially offset by
•increase in cost of revenue of $0.2 million driven primarily by an increase in the number of franchised clinics in operation during the current period, along with continued sales growth in existing franchised clinics in regional developer regions,
•increase in selling and marketing expenses of $0.3 million driven by an increase in advertising fund expenditures from a larger franchise base; and
•increase of $0.1 million in payroll-related expenses.
Unallocated Corporate
Unallocated corporate expenses for the three months ended September 30, 2024 increased by $0.9 million compared to the prior year period, primarily due to an increase of $0.7 million of professional services primarily related to the chief executive search and IT support plus increases in payroll-related expenses of $0.3 million partially offset by decrease in accounting and legal fees of $0.1 million.
Loss from Operations - Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023
36
| Nine Months Ended September 30, | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Loss from Operations | $ | (5,593,597) | $ | (1,925,711) | $ | (3,667,886) | 190.5 | % | ||||||||||||||||||
Consolidated Results
Consolidated loss from operations increased by $3.7 million for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023, primarily due to an increase in unallocated corporate expenses partially offset by increased total revenues of $3.1 million for the nine months ended September 30, 2024.
Corporate Clinics
Our corporate clinics segment had loss from operations of $1.5 million for the nine months ended September 30, 2024, a decrease of $0.2 million compared to loss from operations of $1.3 million for the prior year period. The decrease was primarily due to:
•decrease in revenues of $0.1 million from company-owned or managed clinics; plus
•$0.5 million increase in payroll-related expenses; offset by
•$0.2 million decrease in selling and marketing expenses; and
•$0.2 million net decrease in operating expenses due to the re-franchising efforts with changes in the following: (i) a decrease in depreciation and amortization expense of $2.8 million, (ii) a decrease in utilities and facilities expenses of $1.9 million, and (iii) an increase in net loss on disposition or impairment of $4.5 million.
Franchise Operations
Our franchise operations segment had income from operations of $14.9 million for the nine months ended September 30, 2024, an increase of $1.0 million, compared to income from operations of $13.9 million for the prior year period. This increase was primarily due to:
•increase of $3.2 million in total revenues; plus
•decrease of general and administrative expenses related to reacquired regional developer rights of $0.3 million; partially offset by
•increase of $0.7 million in cost of revenues primarily due to an increase in regional developer royalties; and
•increase of $1.5 million in operating expenses, primarily due to an increase in: (i) selling and marketing expenses resulting from a larger franchise base of $1.1 million, (ii) payroll-related expenses of $0.7 million, partially offset by (iii) reacquired franchise rights of $0.3 million in 2023.
Unallocated Corporate
Unallocated corporate expenses for the nine months ended September 30, 2024 increased by $4.5 million compared to the prior year period, primarily due to litigation expenses, including settlement costs related to employment matters that were outside the normal course of business of $1.5 million incurred for the nine months ended September 30, 2024 and no comparable costs for the same period in 2023 plus increases in state and local taxes of $0.1 million, increases in insurance costs of $0.1 million and increases in the following to support the re-franchising strategy efforts: (i) payroll and related expenses of $1.1 million; (ii) professional and advisory fees of $1.2 million; (iii) and legal and accounting fees of $0.5 million.
Other Income (Expense), Net
37
| Three Months Ended September 30, | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Other income (expense), net | $ | 83,333 | $ | (6,244) | $ | 89,577 | 1,434.6 | % | ||||||||||||||||||
Other income (expenses), net increased during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to decreased interest expense due to the pay down of the outstanding balance on our Debt under the Credit Agreement in 2024.
| Nine Months Ended September 30, | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Other income (expense), net | $ | 198,873 | $ | 3,708,399 | $ | (3,509,526) | 94.6 | % | ||||||||||||||||||
Other income (expenses), net decreased during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to the recognition and receipt of the $3.8 million of ERC, net of the consulting fee, in the first quarter of 2023, partially offset by net interest income (expense) of $0.3 million.
Income Tax Expense
| Income Tax Expense (Benefit) | 2024 | 2023 | Change from Prior Year | Percent Change from Prior Year | ||||||||||||||||||||||
| Three Months Ended September 30, | $ | 62,585 | $ | (188,018) | $ | 250,603 | (133.3) | % | ||||||||||||||||||
| Nine Months Ended September 30, | $ | 419,834 | $ | 493,286 | $ | (73,452) | (14.9) | % | ||||||||||||||||||
Income tax expense increased during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to increased earnings in the variable interest entities partially offset by a change in the valuation allowance assessment as of December 31, 2023 at the Joint Corp.
Income tax expense decreased during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to decreased earnings before income tax expense and a change in the valuation allowance assessment as of December 31, 2023 at the Joint Corp, which was partially offset by increased earnings at the variable interest entities.
Non-GAAP Financial Measures
The table below reconciles net income (loss) to Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023.
38
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Non-GAAP Financial Data: | |||||||||||||||||||||||
| Net (loss) income | $ | (3,165,139) | $ | (716,273) | $ | (5,814,558) | $ | 1,289,402 | |||||||||||||||
| Net interest expense | (83,333) | 6,244 | (198,873) | 70,905 | |||||||||||||||||||
| Depreciation and amortization expense | 1,239,233 | 2,349,206 | 4,166,952 | 6,893,529 | |||||||||||||||||||
| Tax expense (benefit) | 62,585 | (188,018) | 419,834 | 493,286 | |||||||||||||||||||
| EBITDA | (1,946,654) | 1,451,159 | (1,426,645) | 8,747,122 | |||||||||||||||||||
| Stock compensation expense | 430,250 | 526,069 | 1,475,710 | 1,209,296 | |||||||||||||||||||
| Acquisition related expenses | — | 15,222 | 478,710 | 873,214 | |||||||||||||||||||
| Loss on disposition or impairment | 3,805,218 | 904,923 | 5,602,641 | 1,114,738 | |||||||||||||||||||
| Restructuring costs | 153,182 | — | 454,457 | — | |||||||||||||||||||
| Litigation expenses | (9,000) | — | 1,481,000 | — | |||||||||||||||||||
| Other income related to the ERC | — | — | — | (3,779,304) | |||||||||||||||||||
| Adjusted EBITDA | $ | 2,432,996 | $ | 2,897,373 | $ | 8,065,873 | $ | 8,165,066 | |||||||||||||||
Adjusted EBITDA consists of net income (loss) before interest, income taxes, depreciation and amortization, acquisition related expenses (which includes contract termination costs associated with reacquired regional developer rights), stock-based compensation expense, bargain purchase gain, (gain) loss on disposition or impairment, costs related to restatement filings, restructuring costs, litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business) and other income related to the ERC. There were no costs related to restatement filings or bargain purchase gain for the three and nine months ended September 30, 2024 and 2023. 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 September 30, 2024, we had unrestricted cash and short-term bank deposits of $20.7 million and $20 million of available capacity under the Line of Credit. While unfavorable global economic or political conditions create potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations, our anticipated cash flows from investments as we execute our re-franchising strategy and amounts available under our Line of Credit will be sufficient to fund our anticipated operating and investment needs for at least the next 12 months.
While the interruptions, delays and/or cost increases resulting from, political instability and geopolitical tensions, economic weakness, inflationary pressures, increase in interest rates and other factors have created uncertainty as to general economic conditions for 2024 and beyond, as of the date of this Quarterly Report on Form 10-Q, 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 2024, 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 could be dependent on our ability to access additional funds through the debt and/or equity markets. If the equity or debt markets deteriorate, including as a result of economic weakness, political unrest or 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
39
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. 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 decreased by $6.0 million to $5.3 million for the nine months ended September 30, 2024, compared to $11.3 million for the nine months ended September 30, 2023. The decrease was primarily attributable to the receipt of the $4.8 million ERC in the prior period, in addition to an increase in general and administrative expenses over the prior year period.
Net cash used in investing activities was $0.5 million and $4.9 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, this included proceeds from sales of clinics of $0.4 million, and purchases of property and equipment of $0.9 million. For the nine months ended September 30, 2023, this included acquisitions of $1.1 million, and the purchases of property and equipment of $3.8 million.
Net cash used in financing activities for the nine months ended September 30, 2024 was $2.0 million, compared to $0.2 million in net cash provided by financing activities for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, this included paying down the outstanding balance on its Debt under the Credit Agreement of $2.0 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 Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements that may impact our financial statements.
Off-Balance Sheet Arrangements
During the nine months ended September 30, 2024, 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 September 30, 2024, 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, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. 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 procedures as of September 30, 2024, 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
40
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 quarter ended September 30, 2024 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
Information regarding our legal proceedings is discussed in Note 10 to our condensed consolidated financial statements, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
We documented our risk factors in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to our risk factors since the filing of that Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 5. OTHER INFORMATION
During the quarter ended September 30, 2024, no director or officer of our company adopted terminated
41
ITEM 6. EXHIBITS
EXHIBIT INDEX
| Exhibit Number | Description of Document | |||||||
| 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
42
THE JOINT CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| THE JOINT CORP. | ||||||||
| Dated: November 7, 2024 | By: | /s/ Sanjiv Razdan | ||||||
| Sanjiv Razdan Chief Executive Officer and President (Principal Executive Officer) | ||||||||
| Dated: November 7, 2024 | By: | /s/ Jake Singleton | ||||||
| Jake Singleton Chief Financial and Accounting Officer (Principal Financial Officer) | ||||||||
43