Quarterly report pursuant to Section 13 or 15(d)

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

v3.19.3
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Notes to Financial Statements  
Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]
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”), its variable interest entities (“VIEs”), 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 and Affiliates consolidated financial statements and the notes thereto as set forth in The Joint’s Form
10
-K, which included all disclosures required by generally accepted accounting principles (“GAAP”) and the “
prior period financial statement correction of immaterial error
” note below. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position on a consolidated basis and the consolidated results of operations, equity and cash flows for the interim periods presented. The results of operations for the periods ended
September 30, 2019
and
2018
are
not
necessarily indicative of expected operating results for the full year. The information presented throughout the document as of and for the periods ended
September 30, 2019
and
2018
is unaudited.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other (expenses) income that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company
may
undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results
may
be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue and accounting for leases, see Note
3,
 
Revenue Disclosures
and Note
13
, Commitments and Contingencies
, respectively
.
 
Prior Period Financial Statement Correction of Immaterial Error
 
Certain states in which the Company manages clinics regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. The PCs are VIEs as defined by Accounting Standards Codification
810,
Consolidations (“ASC
810”
). During the
first
quarter of
2019,
the Company reassessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by ASC
810.
Therefore, the Company is the primary beneficiary of the VIEs, and per ASC
810,
must consolidate the VIEs. Prior to
2019,
the Company did
not
consolidate the PCs. The Company has concluded the previous accounting policy to
not
consolidate the PCs was an immaterial error and has determined that the PCs should be consolidated. The adjustments resulted in an increase to revenues from company clinics and a corresponding increase to general and administrative expenses. The adjustments had
no
impact on net income (loss), except when the PCs had sold treatment packages and wellness plans. Revenue from these treatment packages and wellness plans are now deferred and will be recognized when patients use their visits. The Company has corrected this immaterial error by restating the
2018
condensed consolidated financial statements and related notes included herein. 
 
The immaterial impacts of this error correction in the
three
and
nine
months ended
September 30, 2018
and the fiscal year ended
December 31, 2018
are as follows:
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    Three Months Ended   Adjustments Due To   Three Months Ended
    September 30, 2018   VIE Consolidation   September 30, 2018
    (as reported)       (as adjusted)
Revenues:                        
Revenues from company-owned or managed clinics   $
3,674,704
     
1,179,137
    $
4,853,841
 
Total revenues    
8,062,550
     
1,179,137
     
9,241,687
 
General and administrative expenses    
5,242,026
     
1,234,877
     
6,476,903
 
Total selling, general and administrative expenses    
6,825,890
     
1,234,877
     
8,060,767
 
Loss from operations    
(191,302
)    
(55,740
)    
(247,042
)
                         
Loss before income tax benefit (expense)    
(201,974
)    
(55,740
)    
(257,714
)
                         
Net loss and comprehensive loss   $
(151,803
)    
(55,740
)   $
(207,543
)
                         
Loss per share:                        
Basic and diluted loss per share   $
(0.01
)    
(0.01
)   $
(0.02
)
                         
Basic and diluted weighted average shares    
13,727,712
     
-
     
13,727,712
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
    Nine Months Ended   Adjustments Due To   Nine Months Ended
    September 30, 2018   VIE Consolidation   September 30, 2018
    (as reported)       (as adjusted)
Revenues:                        
Revenues from company-owned or managed clinics   $
10,352,013
     
3,976,139
    $
14,328,152
 
Total revenues    
22,717,298
     
3,976,139
     
26,693,437
 
General and administrative expenses    
14,973,261
     
3,639,840
     
18,613,101
 
Total selling, general and administrative expenses    
19,745,484
     
3,639,840
     
23,385,324
 
Loss from operations    
(731,743
)    
336,299
     
(395,444
)
                         
Other income (expense):                        
Bargain purchase gain    
75,264
     
(44,809
)    
30,455
 
Total other income (expense)    
42,682
     
(44,809
)    
(2,127
)
                         
Loss before income tax benefit (expense)    
(689,061
)    
291,490
     
(397,571
)
                         
Net loss and comprehensive loss   $
(581,486
)    
291,490
    $
(289,996
)
                         
Loss per share:                        
Basic and diluted loss per share   $
(0.04
)    
0.02
    $
(0.02
)
                         
Basic and diluted weighted average shares    
13,646,599
     
-
     
13,646,599
 
 
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 
    December 31,   Adjustments Due To   December 31,
    2018   VIE Consolidation   2018
ASSETS  
(as reported)
 
 
 
(as adjusted)
Current assets:                        
Accounts receivable, net    
1,213,707
 
   
(407,357
)    
806,350
 
Total current assets    
11,711,345
 
   
(407,357
)    
11,303,988
 
Goodwill    
2,916,426
 
   
308,719
     
3,225,145
 
Total assets   $
23,526,352
 
  $
(98,639
)   $
23,427,713
 
                         
LIABILITIES AND STOCKHOLDERS' EQUITY                        
Current liabilities:                        
Deferred revenue from company clinics    
994,493
 
   
1,535,004
     
2,529,497
 
Total current liabilities    
8,738,123
 
   
1,535,004
     
10,273,127
 
Total liabilities    
21,165,108
 
   
1,535,004
     
22,700,112
 
Commitments and contingencies                        
Equity:                        
The Joint Corp. stockholders' equity:                        
Accumulated deficit    
(35,750,908
)
   
(1,633,543
)    
(37,384,451
)
Total The Joint Corp. stockholders' equity    
2,361,244
 
   
(1,633,543
)    
727,701
 
Non-controlling Interest    
-
 
   
(100
)    
(100
)
Total equity    
2,361,244
 
   
(1,633,643
)    
727,601
 
Total liabilities and equity   $
23,526,352
 
  $
(98,639
)   $
23,427,713
 
 
Principles of Consolidation
 
The accompanying condensed consolidated financial statements include the accounts of The Joint and its wholly owned subsidiary, The Joint Corporate Unit
No.
1,
LLC, which was dormant for all periods presented. The Company consolidates VIEs in which the Company is the primary beneficiary in accordance with ASC
810.
Non-controlling interests represent
third
-party equity ownership interests in VIEs.
 
All significant inter-affiliate accounts and transactions between The Joint and its VIEs have been eliminated in consolidation. Certain balances were reclassified from regional developer fees to other revenues for the
three
and
nine
months ended
September 30, 2018
to conform to the current year presentation.
 
Comprehensive Income (Loss)
 
Net income (loss) and comprehensive income (loss) are the same for the
three
and
nine
months ended
September 30, 2019
and
2018.
  
Nature of Operations
 
The Joint, a Delaware corporation, was formed on
March 10, 2010
for the principal purpose of franchising, developing and managing chiropractic clinics, selling regional developer rights and supporting the operations of franchised chiropractic clinics at locations throughout the United States of America. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.  
 
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, 2019
and
2018:
 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
Franchised clinics:   2019   2018   2019   2018
Clinics open at beginning of period    
417
     
365
     
394
     
352
 
Opened during the period    
21
     
10
     
47
     
25
 
Sold during the period    
(6
)    
-
     
(7
)    
(1
)
Closed during the period    
(2
)    
(1
)    
(4
)    
(2
)
Clinics in operation at the end of the period    
430
     
374
     
430
     
374
 
 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
Company-owned or managed clinics:   2019   2018   2019   2018
Clinics open at beginning of period    
51
     
48
     
48
     
47
 
Opened during the period    
1
     
-
     
4
     
-
 
Acquired during the period    
6
     
-
     
7
     
1
 
Closed during the period    
-
     
-
     
(1
)    
-
 
Clinics in operation at the end of the period    
58
     
48
     
58
     
48
 
                                 
Total clinics in operation at the end of the period    
488
     
422
     
488
     
422
 
                                 
Clinic licenses sold but not yet developed    
179
     
126
     
179
     
126
 
Executed letters of intent for future clinic licenses    
29
     
12
     
29
     
12
 
 
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 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.
 
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. 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. Such PCs are VIEs, as fees paid by the PCs to the Company as its management service provider are considered variable interests because they are liabilities on the PC’s books and the fees do
not
meet all the following criteria:
1
) The fees are compensation for services provided and are commensurate with the level of effort required to provide those services;
2
) The decision maker or service provider does
not
hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns;
3
) The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. During the
first
quarter of
2019,
the Company reassessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by ASC
810,
Therefore, the Company is the primary beneficiary of the VIEs, and per ASC
810,
must consolidate the VIEs. The carrying amount of VIE assets and liabilities are immaterial as of
September 30, 2019.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid instruments purchased with an original maturity of
three
months or less to be cash equivalents. The Company continually monitors its positions with, and credit quality of, the financial institutions with which it invests. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has invested substantially all its cash in short-term bank deposits. The Company had
no
cash equivalents as of
September 30, 2019
and
December 31, 2018.
  
Restricted Cash
 
Restricted cash relates to cash that franchisees and company-owned or managed clinics contribute to the Company’s National Marketing Fund and cash that franchisees provide to various voluntary regional Co-Op Marketing Funds. Cash contributed by franchisees to the National Marketing Fund is to be used in accordance with the Company’s Franchise Disclosure Document with a focus on regional and national marketing and advertising. 
 
Accounts Receivable
 
Accounts receivable primarily represent amounts due from franchisees for 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, 2019,
and
December 31, 2018,
the Company had an allowance for doubtful accounts of
$0.
  
Deferred Franchise Costs
 
Deferred franchise costs represent commissions that are direct and incremental to the Company and are paid in conjunction with the sale of a franchise license. These costs are recognized as an expense, in franchise cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise agreement.
 
Property and Equipment
 
Property and equipment are stated at cost or for property acquired as part of franchise acquisitions at fair value at the date of closing. Depreciation is computed using the straight-line method over estimated useful lives of
three
to
seven
years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the assets.
 
Maintenance and repairs are charged to expense as incurred; major renewals and improvements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.
  
Capitalized Software
 
The Company capitalizes certain software development costs. These capitalized costs are primarily related to software used by clinics for operations and by the Company for the management of operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized as assets in progress until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Software developed is recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, which is generally
five
years.
 
Leases
 
The Company adopted the guidance of Accounting Standards Codification
842
– Leases (“ASC
842”
) on
January 1, 2019
which requires lessees to recognize a right-of-use ("ROU") asset and lease liability for all leases. The Company elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs.
 
The Company leases property and equipment under operating and finance 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 the Company to exercise or
not
exercise an option. When available, the Company uses the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is
not
readily determinable for substantially all of its leases. In such cases, the Company estimates its incremental borrowing rate as the interest rate it would pay to borrow an amount equal to the lease payments over a similar term, with similar collateral as in the lease, and in a similar economic environment. The Company estimates these rates using available evidence such as rates imposed by
third
-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company’s estimated creditworthiness.
 
For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. Pre-opening costs are recorded as incurred in general and administrative expenses. The Company records 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 also included in general and administrative expenses on the condensed consolidated statements of operations.
 
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 generally range from
four
to
eight
years. In the case of regional developer rights, the Company generally amortizes the re-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, 2019
and
2018.
 
Long-Lived Assets
 
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset
may
not
be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or
not
long-lived assets are recoverable.
No
impairments of long-lived assets were recorded for the
three
and
nine
months ended
September 30, 2019
and
2018.
 
Advertising Fund
 
The Company has established an advertising fund for national/regional marketing and advertising of services offered by its clinics. The monthly marketing fee is
2%
of clinic sales. The Company segregates the marketing funds collected which are included in restricted cash on its consolidated balance sheets. As amounts are expended from the fund, the Company recognizes a related expense.
 
Co-Op Marketing Funds
 
Some franchises have established regional Co-Ops for advertising within their local and regional markets. The Company maintains a custodial relationship under which the marketing funds collected are segregated and used for the purposes specified by the Co-Ops’ officers. The marketing funds are included in restricted cash on the Company’s condensed consolidated balance sheets.
 
Revenue Recognition
 
The Company generates revenue primarily through its company-owned and managed clinics, royalties, franchise fees, advertising fund, and through IT related income and computer software fees.
 
Revenues from Company-Owned or Managed Clinics.  
The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  In those states where the Company owns and operates or manages the clinic, revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing.  Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed.  The Company recognizes a contract liability (or a deferred revenue liability) related to the prepaid treatment plans for which the Company has an ongoing performance obligation. The Company recognizes this contract liability, and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. Based on a historical lag analysis, the Company concluded that any remaining contract liability that exists after
24
months from transaction date will be deemed breakage, and only at that point when the likelihood of the patient exercising his or her remaining rights becomes remote will the Company recognize any breakage revenue.
 
Royalties and Advertising Fund Revenue.
 The Company collects royalties, as stipulated in the franchise agreement, equal to
7%
of gross sales, and a marketing and advertising fee currently equal to
2%
of gross sales. Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the term of the franchise agreement. The franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to the Company’s performance obligation under the franchise agreement and are recognized as franchisee clinic level sales occur. Royalties are collected bi-monthly
two
working days after each sales period has ended.
 
Franchise Fees.
 The Company requires the entire non-refundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of
ten
years. Initial franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement.  The Company’s services under the franchise agreement include: training of franchisees and staff, site selection, construction/vendor management and ongoing operations support. The Company provides
no
financing to franchisees and offers
no
guarantees on their behalf. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
 
Software Fees.
  The Company collects a monthly fee for use of its proprietary chiropractic software, computer support, and internet services support. These fees are recognized ratably on a straight-line basis over the term of the respective franchise agreement.
 
Regional Developer Fees
. During
2011,
the Company established a regional developer program to engage independent contractors to assist in developing specified geographical regions. Under the historical program, regional developers paid a license fee for each franchise they received the right to develop within the region. In
2017,
the program was revised to grant exclusive geographical territory and establish a minimum development obligation within that defined territory. Regional developer fees paid to the Company are non-refundable 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 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. In addition, regional developers receive fees which are funded by the initial franchise fees collected from franchisees upon the sale of franchises within their exclusive geographical territory and a royalty of
3%
of sales generated by franchised clinics in their exclusive geographical territory. Fees related to the sale of franchises within their exclusive geographical territory are initially deferred as deferred franchise costs and are recognized as an expense in franchise cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise agreement. Royalties of
3%
of sales generated by franchised clinics in their regions are also recognized as franchise cost of revenues as franchisee clinic level sales occur.
 
The Company entered into
one
regional developer agreement for the
nine
months ended
September 30, 2019
for which it received approximately
$290,000
which was deferred as of the transaction date and will be recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to begin upon the execution of the agreement. Certain of these regional developer agreements resulted in the regional developer acquiring the rights to existing royalty streams from clinics already open in the respective territory. In those instances, the revenue associated from the sale of the royalty stream is being recognized over the remaining life of the respective franchise agreements.
  
Advertising Costs
 
Advertising costs are expensed as incurred. Advertising expenses were
$562,516
and
$1,658,428
for the
three
and
nine
months ended
September 30, 2019,
respectively. Advertising expenses were
$377,679
and
$1,259,373
for the
three
and
nine
months ended
September 30, 2018,
respectively.
 
Income Taxes
 
The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates. Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to depreciation of property and equipment, amortization of goodwill, accounting for leases and stock-based compensation 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, 2019
and
December 31, 2018.
Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses.
 
The Company's tax returns for tax years subject to examination by tax authorities included
2014
through the current period for state and
2015
through the current period for federal reporting purposes.
 
Earnings (Loss) per Common Share
 
Basic earnings (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings 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   Nine Months Ended
    September 30,   September 30,
    2019   2018   2019   2018
        (as adjusted)       (as adjusted)
Net Income (loss)   $
616,980
    $
(207,543
)   $
2,031,887
    $
(289,996
)
                                 
Weighted average common shares outstanding - basic    
13,846,045
     
13,727,712
     
13,798,593
     
13,646,599
 
Effect of dilutive securities:                                
Unvested restricted stock and stock options    
680,493
     
-
     
643,610
     
-
 
Weighted average common shares outstanding - diluted    
14,526,538
     
13,727,712
     
14,442,203
     
13,646,599
 
                                 
Basic earnings (loss) per share   $
0.04
    $
(0.02
)   $
0.15
    $
(0.02
)
Diluted earnings (loss) per share   $
0.04
    $
(0.02
)   $
0.14
    $
(0.02
)
 
Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
Weighted average potentially dilutive securities:   2019   2018   2019   2018
Unvested restricted stock    
-
     
-
     
-
     
-
 
Stock options    
2,815
     
-
     
49,367
     
-
 
 
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 the closing price on the date of the grant and the grant-date fair value of stock options using the Black-Scholes-Merton model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. The Company recognizes compensation costs ratably over the period of service using the straight-line method. 
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Items subject to significant estimates and assumptions include the allowance for doubtful accounts, share-based compensation arrangements, fair value of stock options, useful lives and realizability of long-lived assets, classification of deferred revenue and revenue recognition related to breakage, classification of deferred franchise costs, calculation of ROU assets and liabilities related to leases, realizability of deferred tax assets, impairment of goodwill and intangible assets and purchase price allocations and related valuations.
 
Recent Accounting Pronouncements
 
Accounting Standards Adopted Effective
January 1, 2019
 
On
January 1, 2019,
the Company adopted ASC
842,
which requires lessees to recognize a ROU asset and lease liability on their balance sheet for all leases with terms beyond
twelve
months. The new standard also requires enhanced disclosures that provide more transparency and information to financial statement users about lease portfolios. Effective
January 1, 2019,
the Company adopted the requirements of ASC
842
using the modified retrospective approach using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest date presented. The consolidated financial statements for the period ended
September 30, 2019
are presented under the new standard, while comparative periods presented have
not
been adjusted and continue to be reported in accordance with the previous standard.
 
During the process of adoption, the Company made the following elections:
 
 
·
The Company elected the package of practical expedients which allowed the Company to
not
reassess:
 
 
·
Whether existing or expired contracts contain leases under the new definition of a lease;
 
 
·
Lease classification for existing or expired leases; and
 
 
·
Initial direct costs for any expired or existing leases to determine if they would qualify for capitalization under ASC
842.
 
 
·
The Company did
not
elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.
 
 
·
The Company did
not
elect the land easement practical expedient, which permits an entity to continue applying its current policy for accounting for land easements that existed as of, or expired before, the effective date of ASC
842.
 
 
·
The Company elected to make the accounting policy election for short-term leases, permitting the Company to
not
apply the recognition requirements of ASC
842
to short-term leases with terms of
12
months or less.
 
The adoption of ASC
842
does
not
materially impact the Company’s results of operations other than recognition of the operating lease ROU asset and lease liability. See Note
13
for additional disclosures required by ASC
842.
 
The Company reviewed other newly issued accounting pronouncements and concluded that they either are
not
applicable to the Company's operations or that
no
material effect is expected on the Company's financial statements upon future adoption.