Quarterly report pursuant to Section 13 or 15(d)

Significant Accounting Policies (Policies)

v3.7.0.1
Significant Accounting Policies (Policies)
 3 Months Ended
Mar. 31, 2017
Accounting Policies [Abstract]  
Consolidation, Policy [Policy Text Block]
Principles of Consolidation
 
The accompanying condensed consolidated financial statements include the accounts of The Joint Corp. and its wholly owned subsidiary, The Joint Corporate Unit No.
1,
LLC, which was dormant for all periods presented.
 
All significant intercompany accounts and transactions between The Joint Corp. and its subsidiary have been eliminated in consolidation.
Comprehensive Income, Policy [Policy Text Block]
Comprehensive Loss
 
Net loss and comprehensive loss are the same for the
three
months ended
March
31,
2017
and
2016.
Nature of Operations Policy [Policy Text Block]
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,
2017
and
2016:
 
    Three Months Ended
    March 31,
Franchised clinics:   2017   2016
Clinics open at beginning of period    
309
      
265
  
Opened or purchased during the period    
18
      
14
  
Acquired during the period    
-
      
-
  
Closed during the period    
(1
 )    
(2
 )
Clinics in operation at the end of the period    
326
      
277
  
 
    March 31,
Company-owned or managed clinics:   2017   2016
Clinics open at beginning of period    
61
      
47
  
Opened during the period    
-
      
7
  
Acquired during the period    
-
      
-
  
Closed or sold during the period    
(14
 )    
-
  
Clinics in operation at the end of the period    
47
      
54
  
                 
Total clinics in operation at the end of the period    
373
      
331
  
                 
Clinic licenses sold but not yet developed    
107
      
146
  
Consolidation, Variable Interest Entity, Policy [Policy Text Block]
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, Policy [Policy Text Block]
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 of its cash in short-term bank deposits. The Company had
no
cash equivalents as of
March
31,
2017
and
December
31,
2016.
Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]
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. 
Concentration Risk, Credit Risk, Policy [Policy Text Block]
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,
2017
and
December
31,
2016,
three
PC entities and
five
franchisees represented
28%
and
24%,
respectively, 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,
2017
and
2016.
Trade and Other Accounts Receivable, Policy [Policy Text Block]
Accounts Receivable
 
Accounts receivable represent amounts due from franchisees for initial franchise fees and royalty fees, working capital advances due from PCs, and
tenant
improvement allowances due from landlords. 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,
2017
and
December
31,
2016,
the Company had an allowance for doubtful accounts of
$131,830
.
Revenue Recognition, Services, Commissions [Policy Text Block]
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 upon the opening of a clinic.
Property, Plant and Equipment, Policy [Policy Text Block]
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.
Internal Use Software, Policy [Policy Text Block]
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, Finite-Lived, Policy [Policy Text Block]
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
to
eight
years. In the case of regional developer rights the Company amortizes the acquired regional developer rights over
seven
years. The fair value of customer relationships is amortized over their estimated useful life of 
two
 years. 
Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block]
Goodwill
 
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions.  Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. As required, the Company performs an annual impairment test of goodwill as of the
first
day of the
fourth
quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
No
impairments of goodwill were recorded for the
three
months ended
March
31,
2017
and
2016.
Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]
Long-Lived Assets
 
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset
may
not be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired.
No
impairments of long-lived assets were recorded for the
three
months ended
March
31,
2017
and
2016.
Advertising Fund, Policy [Policy Text Block]
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 advertising fund revenue and a related expense. Amounts collected in excess of marketing expenditures are included in restricted cash on the Company’s condensed consolidated balance sheets. 
Cooperative Advertising Policy [Policy Text Block]
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.
Costs Associated with Exit or Disposal Activities or Restructurings, Policy [Policy Text Block]
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 is 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 fair value of the liability initially. The cumulative effect of a change resulting from a revision to either the timing or the amount of estimated cash flows is recognized as an adjustment to the liability in the period of the change.
 
In the
three
months ended
March
31,
2017
the Company recognized an additional lease exit liability of approximately
$0.7
million classified in Other Liabilities on its condensed consolidated balance sheets related to operating leases that will no longer provide economic benefit to the Company, net of estimated sublease income.
Lessee, Leases [Policy Text Block]
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, Policy [Policy Text Block]
Revenue Recognition
 
The Company generates revenue through initial franchise fees, regional developer fees, royalties, advertising fund revenue, IT related income, and computer software fees, and from its company-owned and managed clinics.
Revenue Recognition, Services, Franchise Fees [Policy Text Block]
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 as revenue when the Company has substantially completed its initial services under the franchise agreement, which typically occurs upon opening of the clinic.  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. 
Regional Developer Fees, Policy [Policy Text Block]
Regional Developer Fees
. During
2011,
the Company established a regional developer program to engage independent contractors to assist in developing specified geographical regions. Under this program, regional developers pay a license fee ranging from
$7,250
to
25%
of the then current franchise fee for each franchise they receive the right to develop within the region. Each regional developer agreement establishes a minimum number of franchises that the regional developer must develop. Regional developers receive fees ranging from
$14,500
to
$19,950
which are collected from franchisees upon the sale of franchises within their region and a royalty of
3%
of sales generated by franchised clinics in their region. Regional developer license fees paid to the Company are nonrefundable and are recognized as revenue when the Company has performed substantially all initial services required by the regional developer agreement, which generally is considered to be upon the opening of each franchised clinic. Accordingly, revenue is recognized on a pro-rata basis determined by the number of franchised clinics to be opened in the area covered by the regional developer agreement. Upon the execution of a regional developer agreement, the Company estimates the number of franchised clinics to be opened, which is typically consistent with the contracted minimum. The Company reassesses the number of clinics expected to be opened as the regional developer performs under its regional developer agreement. When a material change to the original estimate becomes apparent, the amount of revenue to be recognized per clinic is revised on a prospective basis, and the unrecognized fees are allocated among, and recognized as revenue upon the opening of, the expected remaining unopened franchised clinics within the region. Certain regional developer agreements provide that no additional fee is required for franchises developed by the regional developer above the contracted minimum, while other regional developer agreements require a supplemental payment. 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. Several of the regional developer agreements grant the Company the option to repurchase the regional developer’s license.
 
For the
three
months ended
March
31,
2017,
the Company entered into
three
regional development agreements for which it received approximately
$650,000,
which was deferred as of the respective transaction dates and will be recognized on a pro-rata basis over the estimated number of franchised clinics to be opened in the respective regions.
Revenues and Management Fees, Policy [Policy Text Block]
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.  When the collectability of the full management fee is uncertain, the Company recognizes management fee revenue only to the extent of fees expected to be collected from the PCs.
Royalties, Policy [Policy Text Block]
Royalties.
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. Certain franchisees with franchise agreements acquired during the formation of the Company pay a monthly flat fee. Royalties are recognized as revenue when earned. Royalties are collected bi-monthly
two
working days after each sales period has ended.
IT Related Income And Software Fees, Policy [Policy Text Block]
IT Related Income and Software Fees.
  The Company collects a monthly computer software fee for use of its proprietary chiropractic software, computer support, and internet services support. These fees are recognized on a monthly basis as services are provided. IT related revenue represents a flat fee to purchase a clinic’s computer equipment, operating software, preinstalled chiropractic system software, key card scanner (patient identification card), credit card scanner and credit card receipt printer. These fees are recognized as revenue upon receipt of equipment by the franchisee.
Advertising Costs, Policy [Policy Text Block]
Advertising Costs
 
Advertising costs are expensed as incurred. Advertising expenses were
$286,415
and
$422,098
for the
three
months ended
March
31,
2017
and
2016,
respectively.
Income Tax, Policy [Policy Text Block]
Income Taxes
 
The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates. Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to depreciation of property and equipment, amortization of goodwill, accounting for leases, and treatment of revenue for franchise fees and regional developer fees collected. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 
 
The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the condensed consolidated financial statements from such a position based on the largest benefit that has a greater than
50%
likelihood of being realized upon ultimate resolution.
 
At
March
31,
2017
and
December
31,
2016,
the Company maintained a liability for income taxes for uncertain tax positions of approximately
$40,000
,
of which
$27,000
represents penalties and interest and is recorded in the “other liabilities” section of the accompanying condensed consolidated balance sheets. 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 include
2012
through the current period for state and
2013
through the current period for federal reporting purposes.
Earnings Per Share, Policy [Policy Text Block]
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,
    2017   2016
         
Net loss   $
(1,647,064
 )   $
(3,525,134
 )
                 
Weighted average common shares outstanding - basic    
13,042,595
      
12,567,901
  
Effect of dilutive securities:                
Stock options    
-
      
-
  
Weighted average common shares outstanding - diluted    
13,042,595
      
12,567,901
  
                 
Basic and diluted loss per share   $
(0.13
 )   $
(0.28
 )
 
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,
    2017   2016
Unvested restricted stock    
80,070
      
292,466
  
Stock options    
916,915
      
768,625
  
Warrants    
90,000
      
90,000
  
Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]
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, Policy [Policy Text Block]
Use of Estimates
 
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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.
New Accounting Pronouncements, Policy [Policy Text Block]
Recent Accounting Pronouncements
 
In
May,
2014,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2014
-
09,
“
Revenue from Contracts with Customers
”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard becomes effective for us on
January
1,
2018.
The Company has performed a preliminary review of ASU
2014
-
09
and does not expect the adoption of ASU
2014
-
09
to have a material impact on its revenues and management fees from company clinics or franchise royalty revenues. The Company continues to evaluate the impact of the adoption of this standard on recognition of revenue from franchise agreements, advertising fund revenue, and regional developer fee revenue. The Company is still evaluating its transition approach and expects to reach a decision in the
first
half of fiscal
2017.
 
In
February
2016,
the FASB issued ASU No.
2016
-
02,
“
Leases (Topic
842).
” The ASU requires that substantially all operating leases be recognized as assets and liabilities on the Company’s balance sheet, which is a significant departure from the current standard, which classifies operating leases as off balance sheet transactions and accounts for only the current year operating lease expense in the statement of operations. The right to use the leased property is to be capitalized as an asset and the expected lease payments over the life of the lease will be accounted for as a liability. The effective date is for fiscal years beginning after
December
31,
2018.
While the Company has not yet quantified the impact this standard will have on its financial statements, it will result in a significant increase in the asset and liabilities reflected on the Company’s balance sheet and in the interest expense and depreciation and amortization expense reflected in its statement of operations, while reducing the amount of rent expense. This could potentially decrease the Company’s reported net income.
 
In
March
2016,
the FASB issued ASU
2016
-
09,
“
Compensation—Stock Compensation (Topic
718):
Improvements to Employee Share-Based Payment Accounting
”. This update simplifies accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this new standard as of
January
1,
2017.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements
 
In
April
2016,
the FASB issued ASU No.
2016
-
10,
“
Revenue from Contracts with Customers (Topic
606):
Identifying Performance Obligations and Licensing
”, to clarify the following
two
aspects of Topic
606:
1)
identifying performance obligations, and
2)
the licensing implementation guidance. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU
2014
-
09.
The Company is currently evaluating the impact of this amendment on its financial statements.
 
In
May
2016,
the FASB issued ASU No.
2016
-
12,
“
Revenue from Contracts with Customers (Topic
606):
Narrow-Scope Improvements and Practical Expedients
”, to clarify certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU
2014
-
09.
The Company is currently evaluating the impact of this amendment on its financial statements.
 
In
August
2016,
the FASB issued ASU No.
2016
-
15,
“Statement of Cash Flows (Topic
230):
Classification of Certain Cash Receipts and Cash Payments”.
This update addresses how certain cash inflows and outflows are classified in the statement of cash flows to eliminate existing diversity in practice. This update is effective for annual and interim reporting periods beginning after
December
15,
2017.
Early adoption is permitted. The Company is currently evaluating the impact of this amendment on its financial statements.
 
In
November
2016,
the FASB issued ASU No.
2016
-
18,
“
Statement of Cash Flows (Topic
230):
Restricted Cash”
 (a consensus of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after
December
15,
2017,
including interim periods within those fiscal years. The Company is currently evaluating the impact of these amendments on its consolidated financial statements.
 
In
January
2017,
the FASB issued ASU No.
2017
-
01,
“
Business Combinations (Topic
805):
Clarifying the Definition of a Business”,
 to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments should be applied prospectively, and are effective for fiscal years beginning after
December
15,
2017,
including interim periods within those fiscal years. The Company is currently evaluating the impact of these amendments on its consolidated financial statements.
 
In
January
2017,
the Financial Accounting Standards Board FASB issued ASU 
2017
-
04,
 “
Intangibles - Goodwill and Other (Topic
350):
Simplifying the Test for Goodwill Impairment
”. This update simplifies the subsequent measurement of goodwill by eliminating “Step
2”
from the goodwill impairment test. This update is effective for annual and interim reporting periods beginning after
December
15,
2019.
Early adoption is permitted. The Company is currently evaluating the impact this standard will have on the Company's consolidated financial statements and related disclosures.