The Joint Corp. (NASDAQ: JYNT), a national operator, manager, and
franchisor of chiropractic clinics, announced the company intends
to restate previously issued audited financial statements as of and
for the year ending December 31, 2022 contained in the Annual
Report on Form 10-K for the year ended December 31, 2022 and the
unaudited interim financial statements contained in the Quarterly
Reports on Form 10-Q for the quarters and cumulative periods ended
June 30, 2022, and September 30, 2022 (the “Previously Issued
Financial Statements”) related to the reacquisition of regional
developer rights and transfer pricing adjustments for the Company’s
variable interest entities.
Background and Determination
The Company enters into agreements with its regional developers
(the “RD Agreements”). Under each RD Agreement, the Company sells
to each of its regional developers the exclusive rights to open a
minimum number of clinics in a defined territory (the “Regional
Developer Rights”). Upon entering into each RD Agreement, the
regional developer pays the Company an upfront fee for such
Regional Developer Rights. Each regional developer helps the
Company to identify and qualify potential new franchisees in its
territory and assists the Company in providing field training,
clinic openings and ongoing support. In return, the Company shares
with the regional developer part of the initial upfront franchise
fee paid to the Company by new franchisees in the regional
developer’s protected territory and pays the regional developer 3%
of the 7% ongoing royalties the Company collects from the
franchisees in the regional developer’s protected territory. From
time to time, the Company has re-acquired Regional Developer Rights
from certain of its regional developers.
Historically, the Company has recorded the re-acquired Regional
Developer Rights as an intangible asset and amortized the
re-acquired Regional Developer Rights over the contractual terms
under the RD Agreement remaining at the time of the re-acquisition.
The Company has concluded that this treatment was incorrect in
accordance with U.S. GAAP. The Company should not have capitalized
the re-acquired Regional Developer Rights but instead should have
recognized the full cost of the re-acquisition as an expense in the
respective period. In addition, the Company has historically
recorded the upfront fee paid by the regional developer as a
deferred liability, which was then recognized ratably to revenue as
the regional developer performed various service obligations. The
amended treatment will still defer the upfront payment, but the
deferred liability will be ratably recognized against cost of
revenue as an offset against future commissions.
Additionally, the Company files standalone Federal corporate and
State tax returns as well as city income and franchise tax returns
for itself and its four variable interest entities (“VIEs") which
it controls under its corresponding management agreements. The four
VIEs were set up due to the various States’ regulatory and legal
requirements. The Joint Corp has management agreements with each of
the four VIEs (“PCs or professional corporations”).
The Company has historically charged the VIEs a management fee
for the benefit of the Company providing non-clinical
administrative services needed by the professional corporation
chiropractic practice. However, the standalone professional
corporations have not historically been profitable from an income
tax perspective and are fully valuing their deferred tax assets and
related attributes for ASC 740 purposes. As such, the Company has
initiated a review of its transfer pricing with the VIEs.
The economic compensation or profitability resulting from an
intercompany transaction between two or more parties is based on
each party’s relative contribution to the economic activity under
analysis. Or stated in transfer pricing terms, the economic
compensation or profitability from an intercompany transaction is
based on each party’s functions performed, risks assumed, and
assets employed in the activity.
Overall, the PCs earned annual losses were not consistent with
their function, risk, and asset profile for transfer pricing. As
such, the Company has estimated transfer pricing adjustments which
were computed based on assumed targets of profitability. The
resulting operating profit, after incorporating estimated transfer
pricing adjustments, were further used as a means for computing
overall potential tax exposure and correlative benefit.
The Company plans to restate and reissue the Previously Issued
Financial Statements to reflect the revised method of accounting
for the re-acquired Regional Developer Rights and transfer pricing
adjustments. The Company intends to file as soon as practical a
10-K/A, which will contain the restated Previously Issued Financial
Statements utilizing the correct methods of accounting. Based on
the Company’s preliminary estimates, the Company will also revise
and reissue the financial statements for the year ended December
31, 2021, and the quarters and cumulative periods ended March 31,
2021, June 30, 2021 and September 30, 2021 (the “2021 Financial
Statements”) in the 10-K/A in order to make meaningful comparisons
of the Previously Issued Financial Statements to the 2021 Financial
Statements. While the Company currently anticipates that the
changes to the 2021 Financial Statements will not be material in
the aggregate, it is possible the conclusion with respect to the
materiality of the errors on the 2021 Financial Statements will
change upon finalizing the revised amounts.
Additionally, going forward, the Company will utilize the
amended methods of accounting for any financial statements in
newly-issued periodic reports. The Company intends to file its
quarterly report on Form 10-Q for the quarter ended June 30, 2023
(the “2023 Q2 10-Q”) as soon as practicable after the filing of its
10-K/A. The six month period ended June 30, 2023 included in the
2023 Q2 10Q will include revised results of operations for the
period ended March 31, 2023 for purposes of comparison. However,
the Company anticipates that the changes to the financial
statements for the quarter ended March 31, 2023 will not be
material in the aggregate.
The Company is also evaluating the impact of the identified
errors on its internal control over financial reporting and
disclosure controls and procedures. Although the evaluation is not
yet complete, the Company expects it will result in one or more
material weaknesses in the Company’s internal control over
financial reporting and that its disclosure controls and procedures
were ineffective during the applicable periods related to the
Previously Issued Financial Statements. The Company continues to
evaluate and implement remedial measures to address such material
weaknesses.
Estimated Non-cash Impact
The Company is in the process of, but has not yet completed, its
determination of the degree to which these errors will have an
effect on the Company’s Previously Issued Financial Statements.
Based on its review to date, the following preliminary estimated
impact of the identified errors on the Previously Issued Annual
Financial Statements are management’s current estimates of the
impact and are subject to change in connection with the completion
of the restatements.
For the year ended December 31, 2022 the annual impact of the
re-acquired Regional Developer Rights to the historical period will
be:
- An estimated reduction of total
revenue of approximately $0.7M, with an offsetting adjustment to
Cost of Revenue of the same $0.7M.
- An estimated reduction in
Depreciation and Amortization expenses of approximately $1.0M, and
an increase in General & Administrative expenses of
approximately $2.2M.
- Resulting in an estimated reduction
of Net Income by $1.2M or $0.9M net of income taxes.
For the year ended December 31, 2022 the annual impact of the
transfer pricing adjustments to the historical period will be:
- An estimated income tax benefit of
$0.3M.
Therefore, the total aggregated impact of both the re-acquired
Regional Developer Rights and transfer pricing adjustments for the
year ended December 31, 2022 would be a reduction to net income of
approximately $0.6M.
The Company estimates that these impacts would result in no
change to Adjusted EBITDA for the period, or to cash, cash
equivalents and restricted cash as of December 31, 2022.
Second Quarter 2023 Conference Call
Management intends to hold a conference call to discuss the
results for the quarter ending June 30, 2023 shortly after filing
the Form 10-Q for the period ending June 30, 2023 with the SEC.
Forward-Looking Statements
This press release contains statements about future events and
expectations that constitute forward-looking statements.
Forward-looking statements, including expectations about the timing
of the completion and filing of the 10-K/A and the Quarterly Report
on Form 10-Q for the period ended June 30, 2023 and the anticipated
effects of the errors on the Previously Issued Financial
Statements, are based on our beliefs, assumptions and expectations
of industry trends, our future financial and operating performance
and our growth plans, taking into account the information currently
available to us. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties
that may cause our actual results to differ materially from the
expectations of future results we express or imply in any
forward-looking statements, and you should not place undue reliance
on such statements. Factors that could contribute to these
differences include, but are not limited to, the probable breach of
certain covenants in our credit facility arising out of our SEC
filing delinquency, which could result in an event of default,
allowing our lender to terminate its commitments under the credit
facility and require the immediate payment of all principal and
interest due if we fail to secure a waiver from the lender;
increases in our borrowing costs under our credit facility, given
that borrowings under the credit facility bear interest at rates
tied to certain rising benchmark interest rates; state laws
limiting the use our business model, including prohibitions on
advance payment for chiropractic services, which recently caused us
to elect not to offer franchises in South Dakota and Wyoming;
increased costs to comply with a new SEC reporting rule enhancing
and standardizing disclosures regarding cybersecurity incidents and
cybersecurity risk management, the factors described in our filings
with the SEC, including in the section entitled “Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2022
filed with the SEC on March 10, 2023 and subsequently-filed current
and quarterly reports. Words such as, "anticipates," "believes,"
"continues," "estimates," "expects," "goal," "objectives,"
"intends," "may," "opportunity," "plans," "potential," "near-term,"
"long-term," "projections," "assumptions," "projects," "guidance,"
"forecasts," "outlook," "target," "trends," "should," "could,"
"would," "will," and similar expressions are intended to identify
such forward-looking statements. We qualify any forward-looking
statements entirely by these cautionary factors. We assume no
obligation to update or revise any forward-looking statements for
any reason or to update the reasons actual results could differ
materially from those anticipated in these forward-looking
statements, even if new information becomes available in the
future. Comparisons of results for current and any prior periods
are not intended to express any future trends or indications of
future performance, unless expressed as such, and should only be
viewed as historical data.
About The Joint Corp. (NASDAQ: JYNT) The Joint
Corp. (NASDAQ: JYNT) revolutionized access to chiropractic care
when it introduced its retail healthcare business model in 2010.
Today, it is the nation's largest operator, manager and franchisor
of chiropractic clinics through The Joint Chiropractic network. The
company is making quality care convenient and affordable, while
eliminating the need for insurance, for millions of patients
seeking pain relief and ongoing wellness. With more than 900
locations nationwide and over 12 million patient visits
annually, The Joint Chiropractic is a key leader in the
chiropractic industry. Consistently named to Franchise Times “Top
500+ Franchises” and Entrepreneur’s “Franchise 500” lists and
recognized by FRANdata with the TopFUND award, as well as Franchise
Business Review’s “Top Franchise for 2023,” “Most Profitable
Franchises” and “Top Franchises for Veterans” ranking, The Joint
Chiropractic is an innovative force, where healthcare meets
retail.
For more information, visit www.thejoint.com. To learn about
franchise opportunities, visit www.thejointfranchise.com.
Business StructureThe Joint Corp. is a
franchisor of clinics and an operator of clinics in certain states.
In Arkansas, California, Colorado, District of Columbia, Florida,
Illinois, Kansas, Kentucky, Maryland, Michigan, Minnesota, New
Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode
Island, South Dakota, Tennessee, Washington, West Virginia and
Wyoming, The Joint Corp. and its franchisees provide management
services to affiliated professional chiropractic practices.
Media Contact: Margie Wojciechowski, The Joint
Corp., margie.wojciechowski@thejoint.comInvestor
Contact: Kirsten Chapman, LHA Investor Relations,
415-433-3777, thejoint@lhai.com
Joint (NASDAQ:JYNT)
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