Note Nature of Operations and Summary of Significant Accounting Policies

No.

1,

10

prior period financial statement correction of immaterial error

March 31, 2019

2018

not

March 31, 2019

2018

may

may

3,

Revenue Disclosures

13

, Commitments and Contingencies

.

first

2019,

810

810”

810,

2019,

not

not

no

2018

three

March 31, 2018

December 31, 2018

 

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

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

 

 

The accompanying condensed consolidated financial statements include the accounts of The Joint Corp. and its wholly owned subsidiary, The Joint Corporate Unit 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. All variable interest entity eliminations have been attributable to the Company.

 

 

Net income (loss) and comprehensive income (loss) are the same for the months ended and

  

 

The Joint, a Delaware corporation, was formed on 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.  

  

The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the months ended and

 

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

 

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

 

 

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 hold the controlling interest and are the primary beneficiary are accounted for under the equity method.

 

Certain states, in which the Company manages clinics, regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. Such PCs are VIEs, as fees paid by the PC to the Company as its management service provider are considered variable interests because they are liabilities on the PC’s books and the fees do meet all the following criteria: ) The fees are compensation for services provided and are commensurate with the level of effort required to provide those services; ) The decision maker or service provider does hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns; ) The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. In these states, the Company has entered into management services agreements with PCs under which the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice. During the quarter of the Company reassessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by Accounting Standards Codification (“ASC ), Consolidations. Therefore, the Company is the primary beneficiary of the VIEs, and per ASC must consolidate the VIEs. The carrying amount of VIE assets and liabilities are immaterial as of

 

 

The Company considers all highly liquid instruments purchased with an original maturity of 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 cash equivalents as of and

  

 

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 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 and the Company had an allowance for doubtful accounts of

  

 

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 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 to years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the assets.

 

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

  

 

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

 

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

 

The Company leases property and equipment under finance and operating leases. The Company leases its corporate office space and the space for each of the company-owned or managed clinic in the portfolio. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the optional period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, all relevant economic factors are considered that would compel us to exercise or exercise an option. When available, the Company uses the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is readily determinable for substantially all of our leases. In such cases, the Company estimates its incremental borrowing rate as the interest rate it could borrow an amount equal to the lease payments over a similar term, with similar collateral as in the lease, and in a similar economic environment. The Company estimates these rates using available evidence such as rates imposed by -party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company’s estimated creditworthiness.

 

For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. Lease expense incurred before a clinic opens is recorded in pre-opening costs. Once a clinic opens, we record the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated statements of operations. Many of the Company’s leases also require it to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in general and administrative expenses on the condensed consolidated statements of operations.

 

 

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 to years. In the case of regional developer rights, the Company amortizes the acquired regional developer rights over years. The fair value of customer relationships is amortized over their estimated useful life of  years. 

 

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 amortized but are subject to annual impairment tests. As required, the Company performs an annual impairment test of goodwill as of the day of the quarter or more frequently if events or circumstances change that would more likely than reduce the fair value of a reporting unit below its, carrying value. impairments of goodwill were recorded for the months ended and

 

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or long-lived assets have been impaired. impairments of long-lived assets were recorded for the months ended and

 

 

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

 

 

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.

 

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.

 

The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  In those states where the Company owns and operates or manages the clinic, revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing.  Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed.  The Company recognizes a contract liability (or a deferred revenue liability) related to the prepaid treatment plans for which the Company has an ongoing performance obligation. The Company recognizes this contract liability, and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. Based on a historical lag analysis, the Company concluded that any remaining contract liability that exists after months from transaction date will be deemed breakage, and only at that point when the likelihood of the patient exercising his or her remaining rights becomes remote will the Company recognize any breakage revenue.

 The Company collects royalties, as stipulated in the franchise agreement, equal to of gross sales, and a marketing and advertising fee currently equal to 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 working days after each sales period has ended.

 

 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 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 financing to franchisees and offers 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.

 

  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.

 

. During 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 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 of sales generated by franchised clinics in their region. Regional developer fees paid to the Company are nonrefundable and are recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to begin upon the execution of the agreement. The Company’s services under regional developer agreements include site selection, grand opening support for the clinics, sales support for identification of qualified franchisees, general operational support and marketing support to advertise for ownership opportunities. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.

 

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

 

Advertising costs are expensed as incurred. Advertising expenses were and for the months ended and respectively. 

 

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

 

The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than 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 likelihood of being realized upon ultimate resolution. The Company has identified any material uncertain tax positions as of and 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 through the current period for state and through the current period for federal reporting purposes.

 

 

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

 

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

 

Anti-Dilutive shares:

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

 

 

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.

 

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Items subject to significant estimates and assumptions include the allowance for doubtful accounts, share-based compensation arrangements, fair value of stock options, useful lives and realizability of long-lived assets, classification of deferred revenue and revenue recognition related to breakage, classification of deferred franchise costs, lease exit liabilities, realizability of deferred tax assets, impairment of goodwill and intangible assets and purchase price allocations.

 

 

On the Company adopted the guidance of Accounting Standards Codification – Leases (“ASC ), which requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective the Company adopted the requirements of ASC using the modified retrospective approach using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest date presented. The consolidated financial statements for the period ended are presented under the new standard, while comparative periods presented have been adjusted and continue to be reported in accordance with the previous standard.

 

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

 

 

The adoption of the guidance does materially impact the Company’s results of operations other than recognition of the operating lease right-of-use asset and lease liability. See Note for additional disclosures required by ASC

 

The Company reviewed other newly issued accounting pronouncements and concluded that they either are applicable to the Company's operations or that material effect is expected on the Company's financial statements upon future adoption.