Company Quick10K Filing
Quick10K
Joint
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.40 14 $240
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
8-K 2019-05-31 Shareholder Vote
8-K 2019-05-09 Earnings, Regulation FD, Exhibits
8-K 2019-03-28 Enter Agreement, Exhibits
8-K 2018-12-04 Officers, Exhibits
8-K 2018-11-06 Earnings, Officers, Regulation FD, Exhibits
8-K 2018-10-01 Accountant, Exhibits
8-K 2018-08-09 Earnings, Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-06-19 Officers, Other Events, Exhibits
8-K 2018-06-01 Shareholder Vote
8-K 2018-05-10 Earnings, Regulation FD, Exhibits
8-K 2018-03-12 Regulation FD, Exhibits
8-K 2018-03-08 Earnings, Regulation FD, Exhibits
8-K 2018-03-07 Officers
8-K 2018-01-18 Earnings, Exhibits
LMT Lockheed Martin 95,880
STWD Starwood Property Trust 6,270
RS Reliance Steel & Aluminum 6,070
EAF GrafTech 3,510
CALM Cal-Maine Foods 2,070
AGRX Agile Therapeutics 63
OPVS Nanoflex Power 0
PKPL Park Place Energy 0
FMCF 4M Carbon Fiber 0
NDRAU Endra Life Sciences 0
JYNT 2019-03-31
Part I: Financial Information
Item 1. Unaudited Financial Statements
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Note 2: Acquisition
Note 3: Revenue Disclosures
Note 4. Restricted Cash
Note 5: Notes Receivable
Note 6: Property and Equipment
Note 7: Fair Value Consideration
Note 8: Intangible Assets
Note 9: Debt
Note 10: Equity
Note 11: Income Taxes
Note 12: Related Party Transactions
Note 13: Commitments and Contingencies
Note 14: Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32 exh_32.htm

Joint Earnings 2019-03-31

JYNT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q_051019p.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from __________________ to _________________

 

Commission file number: 001-36724

 

The Joint Corp.

(Exact name of registrant as specified in its charter)

 

Delaware 90-0544160

(State or other jurisdiction of incorporation or

organization)

(IRS Employer Identification No.)

 

16767 N. Perimeter Drive, Suite 240, Scottsdale

Arizona

85260
(Address of principal executive offices) (Zip Code)

 

(480) 245-5960

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     Yes      No  

 

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer     Accelerated filer  
       
Non-accelerated filer     (Do not check if a smaller reporting company)   Smaller reporting company  
       
        Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).    Yes      No  

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share JYNT The NASDAQ Capital Market LLC

 

As of May 3, 2019, the registrant had 13,785,334 shares of Common Stock ($0.001 par value) outstanding.

 

 

 

 

 

 

 

 

 

THE JOINT CORP.

FORM 10-Q

 

TABLE OF CONTENTS

 

        PAGE
NO.
PART I FINANCIAL INFORMATION  
         
  Item 1.   Financial Statements:  
      Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 1
      Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited) 2
      Condensed Consolidated Statements of Changes in Stockholders’ Equity for The Three Months Ended March 31, 2019 and 2018 (unaudited) 3
      Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited) 4
      Notes to Unaudited Condensed Consolidated Financial Statements 5
         
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
         
  Item 4.   Controls and Procedures 33
         
Part I, Item 3 – Not applicable  
     
PART II OTHER INFORMATION  
         
  Item 1.   Legal Proceedings 33
         
  Item 1A.   Risk Factors 33
         
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 34
         
  Item 6.   Exhibits 34
         
  SIGNATURES 35
         
  EXHIBIT INDEX 36
         
Part II, Items 3, 4, and 5 - Not applicable  

 

 

 

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

 

 

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,
2019
  December 31,
2018
ASSETS  (unaudited)  (as adjusted)
Current assets:          
Cash and cash equivalents  $8,086,426   $8,716,874 
Restricted cash   111,065    138,078 
Accounts receivable, net   1,078,558    806,350 
Income taxes receivable   159    268 
Notes receivable - current portion   153,114    149,349 
Deferred franchise costs - current portion   644,560    611,047 
Prepaid expenses and other current assets   830,571    882,022 
Total current assets   10,904,453    11,303,988 
Property and equipment, net   4,211,550    3,658,007 
Operating lease right-of-use asset   9,977,018     
Notes receivable, net of current portion and reserve   89,004    128,723 
Deferred franchise costs, net of current portion   3,034,372    2,878,163 
Intangible assets, net   2,167,522    1,634,060 
Goodwill   3,225,145    3,225,145 
Deposits and other assets   330,653    599,627 
Total assets  $33,939,717   $23,427,713 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $1,216,513   $1,253,274 
Accrued expenses   152,127    266,322 
Co-op funds liability   111,065    104,057 
Payroll liabilities   884,006    2,035,658 
Notes payable - current portion   1,000,000    1,100,000 
Deferred rent - current portion       136,550 
Operating lease liability - current portion   1,831,056     
Finance lease liability - current portion   22,507     
Deferred franchise revenue - current portion   2,521,297    2,370,241 
Deferred revenue from company clinics   2,527,032    2,529,497 
Other current liabilities   598,276    477,528 
Total current liabilities   10,863,879    10,273,127 
Notes payable, net of current portion        
Deferred rent, net of current portion       721,730 
Operating lease liability - net of current portion   9,031,909     
Finance lease liability - net of current portion   52,812     
Deferred franchise revenue, net of current portion   11,811,665    11,239,221 
Deferred tax liability   79,962    76,672 
Other liabilities   27,230    389,362 
Total liabilities   31,867,457    22,700,112 
Commitments and contingencies          
Equity:          
The Joint Corp. stockholders' equity:          
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding, as of March 31, 2019 and December 31, 2018        
Common stock, $0.001 par value; 20,000,000 shares authorized, 13,800,004 shares issued and 13,785,334 shares outstanding as of March 31, 2019 and 13,757,200 shares issued and 13,742,530 outstanding as of December 31, 2018   13,800    13,757 
Additional paid-in capital   38,581,223    38,189,251 
Treasury stock 14,670 shares as of March 31, 2019 and December 31, 2018, at cost   (90,856)   (90,856)
Accumulated deficit   (36,431,807)   (37,384,451)
Total The Joint Corp. stockholders' equity   2,072,360    727,701 
Non-controlling Interest   (100)   (100)
Total equity   2,072,260    727,601 
Total liabilities and equity  $33,939,717   $23,427,713 

 

 

Note: The Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements, restated to reflect the consolidation of variable interest entities. See Note 1 of “Notes to Condensed Consolidated Financial Statements” under the heading “Prior Period Financial Statement Correction of Immaterial Error” for more details. The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 

1

 

 

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended
March 31,
   2019  2018
      (as adjusted)
Revenues:          
Revenues from company-owned or managed clinics  $5,639,076   $4,805,673 
Royalty fees   3,026,815    2,273,988 
Franchise fees   417,073    348,337 
Advertising fund revenue   891,567    659,030 
Software fees   365,236    307,475 
Regional developer fees   183,858    124,011 
Other revenues   155,751    128,450 
Total revenues   10,679,376    8,646,964 
Cost of revenues:          
Franchise cost of revenues   1,117,053    872,768 
IT cost of revenues   88,888    99,564 
Total cost of revenues   1,205,941    972,332 
Selling and marketing expenses   1,505,988    1,102,304 
Depreciation and amortization   365,678    387,417 
General and administrative expenses   6,552,904    6,268,686 
Total selling, general and administrative expenses   8,424,570    7,758,407 
Income (loss) from operations   1,048,865    (83,775)
           
Other income (expense):          
Bargain purchase gain   19,298     
Other income (expense), net   (116,838)   (11,194)
Total other income (expense)   (97,540)   (11,194)
           
Income (loss) before income tax expense   951,325    (94,969)
           
Income tax benefit   1,319    63,355 
           
Net income (loss) and comprehensive income (loss)  $952,644   $(31,614)
           
Less: Net income (loss) attributable to the non-controlling interest  $   $ 
           
Net income (loss) attributable to The Joint Corp. stockholders  $952,644   $(31,614)
           
Earnings (loss) per share:          
Basic (earnings) loss per share  $0.07   $(0.00)
Diluted (earnings) loss per share  $0.07   $(0.00)
           
Basic weighted average shares   13,751,196    13,587,837 
Diluted weighted average shares   14,256,006    13,587,837 

 

Note: The Condensed Consolidated Statement of Operations is unaudited and has been restated to reflect the consolidation of variable interest entities. See Note 1 of “Notes to Condensed Consolidated Financial Statements” under the heading “Prior Period Financial Statement Correction of Immaterial Error” for more details. The accompanying notes are an integral part of these condensed consolidated financial statements.

  

2

 

 

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

         Additional                  
   Common Stock  Paid In  Treasury Stock  Accumulated  Total The Joint Corp.  Non-controlling   
   Shares  Amount  Capital  Shares  Amount  Deficit  stockholders' equity  interest  Total Equity
Balances, December 31, 2017 (as adjusted)   13,600,338   $13,600   $37,229,869    14,084   $(86,045)  $(37,531,145)  $(373,721)  $(100)  $(373,821)
Stock-based compensation expense           207,641               $207,641       $207,641 
Exercise of stock options   7,500    7    23,318               $23,325       $23,325 
Net loss                       (31,614)  $(31,614)      $(31,614)
Balances, March 31, 2018 (unaudited), as adjusted   13,607,838   $13,607   $37,460,828    14,084   $(86,045)  $(37,562,759)  $(174,369)  $(100)  $(174,469)

 

         Additional                  
   Common Stock  Paid In  Treasury Stock  Accumulated  Total The Joint Corp.  Non-controlling   
   Shares  Amount  Capital  Shares  Amount  Deficit  stockholders' equity  interest  Total Equity
Balances, December 31, 2018 (as adjusted)   13,757,200   $13,757   $38,189,251    14,670   $(90,856)  $(37,384,451)  $727,701   $(100)  $727,601 
Stock-based compensation expense           171,771                171,771        171,771 
Exercise of stock options   42,804    43    220,201                220,244        220,244 
Net income                       952,644    952,644        952,644 
Balances, March 31, 2019 (unaudited)   13,800,004   $13,800   $38,581,223    14,670   $(90,856)  $(36,431,807)  $2,072,360   $(100)  $2,072,260 

  

Note: The Condensed Consolidated Statement of Changes in Stockholders’ Equity is unaudited and has been restated to reflect the consolidation of variable interest entities. See Note 1 of “Notes to Condensed Consolidated Financial Statements” under the heading “Prior Period Financial Statement Correction of Immaterial Error” for more details. The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

3

 

 

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Three Months Ended
March 31,
   2019  2018
      (as adjusted)
Cash flows from operating activities:          
Net income (loss) including those of non-controlling interest  $952,644   $(31,614)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   365,678    387,417 
(Gain) loss on sale of fixed assets   105,193    388 
Bargain purchase gain   (19,298)   —   
Deferred income taxes   (22,425)   (79,243)
Stock based compensation expense   171,771    207,641 
Changes in operating assets and liabilties:          
Accounts receivable   (241,850)   84,693 
Prepaid expenses and other current assets   51,560    (191,160)
Deferred franchise costs   (189,722)   (133,551)
Deposits and other assets   268,974    17,595 
Accounts payable   (276,074)   (133,010)
Accrued expenses   (117,795)   110,853 
Payroll liabilities   (1,151,652)   (20,511)
Other liabilities   (206,709)   23,723 
Deferred revenue   769,216    (276,324)
Net cash provided by (used in) operating activities   459,511    (33,103)
           
Cash flows from investing activities:          
Acquisition of business, net of cash acquired   (30,000)   —   
Purchase of property and equipment   (526,027)   (183,734)
Reacquisition and termination of regional developer rights   (681,500)   —   
Payments received on notes receivable   35,954    41,391 
Net cash used in investing activities   (1,201,573)   (142,343)
           
Cash flows from financing activities:          
Payments of finance lease obligation   (5,285)   —   
Proceeds from exercise of stock options   189,886    23,325 
Repayments on notes payable   (100,000)   —   
Net cash provided by financing activities   84,601    23,325 
           
Decrease in cash   (657,461)   (152,121)
Cash and restricted cash, beginning of period   8,854,952    4,320,040 
Cash and restricted cash, end of period  $8,197,491   $4,167,919 

 

During the three months ended March 31, 2019 and 2018, cash paid for income taxes was $55 and $0, respectively. During the three months ended March 31, 2019 and 2018, cash paid for interest was $25,000.

Supplemental disclosure of non-cash activity:

As of March 31, 2019, we had property and equipment purchases of $239,313 and $3,600 included in accounts payable and accrued expenses, respectively. As of December 31, 2018, we had property and equipment purchases of $121,038 and $1,595 included in accounts payable and accrued expenses, respectively.

In connection with our acquisition during the three months ended March 31, 2019, we acquired $9,166 of property and equipment and intangible assets of $62,000, in exchange for $30,000 in cash to the seller.  Additionally, at the time of these transactions, we carried deferred revenue of $3,847, representing franchise fees collected upon the execution of the franchise agreement.  We netted this amount against the purchase price of the acquisition (Note 2).  

In connection with our reacquisition and termination of regional developer rights during the three months ended March 31, 2019, we had deferred revenue of $44,334 representing license fees collected upon the execution of the regional developer agreements.  We netted these amounts against the aggregate purchase price of the acquisitions (Note 8)

As of March 31, 2019, we had $30,358 of proceeds from the exercise of stock options included in accounts receivable.

Note: The Condensed Consolidated Statements of Cash Flows is unaudited and has been restated to reflect the consolidation of variable interest entities. See Note 1 of “Notes to Condensed Consolidated Financial Statements” under the heading “Prior Period Financial Statement Correction of Immaterial Error” for more details. The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

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”) and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC (collectively, the “Company”). These unaudited condensed consolidated financial statements should be read in conjunction with The Joint Corp. and Subsidiary consolidated financial statements and the notes thereto as set forth in The Joint Corp.’s Form 10-K, which included all disclosures required by generally accepted accounting principles (“GAAP”) and the “prior period financial statement correction of immaterial error” note below. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position on a consolidated basis and the consolidated results of operations, equity and cash flows for the interim periods presented. The results of operations for the periods ended March 31, 2019 and 2018 are not necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the periods ended March 31, 2019 and 2018 is unaudited.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other (expenses) income that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue and accounting for leases, see Note 3, Revenue Disclosures and Note 13, Commitments and Contingencies, respectively.

 

Prior Period Financial Statement Correction of Immaterial Error

 

Certain states, in which the Company manages clinics, regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. The PCs are variable interest entities (“VIEs”). During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by Accounting Standards Codification 810 (“ASC 810”), Consolidations. Therefore, the Company is the primary beneficiary of the VIEs, and per ASC 810, must consolidate the VIEs. Prior to 2019, the Company did not consolidate the PCs. The Company has concluded the previous accounting policy to not consolidate the PCs was an immaterial error and has determined that the PCs should be consolidated. The adjustments will result in an increase to revenues from company clinics and a corresponding increase to general and administrative expenses. This will have no impact on net income (loss), except when the PC has sold treatment packages and wellness plans. Revenue from these treatment packages and wellness plans will now be deferred and will be recognized when patients use their visits. The Company has corrected this immaterial error by restating the 2018 condensed consolidated financial statements and related notes included herein.

 

5

 

 

The immaterial impacts of this error correction in the three months ended March 31, 2018 and the fiscal year ended December 31, 2018 are as follows:

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

   Three Months Ended
March 31, 2018
  Adjustments Due To
VIE Consolidation
  Three Months Ended
March 31, 2018
   (as reported)     (as adjusted)
Revenues:               
Revenues from company-owned or managed clinics  $3,256,624    1,549,049   $4,805,673 
Total revenues   7,097,915    1,549,049    8,646,964 
General and administrative expenses   5,074,927    1,193,759    6,268,686 
Total selling, general and administrative expenses   6,564,648    1,193,759    7,758,407 
Loss from operations   (439,065)   355,290    (83,775)
                
Other (expense) income, net   (11,194)       (11,194)
Loss before income tax benefit (expense)   (450,259)   355,290    (94,969)
                
Net loss and comprehensive loss  $(386,904)   355,290   $(31,614)
                
Loss per share:               
Basic and diluted loss per share  $(0.03)   0.03   $(0.00)
                
Basic and diluted weighted average shares   13,587,837        13,587,837 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

   Year Ended
December 31, 2018
  Adjustments Due To
VIE Consolidation
  Year Ended
December 31, 2018
   (as reported)     (as adjusted)
Revenues:               
Revenues from company-owned or managed clinics  $14,672,865    4,872,411   $19,545,276 
Total revenues   31,789,249    4,872,411    36,661,660 
General and administrative expenses   20,304,132    4,933,989    25,238,121 
Total selling, general and administrative expenses   26,679,927    4,933,989    31,613,916 
Income from operations   205,113    (61,578)   143,535 
                
Other (expense) income, net   10,241    (44,808)   (34,567)
Income before income tax benefit (expense)   215,354    (106,386)   108,968 
                
Net income and comprehensive income  $253,083    (106,386)  $146,696 
                
Earnings (loss) per share:               
Basic earnings (loss) per share  $0.02    (0.01)  $0.01 
Diluted earnings (loss) per share  $0.02    (0.01)  $0.01 
                
Basic weighted average shares   13,669,107        13,669,107 
Diluted weighted average shares   14,031,717        14,031,717 

 

6

 

 

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   December 31,
2018
  Adjustments Due To
VIE Consolidation
  December 31,
2018
ASSETS  (as reported)     (as adjusted)
Current assets:               
Accounts receivable, net   1,213,707    (407,357)   806,350 
Total current assets   11,711,345    (407,357)   11,303,988 
Goodwill   2,916,426    308,719    3,225,145 
Total assets  $23,526,352   $(98,639)  $23,427,713 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
Current liabilities:               
Deferred revenue from company clinics   994,493    1,535,004    2,529,497 
Total current liabilities   8,738,123    1,535,004    10,273,127 
Total liabilities   21,165,108    1,535,004    22,700,112 
Commitments and contingencies               
Equity:               
The Joint Corp. stockholders' equity:               
Accumulated deficit   (35,750,908)   (1,633,543)   (37,384,451)
Total The Joint Corp. stockholders' equity   2,361,244    (1,633,543)   727,701 
Non-controlling Interest       (100)   (100)
Total equity   2,361,244    (1,633,643)   727,601 
Total liabilities and equity  $23,526,352   $(98,639)  $23,427,713 

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of The Joint Corp. and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC, which was dormant for all periods presented. The Company consolidates its interest in PCs, in accordance with ASC 810, Consolidation. PCs’ interests in the consolidated entities are reported as non-controlling interests.

 

All significant intercompany accounts and transactions between The Joint Corp. and its subsidiary have been eliminated in consolidation. All variable interest entity eliminations have been attributable to the Company. Certain balances were reclassified from regional developer fees to other revenues, for the three months ended March 31, 2018 to conform to the current year presentation.

 

Comprehensive Income (Loss)

 

Net income (loss) and comprehensive income (loss) are the same for the three months ended March 31, 2019 and 2018.

  

Nature of Operations

 

The Joint, a Delaware corporation, was formed on March 10, 2010 for the principal purpose of franchising, developing and managing chiropractic clinics, selling regional developer rights and supporting the operations of franchised chiropractic clinics at locations throughout the United States of America. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.  

  

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The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three months ended March 31, 2019 and 2018:

 

   Three Months Ended
March 31,
Franchised clinics:  2019  2018
Clinics open at beginning of period   394    352 
Opened or Purchased during the period   12    7 
Acquired or sold during the period   (1)   - 
Closed during the period   (1)   - 
Clinics in operation at the end of the period   404    359 

 

   Three Months Ended
March 31,
Company-owned or managed clinics:  2019  2018
Clinics open at beginning of period   48    47 
Opened during the period   2    - 
Acquired during the period   1    - 
Closed or Sold during the period   (1)   - 
Clinics in operation at the end of the period   50    47 
           
Total clinics in operation at the end of the period   454    406 
           
Clinic licenses sold but not yet developed   145    114 
Executed letters of intent for future clinic licenses   27    8 

 

Variable Interest Entities

 

An entity deemed to hold the controlling interest in a voting interest entity or deemed to be the primary beneficiary of a variable interest entity (“VIE”) is required to consolidate the VIE in its financial statements. An entity is deemed to be the primary beneficiary of a VIE if it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb the majority of losses of the VIE or the right to receive the majority of benefits from the VIE. Investments where the Company does not hold the controlling interest and are not the primary beneficiary are accounted for under the equity method.

 

Certain states, in which the Company manages clinics, regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. Such PCs are VIEs, as fees paid by the PC to the Company as its management service provider are considered variable interests because they are liabilities on the PC’s books and the fees do not meet all the following criteria: 1) The fees are compensation for services provided and are commensurate with the level of effort required to provide those services; 2) The decision maker or service provider does not hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns; 3) The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. In these states, the Company has entered into management services agreements with PCs under which the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice. During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by Accounting Standards Codification 810 (“ASC 810”), Consolidations. Therefore, the Company is the primary beneficiary of the VIEs, and per ASC 810, must consolidate the VIEs. The carrying amount of VIE assets and liabilities are immaterial as of March 31, 2019.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and credit quality of, the financial institutions with which it invests. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has invested substantially all its cash in short-term bank deposits. The Company had no cash equivalents as of March 31, 2019 and December 31, 2018.

  

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. 

  

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Accounts Receivable

 

Accounts receivable represent amounts due from franchisees for initial franchise fees and royalty fees. The Company considers a reserve for doubtful accounts based on the creditworthiness of the entity. The provision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management’s best estimate of uncollectible amounts and is determined based on specific identification and historical performance that the Company tracks on an ongoing basis. Actual losses ultimately could differ materially in the near term from the amounts estimated in determining the allowance. As of March 31, 2019, and December 31, 2018, the Company had an allowance for doubtful accounts of $0.

  

Deferred Franchise Costs

 

Deferred franchise costs represent commissions that are direct and incremental to the Company and are paid in conjunction with the sale of a franchise. These costs are recognized as an expense when the respective revenue is recognized, which is generally over the term of the related franchise agreement.

 

Property and Equipment

 

Property and equipment are stated at cost or for property acquired as part of franchise acquisitions at fair value at the date of closing. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the assets.

 

Maintenance and repairs are charged to expense as incurred; major renewals and improvements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.

  

Capitalized Software

 

The Company capitalizes certain software development costs. These capitalized costs are primarily related to software used by clinics for operations and by the Company for the management of operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized as assets in progress until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Software developed is recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally five years.

 

Leases

 

The Company adopted ASC 842 on January 1, 2019 which requires lessees to recognize a right-of-use ("ROU") asset and lease liability for all leases. The Company elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs.

 

The Company leases property and equipment under finance and operating leases. The Company leases its corporate office space and the space for each of the company-owned or managed clinic in the portfolio. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the optional period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, all relevant economic factors are considered that would compel us to exercise or not exercise an option. 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 our leases. In such cases, the Company estimates its incremental borrowing rate as the interest rate it could 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. Lease expense incurred before a clinic opens is recorded in pre-opening costs. Once a clinic opens, we record the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated statements of operations. Many of the Company’s leases also require it to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in general and administrative expenses on the condensed consolidated statements of operations.

 

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Intangible Assets

 

Intangible assets consist primarily of re-acquired franchise and regional developer rights and customer relationships.  The Company amortizes the fair value of re-acquired franchise rights over the remaining contractual terms of the re-acquired franchise rights at the time of the acquisition, which range from four to eight years. In the case of regional developer rights, the Company amortizes the acquired regional developer rights over seven years. The fair value of customer relationships is amortized over their estimated useful life of two years. 

 

Goodwill

 

Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions of franchises.  Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. As required, the Company performs an annual impairment test of goodwill as of the first day of the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its, carrying value. No impairments of goodwill were recorded for the three months ended March 31, 2019 and 2018.

 

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 have been impaired. No impairments of long-lived assets were recorded for the three months ended March 31, 2019 and 2018.

 

Advertising Fund

 

The Company has established an advertising fund for national/regional marketing and advertising of services offered by its clinics. The monthly marketing fee is 2% of clinic sales. The Company segregates the marketing funds collected which are included in restricted cash on its consolidated balance sheets. As amounts are expended from the fund, the Company recognizes a related expense.

 

Co-Op Marketing Funds

 

Some franchises have established regional Co-Ops for advertising within their local and regional markets. The Company maintains a custodial relationship under which the marketing funds collected are segregated and used for the purposes specified by the Co-Ops’ officers. The marketing funds are included in restricted cash on the Company’s condensed consolidated balance sheets.

 

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Revenue Recognition

 

The Company generates revenue primarily through its company-owned and managed clinics, royalties, franchise fees, advertising fund, and through IT related income and computer software fees.

 

Revenues from Company-Owned or Managed Clinics.  The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  In those states where the Company owns and operates or manages the clinic, 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.  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 recognizes this contract liability, and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. Based on a historical lag analysis, the Company concluded that any remaining contract liability that exists after 24 months from transaction date will be deemed breakage, and only at that point when the likelihood of the patient exercising his or her remaining rights becomes remote will the Company recognize any breakage revenue.

 

Royalties and Advertising Fund Revenue. The Company collects royalties, 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 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 are recognized as franchisee clinic level sales occur. Royalties are collected bi-monthly two working days after each sales period has ended.

 

Franchise Fees. The Company requires the entire non-refundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of ten years. Initial franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement.  The Company’s services under the franchise agreement include: training of franchisees and staff, site selection, construction/vendor management and ongoing operations support. The Company provides no financing to franchisees and offers no guarantees on their behalf. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.

 

Software Fees.  The Company collects a monthly fee for use of its proprietary chiropractic software, computer support, and internet services support. These fees are recognized ratably on a straight-line basis over the term of the respective franchise agreement.

 

Regional Developer Fees. During 2011, the Company established a regional developer program to engage independent contractors to assist in developing specified geographical regions. Under the historical program, regional developers paid a license fee for each franchise they received the right to develop within the region. In 2017, the program was revised to grant exclusive geographical territory and establish a minimum development obligation within that defined territory. Regional developers receive fees which are collected from franchisees upon the sale of franchises within their region and a royalty of 3% of sales generated by franchised clinics in their region. Regional developer fees paid to the Company are nonrefundable and are recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to begin upon the execution of the agreement. The Company’s services under regional developer agreements include site selection, grand opening support for the clinics, sales support for identification of qualified franchisees, general operational support and marketing support to advertise for ownership opportunities. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.

 

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The Company entered into one regional developer agreement for the three months ended March 31, 2019 for which it received approximately $290,000 which was deferred as of the transaction date and will be recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to begin upon the execution of the agreement. Certain of these regional developer agreements resulted in the regional developer acquiring the rights to existing royalty streams from clinics already open in the respective territory. In those instances, the revenue associated from the sale of the royalty stream is being recognized over the remaining life of the respective franchise agreements.

  

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising expenses were $439,436 and $410,637 for the three months ended March 31, 2019 and 2018, respectively. 

 

Income Taxes

 

The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates. Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to depreciation of property and equipment, amortization of goodwill, accounting for leases, and treatment of revenue for franchise fees and regional developer fees collected. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the condensed consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company has not identified any material uncertain tax positions as of March 31, 2019 and December 31, 2018. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses.

 

The Company's tax returns for tax years subject to examination by tax authorities included 2014 through the current period for state and 2015 through the current period for federal reporting purposes.

 

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 preferred stock, restricted stock, and stock options.

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Three Months Ended
March 31,
     2019      2018  
        (as adjusted)  
Net Income (loss)  $952,644   $(31,614)
           
Weighted average common shares outstanding - basic   13,751,196    13,587,837 
Effect of dilutive securities:          
Unvested restricted stock and stock options   504,810    - 
Weighted average common shares outstanding - diluted   14,256,006    13,587,837 
           
Basic earnings (loss) per share  $0.07   $(0.00)
Diluted earnings (loss) per share  $0.07   $(0.00)

 

Anti-Dilutive shares:

 
 
 
 
Three Months Ended
March 31,
     2019      2018  
Unvested restricted stock   31,247    63,700 
Stock options   533,039    1,053,811 
Warrants   -    90,000 

 

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 quoted market prices and the grant-date fair value of stock options using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, 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.

 

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 doubtful accounts, share-based compensation arrangements, fair value of stock options, useful lives and realizability of long-lived assets, classification of deferred revenue and revenue recognition related to breakage, classification of deferred franchise costs, lease exit liabilities, realizability of deferred tax assets, impairment of goodwill and intangible assets and purchase price allocations.

 

Recent Accounting Pronouncements

 

Accounting Standards Adopted Effective January 1, 2019

 

On January 1, 2019, the Company adopted the guidance of Accounting Standards Codification 842 – Leases (“ASC 842), which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective January 1, 2019, the Company adopted the requirements of ASC 842 using the modified retrospective approach using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest date presented. The consolidated financial statements for the period ended March 31, 2019 are presented under the new standard, while comparative periods presented have not been adjusted and continue to be reported in accordance with the previous standard.

 

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During the process of adoption, the Company made the following elections:

 

·The Company elected the package of practical expedients which allowed the Company to not reassess:
·Whether existing or expired contracts contain leases under the new definition of a lease;
·Lease classification for existing or expired leases; and
·Initial direct costs for any expired or existing leases to determine if they would qualify for capitalization under ASC 842.
·The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.
·The Company did not elect the land easement practical expedient, which permits an entity to continue applying its current policy for accounting for land easements that existed as of, or expired before, the effective date of Topic 842.
·The Company elected to make the accounting policy election for short-term leases, permitting the Company to not apply the recognition requirements of this standard to short-term leases with terms of 12 months or less.

 

The adoption of the guidance does not materially impact the Company’s results of operations other than recognition of the operating lease right-of-use asset and lease liability. See Note 13 for additional disclosures required by ASC 842.

 

The Company reviewed other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements upon future adoption.

 

Note 2: Acquisition

 

On March 18, 2019, the Company entered into an Asset and Franchise Purchase Agreement under which (i) the Company repurchased from the seller one operating franchise in West Covina, California and (ii) the parties agreed to terminate a second franchise agreement for an operating franchise. The Company intends to operate the remaining franchise as a company-managed clinic. The total purchase price for the transaction was $30,000, less $3,847 of deferred revenue resulting in total purchase consideration of $26,153.

  

Purchase Price Allocation

 

The following summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed during 2019 as of the acquisition date:

 

Property and equipment  $9,166 
Intangible assets   62,000 
Total assets acquired   71,166 
Deferred revenue   (25,715)
Bargain purchase gain   (19,298)
Net purchase price  $26,153 

 

Intangible assets in the table above consist of reacquired franchise rights of $30,000 amortized over an estimated useful life of three years and customer relationships of $32,000 amortized over an estimated useful life of two years.

 

Pro Forma Results of Operations (Unaudited)

 

The following table summarizes selected unaudited pro forma condensed consolidated statements of operations data for the three months ended March 31, 2019 and 2018 as if the acquisition in 2019 had been completed on January 1, 2018.

 

   Pro Forma for the Three Months Ended
     March 31, 2019      March 31, 2018  
Revenues, net  $10,725,000   $8,753,702 
Net income (loss)  $934,418   $(97,764)

 

This selected unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisition had been completed on that date. Moreover, this information is not indicative of what the Company’s future operating results will be. The information for 2018 and 2019 prior to the acquisition is included based on prior accounting records maintained by the acquired company. In some cases, accounting policies differed materially from accounting policies adopted by the Company following the acquisition. For 2018, this information includes actual data recorded in the Company’s financial statements for the period subsequent to the date of the acquisition. The Company’s condensed consolidated statement of operations for the three months ended March 31, 2019 includes net revenue and net loss of approximately $3,000 and $5,000, respectively, attributable to the acquisition.

 

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The pro forma amounts included in the table above reflect the application of accounting policies and adjustment of the results of the clinics to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, 2018.

 

Note 3: Revenue Disclosures

 

Company-owned or Managed Clinics

 

The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  Revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing.  Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed or in accordance with the Company’s breakage policy as discussed in Note 1, Revenue Recognition.  

 

Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees

 

The Company currently franchises its concept across 33 states. 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. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required.

 

The Company recognizes the primary components of the transaction price as follows:

 

Franchise fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the execution of the franchise agreement. As these fees are typically received in cash at or near the beginning of the franchise 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.

 

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In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgment as it is based on either the franchise term or the reported sales of the franchisee, none of which require estimation. The Company believes its franchising arrangements do not contain a significant financing component. Prior to the adoption of ASC 606, the Company generally recognized the entire franchise fee as revenue at the clinic opening date.

 

Under ASC 606, the Company recognizes advertising fees received under franchise agreements as advertising fund revenue. Under previously issued accounting guidance for franchisors, advertising revenue and expense were recognized in the same amount in each period. That guidance was superseded by ASC 606 such that advertising expense may now be different than the advertising revenue recognized as described above. The impact of these changes with respect to advertising fees and advertising expenses on the Company's previously reported financial statements was not material.

 

Regional Developer Fees

 

The Company currently utilizes regional developers to assist in the development of the brand across certain geographic territories. The arrangement is documented in the form of a regional developer agreement. The arrangement between the Company and the regional developer requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the regional developer, but instead represent a single performance obligation, which is the transfer of the development rights to the defined geographic region. The intellectual property subject to the development rights is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the development rights is to provide the regional developer with access to the brand’s symbolic intellectual property over the term of the agreement. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation.

  

The transaction price in a standard regional developer arrangement primarily consists of the initial territory fees. The Company recognizes the regional developer fee as revenue ratably on a straight-line basis over the term of the regional developer agreement commencing with the execution of the regional developer agreement. As these fees are typically received in cash at or near the beginning of the term of the regional developer agreement, the cash received is initially recorded as a contract liability until recognized as revenue over time.

 

Disaggregation of Revenue

 

The Company believes that the captions contained on the condensed consolidated statements of operations appropriately reflect the disaggregation of its revenue by major type for the three months ended March 31, 2019 and 2018.

 

Rollforward of Contract Liabilities and Contract Assets

 

Changes in the Company's contract liability for deferred franchise and regional development fees during the three months ended March 31, 2019 were as follows (in thousands):

 

   Deferred Revenue
short and long-term
Balance at December 31, 2018  $13,609 
Recognized as revenue during the three months ended March 31, 2019   (601)
Fees received and deferred during the three months ended March 31, 2019   1,325 
Balance at March 31, 2019  $14,333 

 

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Changes in the Company's contract assets for deferred franchise costs during the three months ended March 31, 2019 are as follows (in thousands):

 

   Deferred Franchise Costs
short and long-term
Balance at December 31, 2018  $3,489 
Recognized as cost of revenue during the three months ended March 31, 2019   (155)
Costs incurred and deferred during the three months ended March 31, 2019   345 
Balance at March 31, 2019  $3,679 

 

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 March 31, 2019 (in thousands):

 

Contract liabilities expected to be recognized in  Amount
2019 (remainder)  $1,894 
2020   2,517 
2021   2,392 
2022   1,969 
2023   1,494 
Thereafter   4,067 
Total  $14,333 

 

 

Note 4. Restricted Cash

 

The table below reconciles the cash and cash equivalents balance and restricted cash balances from The Company’s condensed consolidated balance sheet to the amount of cash reported on the condensed consolidated statement of cash flows:

 

   March 31,
2019
  December 31,
2018
Cash and cash equivalents  $8,086,426   $8,716,874 
Restricted cash   111,065    138,078 
Total cash, cash equivalents and restricted cash  $8,197,491   $8,854,952 

 

Note 5: Notes Receivable

 

Effective April 29, 2017, the Company entered into a regional developer agreement for certain territories in the state of Florida in exchange for $320,000, of which $187,000 was funded through a promissory note. The note bears interest at 10% per annum for 42 months and requires monthly principal and interest payments over 36 months, beginning November 1, 2017 and maturing on October 1, 2020. The note is secured by the regional developer rights in the respective territory.

 

Effective August 31, 2017, the Company entered into a regional developer agreement for certain territories in Maryland/Washington DC in exchange for $220,000, of which $117,475 was funded through a promissory note. The note bears interest at 10% per annum for 36 months and requires monthly principal and interest payments over 36 months, beginning September 1, 2017 and maturing on August 1, 2020. The note is secured by the regional developer rights in the respective territory.

 

17

 

Effective September 22, 2017, the Company entered into a regional developer and asset purchase agreement for certain territories in Minnesota in exchange for $228,293, of which $119,147 was funded through a promissory note. The note bears interest at 10% per annum for 36 months and requires monthly principal and interest payments over 36 months, beginning October 1, 2017 and maturing on September 1, 2020. The note is collateralized by the regional developer rights in the territory. The note was paid in full on September 28, 2018.

 

Effective October 10, 2017, the Company entered into a regional developer agreement for certain territories in Texas, Oklahoma and Arkansas in exchange for $170,000, of which $135,688 was funded through a promissory note. The note bears interest at 10% per annum for 36 months and requires monthly principal and interest payments over 36 months, maturing on October 24, 2020. The note is collateralized by the regional developer rights in the territory.

 

The net outstanding balances of the notes as of March 31, 2019 and December 31, 2018 were $242,118 and $278,072, respectively. Maturities of notes receivable as of March 31, 2019 are as follows:

 

2019 (remaining)  $113,395 
2020   128,723 
Total  $242,118 

 

Note 6: Property and Equipment

 

Property and equipment consist of the following:

 

   March 31, 
2019
  December 31, 
2018
       
Office and computer equipment  $1,308,925   $1,243,104 
Leasehold improvements   5,570,288    5,407,915 
Software developed   1,145,536    1,145,742 
Other   80,604     
    8,105,353    7,796,761 
Accumulated depreciation and amortization   (5,043,512)   (4,909,002)
    3,061,841    2,887,759 
Construction in progress   1,149,709    770,248 
   $4,211,550   $3,658,007 

 

 

Depreciation expense was $193,805 and $264,353 for the three months ended March 31, 2019 and 2018, respectively.

 

Note 7: Fair Value Consideration

 

The Company’s financial instruments include cash, restricted cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of its financial instruments approximate their fair value due to their short maturities. 

 

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks.

 

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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 March 31, 2019, and December 31, 2018, the Company did not have any financial instruments that were measured on a recurring basis as Level 1, 2 or 3.

 

The intangible assets resulting from the acquisition (reference Note 2) were recorded at fair value on a non-recurring basis and are considered Level 3 within the fair value hierarchy.

 

Note 8: Intangible Assets

 

On February 4, 2019, the Company entered into an agreement under which it repurchased the right to develop franchises in various counties in South Carolina and Georgia. The total consideration for the transaction was $681,500. The Company carried a deferred revenue balance associated with these transactions of $44,334, representing license fees collected upon the execution of the regional developer agreements.  The Company accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price.  

 

Intangible assets consist of the following:

 

   As of March 31, 2019
   Gross Carrying
Amount
  Accumulated
Amortization
  Net Carrying
Value
Amortized intangible assets:               
Reacquired franchise rights  $1,788,000   $988,265   $799,735 
Customer relationships   777,000    722,997    54,003 
Reacquired development rights   2,050,482    736,698    1,313,784 
   $4,615,482   $2,447,960   $2,167,522 

 

 

   As of December 31, 2018
   Gross Carrying
Amount
  Accumulated
Amortization
  Net Carrying
Value
Amortized intangible assets:               
Reacquired franchise rights  $1,758,000   $921,138   $836,862 
Customer relationships   745,000    717,498    27,502 
Reacquired development rights   1,413,316    643,620    769,696 
   $3,916,316   $2,282,256   $1,634,060 

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Amortization expense was $171,873 and $123,064 for the three months ended March 31, 2019 and 2018, respectively.

 

Estimated amortization expense for 2019 and subsequent years is as follows:

 

  2019 (remainder)  $570,435   
  2020   741,202   
  2021   657,152   
  2022   186,520   
  2023   12,213   
  Thereafter   -   
  Total  $2,167,522   

 

Note 9: Debt

 

Notes Payable

 

During 2016, the Company issued two notes payable totaling $186,000 as a portion of the consideration paid in connection with the Company’s various acquisitions. Interest rates for both notes were 4.25% with maturities through May 2017. There was one outstanding note with a balance of $100,000 which was paid in February 2019.

 

Credit and Security Agreement

 

On January 3, 2017, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) and signed a revolving credit note payable to the lender. Under the Credit Agreement, the Company is able to borrow up to an aggregate of $5,000,000 under revolving loans. Interest on the unpaid outstanding principal amount of any revolving loans is at a rate equal to 10% per annum, provided that the minimum amount of interest paid in the aggregate on all revolving loans granted over the term of the Credit Agreement is $200,000. Interest is due and payable on the last day of each fiscal quarter in an amount determined by the Company, but not less than $25,000. The Credit Agreement terminates in December 2019, unless sooner terminated in accordance with the provisions of the Credit Agreement. The Credit Agreement is collateralized by the assets in the Company’s company-owned or managed clinics. The Company is using the credit facility for general working capital needs. As of March 31, 2019, the Company had drawn $1,000,000 of the $5,000,000 available under the Credit Agreement.

 

Note 10: Equity

 

Stock Options

 

In the three months ended March 31, 2019, the Company granted 62,944 stock options to employees with an exercise price of $12.02.

 

The Company’s stock trading price 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, it will rely upon the volatilities from publicly traded companies with similar business models until its common stock has accumulated enough trading history for it to utilize its own historical volatility, and the Company has no reason to believe that its future volatility will differ materially during the expected or contractual term, as applicable, from the volatility calculated from this past information.. We use the simplified method to calculate the expected term of stock option grants to employees as we do 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 and the contractual term of the option. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury 10-year yield curve in effect at the date of the grant. 

 

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The Company has computed the fair value of all options granted during the three months ended March 31, 2019 and 2018, using the following assumptions:

 

   Three Months Ended March 31,
   2019  2018
Expected volatility   35%     42% - 43% 
Expected dividends   None      None   
Expected term (years)   7%      7   
Risk-free rate   2.61%     2.53% to 2.63% 
Forfeiture rate   20%      20%   

 

The information below summarizes the stock options activity:

 

   Number of
Shares
  Weighted
Average
Exercise
Price
  Weighted
Average
Fair
Value
  Weighted
Average
Remaining
Contractual Life
Outstanding at December 31, 2017   1,003,916   $4.18   $1.87    8.1 
Granted at market price   145,792    7.00           
Exercised   (95,162)   3.48           
Cancelled   (67,855)   3.37           
Outstanding at December 31, 2018   986,691   $4.72   $2.09    6.8 
Granted at market price   62,944    12.02           
Exercised   (42,804)   5.15           
Cancelled   -    -           
Outstanding at March 31, 2019   1,006,831   $5.16   $2.25    6.5 
Exercisable at March 31, 2019   522,488   $4.67   $2.04    6.5 

 

The intrinsic value of the Company’s stock options outstanding was $10,659,380 at March 31, 2019.

 

For the three months ended March 31, 2019 and 2018, stock-based compensation expense for stock options was $96,804 and $139,172, respectively.  Unrecognized stock-based compensation expense for stock options as of March 31, 2019 was $1,020,834, which is expected to be recognized ratably over the next 3.0 years.

 

Restricted Stock

 

The information below summaries the restricted stock activity:

 

  Restricted Stock Awards  Shares  
  Outstanding at December 31, 2018   51,134   
  Awards granted   11,131   
  Awards vested   -   
  Awards forfeited   -   
  Outstanding at March 31, 2019   62,265   

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For the three months ended March 31, 2019 and 2018, stock-based compensation expense for restricted stock was $74,967 and $68,469, respectively. Unrecognized stock-based compensation expense for restricted stock awards as of March 31, 2019 was $308,413, which is expected to be recognized ratably over the next 3.1 years.

 

Note 11: Income Taxes

 

During the three months ended March 31, 2019 and 2018, the Company recorded income tax expense (benefit) of approximately ($1,000) and ($63,000), respectively, due to a valuation allowance on the Company's deferred tax assets, and the impact of certain permanent differences on taxable income.  

 

Note 12: Related Party Transactions

 

The Company entered into a legal agreement with a certain common stockholder related to services performed for the operations and transaction related activities of the Company. Amounts paid to or for the benefit of this stockholder was approximately $83,000 and $48,000 for the three months ended March 31, 2019 and 2018, respectively.

 

Note 13: Commitments and Contingencies

 

Leases

 

The table below summarizes the components of lease expense for the three months ended March 31, 2019:

 

   Three Months Ended
March 31, 2019
    
Finance lease costs:     
Amortization of assets  $6,169 
Interest on lease liabilities   1,911 
Total finance lease costs   8,080 
Operating lease costs  $697,755 
Total lease costs  $705,835 

 

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Supplemental information and balance sheet location related to leases is as follows:

 

     March 31, 2019  
    
Operating Leases:     
Operating lease right-of -use asset  $9,977,018 
      
Current maturities of operating leases  $1,831,056 
Non-current operating leases   9,031,909 
Total operating lease liabilities  $10,862,965 
      
Finance Leases:     
Property and equipment, at cost  $80,604 
Less accumulated amortization   (6,169)
Property and equipment, net  $74,435 
      
      
Current maturities of finance leases  $22,507 
Long-term debt and finance leases   52,812 
Total finance lease libililities  $75,319 
      
Weighted average remaining lease term (in years):     
Operating leases   5.73 
Finance lease   3.02 
      
Weighted average discount rate:     
Operating leases   9.38%
Finance leases   10.00%

 

Supplemental cash flow information related to leases is as follows:

 

   Three Months Ended
March 31, 2019
    
Cash paid for amounts included in measurement of liabilities:     
Operating cash flows from operating leases  $735,426 
Operating cash flows from finance leases   1,911 
Financing cash flows from finance leases   5,285 
      
ROU assets obtained in exchange for lease liabilities     
Operating lease  $- 
Finance lease   80,604 

 

 

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Maturities of undiscounted lease liabilities as of March 31, 2019 are as follows:

 

       Operating Leases      Finance Lease    
  2019 (remainder)  $2,065,779   $21,590   
  2020   2,557,295    28,786   
  2021   2,455,323    28,786   
  2022   2,363,234    7,676   
  2023   1,683,255    -   
  Thereafter   2,905,580    -   
  Total lease payments  $14,030,466   $86,838   
  Less: Imputed interest   (3,167,501)   (11,519)  
  Total lease obligations   10,862,965    75,319   
  Less: Current obligations   (1,831,056)   (22,507)  
  Long-term lease obligation  $9,031,909   $52,812   

 

 

Future minimum annual lease payments under operating leases in accordance with ASC 840 as of December 31, 2018:

 

     Operating Leases  
  2019  $2,630,443   
  2020   2,406,645   
  2021   2,299,887   
  2022   2,195,077   
  2023   1,474,396   
  Thereafter   2,772,575   
  Total lease payments  $13,779,023   

 

Litigation

 

In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.

 

Note 14: Segment Reporting

 

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”) to evaluate performance and make operating decisions. The Company has identified its CODM as the Chief Executive Officer.

  

The Company has two operating business segments. The Corporate Clinics segment is comprised of the operating activities of the company-owned or managed clinics. As of March 31, 2019, the Company operated or managed 50 clinics under this segment. The Franchise Operations segment is comprised of the operating activities of the franchise business unit. As of March 31, 2019, the franchise system consisted of 404 clinics in operation. Corporate is a non-operating segment that develops and implements strategic initiatives and supports the Company’s two operating business segments by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, legal and human resources. Corporate also provides the necessary administrative functions to support the Company as a publicly-traded company. A portion of the expenses incurred by Corporate are allocated to the operating segments.  

  

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The tables below present financial information for the Company’s two operating business segments (in thousands).

 

   Three Months Ended
March 31,
   2019  2018
      (as adjusted)
Revenues:      
Corporate clinics  $5,639   $4,805 
Franchise operations   5,040    3,841 
Total revenues  $10,679   $8,646 
           
Segment operating (loss) income:          
Corporate clinics  $946   $466 
Franchise operations   2,389    1,815 
Total segment operating income  $3,335   $2,281 
           
Depreciation and amortization:          
Corporate clinics  $313   $303 
Franchise operations        
Corporate administration   53    84 
Total depreciation and amortization  $366   $387 
           
Reconciliation of total segment operating income (loss) to consolidated earnings (loss) before income taxes (in thousands):          
Total segment operating (loss) income  $3,335   $2,281 
Unallocated corporate   (2,286)   (2,365)
Consolidated income (loss) from operations   1,049    (84)
Bargain purchase gain   19     
Other (expense) income, net   (117)   (11)
Income (loss) before income tax expense  $951   $(95)

 

 

25

 

 

 

   March 31,
2019
  December 31,
2018
Segment assets:     (as adjusted)
Corporate clinics  $18,278   $8,827 
Franchise operations   4,646    4,455 
Total segment assets  $22,924   $13,283 
           
Unallocated cash and cash equivalents and restricted cash  $8,197   $8,855 
Unallocated property and equipment   1,874    487 
Other unallocated assets   945    803 
Total assets  $33,940   $23,428 

 

“Unallocated cash and cash equivalents and restricted cash” relates primarily to corporate cash and cash equivalents and restricted cash (see Note 1), “unallocated property and equipment” relates primarily to corporate fixed assets, and “other unallocated assets” relates primarily to deposits, prepaid and other assets.

 

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, 2018 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.

 

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Forward-Looking Statements

 

The information in this discussion 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, (“the Exchange Act”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management; and accounting estimates and the impact of new or recently issued accounting pronouncements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “should,” “could,” “predicts,” “potential,” “continue,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations as described from time to time in our SEC reports, including those risks outlined under “Risk Factors” which are contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2018 and in Part II, Item 1A of this Form 10-Q. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider these risks and uncertainties 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. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. Some of the important factors contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2018 and in Part II, Item 1A of this Form 10-Q 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:

 

we may not be able to successfully implement our growth strategy if we or our franchisees are unable to locate and secure appropriate sites for clinic locations, obtain favorable lease terms, and attract patients to our clinics;

 

we have limited experience operating company-owned or managed clinics, and we may not be able to duplicate the success of some of our franchisees;

 

  we may not be able to acquire operating clinics from existing franchisees or develop company-owned or managed clinics on attractive terms;

 

  any acquisitions that we make could disrupt our business and harm our financial condition;

 

  we may not be able to continue to sell franchises to qualified franchisees;

 

  we may not be able to identify, recruit and train enough qualified chiropractors to staff our clinics;

 

  new clinics may not be profitable, and we may not be able to maintain or improve revenues and franchise fees from existing franchised clinics;

 

27

 

  the chiropractic industry is highly competitive, with many well-established competitors;

 

  recent administrative actions and rulings regarding the corporate practice of medicine and joint employer responsibility may jeopardize our business model;

 

  we may face 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;

 

  legislation and regulations, as well as new medical procedures and techniques, could reduce or eliminate our competitive advantages; and

 

  we face increased costs as a result of being a public company.

   

Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission. Any forward-looking statements in this report should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.

 

Overview

  

Our principal business is to develop, own, operate, support and manage chiropractic clinics through franchising and the sale of regional developer rights and through direct ownership and management arrangements 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 abroad. 

  

Key Performance Measures.  We receive monthly performance reports from our system and our clinics which include key performance indicators per clinic including gross sales, same-store Comp Sales, number of new patients, conversion percentage, and member attrition. In addition, we review monthly reporting related to clinic openings, clinic license sales, 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.

  

Key Clinic Development Trends.   As of March 31, 2019, we and our franchisees operated 454 clinics, of which 404 were operated by franchisees and 50 were operated as company-owned or managed clinics. Of the 50 company-owned or managed clinics, 18 were constructed and developed by us, and 32 were acquired from franchisees.

 

Our current strategy is to grow through the sale and development of additional franchises, build upon our regional developer strategy, and reinitiate our efforts to expand our corporate clinic portfolio within clustered locations in a deliberate and measured manner. The number of franchise licenses sold for the year ended December 31, 2018 increased to 99 licenses, up from 37 and 22 licenses for the years ended December 31, 2017 and 2016, respectively. We ended the first quarter of 2019 with 21 regional developers who were responsible for 100% of the 30 licenses sold during the period. The growth reflects the power of the regional developer program to accelerate the number of clinics sold, and eventually opened, across the country.

 

In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned or managed clinics through the further selective acquisition of existing franchised clinics and opening of greenfield units. We will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other clinics and additional suitability factors. As of March 31, 2019, we opened two greenfield units, executed two leases for future greenfield clinic locations, and had nine additional letters-of-intent in place for further greenfield expansion.

 

We believe that The Joint has a sound concept, benefiting 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 strong 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.

 

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Significant Events and/or Recent Developments

 

We continue to deliver on our strategic initiatives and to progress toward sustained profitability. For the three months ended March 31, 2019 we saw:

i)         Gross sales for all clinics open for any amount of time grew 32% to $48.9 million dollars.

ii)        System-wide Comp Sales – or “same store” retail sales of clinics that have been open for at least 13 full months – for all clinics open 13 months or more – increased 25%.

iii)       System-wide Comp Sales for mature clinics open 48 months or more increased 18%.

iv)       We opened 12 new franchised clinics and two company-owned or managed greenfields for a total of 14 units.

 

We saw over 434,000 new patients in 2018, an increase of 25% from our new patient count the year before, with approximately 26% of those new patients having never been to a chiropractor before. We are not only increasing our percentage of market share but expanding the chiropractic market. These factors, along with continued leverage of our operating expenses, drove improvement in our bottom line.

 

On March 4, 2019, we entered into a regional developer agreement for a number of counties in the states of Virginia, Pennsylvania and West Virginia for $290,000. The development schedule requires a minimum of 40 clinics open over a ten-year period.

 

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, consumer confidence in the economy, consumer preferences, and competitive factors.

 

Significant Accounting Polices and Estimates

  

There were no changes in our significant accounting policies and estimates during the three months ended March 31, 2019 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2018, except as outlined in Note 1, Nature of Operations and Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report as it relates to revenue recognition under ASC 606 and leases under ASC 842.

 

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. 

  

Prior Period Financial Statement Correction of Immaterial Error

 

Certain states, in which the Company manages clinics, regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. The PCs are variable interest entities (“VIEs”). During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by Accounting Standards Codification 810 (“ASC 810”), Consolidations. Therefore, the Company is the primary beneficiary of the VIEs, and per ASC 810, must consolidate the VIEs. Prior to 2019, the Company did not consolidate the PCs. The Company has concluded the previous accounting policy to not consolidate the PCs was an immaterial error and has determined that the PCs should be consolidated. The adjustments will result in an increase to revenues from company clinics and a corresponding increase to general and administrative expenses. This will have no impact on net income (loss), except when the PC has sold treatment packages and wellness plans. Revenue from these treatment packages and wellness plans will now be deferred and will be recognized when patients use their visits. The Company has corrected these immaterial errors by restating the 2018 condensed consolidated financial statements as presented below.

 

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Total Revenues – Three Months Ended March 31, 2019

 

Components of revenues for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, were as follows:

 

   Three Months Ended
March 31,
      
   2019  2018  Change from
Prior Year
  Percent Change
from Prior Year
Revenues:            
Revenues from  company-owned or managed clinics  $5,639,076   $4,805,673   $833,403    17.3%
Royalty fees   3,026,815    2,273,988    752,827    33.1%
Franchise fees   417,073    348,337    68,736    19.7%
Advertising fund revenue   891,567    659,030    232,537    35.3%
Software fees   365,236    307,475    57,761    18.8%
Regional developer fees   183,858    124,011    59,847    48.3%
Other revenues   155,751    128,450    27,301    21.3%
                     
Total revenues  $10,679,376   $8,646,964   $2,032,412    23.5%

 

The reasons for the significant changes in our components of total revenues were as follows:

 

Consolidated Results

 

  Total revenues increased by $2.0 million, primarily due to the continued revenue growth of our company-owned or managed clinics portfolio and continued expansion and revenue growth of our franchise base.

  

Corporate Clinics

 

  Revenues from company-owned or managed clinics increased, primarily due to improved same-store sales growth.

 

Franchise Operations

 

  Royalty fees increased due to an increase in the number of franchised clinics in operation during the current period along with continued sales growth in existing franchised clinics. As of March 31, 2019, and 2018, there were 404 and 359 franchised clinics in operation, respectively.

  

  Franchise fees increased due to an increase in franchise agreements executed.

  

  Regional developer fees increased due to the sale of additional regional developer territories and the related revenue recognition over the life of the regional developer agreement.

 

  Software fees revenue increased due to an increase in our franchise clinic base as described above.

   

Cost of Revenues

 

Cost of Revenues  2019  2018  Change from
Prior Year
  Percent Change
from Prior Year
                     
Three Months Ended March 31,  $1,205,941   $972,332   $233,609    24.0%

 

For the three months ended March 31, 2019, as compared with the three months ended March 31, 2018, the total cost of revenues increased due to an increase in regional developer royalties of $0.2 million triggered by an increase in franchise royalty revenues of approximately 33%.

 

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Selling and Marketing Expenses

 

Selling and Marketing Expenses  2019  2018  Change from
Prior Year
  Percent Change
from Prior Year
                     
Three Months Ended March 31,  $1,505,988   $1,102,304   $403,684    36.6%

 

Selling and marketing expenses increased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, driven by an increase in local marketing expenditures by the company-owned or managed clinics. 

 

Depreciation and Amortization Expenses

 

Depreciation and Amortization Expenses  2019  2018  Change from
Prior Year
  Percent Change
from Prior Year
                     
Three Months Ended March 31,  $365,678   $387,417   $(21,739)   (5.6)%

 

Depreciation and amortization expenses decreased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, primarily due to assets reaching the end of their estimated depreciable lives during the period.

 

General and Administrative Expenses

 

 

General and Administrative Expenses    2019      2018      Change from
Prior Year
     Percent Change
from Prior Year
 
                     
Three Months Ended March 31,  $6,552,904   $6,268,686   $284,218    4.5%

 

General and administrative expenses increased during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to an increase in payroll and related expense of $0.2 million due to the inclusion of the VIEs and an increase in facilities and credit card processing fees of $0.1 million due to continued clinic count and revenue growth.

  

Profit (Loss) from Operations - Three Months Ended March 31, 2019

 

Profit (Loss) from Operations    2019      2018      Change from
Prior Year
     Percent Change
from Prior Year
 
                     
Three Months Ended March 31,  $1,048,865   $(83,775)  $1,132,640    1352.0%

 

Consolidated Results

 

Consolidated profit (loss) from operations increased by $1.1 million for the period ended March 31, 2019 compared to the period ended March 31, 2018, primarily driven by the $0.5 million increase in operating income in the corporate clinics segment discussed below combined with an improvement in operating income of $0.6 million in franchised operations discussed below.

 

Corporate Clinics

 

Our corporate clinics segment (i.e., company-owned or managed clinics) had net income from operations of $0.9 million for the period ended March 31, 2019, an increase of $0.5 million compared to income from operations of $0.4 million for the same period last year. The increase was primarily due to:

  

  An increase in revenues of approximately $0.9 million from company-owned or managed clinics; partially offset by
     
  A $0.4 million increase in depreciation, general and administrative and marketing expenses in the three months ended March 31, 2019 primarily driven by an increase in payroll related expenses.

  

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Franchise Operations

 

Our franchise operations segment had net income from operations of $2.4 million for the three months ended March 31, 2019, an increase of $0.6 million, compared to net income from operations of $1.8 million for the same period ended March 31, 2018. This increase was primarily due to:

 

  An increase of approximately $1.0 million in total royalty revenues (net of advertising fund contributions); offset by
     
  An increase of approximately $0.4 million in selling and marketing expenses primarily due to the increase in franchised clinics in operation.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

As of March 31, 2019, we had cash and short-term bank deposits of approximately $8.1 million. We provided $459,511 of cash flow from operating activities in the three months ended March 31, 2019. We will continue to preserve cash, and while we have resumed the acquisition and development of company-owned or managed clinics, we intend to progress at a measured pace and target geographic clusters where we are able to increase efficiencies through a consolidated real estate penetration strategy, leverage cooperative advertisement and marketing and attain general corporate and administrative operating efficiencies.

 

In January 2017, we executed a Credit and Security Agreement which provided a credit facility up to $5.0 million. We have drawn $1.0 million under the credit facility. See Note 9 to our condensed consolidated financial statements included in this report for additional discussion of the credit facility. 

 

In addition to approximately $8.1 million of unrestricted cash on hand as of March 31, 2019, the Company’s principal sources of liquidity are expected to be cash flows from operations, proceeds from debt financings or equity issuances, and/or proceeds from the sale of assets. The Company expects its available cash and cash flows from operations, debt financings or equity issuances, or proceeds from the sale of assets to be sufficient to fund its short-term working capital requirements. The Company’s long-term capital requirements, primarily for acquisitions and other corporate initiatives, could be dependent on its ability to access additional funds through the debt and/or equity markets. The Company from time to time considers and evaluates transactions related to its portfolio including debt financings, equity issuances, purchases and sales of assets, and other transactions. There can be no assurance that the Company will continue to generate cash flows at or above current levels or that the Company will be able to obtain the capital necessary to meet the Company’s short and long-term capital requirements.

 

Analysis of Cash Flows

 

Net cash provided by (used in) operating activities increased by $492,614 to $459,511 for the three months ended March 31, 2019 compared to ($33,103) for the three months ended March 31, 2018. The change was attributable primarily to decreased expenses and continued profitability of our company-owned or managed clinics.

 

Net cash used in investing activities was $1,201,573 and $142,343 for the three months ended March 31, 2019 and 2018, respectively.  For the three months ended March 31, 2019 this included an acquisition of $30,000, purchases of property and equipment of $526,027 and reacquisition and termination of regional developer rights of $681,500 offset by payments received on notes receivable of $35,954. For the three months ended March 31, 2018, this included purchases of property and equipment of $183,734, offset by payments on notes receivable of $41,391.  

 

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Net cash provided by financing activities was $84,601 and $23,325 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, this included proceeds from the exercise of stock options of $189,886 offset by repayments on notes payable of $100,000 and payments of finance lease obligation of $5,285. For the three months ended March 31, 2018, this included proceeds from exercise of stock options.

 

Recent Accounting Pronouncements

 

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.

   

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2019, 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 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. 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 their 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 March 31, 2019, 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

 

During the first quarter of 2019, we implemented new controls in connection with our adoption of the Accounting Standards Updates related to Topic 842, Leases. No other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In the normal course of business, the Company is party to litigation from time to time.

 

ITEM 1A. RISK FACTORS

 

We documented our risk factors in Item 1A of Part I of our Form 10-K for the year ended December 31, 2018. Other than changes to the risk factors identified below, which should be read in conjunction with the risk factors as they appear in such Form 10-K, there have been no material changes to our risk factors since the filing of that report.

 

The disclosures in the risk factor under the heading “Our management services agreements, according to which we provide non-clinical services to affiliated PCs, could be challenged by a state or chiropractor under laws regulating the practice of chiropractic, and some state chiropractic boards have made inquiries concerning our business model” have been updated below with regard to Arkansas and North Carolina:

 

In February 2019, a bill was introduced in the Arkansas state legislature to prohibit the ownership and management of a chiropractic corporation by a non-chiropractor. The bill was drafted by the Arkansas State Board of Chiropractic Examiners. This bill has since been withdrawn. While the prohibition might not have been applicable to our business model in Arkansas, depending upon how the language of the bill was interpreted, it could have posed a threat to that model if passed. We have no assurance that another bill posing a similar or greater threat to our business model will not be introduced in the future. Previously, in 2015, the Arkansas Board had questioned whether our business model might violate Arkansas law in its response to an inquiry we made on behalf of one of our franchisees. While the Arkansas Board did not thereafter pursue the matter of a possible violation, it might choose to do so at any time in the future.

 

In February 2019, the North Carolina Board of Chiropractic Examiners delivered notices alleging certain violations to approximately fifteen chiropractors working for clinics in North Carolina for which our franchisees provide management services. We retained legal counsel in this matter, and a preliminary hearing was conducted on February 21, 2019. The North Carolina Board issued its findings to each of the individual chiropractors, which generally included an overall finding that probable cause existed to show that the chiropractors violated one or more of the North Carolina Board’s rules. The findings each also proposed an Informal Settlement Agreement in lieu of proceeding to a full hearing before the North Carolina Board. On April 22, 2019, each of the chiropractors, through their attorneys, delivered to the North Carolina Board notices refuting the North Carolina Board’s findings and seeking revisions to the Settlement Agreement. The North Carolina Board has yet to reply to the notices.  While the allegations consist primarily of quality of care and advertising issues, it is possible that the actions of the North Carolina Board arise out of concerns related to our business model, and if so, we have no assurance that the North Carolina Board will not pursue other claims against the chiropractors.

 

The disclosures in the risk factor under the heading “State regulations on corporate practice of chiropractic” have been updated below with regard to Arkansas:

 

In February 2019, a bill was introduced in the Arkansas state legislature prohibiting the ownership and management of a chiropractic corporation by a non-chiropractor. This bill has since been withdrawn. While it is questionable whether the prohibition would have been applicable to our business model in Arkansas, the bill could have been interpreted to challenge that model if it had passed in its proposed form. We have no assurance that another bill posing a similar or greater challenge to our business model will not be introduced in the future.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Use of Proceeds from Registered Securities

 

None.

 

ITEM 6. EXHIBITS

 

The Exhibit Index immediately following the Signatures to this Form 10-Q is hereby incorporated by reference into this Form 10-Q. 

 

 

 

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THE JOINT CORP.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  THE JOINT CORP.
       
Dated: May 15, 2019 By:   /s/ Peter D. Holt  
    Peter D. Holt  
    President and Chief Executive Officer
    (Principal Executive Officer)
   
   
       
Dated: May 15, 2019 By:   /s/ Jake Singleton  
    Jake Singleton  
    Chief Financial Officer
    (Principal Financial Officer)

 

  

 

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EXHIBIT INDEX

 

 

 

Exhibit Number   Description of Document
     
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, (filed herewith).
     
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, (filed herewith).
     
32   Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
     
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.

 

 

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