Note 1: Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
These unaudited financial statements represent
the condensed consolidated financial statements of The Joint Corp. (“The Joint”) and its wholly owned subsidiary The
Joint Corporate Unit No. 1, LLC (collectively, the “Company”). These unaudited condensed consolidated financial statements
should be read in conjunction with The Joint Corp. and Subsidiary consolidated financial statements and the notes thereto as set
forth in The Joint Corp.’s Form 10-K, which included all disclosures required by generally accepted accounting principles.
In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to
present fairly the Company’s financial position on a consolidated basis and the consolidated results of operations and cash
flows for the interim periods presented. The results of operations for the periods ended September 30, 2017 and 2016 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, 2017 and 2016 is unaudited.
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. Certain balances were
reclassified from general and administrative expenses to other (expense) income, net, as well as certain balances from other
revenues to revenues and management fees from company clinics for the three and nine months ended September 30, 2016 to
conform to the current year presentation and align with the segment footnote presentation.
Comprehensive Loss
Net loss and comprehensive loss are the same
for the three and nine months ended September 30, 2017 and 2016.
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, 2017 and 2016:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Franchised clinics:
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Clinics open at beginning of period
|
|
|
336
|
|
|
|
280
|
|
|
|
309
|
|
|
|
265
|
|
Opened or Purchased during the period
|
|
|
6
|
|
|
|
13
|
|
|
|
35
|
|
|
|
38
|
|
Acquired during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
Closed during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Clinics in operation at the end of the period
|
|
|
342
|
|
|
|
293
|
|
|
|
342
|
|
|
|
293
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Company-owned or managed clinics:
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Clinics open at beginning of period
|
|
|
47
|
|
|
|
61
|
|
|
|
61
|
|
|
|
47
|
|
Opened during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Acquired during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Closed or Sold during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
Clinics in operation at the end of the period
|
|
|
47
|
|
|
|
61
|
|
|
|
47
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total clinics in operation at the end of the period
|
|
|
389
|
|
|
|
354
|
|
|
|
389
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinics licenses sold but not yet developed
|
|
|
105
|
|
|
|
134
|
|
|
|
105
|
|
|
|
134
|
|
Executed letters of intent for future clinic licenses
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Variable Interest Entities
An entity deemed to hold the controlling interest
in a voting interest entity or deemed to be the primary beneficiary of a variable interest entity (“VIE”)
is required to consolidate the VIE in its financial statements. An entity is deemed to be the primary beneficiary of a VIE if it
has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's
economic performance and (b) the obligation to absorb the majority of losses of the VIE or the right to receive the majority of
benefits from the VIE. Investments where the Company does not hold the controlling interest and is not the primary beneficiary
are accounted for under the equity method.
Certain states in which the Company manages
clinics regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized
under state laws as professional corporations or PCs. Such PCs are VIEs. In these states, the Company has entered into management
services agreements with such PCs under which the Company provides, on an exclusive basis, all non-clinical services of the chiropractic
practice. The Company has analyzed its relationship with the PCs and has determined that the Company does not have the power
to direct the activities of the PCs. As such, the activities of the PCs are not included in the Company’s condensed consolidated
financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions
with, and credit quality of, the financial institutions with which it invests. As of the balance sheet date and periodically throughout
the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company
has invested substantially all its cash in short-term bank deposits. The Company had no cash equivalents as of September 30, 2017
and December 31, 2016.
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 September 30, 2017, one PC entity and four franchisees represented 19% of outstanding accounts receivable, compared
to three PC entities and six franchisees representing 24% of outstanding accounts receivable as of December 31, 2016. The Company
did not have any customers that represented greater than 10% of its revenues during the three or nine months ended September 30,
2017 and 2016.
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 September 30, 2017, and December 31, 2016, the Company
had an allowance for doubtful accounts of $0 and $131,830, respectively.
The Company writes off accounts receivable
when it deems them uncollectible and records recoveries of accounts receivable previously written off when it receives them. In
the nine months ended September 30, 2017, the Company determined that certain working capital advances from its PC entities in
Illinois and New York were no longer collectible as a result of the sale or closure of the related clinics. Accordingly, the Company
wrote-off approximately $47,000 of accounts receivable to loss on disposition or impairment related to these entities during the
nine months ended September 30, 2017.
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 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.
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 to eight years. In the case of regional developer rights, the Company amortizes the acquired regional developer
rights over seven years. The fair value of customer relationships is amortized over their estimated useful life of two years.
Goodwill
Goodwill consists of the excess of the purchase
price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions 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. No impairments of goodwill were recorded for the nine months ended
September 30, 2017 and 2016.
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 nine months ended September 30, 2017 and 2016.
Advertising Fund
The Company has established an advertising
fund for national/regional marketing and advertising of services offered by its clinics. The monthly marketing fee is 2% of clinic
sales. The Company segregates the marketing funds collected which are included in restricted cash on its condensed consolidated
balance sheets. As amounts are expended from the fund, the Company recognizes advertising fund revenue and 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 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.
As of September 30, 2017, the Company maintained
a lease exit liability of approximately $0.4 million classified in other liabilities on its condensed consolidated balance sheets
related to remaining operating leases that will no longer provide economic benefit to the Company, net of estimated sublease income.
Lease exit liability at December 31, 2016
|
|
$
|
338,151
|
|
Additions
|
|
|
883,146
|
|
Settlements
|
|
|
(706,991
|
)
|
Net Accretion
|
|
|
(66,030
|
)
|
Lease exit liability at September 30, 2017
|
|
$
|
448,276
|
|
In the nine months ended September 30, 2017,
the Company ceased use of eight clinic locations from its corporate clinics segment and recognized a liability for lease exit
costs incurred based on the remaining lease rental due, reduced by estimated sublease rental income that could be reasonably obtained
for the properties. The Company recognized the resulting expense of approximately $418,000 in loss on disposition or impairment
in the accompanying condensed consolidated statement of operations.
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 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.
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
. 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 ranging from $7,250 to 25% of the then current franchise
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 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 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. 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 nine months ended September 30, 2017,
the Company entered into eight regional developer agreements for which it received approximately $1.7 million, 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. 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.
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.
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.
The
Company collects a monthly 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
Advertising costs are expensed as incurred.
Advertising expenses were $314,695 and $961,106 for the three and nine months ended September 30, 2017, respectively. Advertising
expenses were $600,804 and $1,770,699 for the three and nine months ended September 30, 2016, 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 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 September 30, 2017 and December 31, 2016,
the Company maintained a liability for income taxes for uncertain tax positions of approximately $27,000 and $40,000, respectively,
of which $26,000 and $27,000, respectively, represent penalties and interest and are 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 2013 through the current period for state, and 2014 through the current period for federal reporting
purposes.
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
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(403,808
|
)
|
|
$
|
(2,626,894
|
)
|
|
$
|
(3,062,035
|
)
|
|
$
|
(9,413,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
13,262,032
|
|
|
|
12,730,624
|
|
|
|
13,144,764
|
|
|
|
12,657,435
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average common shares outstanding - diluted
|
|
|
13,262,032
|
|
|
|
12,730,624
|
|
|
|
13,144,764
|
|
|
|
12,657,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.74
|
)
|
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
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Unvested restricted stock
|
|
|
63,700
|
|
|
|
92,415
|
|
|
|
63,700
|
|
|
|
92,415
|
|
Stock options
|
|
|
1,011,686
|
|
|
|
899,370
|
|
|
|
1,011,686
|
|
|
|
899,370
|
|
Warrants
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Stock-Based Compensation
The Company accounts for share-based payments
by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. The Company determines
the estimated grant-date fair value of restricted shares using quoted market prices and the grant-date fair value of stock options
using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made
regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate,
volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to
the valuation. The Company recognizes compensation costs ratably over the period of service using the straight-line method.
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with 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.
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 standard also calls for additional disclosures around the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers. The ASU will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective. The new standard becomes effective for the Company 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, which are based on a percent of sales. The Company
expects the adoption of Topic 606 to impact its accounting for initial franchise fees and regional developer fees. Currently, the
Company recognizes revenue from initial franchise fees and regional developer fees upon the opening of a franchised clinic when
the Company has performed all of its material obligations and initial services under the respective agreements. Upon the adoption
of Topic 606, the Company expects to recognize the revenue related to initial franchise fees and regional developer fees over the
term of the related franchise agreement or regional developer agreement. The Company is in the process of implementing this standard
and has drafted certain accounting policies. The Company will be finalizing accounting policies, selecting its transition method,
quantifying the impact of adopting this standard, and designing internal controls during the fourth quarter of the year ending
December 31, 2017. The Company is currently unable to estimate the impact on its consolidated financial statements.
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 that this standard will have on its financial statements, it will result in a significant increase
in the assets 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 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 consolidated 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 consolidated 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 consolidated 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 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.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
to provide clarity and
reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock
Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes
to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718.The amendments
are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or
after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating
the impact this standard will have on the Company's consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12,
“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,”
to (1) improve
the transparency and understandability of information conveyed to financial statement users about an entity’s risk management
activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities
and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. Specifically, the guidance creates
better alignment of hedge accounting with risk management activities, eliminates the separate measurement and recording of hedge
ineffectiveness, simplifies effectiveness assessments, and improves presentation and disclosure. The amendments are effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For cash flow and net investment
hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate
measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance
of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation
and disclosure guidance is required only prospectively. The Company is currently evaluating the impact of this amendment on its
financial statements.
Note 8: Equity
Stock Options
In the nine months ended September 30, 2017,
the Company granted 195,286 stock options to employees with exercise prices ranging from $2.65 - $3.88.
Upon the completion of the Company’s
IPO in November 2014, its stock trading price became the basis of fair value of its common stock used in determining the value
of share-based awards. To the extent the value of the Company’s share-based awards involves a measure of volatility, it will
rely upon the volatilities from publicly traded companies with similar business models until its common stock has accumulated enough
trading history for it to utilize its own historical volatility. The expected life of the options granted is based on the average
of the vesting term and the contractual term of the option. The risk-free rate for periods within the expected life of the option
is based on the U.S. Treasury 10-year yield curve in effect at the date of the grant.
The Company has computed the fair value of
all options granted during the nine months ended September 30, 2017 and 2016, using the following assumptions:
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
Expected volatility
|
|
|
42%
|
|
|
43%
|
-
|
45%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
Expected term (years)
|
|
5.5
|
to
|
7
|
|
|
7
|
|
Risk-free rate
|
|
1.98%
|
to
|
2.14%
|
|
1.19%
|
to
|
1.68%
|
Forfeiture rate
|
|
|
20%
|
|
|
|
20%
|
|
The information below summarizes the stock options activity:
|
|
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Fair
|
|
Remaining
|
|
|
Shares
|
|
Price
|
|
Value
|
|
Contractual Life
|
Outstanding at December 31, 2016
|
|
|
953,075
|
|
|
$
|
3.66
|
|
|
$
|
1.86
|
|
|
|
6.9
|
|
Granted at market price
|
|
|
195,286
|
|
|
|
3.70
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(106,221
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(30,454
|
)
|
|
|
5.21
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,011,686
|
|
|
$
|
3.87
|
|
|
$
|
1.76
|
|
|
|
7.4
|
|
Exercisable at September 30, 2017
|
|
|
370,634
|
|
|
$
|
4.67
|
|
|
$
|
2.17
|
|
|
|
5.6
|
|
The intrinsic value of the Company’s
stock options outstanding was $1,405,592 at September 30, 2017.
For the three and nine months ended September
30, 2017, stock-based compensation expense for stock options was $125,588 and $261,471, respectively. For the three and nine
months ended September 30, 2016, stock based compensation expense for stock options was $183,608, and $522,519, respectively. Unrecognized
stock-based compensation expense for stock options as of September 30, 2017 was $716,667, which is expected to be recognized ratably
over the next 2.2 years.
Restricted Stock
The information below summaries the restricted
stock activity:
Restricted Stock Awards
|
|
Shares
|
Outstanding at December 31, 2016
|
|
|
92,415
|
|
Awards granted
|
|
|
59,700
|
|
Awards vested
|
|
|
(76,070
|
)
|
Awards forfeited
|
|
|
(12,345
|
)
|
Outstanding at September 30, 2017
|
|
|
63,700
|
|
For the three and nine months ended September
30, 2017, stock-based compensation expense for restricted stock was $59,804 and $151,041, respectively. For the three and nine
months ended September 30, 2016, stock based compensation expense for restricted stock was $71,698, and $490,181, respectively.
Unrecognized stock based compensation expense for restricted stock awards as of September 30, 2017 was $206,502 to be recognized
ratably over the next year.
Treasury Stock
In December 2013, the Company exercised its
right of first refusal under the terms of a Stockholders Agreement dated March 10, 2010 to repurchase 534,000 shares of the Company’s
common stock. The shares were purchased for $0.45 per share or $240,000 in cash along with the issuance of an option to repurchase
the 534,000 shares. The repurchased shares were recorded as treasury stock, at cost in the amount of $791,638. The option is classified
in equity as it is considered indexed to the Company’s stock and meets the criteria for classification in equity. The
option was granted to the seller for a term of 8 years. The option contained the following exercise prices:
Year 1
|
|
$
|
0.56
|
|
Year 2
|
|
$
|
0.68
|
|
Year 3
|
|
$
|
0.84
|
|
Year 4
|
|
$
|
1.03
|
|
Year 5
|
|
$
|
1.28
|
|
Year 6
|
|
$
|
1.59
|
|
Year 7
|
|
$
|
1.97
|
|
Year 8
|
|
$
|
2.45
|
|
Consideration given in the form of the option
was valued using a Binomial Lattice-Based model resulting in a fair value of $1.03 per share option for a total fair value of $551,638.
The option was valued using the Binomial Lattice-Based valuation methodology because that model embodies all of the relevant assumptions
that address the features underlying the instrument.
During December 2016, the option holder partially
exercised the call option and purchased 250,872 shares at a total repurchase price of $210,000. The Company reduced the cost of
treasury shares by approximately $113,000 related to the transaction, reduced the value of the option by approximately $259,000,
and reduced additional paid-in-capital by approximately $162,000.
During September 2017, the option holder exercised
the remainder of the call option and purchased 283,128 shares at a total repurchase price of $292,671. The Company reduced the
cost of treasury shares by approximately $127,000 related to the transaction, reduced the value of the option by approximately
$292,000, and reduced additional paid-in-capital by approximately $127,000.