10-Q 1 f10q_110918p.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 September 30, 2018

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

 

 

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

 

Large accelerated filer     Accelerated filer  
       
Non-accelerated filer   ☒     Smaller reporting company  
       
        Emerging growth company  

 

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

 

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

 

As of November 2, 2018, the registrant had 13,734,193 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 September 30, 2018 (unaudited) and December 31, 2017 1
      Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited) 2
      Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited) 3
      Notes to Unaudited Condensed Consolidated Financial Statements 4
         
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
         
  Item 4.   Controls and Procedures 32
         
Part I, Item 3 – Not applicable  
     
PART II OTHER INFORMATION  
         
  Item 1.   Legal Proceedings 32
         
  Item 1A.   Risk Factors 32
         
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 32
         
  Item 6.   Exhibits 32
         
  SIGNATURES 33
         
  EXHIBIT INDEX 34
         
Part II, Items 3, 4, and 5 - Not applicable  

 

 

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

 

 

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,  December 31,
   2018  2017
ASSETS  (unaudited)  (as adjusted)
Current assets:          
Cash and cash equivalents  $5,611,008   $4,216,221 
Restricted cash   185,396    103,819 
Accounts receivable, net   1,204,957    1,138,380 
Notes receivable - current portion   145,677    171,928 
Deferred franchise costs - current portion   573,893    498,433 
Prepaid expenses and other current assets   702,233    542,342 
Total current assets   8,423,164    6,671,123 
Property and equipment, net   3,269,739    3,800,466 
Notes receivable, net of current portion and reserve   167,466    351,857 
Deferred franchise costs, net of current portion   2,668,493    2,312,837 
Intangible assets, net   1,765,322    1,760,042 
Goodwill   2,916,426    2,916,426 
Deposits and other assets   593,009    623,308 
Total assets  $19,803,619   $18,436,059 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $911,618   $1,068,669 
Accrued expenses   103,801    86,959 
Co-op funds liability   145,766    89,681 
Payroll liabilities   1,288,436    867,430 
Notes payable - current portion   100,000    100,000 
Deferred rent - current portion   143,713    152,198 
Deferred franchise revenue - current portion   2,165,112    1,994,182 
Deferred revenue from company clinics   1,002,578    867,804 
Other current liabilities   327,924    152,534 
Total current liabilities   6,188,948    5,379,457 
Notes payable, net of current portion   1,000,000    1,000,000 
Deferred rent, net of current portion   724,651    802,492 
Deferred franchise revenue, net of current portion   10,148,199    9,552,746 
Deferred tax liability   -    136,434 
Other liabilities   407,028    411,497 
Total liabilities   18,468,826    17,282,626 
Commitments and contingencies          
Stockholders' equity:          
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding as of September 30, 2018, and December 31, 2017   -    - 
Common stock, $0.001 par value; 20,000,000 shares authorized, 13,748,678 shares issued and 13,734,008 shares outstanding as of September 30, 2018 and 13,600,338 shares issued and 13,586,254 outstanding as of December 31, 2017   13,749    13,600 
Additional paid-in capital   37,997,377    37,229,869 
Treasury stock 14,670 shares as of September 30, 2018 and 14,084 shares as of December 31, 2017, at cost   (90,856)   (86,045)
Accumulated deficit   (36,585,477)   (36,003,991)
Total stockholders' equity   1,334,793    1,153,433 
Total liabilities and stockholders' equity  $19,803,619   $18,436,059 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2018  2017  2018  2017
      (as adjusted)     (as adjusted)
Revenues:            
Revenues and management fees from company clinics  $3,674,704   $2,929,850   $10,352,013   $8,106,121 
Royalty fees   2,588,666    1,958,249    7,283,839    5,518,409 
Franchise fees   457,516    381,777    1,254,997    1,041,151 
Advertising fund revenue   736,987    775,221    2,083,769    1,995,235 
Software fees   324,250    290,250    947,635    839,788 
Regional developer fees   142,651    99,215    415,075    262,102 
Other revenues   137,776    103,336    379,970    282,289 
Total revenues   8,062,550    6,537,898    22,717,298    18,045,095 
Cost of revenues:                    
Franchise cost of revenues   1,005,162    735,554    2,855,712    2,071,394 
IT cost of revenues   79,545    103,590    252,911    227,903 
Total cost of revenues   1,084,707    839,144    3,108,623    2,299,297 
Selling and marketing expenses   1,194,595    1,172,559    3,590,562    3,189,489 
Depreciation and amortization   389,269    468,800    1,181,661    1,550,013 
General and administrative expenses   5,242,026    4,462,922    14,973,261    13,694,691 
Total selling, general and administrative expenses   6,825,890    6,104,281    19,745,484    18,434,193 
Loss on disposition or impairment   343,255    -    593,960    417,971 
Loss from operations   (191,302)   (405,527)   (730,769)   (3,106,366)
                     
Other income (expense):                    
Bargain purchase gain   -    -    75,264    - 
Other income (expense), net   (10,672)   9,907    (33,556)   (33,589)
Total other income (expense)   (10,672)   9,907    41,708    (33,589)
                     
Loss before income tax expense   (201,974)   (395,620)   (689,061)   (3,139,955)
                     
Income tax benefit (expense)   50,171    (36,085)   107,575    (79,277)
                     
Net loss and comprehensive loss  $(151,803)  $(431,705)  $(581,486)  $(3,219,232)
                     
Loss per share:                    
Basic and diluted loss per share  $(0.01)  $(0.03)  $(0.04)  $(0.24)
                     
Basic and diluted weighted average shares   13,727,712    13,262,032    13,646,599    13,144,764 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Nine Months Ended
   September 30,
   2018  2017
      (as adjusted)
Cash flows from operating activities:          
Net loss  $(581,486)  $(3,219,232)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   1,181,661    1,550,013 
(Gain) loss on sale of fixed assets   974    (34,355)
Loss on disposition or impairment of assets   593,960    417,971 
Net franchise fees recognized upon termination of franchise agreements   (186,850)   (46,115)
Bargain purchase gain   (75,264)   - 
Deferred income taxes   (136,434)   66,697 
Stock based compensation expense   469,405    412,512 
Changes in operating assets and liabilities:          
Accounts receivable   (59,857)   (303,590)
Income taxes receivable   -    38,960 
Prepaid expenses and other current assets   (159,891)   (105,252)
Deferred franchise costs   (510,266)   110,145 
Deposits and other assets   45,601    70,632 
Accounts payable   (225,839)   (336,535)
Accrued expenses   14,628    (168,332)
Co-op funds liability   56,085    24,942 
Payroll liabilities   421,006    (216,540)
Other liabilities   (79,783)   (493,122)
Deferred rent   (86,326)   (377,995)
Deferred revenue   1,207,089    1,015,775 
Net cash provided by (used in) operating activities   1,888,413    (1,593,421)
           
Cash flows from investing activities:          
Acquisition of business, net of cash acquired   (100,000)   - 
Purchase of property and equipment   (531,162)   (190,589)
Reacquisition and termination of regional developer rights   (278,250)   - 
Payments received on notes receivable   210,642    39,888 
Net cash used in investing activities   (698,770)   (150,701)
           
Cash flows from financing activities:          
Borrowings on revolving credit note payable   -    1,000,000 
Purchases of treasury stock under employee stock plans   (4,811)   (2,655)
Proceeds from sale of treasury stock   -    292,671 
Proceeds from exercise of stock options   291,532    127,466 
Repayments on notes payable   -    (231,500)
Net cash provided by financing activities   286,721    1,185,982 
           
Increase (decrease) in cash   1,476,364    (558,140)
Cash and restricted cash, beginning of period   4,320,040    3,344,258 
Cash and restricted cash, end of period  $5,796,404   $2,786,118 

 

During the nine months ended September 30, 2018 and 2017, cash paid for income taxes was $29,522 and $22,838, respectively. During the nine months ended September 30, 2018 and 2017, cash paid for interest was $75,000 and $81,993, respectively.

 

Supplemental disclosure of non-cash activity:

 

As of September 30, 2018, we had property and equipment purchases of $68,788 and $2,214 included in accounts payable and accrued expenses, respectively. As of December 31, 2017, we had property and equipment purchases of $50,474 included in accounts payable.

 

As of September 30, 2018, we had stock option exercise proceeds of $6,720 included in accounts receivable.

 

In connection with our acquisitions of franchises during the nine months ended September 30, 2018, we acquired $17,964 of property and equipment, intangible assets of $129,000, favorable leases of $15,302, in exchange for $100,000 in cash to the sellers.  Additionally, at the time of these transactions, we carried deferred revenue of $12,998, representing franchise fees collected upon the execution of the franchise agreement.  In accordance with ASC-952-605, we netted this amount against the aggregate purchase price of the acquisitions (Note 2) and a bargain purchase gain of $75,264 was recognized.

 

In connection with our reacquisition and termination of regional developer rights during the nine months ended September 30, 2018, we had deferred revenue of $26,934  representing license fees collected upon the execution of the regional developer agreements.  In accordance with ASC-952-605, we netted these amounts against the aggregate purchase price of the acquisitions. (Note 8)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

THE JOINT CORP. AND SUBSIDIARY

 

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”). 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 and cash flows for the interim periods presented. The results of operations for the periods ended September 30, 2018 and 2017 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 September 30, 2018 and 2017 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 under the new revenue standard, see Note 3, Revenue Disclosures. Certain balances were reclassified from general and administrative expenses to other expense, net, as well as certain balances from other revenues to revenues and management fees from Company clinics for the period ended September 30, 2017 to conform to the current year presentation and align with the segment footnote presentation.

 

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.

 

All significant intercompany accounts and transactions between The Joint Corp. and its subsidiary have been eliminated in consolidation.

  

Comprehensive Loss

 

Net loss and comprehensive loss are the same for the three and nine months ended September 30, 2018 and 2017.

  

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.  

 

4

 

The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three and nine months ended September 30, 2018 and 2017:

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
Franchised clinics:  2018  2017  2018  2017
Clinics open at beginning of period   365    336    352    309 
Opened or purchased during the period   10    6    25    35 
Acquired during the period   -    -    (1)   - 
Closed during the period   (1)   -    (2)   (2)
Clinics in operation at the end of the period   374    342    374    342 

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
Company-owned or managed clinics:  2018  2017  2018  2017
Clinics open at beginning of period   48    47    47    61 
Opened during the period   -    -    -    - 
Acquired during the period   -         1    - 
Closed or sold during the period   -    -    -    (14)
Clinics in operation at the end of the period   48    47    48    47 
                     
Total clinics in operation at the end of the period   422    389    422    389 
                     
Clinic licenses sold but not yet developed   126    105    126    105 
Executed letters of intent for future clinic licenses   12    5    12    5 

 

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 is not the primary beneficiary are accounted for under the equity method.

 

5

 

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. In these states, the Company has entered into management services agreements with such PCs under which the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice.  The Company has analyzed its relationship with the PCs and has determined that the Company does not have the power to direct the activities of the PCs. As such, the activities of the PCs are not included in the Company’s condensed consolidated financial statements. 

 

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 September 30, 2018 and December 31, 2017.

  

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. 

  

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 September 30, 2018, and December 31, 2017, 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.

  

6

 

Software Developed

 

The Company capitalizes certain software development costs. These capitalized costs are primarily related to proprietary 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. 

 

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 and nine months ended September 30, 2018 and 2017.

 

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 and nine months ended September 30, 2018 and 2017.

 

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 condensed 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.

 

Accounting for Costs Associated with Exit or Disposal Activities

 

The Company recognizes a liability for the cost associated with an exit or disposal activity that is measured initially at its fair value in the period in which the liability is incurred.

 

7

 

Costs to terminate an operating lease or other contracts are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be recognized at the cease-use date. In periods subsequent to initial measurement, changes to the liability are measured using the credit adjusted risk-free rate that was used to measure the liability initially. The cumulative effect of a change resulting from a revision to either the timing or the amount of estimated cash flows shall be recognized as an adjustment to the liability in the period of the change.

 

Deferred Rent

 

The Company leases office space for its corporate offices and company-owned or managed clinics under operating leases, which may include rent holidays and rent escalation clauses.  It recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the term of the lease.  The Company records tenant improvement allowances as deferred rent and amortizes the allowance over the term of the lease, as a reduction to rent expense.

 

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 and Management Fees from Company 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 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.  In other states where state law requires the chiropractic practice to be owned by a licensed chiropractor, the Company enters into a management agreement with the doctor’s PC.  Under the management agreement, the Company provides administrative and business management services to the doctor’s PC in return for a monthly management fee.  Due to certain implicit variable consideration in these management agreement contracts, and based on past practices between the parties, the Company determined that it cannot meet the probable threshold if it includes all of the variable consideration in the transaction price. Therefore, the Company recognizes revenue under these contracts only when it has a high degree of confidence that revenue will not be reversed in a subsequent reporting period.

 

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.

 

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 be 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.

 

8

 

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.

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising expenses were $377,679 and $1,259,373 for the three and nine months ended September 30, 2018, respectively. Advertising expenses were $314,695 and $961,106 for the three and nine months ended September 30, 2017, 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 (loss), 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 September 30, 2018 and December 31, 2017. 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.

 

The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Company has completed its determination of the accounting implications of the 2017 Tax Act on its accruals. During the quarter, an income tax benefit of approximately $85,000 was recorded due to the change in the valuation allowance against the net deferred tax asset. 

 

Loss per Common Share

 

Basic loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is computed by giving effect to all potentially dilutive common shares including preferred stock, restricted stock, stock options and warrants.

 

9

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2018  2017  2018  2017
      (as adjusted)     (as adjusted)
Net loss  $(151,803)  $(431,705)  $(581,486)  $(3,219,232)
                     
Weighted average common shares outstanding - basic   13,727,712    13,262,032    13,646,599    13,144,764 
Effect of dilutive securities:                    
Unvested restricted stock, stock options and warrants   -    -    -    - 
Weighted average common shares outstanding - diluted   13,727,712    13,262,032    13,646,599    13,144,764 
                     
Basic and diluted loss per share  $(0.01)  $(0.03)  $(0.04)  $(0.24)

 

Anti-Dilutive shares:            
   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2018  2017  2018  2017
     Unvested restricted stock   51,134    63,700    51,134    63,700 
     Stock options   960,213    1,011,686    960,213    1,011,686 
     Warrants   90,000    90,000    90,000    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 condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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 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, 2018

 

On January 1, 2018, the Company adopted the guidance of Accounting Standards Codification 606 - Revenue from Contracts with Customers (“ASC 606”). The Company adopted this change in accounting principles using the full retrospective method to all contracts at the date of initial application. Accordingly, previously reported financial information has been restated to reflect the application of ASC 606 to all comparative periods presented. The Company utilized all of the practical expedients for adoption allowed under the full retrospective method. The Company believes utilization of the practical expedients did not have a significant impact on the consolidated financial statements for the periods presented herein.

  

10

 

Adoption of ASC 606 impacted the Company’s previously reported consolidated balance sheet as follows (in thousands):

 

THE JOINT CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   As of December
31, 2017
  Adjustments Due
to ASC 606
Adoption
  As of December
31, 2017
ASSETS  (as reported)     (as adjusted)
Current assets:               
Deferred franchise costs - current portion  $484   $14   $498 
Total current assets   6,657    14    6,671 
Deferred franchise costs, net of current portion   813    1,500    2,313 
Deposits and other assets   612    12    623 
Total assets  $16,910   $1,526   $18,436 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
Current liabilities:               
Deferred franchise revenue - current portion  $1,686   $308   $1,994 
Other current liabilities   49    104    153 
Total current liabilities   4,967    412    5,379 
Deferred revenue, net of current portion   4,693    4,859    9,553 
Total liabilities   12,011    5,271    17,283 
Stockholders' equity:               
Accumulated deficit   (32,259)   (3,745)   (36,004)
Total stockholders' equity   4,899    (3,745)   1,153 
Total liabilities and stockholders' equity  $16,910   $1,526   $18,436 

 

The revenue and deferred cost adjustments are due to the change in method of recognizing franchise and regional developer fees. See Note 3, Revenue Disclosures, for a description of these changes. The change in other current liabilities relates to the Company’s classification of funds received related to letters of intent for future clinic licenses.

 

Adoption of ASC 606 impacted the Company’s previously reported condensed consolidated statement of operations for the three and nine months ended September 30, 2017, as follows (in thousands, except per share data):

 

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

  

   Three Months Ended
September 30, 2017
  Three Months Ended
Adjustments Due
to ASC 606
Adoption
  Three Months Ended
September 30, 2017
   (as reported)     (as adjusted)
Revenues:         
Franchise fees  $230   $152   $382 
Regional developer fees   259    (160)   99 
Total revenues   6,546    (8)   6,538 
Cost of revenues:               
Franchise cost of revenues   716    20    736 
Total cost of revenues   819    20    839 
Loss from operations   (378)   (28)   (406)
Loss before income tax expense   (368)   (28)   (396)
Net loss and comprehensive loss  $(404)  $(28)  $(432)
                
Loss per share:               
Basic and diluted loss per share  $(0.03)  $(0.00)  $(0.03)

 

 

11

 

   Nine Months Ended
September 30, 2017
  Nine Months Ended
Adjustments Due
to ASC 606
adoption
  Nine Months Ended
September 30, 2017
   (as reported)     (as adjusted)
Revenues:               
Franchise fees  $1,037   $4   $1,041 
Regional developer fees   456    (194)   262 
Total revenues   18,235    (189)   18,045 
Cost of revenues:               
Franchise cost of revenues   2,104    (32)   2,071 
Total cost of revenues   2,332    (32)   2,299 
Loss from operations   (2,949)   (157)   (3,106)
Loss before income tax expense   (2,983)   (157)   (3,140)
Net loss and comprehensive loss  $(3,062)  $(157)  $(3,219)
                
Loss per share:               
Basic and diluted loss per share  $(0.23)  $(0.01)  $(0.24)

 

The revenue and deferred cost adjustments are due to the change in method of recognizing franchise and regional developer fees. See Note 3, Revenue Disclosures, for a description of these changes.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The Company retrospectively adopted the standard on January 1, 2018 and reclassified restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. Accordingly, the Company reclassified $176,924 of restricted cash into cash, cash equivalents, and restricted cash as of September 30, 2017, which resulted in an increase in net cash used in operating activities in the condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The adoption of the guidance also requires the Company to make disclosures about the nature of restricted cash balances. See previous discussion in Note 1. ‘Restricted Cash’ for these disclosures.

 

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year form the enactment date. SAB 118 was codified by the FASB as part of ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The Company has completed its determination of the accounting implications of the 2017 Tax Act on its accruals. During the quarter, an income tax benefit of approximately $85,000 was recorded due to the change in the valuation allowance against the net deferred tax asset.

 

Additional new accounting guidance became effective for the Company effective January 1, 2018 that the Company reviewed and concluded was either not applicable to the Company's operations or had no material effect on the Company's consolidated financial statements.

 

Newly Issued Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance will require lessees to recognize a right-of-use asset and a lease liability for virtually all leases, other than leases with a term of 12 months or less, and to provide additional disclosures about leasing arrangements. Accounting by lessors is largely unchanged from existing accounting guidance. The Company will be required to adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2019. Early adoption is permitted.

 

12

 

While the Company is still in the process of evaluating the impact of the new guidance on its consolidated financial statements and disclosures, the Company expects adoption of the new guidance will have a material impact on its consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to its operating leases. While the new guidance is also expected to impact the measurement and presentation of elements of expenses and cash flows related to leasing arrangements, the Company does not presently believe there will be a material impact on its consolidated statements of operations or consolidated statements of cash flows. Recognition of a lease liability related to operating leases will not impact any covenants related to the Company's long-term debt because the debt agreements specify that covenant ratios be calculated using U.S. GAAP in effect at the time the debt agreements were entered into.

 

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 April 6, 2018, the Company entered into an Asset and Franchise Purchase Agreement under which (i) the Company repurchased from the seller one operating franchise in San Diego, 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 $100,000, less $12,998 of deferred revenue resulting in total purchase consideration of $87,002.

 

The Company incurred approximately $3,250 of transaction costs related to this acquisition, which are included in general and administrative expenses in the accompanying statements of operations.

  

Purchase Price Allocation

 

The following summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed during 2018 as of the acquisition date:

 

Property and equipment  $17,964 
Intangible assets   129,000 
Favorable leases   15,302 
Total assets acquired   162,266 
Bargain purchase gain   (75,264)
Net purchase price  $87,002 

 

Intangible assets in the table above consist of reacquired franchise rights of $85,000 amortized over an estimated useful life of four years and customer relationships of $44,000 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 and nine months ended September 30, 2018 and 2017 as if the acquisition in 2018 had been completed on January 1, 2017.

 

   Pro Forma for the Three Months Ended  Pro Forma for the Nine Months Ended
   September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017
Revenues, net  $8,062,550   $6,619,945   $22,791,369   $18,283,261 
Net income (loss)  $(211,974)  $(432,669)  $(689,141)  $(2,790,165)

 

 

13

 

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 2017 and 2018 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 September 30, 2018 includes net revenue and net income of approximately $67,000 and $23,000, respectively, attributable to the acquisition. The Company’s condensed consolidated statement of operations for the nine months ended September 30, 2018 includes net revenue and net income of approximately $129,000 and $40,000, respectively, attributable to the acquisition.

 

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, 2017.

 

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.  In those states where the Company owns and operates 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.  In other states where state law requires the chiropractic practice to be owned by a licensed chiropractor, the Company enters into a management agreement with the doctor’s PC.  Under the management agreement, the Company provides administrative and business management services to the doctor’s PC in return for a monthly management fee.  Due to certain implicit variable consideration in these management agreement contracts, and based on past practices between the parties, the Company determined that it cannot meet the probable threshold if it includes all of the variable consideration in the transaction price. Therefore, the Company recognizes revenue under these contracts only when it has a high degree of confidence that revenue will not be reversed in a subsequent reporting period.

 

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

 

The Company currently franchises its concept across 30 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;

 

14

 

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 monthly software fee, which is charged monthly. The Company recognizes revenue related to software fees ratably on a straight-line basis over the term of the franchise agreement.

 

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

 

Prior to the adoption of ASC 606, the Company generally recognized the entire franchise fee as revenue at the clinic opening date. The impact on the Company's previously reported financial statements of the change from that policy to the policy described above is presented in Note 1, Nature of Operations and Summary of Significant Accounting Policies.

 

Under ASC 606, the Company will record 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 eighteen 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 and nine months ended September 30, 2018 and 2017.

 

15

 

Rollforward of Contract Liabilities and Contract Assets

 

Changes in the Company's contract liability for deferred franchise and regional development fees during the nine months ended September 30, 2018 were as follows (in thousands):

 

   Deferred Revenue
   short and long-term
Balance at December 31, 2017  $11,547 
Recognized as revenue during the nine months ended September 30, 2018   (1,665)
Fees received and deferred during the nine months ended September 30, 2018   2,431 
Balance at September 30, 2018  $12,313 

 

Changes in the Company's contract assets for deferred franchise costs during the nine months ended September 30, 2018 are as follows (in thousands):

 

   Deferred Franchise Costs
   short and long-term
Balance at December 31, 2017  $2,811 
Recognized as cost of revenue during the nine months ended September 30, 2018   (468)
Costs incurred and deferred during the nine months ended September 30, 2018   899 
Balance at September 30, 2018  $3,242 

 

The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of September 30, 2018 (in thousands):

 

Contract liabilities expected to be recognized in  Amount
2018 (remainder)  $546 
2019   2,165 
2020   2,167 
2021   2,042 
2022   1,603 
Thereafter   3,790 
Total  $12,313 

 

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:

  

   September 30,  September 30,
   2018  2017
Cash and cash equivalents  $5,611,008   $2,628,648 
Restricted cash   185,396    157,470 
Total cash, cash equivalents and restricted cash  $5,796,404   $2,786,118 

 

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 collateralized by the regional developer rights in the 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 collateralized by the regional developer rights in the territory.

 

16

 

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, beginning September 24, 2017 and 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 September 30, 2018 and December 31, 2017 were $313,143 and $523,785, respectively. Maturities of notes receivable as of September 30, 2018 are as follows:

 

2018 (remaining)  $35,071 
2019   149,349 
2020   128,723 
Total  $313,143 

 

Note 6: Property and Equipment

 

Property and equipment consist of the following:

 

   September 30,  December 31,
   2018  2017
       
Office and computer equipment  $1,214,801   $1,137,970 
Leasehold improvements   5,361,821    5,117,379 
Software developed   1,145,742    1,066,454 
    7,722,364    7,321,803 
Accumulated depreciation   (4,665,685)   (3,928,349)
    3,056,679    3,393,454 
Construction in progress   213,060    407,012 
   $3,269,739   $3,800,466 

 

Depreciation expense was $258,007 and $806,625 for the three and nine months ended September 30, 2018, respectively. Depreciation expense was $340,238 and $1,099,698 for the three and nine months ended September 30, 2017, respectively.

 

In August 2018, the Board of Directors approved a change in strategy as it relates to the development of the Company’s IT platform. The Company will move away from internal development and utilize a third party software-as-a-service CRM platform as the basis for its IT infrastructure. Based on this decision, the Company recorded an impairment of approximately $343,000 of previously capitalized software development costs during the three months ended September 30, 2018.

 

17

  

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.

 

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:

 

  Level 1: Observable inputs such as quoted prices in active markets;

  

  Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

  Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

As of September 30, 2018, and December 31, 2017, 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 July 26, 2018, the Company entered into an agreement under which it repurchased the regional development rights to develop franchises in Las Vegas, Nevada. The total consideration for the transaction was $278,250, paid in cash. The Company carried a deferred revenue balance associated with these transactions of $26,934, 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.  

 

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Intangible assets consist of the following:

 

   As of September 30, 2018
   Gross Carrying  Accumulated  Net Carrying
   Amount  Amortization  Value
Amortized intangible assets:               
Reacquired franchise rights  $1,758,000   $854,011   $903,989 
Customer relationships   745,000    711,999    33,001 
Reacquired development rights   1,413,316    584,984    828,332 
   $3,916,316   $2,150,994   $1,765,322 

 

   As of December 31, 2017
   Gross Carrying  Accumulated  Net Carrying
   Amount  Amortization  Value
Amortized intangible assets:               
Reacquired franchise rights  $1,673,000   $657,943   $1,015,057 
Customer relationships   701,000    674,667    26,333 
Reacquired development rights   1,162,000    443,348    718,652 
   $3,536,000   $1,775,958   $1,760,042 

 

Amortization expense was $131,262 and $375,036 for the three and nine months ended September 30, 2018, respectively. Amortization expense was $128,562 and $450,315 for the three and nine months ended September 30, 2017, respectively.

 

Estimated amortization expense for 2018 and subsequent years is as follows:

 

2018 (remainder)  $131,262 
2019   525,048 
2020   508,551 
2021   437,830 
2022   150,418 
Thereafter   12,213 
Total  $1,765,322 

 

Note 9: Debt

 

Notes Payable

 

During 2015, the Company issued 12 notes payable, which matured through February 2017, totaling $800,350 as a portion of the consideration paid in connection with the Company’s various acquisitions. Interest rates ranged from 1.5% to 5.25%.

 

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 are 4.25% with maturities through May of 2017. There is one outstanding note which will be paid upon execution of a final settlement and release agreement between the parties.

 

Maturities of notes payable are as follows as of September 30, 2018:

 

2018 (remainder)  $100,000 
Total  $100,000 

 

 

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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 September 30, 2018, the Company had drawn $1,000,000 of the $5,000,000 available under the Credit Agreement.

 

Note 10: Equity

 

Stock Options

 

In the nine months ended September 30, 2018, the Company granted 110,792 stock options to employees with exercise prices ranging from $4.92 - $8.25. 

 

Upon the completion of the Company’s IPO in November 2014, its stock trading price became 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. 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. 

 

The Company has computed the fair value of all options granted during the nine months ended September 30, 2018 and 2017, using the following assumptions:

 

   Nine Months Ended September 30,
   2018  2017
Expected volatility   35%   42%
Expected dividends   None    None 
Expected term (years)   7   5.5 -7
Risk-free rate  2.53% to2.90%  1.98% to2.14%
Forfeiture rate   20%   20%

 

 

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The information below summarizes the stock options activity:

 

      Weighted  Weighted  Weighted
      Average  Average  Average
   Number of  Exercise  Fair  Remaining
   Shares  Price  Value  Contractual Life
Outstanding at December 31, 2016   953,075   $3.66   $1.86    6.9 
Granted at market price   295,286    4.31           
Exercised   (206,875)   1.76           
Cancelled   (37,570)   5.11           
Outstanding at December 31, 2017   1,003,916   $4.18   $1.87    8.1 
Granted at market price   110,792    6.97           
Exercised   (86,640)   3.44           
Cancelled   (67,855)   3.37           
Outstanding at Sepember 30, 2018   960,213   $4.63   $2.05    7.0 
Exercisable at September 30, 2018   476,189   $4.74   $2.08    7.0 

 

The intrinsic value of the Company’s stock options outstanding was $ 3,815,537 at September 30, 2018.

 

For the three and nine months ended September 30, 2018, stock-based compensation expense for stock options was $62,951 and $271,764, respectively.  For the three and nine months ended September 30, 2017, stock-based compensation expense for stock options was $125,588 and $261,471, respectively. Unrecognized stock-based compensation expense for stock options as of September 30, 2018 was $792,031, which is expected to be recognized ratably over the next 2.77 years.

 

Restricted Stock

 

The information below summaries the restricted stock activity:

 

Restricted Stock Awards  Shares
Outstanding at December 31, 2017   63,700 
Awards granted   50,134 
Awards vested   (61,700)
Awards forfeited   (1,000)
Outstanding at September 30, 2018   51,134 

 

For the three and nine months ended September 30, 2018, stock-based compensation expense for restricted stock was $59,825 and $197,641, respectively. For the three and nine months ended September 30, 2017, stock-based compensation expense for restricted stock was $59,804 and $151,041, respectively. Unrecognized stock-based compensation expense for restricted stock awards as of September 30, 2018 was $316,807, which is expected to be recognized ratably over the next 2.06 years.

 

Note 11: Income Taxes

 

During the three and nine months ended September 30, 2018, the Company recorded income tax benefits of approximately $50,000 and $108,000, respectively. The Company’s effective tax rate differs from the federal statutory tax rate due to permanent differences, state taxes and changes in the valuation allowance.

 

During the three and nine months ended September 30, 2017, the Company recorded an income tax expense of approximately $36,000 and $79,000, respectively, with the difference between the Company’s effective tax rate and the federal statutory tax rate due to state tax expense and a valuation allowance on the Company's deferred tax assets and the impact of certain permanent differences on taxable income.

 

 

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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 $78,000 and $194,000 for the three and nine months ended September 30, 2018, respectively. Amounts paid to or for the benefit of this stockholder was approximately $56,000 and $169,000 for the three and nine months ended September 30, 2017, respectively.

 

Note 13: Commitments and Contingencies

 

Operating Leases

 

The Company leases its corporate office space and the space for each of the company-owned or managed clinics in the portfolio. Total rent expense for the three and nine months ended September 30, 2018 was $725,867 and $2,117,624, respectively.  Total rent expense for the three and nine months ended September 30, 2017 was $688,031 and $2,114,118, respectively.

 

Future minimum annual lease payments are as follows:

 

2018 (remainder)  $658,905 
2019   2,450,981 
2020   2,192,597 
2021   2,081,455 
2022   1,972,180 
Thereafter   3,377,973 
Total  $12,734,091 

 

The Company has recognized liabilities from costs associated with the termination of certain operating leases. The Company has recorded the cumulative effect of a change resulting from a revision to either the timing or the amount of estimated cash flows in the period as follows:

 

Lease exit liability at December 31, 2017  $299,400 
Additions or changes in estimates   250,704 
Settlements   (153,220)
Net accretion   (36,614)
Lease exit liability at September 30, 2018  $360,270 

 

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 September 30, 2018, the Company operated or managed 48 clinics under this segment. The Franchise Operations segment is comprised of the operating activities of the franchise business unit. As of September 30, 2018, the franchise system consisted of 374 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). The prior period comparatives have been adjusted to reflect the changes from ASC 606.

 

   Three Months Ended  Nine Months Ended
  September 30,  September 30,
   2018  2017  2018  2017
      (as adjusted)     (as adjusted)
Revenues:            
Corporate clinics  $3,675   $2,930   $10,352   $8,106 
Franchise operations   4,387    3,608    12,365    9,939 
Total revenues  $8,062   $6,538   $22,717   $18,045 
                     
Segment operating (loss) income:                    
Corporate clinics  $440   $(196)  $466   $(1,651)
Franchise operations   2,130    1,643    5,919    4,321 
Total segment operating (loss) income  $2,570   $1,447   $6,385   $2,670 
                     
Depreciation and amortization:                    
Corporate clinics  $276   $379   $825   $1,222 
Franchise operations   -    -    -    - 
Corporate administration   113    90    357    328 
Total depreciation and amortization  $389   $469   $1,182   $1,550 
                     
Reconciliation of total segment operating income (loss) to consolidated earnings (loss) before income taxes (in thousands):                    
Total segment operating (loss) income  $2,570   $1,447   $6,385   $2,670 
Unallocated corporate   (2,761)   (1,853)   (7,116)   (5,776)
Consolidated loss from operations   (191)   (406)   (731)   (3,106)
Bargain purchase gain   -    -    75    - 
Other (expense) income, net   (11)   10    (33)   (34)
Loss before income tax expense  $(202)  $(396)  $(689)  $(3,140)

 

For the nine months ended September 30, 2017, $418,000 of loss on disposition/impairment has been reclassified from unallocated corporate to the corporate clinic segment operating loss to align with current year presentation.

 

   September 30,  December 31,
   2018  2017
Segment assets:     (as adjusted)
Corporate clinics  $8,906   $8,998 
Franchise operations   4,221    3,888 
Total segment assets  $13,127   $12,886 
           
Unallocated cash and cash equivalents and restricted cash  $5,796   $4,320 
Unallocated property and equipment   234    765 
Other unallocated assets   647    465 
Total assets  $19,804   $18,436 

 

 

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“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.

 

Note 15: Subsequent Events

 

Effective October 5, 2018, the Company entered into a regional developer agreement for certain territories in the state of California in exchange for cash of $280,000.

 

Effective October 5, 2018, the Company entered into a regional developer agreement for certain territories in the state of Florida in exchange for cash of $170,000.

 

 

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, 2017 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K.

 

Forward-Looking Statements

 

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 Item 1A of our Form 10-K for the year ended December 31, 2017. 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 Item 1A of our Form 10-K for the year ended December 31, 2017 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;

 

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  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;

 

  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 strive to be the leading provider of chiropractic care in the markets we serve and to increase brand recognition in our industry through the expansion of chiropractic clinics in key markets throughout North America and abroad.

  

Key Performance Measures.  We receive both weekly and monthly performance reports from our clinics which include key performance indicators including gross clinic sales, total royalty income, and patient office visits. 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 September 30, 2018, we and our franchisees operated 422 clinics. Of the 48 company-owned or managed clinics, 16 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 and to foster the growth of acquired and developed clinics that we own and manage. 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. We will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other clinics and additional suitability factors. Finally, we have executed one lease for a future greenfield clinic location, and have additional letters-of-intent in place for further greenfield expansion in the coming months.

 

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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.

 

Significant Events and/or Recent Developments

 

We continue to deliver on our strategic initiatives and to progress toward sustained profitability. In 2018 to date, we have continued to follow or have implemented these three key strategies with the goal of accelerating growth: (1) continued acceleration of franchise sales; (2) continued execution of our regional developer strategy; and (3) expansion of our corporate clinics portfolio within clustered locations. Following these strategic initiatives, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, we saw gross system-wide sales grow by 31%, system-wide comp sales – or “same store” retail sales of clinics that have been open for at least 13 full months – increase by 26%, and our revenue grow by 26%. These factors drove improvement in our bottom line, and we continue to drive toward sustainable profitability with our net loss decreasing by $2.6 million to $0.6 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Further, cash and cash equivalents increased to $5.6 million at September 30, 2018 compared to $4.2 million at December 31, 2017.

 

Factors Affecting Our Performance

 

Our operating results may fluctuate significantly as a result of a variety of factors, including the timing of new clinic openings, markets in which they are contained and related expenses, general economic conditions, consumer confidence in the economy, consumer preferences, and competitive factors.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard also calls for additional disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP. We adopted the new standard effective January 1, 2018.

 

Significant Accounting Polices and Estimates

  

There were no changes in our significant accounting policies and estimates during the nine months ended September 30, 2018 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2017, 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.

 

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. 

 

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Total Revenues – Three Months Ended September 30, 2018

 

Components of revenues for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, were as follows:

 

   Three Months Ended      
   September 30,      
   2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
Revenues:            
Revenues and management fees from company clinics  $3,674,704   $2,929,850   $744,854    25.4%
Royalty fees   2,588,666    1,958,249    630,417    32.2%
Franchise fees   457,516    381,777    75,739    19.8%
Advertising fund revenue   736,987    775,221    (38,234)   (4.9)%
IT related income and software fees   324,250    290,250    34,000    11.7%
Regional developer fees   142,651    99,215    43,436    43.8%
Other revenues   137,776    103,336    34,440    33.3%
                     
Total revenues  $8,062,550   $6,537,898   $1,524,652    23.3%

 

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

 

Consolidated Results

 

  Total revenues increased by $1.5 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 and management fees 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 September 30, 2018, and 2017, there were 374 and 342 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.

 

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Total Revenues – Nine Months Ended September 30, 2018

 

Components of revenues for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 were as follows:

 

   Nine Months Ended      
   September 30,      
   2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
Revenues:            
Revenues and management fees from company clinics  $10,352,013   $8,106,121   $2,245,892    27.7%
Royalty fees   7,283,839    5,518,409    1,765,430    32.0%
Franchise fees   1,254,997    1,041,151    213,846    20.5%
Advertising fund revenue   2,083,769    1,995,235    88,534    4.4%
Software fees   947,635    839,788    107,847    12.8%
Regional developer fees   415,075    262,102    152,973    58.4%
Other revenues   379,970    282,289    97,681    34.6%
                     
Total revenues  $22,717,298   $18,045,095   $4,672,203    25.9%

 

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

 

Consolidated Results

 

  Total revenues increased by $4.7 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 and management fees 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 September 30, 2018, and 2017, there were 374 and 342 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 and advertising fund revenue increased due to an increase in our franchise clinic base as described above.

 

Cost of Revenues

 

Cost of Revenues  2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
             
Three Months Ended September 30,  $1,084,707   $839,144   $245,563    29.3%
Nine Months Ended September 30,   3,108,623    2,299,297    809,326    35.2%

 

For the three months ended September 30, 2018, as compared with the three months ended September 30, 2017, 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 32%.

 

For the nine months ended September 30, 2018, as compared with the nine months ended September 30, 2017, the total cost of revenues increased due to an increase in regional developer royalties of $0.7 million triggered by an increase in franchise royalty revenues of approximately 32%, and an increase of $0.1 million in regional developer commissions.

 

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Selling and Marketing Expenses

 

Selling and Marketing Expenses  2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
             
Three Months Ended September 30,  $1,194,595   $1,172,559   $22,036    1.9%
Nine Months Ended September 30,   3,590,562    3,189,489    401,073    12.6%

 

Selling and marketing expenses increased for the three and nine months ended September 30, 2018, as compared to the three and nine months ended September 30, 2017, driven by an increase in local marketing expenditures by the company-owned or managed clinics. 

 

Depreciation and Amortization Expenses

 

Depreciation and Amortization Expenses  2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
             
Three Months Ended September 30,  $389,269   $468,800   $(79,531)   (17.0)%
Nine Months Ended September 30,   1,181,661    1,550,013    (368,352)   (23.8)%

 

Depreciation and amortization expenses decreased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, primarily due to assets reaching the end of their estimated depreciable lives during the period.

 

Depreciation and amortization expenses decreased for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, primarily due to the sale or closure of 14 company-owned or managed clinics.

 

General and Administrative Expenses

 

 

General and Administrative Expenses  2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
             
Three Months Ended September 30,  $5,242,026   $4,462,922   $779,104    17.5%
Nine Months Ended September 30,   14,973,261    13,694,691    1,278,570    9.3%

 

General and administrative expenses increased during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to an increase in payroll and related expense due to headcount increases and accrued bonus of $0.6 million and an increase in professional services expense of $0.1 million.

 

General and administrative expenses increased during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to an increase of approximately $1.1 million in payroll related expenses due to wage merit increases and accrued bonus for the 2018 period and an increase in professional services of $0.1 million.

     

Loss from Operations - Three Months Ended September 30, 2018

 

Loss from Operations  2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
                     
Three Months Ended September 30,  $(191,302)  $(405,527)  $214,225    (52.8)%

 

 

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Consolidated Results

 

Consolidated loss from operations decreased by $0.2 million for the period ended September 30, 2018 compared to the period ended September 30, 2017, primarily driven by the $0.6 million improvement in operating loss in the corporate clinics discussed below and an improvement in income from operations of $0.5 million in franchised operations discussed below, offset by an increase in unallocated corporate overhead of $0.9 million driven by a $0.3 million loss from disposition or impairment due to the write-off of previously capitalized software development costs and a $0.6 million increase in general and administrative expenses.

 

Corporate Clinics

 

Our corporate clinics segment (i.e., company-owned or managed clinics) had net income from operations of $0.4 million for the period ended September 30, 2018, an improvement of $0.6 million compared to a loss from operations of $0.2 million for the same period last year. This improvement was primarily due to:

  

  An increase in revenues of approximately $0.7 million from company-owned or managed clinics; partially offset by
     
  A $0.1 million increase in general and administrative expenses in the three months ended September 30, 2018.

  

Franchise Operations

 

Our franchise operations segment had net income from operations of $2.1 million for the three months ended September 30, 2018, an increase of $0.5 million, compared to net income from operations of $1.6 million for the same period ended September 30, 2017. This increase was primarily due to:

 

  An increase of approximately $0.7 million in total revenues (net of advertising fund contributions), due primarily to an approximately 32% increase in franchise royalty revenues; offset by
     
  An increase of approximately $0.2 million in regional developer royalties.

  

Loss from Operations - Nine Months Ended September 30, 2018

 

Loss from Operations  2018  2017  Change from
Prior Year
  Percent Change
from Prior Year
                     
Nine Months Ended September 30,  $(730,769)  $(3,106,366)  $2,375,597    (76.5)%

 

Consolidated Results

 

Consolidated loss from operations decreased by $2.4 million for the period ended September 30, 2018 compared to the period ended September 30, 2017, primarily driven by the $2.1 million improvement in operating income (loss) in the corporate clinic segment discussed below and an increase in net income from franchised operations of $1.6 million discussed below, offset by an increase in unallocated corporate overhead of $1.3 million.

 

Corporate Clinics

 

Our corporate clinics segment (i.e., company-owned or managed clinics) had income from operations of approximately $0.5 million for the period ended September 30, 2018, an improvement of $2.1 million, compared to a loss from operations of $1.6 million for the same period last year. This improvement was primarily due to:

  

  An increase in revenues of approximately $2.2 million from company-owned or managed clinics; and

 

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  A decrease of approximately $0.2 million of loss from disposition or impairment due to lease exits in the nine months ended September 30, 2017, which was $0.4 million as compared to $0.2 million for the nine months ended September 30, 2018.  The decrease was offset by an increase of approximately $0.3 million increase in payroll related expenses due to merit increases and bonus accruals.  

 

Franchise Operations

 

Our franchise operations segment had net income from operations of $5.9 million for the nine months ended September 30, 2018, an increase of $1.6 million, compared to net income from operations of $4.3 million for the same period ended September 30, 2017. This increase was primarily due to:

 

  An increase of approximately $2.3 million in total revenues (net of advertising fund contributions), due primarily to an approximately 32% increase in franchise royalty revenues; offset by
     
  An increase of $0.7 million in regional developer royalties.
     

Liquidity and Capital Resources

 

Sources of Liquidity

 

As of September 30, 2018, we had cash and short-term bank deposits of approximately $5.6 million. We provided approximately $1.9 million of cash flow from operating activities in the nine months ended September 30, 2018. 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. 

 

Analysis of Cash Flows

 

Net cash provided by (used in) operating activities increased by $3,481,834 to $1,888,413for the nine months ended September 30, 2018 compared to ($1,593,421) for the nine months ended September 30, 2017. The change was attributable primarily to decreased expenses and decreased working capital requirements of our company-owned or managed clinics.

 

Net cash used in investing activities was $698,700 and $150,701 for the nine months ended September 30, 2018 and 2017, respectively.  For the nine months ended September 30, 2018, this included an acquisition of $100,000, purchases of property and equipment of $531,162, reacquisition and termination of regional developer rights of $278,250 offset by payments received on notes receivable of $210,642.  For the nine months ended September 30, 2017, this primarily included purchases of property and equipment of $190,589.

 

Net cash provided by financing activities was $286,721 and $1,185,982 for the nine months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018, this primarily included proceeds from exercise of stock options of $291,532. For the nine months ended September 30, 2017, this included borrowings of $1,000,000 on our revolving line of credit, proceeds from the sale of treasury stock of $292,671, proceeds from the exercise of stock options of $127,466, offset by repayments on notes payable of $231,500.

 

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.

  

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Off-Balance Sheet Arrangements

 

During the nine months ended September 30, 2018, 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 September 30, 2018. 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 September 30, 2018, 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 2018, we implemented new controls in connection with our adoption of the Accounting Standards Updates related to Topic 606, Revenue from Contracts with Customers. 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 nine months ended September 30, 2018 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

 

As a smaller reporting company, we are not required to provide the information required by this item.

  

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: November 9, 2018 By:   /s/ Peter D. Holt  
    Peter D. Holt  
    President and Chief Executive Officer
    (Principal Executive Officer)
   
   
       
Dated: November 9, 2018 By:   /s/ Jake Singleton  
    Jake Singleton  
    Chief Financial Officer
    (Principal Financial Officer)

 

  

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EXHIBIT INDEX

 

 

Exhibit Number   Description of Document
     
3(ii).1     Second Amended and Restated Bylaws of The Joint Corp. (incorporated by reference to Exhibit 3(ii).1 to the Registrant’s current report on Form 8-K filed on August 9, 2018 (File No. 001-36724))
     
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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