ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated
financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements
and notes thereto as of and for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of
Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K.
Forward-Looking Statements
The information
in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”), which
are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not
limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs,
prospects and plans and objectives of management; and accounting estimates and the impact of new or recently issued accounting
pronouncements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,”
“may,” “plans,” “projects,” “will,” “should,” “could,”
“predicts,” “potential,” “continue,” “would” and similar expressions are intended
to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not
actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue
reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on
which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements
in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties
and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements.
In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our
future results or operations as described from time to time in our SEC reports, including those risks outlined under “Risk
Factors” which are contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2018 and in Part II, Item
1A of this Form 10-Q. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking
statement set forth in this Form 10-Q. You should carefully consider these risks and uncertainties and other information contained
in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Some of the important factors contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2018 and in Part II,
Item 1A of this Form 10-Q that could cause our actual results to differ materially from those projected in any forward-looking
statements include, but are not limited to, the following:
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we may not be able to successfully implement our growth strategy if we or our franchisees
are unable to locate and secure appropriate sites for clinic locations, obtain favorable lease terms, and attract patients to
our clinics;
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we have limited experience operating company-owned
or managed clinics, and we may not be able to duplicate the success of some of our franchisees;
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we may not be able to acquire operating clinics from existing franchisees or develop company-owned or managed clinics on attractive terms;
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any acquisitions that we make could disrupt our business and harm our financial condition;
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we may not be able to continue to sell franchises to qualified franchisees;
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we may not be able to identify, recruit and train enough qualified chiropractors to staff our clinics;
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new clinics may not be profitable, and we may not be able to maintain or improve revenues and franchise fees from existing franchised clinics;
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the chiropractic industry is highly competitive, with many well-established competitors;
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recent administrative actions and rulings regarding the corporate practice of medicine and joint employer responsibility may jeopardize our business model;
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we may face negative publicity or damage to our reputation, which could arise from concerns expressed by opponents of chiropractic and by chiropractors operating under traditional service models;
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legislation and regulations, as well as new medical procedures and techniques, could reduce or eliminate our competitive advantages; and
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we face increased costs as a result of being a public company.
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Additionally, there
may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange
Commission. Any forward-looking statements in this report should be considered in light of various important factors, including
the risks and uncertainties listed above, as well as others.
Overview
Our principal business
is to develop, own, operate, support and manage chiropractic clinics through franchising and the sale of regional developer rights
and through direct ownership and management arrangements throughout the United States.
We seek to be the
leading provider of chiropractic care in the markets we serve and to become the most recognized brand in our industry through the
rapid and focused expansion of chiropractic clinics in key markets throughout North America and abroad.
Key Performance
Measures.
We receive monthly performance reports from our system and our clinics which include key performance indicators
per clinic including gross sales, same-store Comp Sales, number of new patients, conversion percentage, and member attrition. In
addition, we review monthly reporting related to clinic openings, clinic license sales, and various earnings metrics in the aggregate
and per clinic. We believe these indicators provide us with useful data with which to measure our performance and to measure our
franchisees’ and clinics’ performance.
Key Clinic Development
Trends
. As of March 31, 2019, we and our franchisees operated 454 clinics, of which 404 were operated by franchisees
and 50 were operated as company-owned or managed clinics. Of the 50 company-owned or managed clinics, 18 were constructed and
developed by us, and 32 were acquired from franchisees.
Our current strategy is to grow through the sale and development of additional franchises, build upon our
regional developer strategy, and reinitiate our efforts to expand our corporate clinic portfolio within clustered locations in
a deliberate and measured manner. The number of franchise licenses sold for the year ended December 31, 2018 increased to 99 licenses,
up from 37 and 22 licenses for the years ended December 31, 2017 and 2016, respectively. We ended the first quarter of 2019 with
21 regional developers who were responsible for 100% of the 30 licenses sold during the period. The growth reflects the power of
the regional developer program to accelerate the number of clinics sold, and eventually opened, across the country.
In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned
or managed clinics through the further selective acquisition of existing franchised clinics and opening of greenfield units. We
will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other
clinics and additional suitability factors. As of March 31, 2019, we opened two greenfield units, executed two leases for future
greenfield clinic locations, and had nine additional letters-of-intent in place for further greenfield expansion.
We believe that The
Joint has a sound concept, benefiting from the fundamental changes taking place in the manner in which Americans access chiropractic
care and their growing interest in seeking effective, affordable natural solutions for general wellness. These trends join with
the strong preference we have seen among chiropractic doctors to reject the insurance-based model to produce a combination that
benefits the consumer and the service provider alike. We believe that these forces create an important opportunity to accelerate
the growth of our network.
Significant Events and/or Recent Developments
We continue to
deliver on our strategic initiatives and to progress toward sustained profitability. For the three months ended March 31,
2019 we saw:
i) Gross
sales for all clinics open for any amount of time grew 32% to $48.9 million dollars.
ii) System-wide
Comp Sales – or “same store” retail sales of clinics that have been open for at least 13 full months –
for all clinics open 13 months or more – increased 25%.
iii) System-wide
Comp Sales for mature clinics open 48 months or more increased 18%.
iv) We
opened 12 new franchised clinics and two company-owned or managed greenfields for a total of 14 units.
We saw over 434,000
new patients in 2018, an increase of 25% from our new patient count the year before, with approximately 26% of those new patients
having never been to a chiropractor before. We are not only increasing our percentage of market share but expanding the chiropractic
market. These factors, along with continued leverage of our operating expenses, drove improvement in our bottom line.
On March 4, 2019,
we entered into a regional developer agreement for a number of counties in the states of Virginia, Pennsylvania and West Virginia
for $290,000. The development schedule requires a minimum of 40 clinics open over a ten-year period.
Factors Affecting Our Performance
Our operating results
may fluctuate significantly as a result of a variety of factors, including the timing of new clinic sales, openings, closures,
markets in which they are contained and related expenses, general economic conditions, consumer confidence in the economy, consumer
preferences, and competitive factors.
Significant Accounting Polices and Estimates
There were no changes in our significant accounting policies and estimates during the three months ended March
31, 2019 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K
for the year ended December 31, 2018, except as outlined in Note 1,
Nature of Operations and Summary of Significant Accounting
Policies
, to our condensed consolidated financial statements included in this report as it relates to revenue recognition under
ASC 606 and leases under ASC 842.
Results of Operations
The following discussion
and analysis of our financial results encompasses our consolidated results and results of our two business segments: Corporate
Clinics and Franchise Operations.
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 variable interest entities (“VIEs”).
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 Accounting Standards
Codification 810 (“ASC 810”), Consolidations. 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 will result in an increase to revenues from company clinics and a corresponding increase to general and administrative
expenses. This will have no impact on net income (loss), except when the PC has sold treatment packages and wellness plans. Revenue
from these treatment packages and wellness plans will now be deferred and will be recognized when patients use their visits. The
Company has corrected these immaterial errors by restating the 2018 condensed consolidated financial statements as presented below.
Total Revenues – Three Months Ended March 31, 2019
Components of revenues
for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, were as follows:
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Three Months Ended
March 31,
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2019
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2018
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Change from
Prior Year
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Percent Change
from Prior Year
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Revenues:
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Revenues from company-owned or managed clinics
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$
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5,639,076
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$
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4,805,673
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$
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833,403
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17.3
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%
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Royalty fees
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3,026,815
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2,273,988
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752,827
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33.1
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%
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Franchise fees
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417,073
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348,337
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68,736
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19.7
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%
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Advertising fund revenue
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891,567
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659,030
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232,537
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35.3
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%
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Software fees
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365,236
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307,475
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57,761
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18.8
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%
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Regional developer fees
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183,858
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124,011
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59,847
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48.3
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%
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Other revenues
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155,751
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128,450
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27,301
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21.3
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%
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Total revenues
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$
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10,679,376
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$
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8,646,964
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$
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2,032,412
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23.5
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%
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The reasons for the significant changes
in our components of total revenues were as follows:
Consolidated Results
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Total revenues increased by $2.0 million, primarily due to the continued revenue growth of our company-owned or
managed clinics portfolio and continued expansion and revenue growth of our franchise base.
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Corporate Clinics
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Revenues from company-owned or managed clinics increased, primarily due to improved same-store sales growth.
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Franchise Operations
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Royalty fees increased due to an increase in the number of franchised clinics in operation during the current period along with continued sales growth in existing franchised clinics. As of March 31, 2019, and 2018, there were 404 and 359 franchised clinics in operation, respectively.
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Franchise fees increased due to an increase in franchise agreements executed.
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Regional developer fees increased due to the sale of additional regional developer territories and the related revenue recognition over the life of the regional developer agreement.
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Software fees revenue increased due to an increase in our franchise clinic base as described above.
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Cost of Revenues
Cost of Revenues
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2019
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2018
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Change from
Prior Year
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Percent Change
from Prior Year
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Three Months Ended March 31,
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$
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1,205,941
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$
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972,332
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$
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233,609
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24.0
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%
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For the three months
ended March 31, 2019, as compared with the three months ended March 31, 2018, the total cost of revenues increased due to an increase
in regional developer royalties of $0.2 million triggered by an increase in franchise royalty revenues of approximately 33%.
Selling and Marketing Expenses
Selling and Marketing Expenses
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2019
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2018
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Change from
Prior Year
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Percent Change
from Prior Year
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Three Months Ended March 31,
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$
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1,505,988
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$
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1,102,304
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$
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403,684
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36.6
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%
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Selling and marketing
expenses increased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, driven by an
increase in local marketing expenditures by the company-owned or managed clinics.
Depreciation and Amortization Expenses
Depreciation and Amortization Expenses
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2019
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2018
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Change from
Prior Year
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Percent Change
from Prior Year
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Three Months Ended March 31,
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$
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365,678
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$
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387,417
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$
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(21,739
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)
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(5.6
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)%
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Depreciation and amortization
expenses decreased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, primarily due
to assets reaching the end of their estimated depreciable lives during the period.
General and Administrative Expenses
General and Administrative Expenses
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2019
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2018
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Change from
Prior Year
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Percent Change
from Prior Year
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Three Months Ended March 31,
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$
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6,552,904
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$
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6,268,686
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$
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284,218
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4.5
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%
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General and administrative expenses increased during the three months ended March 31, 2019 compared to the three
months ended March 31, 2018, primarily due to an increase in payroll and related expense of $0.2 million due to the inclusion of
the VIEs and an increase in facilities and credit card processing fees of $0.1 million due to continued clinic count and revenue
growth.
Profit (Loss) from Operations - Three Months Ended March
31, 2019
Profit (Loss) from Operations
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2019
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2018
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Change from
Prior Year
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Percent Change
from Prior Year
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Three Months Ended March 31,
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$
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1,048,865
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$
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(83,775
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)
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$
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1,132,640
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1352.0
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%
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Consolidated Results
Consolidated profit
(loss) from operations increased by $1.1 million for the period ended March 31, 2019 compared to the period ended March 31, 2018,
primarily driven by the $0.5 million increase in operating income in the corporate clinics segment discussed below combined with
an improvement in operating income of $0.6 million in franchised operations discussed below.
Corporate Clinics
Our corporate clinics segment (i.e., company-owned or managed clinics) had net income from operations of $0.9
million for the period ended March 31, 2019, an increase of $0.5 million compared to income from operations of $0.4 million for
the same period last year. The increase was primarily due to:
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An increase in revenues of approximately $0.9 million from company-owned or managed clinics; partially offset
by
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A $0.4 million increase in depreciation, general and administrative and marketing expenses in the three months
ended March 31, 2019 primarily driven by an increase in payroll related expenses.
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Franchise Operations
Our franchise operations
segment had net income from operations of $2.4 million for the three months ended March 31, 2019, an increase of $0.6 million,
compared to net income from operations of $1.8 million for the same period ended March 31, 2018. This increase was primarily due
to:
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An increase of approximately $1.0 million in total royalty revenues (net of advertising fund contributions); offset by
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An increase of approximately $0.4 million in selling and marketing expenses primarily due to the increase in franchised clinics in operation.
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Liquidity and Capital Resources
Sources of Liquidity
As of March 31, 2019, we had cash and short-term bank deposits of approximately $8.1 million. We provided
$459,511 of cash flow from operating activities in the three months ended March 31, 2019. We will continue to preserve cash, and
while we have resumed the acquisition and development of company-owned or managed clinics, we intend to progress at a measured
pace and target geographic clusters where we are able to increase efficiencies through a consolidated real estate penetration strategy,
leverage cooperative advertisement and marketing and attain general corporate and administrative operating efficiencies.
In January 2017, we
executed a Credit and Security Agreement which provided a credit facility up to $5.0 million. We have drawn $1.0 million under
the credit facility. See Note 9 to our condensed consolidated financial statements included in this report for additional discussion
of the credit facility.
In addition to approximately
$8.1 million of unrestricted cash on hand as of March 31, 2019, the Company’s principal sources of liquidity are expected
to be cash flows from operations, proceeds from debt financings or equity issuances, and/or proceeds from the sale of assets. The
Company expects its available cash and cash flows from operations, debt financings or equity issuances, or proceeds from the sale
of assets to be sufficient to fund its short-term working capital requirements. The Company’s long-term capital requirements,
primarily for acquisitions and other corporate initiatives, could be dependent on its ability to access additional funds through
the debt and/or equity markets. The Company from time to time considers and evaluates transactions related to its portfolio including
debt financings, equity issuances, purchases and sales of assets, and other transactions. There can be no assurance that the Company
will continue to generate cash flows at or above current levels or that the Company will be able to obtain the capital necessary
to meet the Company’s short and long-term capital requirements.
Analysis of Cash Flows
Net cash provided by (used
in) operating activities increased by $492,614 to $459,511 for the three months ended March 31, 2019 compared to ($33,103) for
the three months ended March 31, 2018. The change was attributable primarily to decreased expenses and continued profitability
of our company-owned or managed clinics.
Net cash used in investing activities was $1,201,573 and $142,343 for the three months ended March 31, 2019
and 2018, respectively. For the three months ended March 31, 2019 this included an acquisition of $30,000, purchases
of property and equipment of $526,027 and reacquisition and termination of regional developer rights of $681,500 offset by payments
received on notes receivable of $35,954. For the three months ended March 31, 2018, this included purchases of property and equipment
of $183,734, offset by payments on notes receivable of $41,391.
Net cash provided
by financing activities was $84,601 and $23,325 for the three months ended March 31, 2019 and 2018, respectively. For the three
months ended March 31, 2019, this included proceeds from the exercise of stock options of $189,886 offset by repayments on notes
payable of $100,000 and payments of finance lease obligation of $5,285. For the three months ended March 31, 2018, this included
proceeds from exercise of stock options.
Recent Accounting Pronouncements
See Note 1,
Nature
of Operations and Summary of Significant Accounting Policies,
to our condensed consolidated financial statements included
in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.
Off-Balance Sheet Arrangements
During the three months
ended March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured
finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.