The Joint Corp. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2018

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

Note

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.

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

-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

March 31, 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

March 31, 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

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

March 31, 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.

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

months ended

March 31, 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.

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

three

months ended

March 31, 2018

and

2017:

	Three Months Ended March 31,
Franchised clinics:	2018		2017
Clinics in operation at beginning of period		352		309
Opened or Purchased during the period		7		18
Acquired during the period		-		-
Closed during the period		-		(1	)
Clinics in operation at the end of the period		359		326

	Three Months Ended March 31,
Company-owned or managed clinics:	2018		2017
Clinics in operation at beginning of period		47		61
Opened during the period		-		-
Acquired during the period		-		-
Closed or sold during the period		-		(14	)
Clinics in operation at the end of the period		47		47

Total clinics in operation at the end of the period		406		373

Clinics licenses sold but not yet developed		114		107
Executed letters of intent for future clinic licenses		8		-

Variable Interest Entities

An entity deemed to hold the controlling interest in a voting interest entity or deemed to be the primary beneficiary of a variable interest entity (“VIE”) is required to consolidate the VIE in its financial statements. An entity is deemed to be the primary beneficiary of a VIE if it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb the majority of losses of the VIE or the right to receive the majority of benefits from the VIE. Investments where the Company does

not

hold the controlling interest and is

not

the primary beneficiary are accounted for under the equity method.

Certain states in which the Company manages clinics regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. Such PCs are VIEs. 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

cash equivalents as of

March 31, 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.

Concentrations of Credit Risk

From time to time, the Company grants credit in the normal course of business to franchisees and PCs related to the collection of royalties and other operating revenues. The Company periodically performs credit analysis and monitors the financial condition of the franchisees and PCs to reduce credit risk. As of

March 31, 2018,

one

PC entity and

one

franchise represented

of outstanding accounts receivable. As of

December 31, 2017,

one

PC entity and

six

franchisees represented

13%

of outstanding accounts receivable. The Company did

not

have any customers that represented greater than

10%

of its revenues during the

three

months ended

March 31, 2018

and

2017.

Accounts Receivable

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

March 31, 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 paid in conjunction with the sale of a franchise and 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

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.

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

six

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 completed in the years ended

December 31, 2014

through

December 31, 2016.

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.

impairments of goodwill were recorded for the

three

months ended

March 31, 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.

impairments of long-lived assets were recorded for the

three

months ended

March 31, 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

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.

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.

Lease exit liability at December 31, 2017	$	299,400
Additions		-
Settlements		-
Net accretion		(12,171	)
Lease exit liability at March 31, 2018	$	287,229

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

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 our 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

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.

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

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 franchisor’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.

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

$410,637

and

$286,415

for the

three

months ended

March 31, 2018

and

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, permanent tax differences and statutory tax rates.

The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than

not

that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the condensed consolidated financial statements from such a position based on the largest benefit that has a greater than

50%

likelihood of being realized upon ultimate resolution. The Company has

not

identified any material uncertain tax positions as of

March 31, 2018

and

December 31, 2017.

Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses.

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%

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

not

completed its determination of the accounting implications of the

2017

Tax Act on its accruals. However, it has reasonably estimated the effects of the

2017

Tax Act and recorded provisional amounts in its financial statements as of

March 31, 2018.

As the Company completes its analysis of the

2017

Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it

may

make adjustments to the provisional amounts.

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 and stock options.

	Three Months Ended March 31,
	2018			2017
				(as adjusted)
Net loss	$	(386,904	)	$	(1,765,385	)

Weighted average common shares outstanding - basic		13,587,837			13,042,595
Effect of dilutive securities:
Stock options		-			-
Weighted average common shares outstanding - diluted		13,587,837			13,042,595

Basic and diluted loss per share	$	(0.03	)	$	(0.14	)

The following table summarizes the potential shares of common stock that were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive:

	Three Months Ended March 31,
	2018		2017
Unvested restricted stock		63,700		80,070
Stock options		1,053,811		916,915
Warrants		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, uncertain tax positions, 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

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 of the periods presented herein.

Adoption of ASC

606

impacted our previously reported consolidated balance sheet as follows (in thousands):

THE JOINT CORP. AND SUBSIDIARY
CONDENSED 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
Total assets	$	16,910		$	1,515		$	18,425

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred franchise revenue - current portion	$	1,686		$	308		$	1,994
Other current liabilities		49			24			73
Total current liabilities		4,967			332			5,299
Deferred revenue, net of current portion		4,693			4,867			9,560
Total liabilities		12,011			5,199			17,210
Stockholders' equity:
Accumulated deficit		(32,259	)		(3,684	)		(35,943	)
Total stockholders' equity		4,899			(3,684	)		1,215
Total liabilities and stockholders' equity	$	16,910		$	1,515		$	18,425

The revenue and deferred cost adjustments are due to the change in method of recognizing franchise and regional developer fees. See Note

Revenue Disclosures

, for a description of these changes.

Adoption of ASC

606

impacted our previously reported condensed consolidated statement of operations for the

three

months ended

March 31, 2017,

as follows (in thousands, except per share data):

THE JOINT CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31, 2017			Adjustments due to ASC 606 adoption			Three Months Ended March 31, 2017
	(as reported)						(as adjusted)
Revenues:
Franchise fees	$	450		$	(154	)	$	296
Regional developer fees		77			(13	)		64
Total revenues		5,674			(167	)		5,507
Cost of revenues:
Franchise cost of revenues		683			(48	)		635
Total cost of revenues		742			(48	)		694
Loss from operations		(1,587	)		(118	)		(1,705	)
Loss before income tax expense		(1,606	)		(118	)		(1,725	)
Net loss and comprehensive loss	$	(1,647	)	$	(118	)	$	(1,765	)

Loss per share:
Basic and diluted loss per share	$	(0.13	)	$	(0.01	)	$	(0.14	)

The revenue and deferred cost adjustments are due to the change in method of recognizing franchise and regional developer fees. See Note

Revenue Disclosures

, for a description of these changes.

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, we reclassified

$21,843

of restricted cash into cash, cash equivalents, and restricted cash as of

March 31, 2017,

which resulted in an increase in net cash used in operating activities in the condensed consolidated statement of cash flows for the

three

months ended

March 31, 2017.

The adoption of the guidance also requires us to make disclosures about the nature of restricted cash balances. See previous discussion in Note

‘

Restricted Cash’

for these disclosures.

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

material effect on the Company's consolidated financial statements.

Newly Issued Accounting Standards

Not

Yet Adopted

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

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.

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 Comprehensive Income 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

material effect is expected on the Company's financial statements upon future adoption.