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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 001-36724
The Joint Corp.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
90-0544160
(IRS Employer Identification No.)

16767 N. Perimeter Drive, Suite 110, Scottsdale
Arizona
(Address of principal executive offices)
85260
(Zip Code)
(480) 245-5960
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share
JYNT
The NASDAQ Capital Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).    Yes     No 
As of November 3, 2020, the registrant had 14,041,146 shares of Common Stock ($0.001 par value) outstanding.


Table of Contents
THE JOINT CORP.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NO.
Part I, Item 3 – Not applicable
Part II, Items 3, 4, and 5 - Not applicable



Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2020
December 31,
2019
ASSETS
(unaudited)
Current assets:
Cash and cash equivalents
$18,305,526 $8,455,989 
Restricted cash
140,400 185,888 
Accounts receivable, net
1,813,684 2,645,085 
Notes receivable, net10,326 128,724 
Deferred franchise and regional development costs, current portion828,842 765,508 
Prepaid expenses and other current assets
921,559 1,122,478 
Total current assets
22,020,337 13,303,672 
Property and equipment, net
8,014,676 6,581,588 
Operating lease right-of-use asset
11,555,086 12,486,672 
Deferred franchise and regional development costs, net of current portion3,757,799 3,627,225 
Intangible assets, net
2,160,944 3,219,791 
Goodwill
4,150,461 4,150,461 
Deposits and other assets
393,508 336,258 
Total assets
$52,052,811 $43,705,667 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$1,239,522 $1,525,838 
Accrued expenses
894,122 216,814 
Co-op funds liability
140,400 185,889 
Payroll liabilities
2,584,487 2,844,107 
Operating lease liability, current portion2,756,838 2,313,109 
Finance lease liability, current portion69,380 24,253 
Deferred franchise and regional developer fee revenue, current portion2,813,515 2,740,954 
Deferred revenue from company clinics
3,228,368 3,196,664 
Debt under the Paycheck Protection Program, current portion1,656,292  
Other current liabilities
545,834 518,686 
Total current liabilities
15,928,758 13,566,314 
Operating lease liability, net of current portion10,798,802 11,901,040 
Finance lease liability, net of current portion150,524 34,398 
Debt under the Credit Agreement and Paycheck Protection Program, net of current portion3,071,678  
Deferred franchise and regional developer fee revenue, net of current portion
12,581,885 12,366,322 
Deferred tax liability
72,841 89,863 
Other liabilities
27,230 27,230 
Total liabilities
42,631,718 37,985,167 
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding, as of September 30, 2020 and December 31, 2019
  
Common stock, $0.001 par value; 20,000,000 shares authorized, 14,073,244 shares issued and 14,057,201 shares outstanding as of September 30, 2020 and 13,898,694 shares issued and 13,882,932 outstanding as of December 31, 2019
14,073 13,899 
Additional paid-in capital
40,625,128 39,454,937 
Treasury stock 16,043 shares as of September 30, 2020 and 15,762 shares as of December 31, 2019, at cost
(115,303)(111,041)
Accumulated deficit
(31,102,905)(33,637,395)
Total The Joint Corp. stockholders' equity
9,420,993 5,720,400 
Non-controlling Interest
100 100 
Total equity
9,421,093 5,720,500 
Total liabilities and stockholders' equity
$52,052,811 $43,705,667 
1

Table of Contents

The accompanying notes are an integral part of these condensed consolidated financial statements.
2

Table of Contents
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenues:
Revenues from company-owned or managed clinics
$8,403,844 $6,829,576 $22,554,946 $18,245,940 
Royalty fees4,170,692 3,447,270 11,157,575 9,737,616 
Franchise fees519,131 541,339 1,555,846 1,405,678 
Advertising fund revenue1,187,666 978,209 3,176,080 2,797,576 
Software fees688,046 514,350 1,964,968 1,256,711 
Regional developer fees222,908 210,233 643,974 594,615 
Other revenues218,266 205,400 591,443 537,596 
Total revenues15,410,553 12,726,377 41,644,832 34,575,732 
Cost of revenues:
Franchise and regional developer cost of revenues1,588,707 1,318,966 4,281,389 3,634,397 
IT cost of revenues123,539 107,903 284,653 297,561 
Total cost of revenues1,712,246 1,426,869 4,566,042 3,931,958 
Selling and marketing expenses1,845,601 1,793,229 5,684,556 5,068,585 
Depreciation and amortization714,288 538,372 2,061,937 1,308,515 
General and administrative expenses9,433,062 8,297,680 26,668,420 22,078,244 
Total selling, general and administrative expenses
11,992,951 10,629,281 34,414,913 28,455,344 
Net (gain) loss on disposition or impairment 29,848 (53,413)116,775 
Income from operations1,705,356 640,379 2,717,290 2,071,655 
Other (expense) income:
Bargain purchase gain   19,298 
Other expense, net(25,667)(16,697)(55,248)(43,469)
Total other expense(25,667)(16,697)(55,248)(24,171)
Income before income tax expense
1,679,689 623,682 2,662,042 2,047,484 
Income tax expense75,730 6,702 127,551 15,597 
Net income and comprehensive income $1,603,959 $616,980 $2,534,491 $2,031,887 
Less: income attributable to the non-controlling interest$ $ $ $ 
Net income attributable to The Joint Corp. stockholders
$1,603,959 $616,980 $2,534,491 $2,031,887 
Earnings per share:
Basic earnings per share$0.11 $0.04 $0.18 $0.15 
Diluted earnings per share$0.11 $0.04 $0.17 $0.14 
Basic weighted average shares14,033,535 13,846,045 13,968,635 13,798,593 
Diluted weighted average shares14,593,107 14,526,538 14,523,329 14,442,203 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common StockAdditional
Paid In
Capital
Treasury StockAccumulated
Deficit
Total The Joint Corp.
stockholders'
equity
Non-controlling
interest
Total
SharesAmountSharesAmount
Balances, December 31, 201913,898,694 $13,899 $39,454,937 15,762 $(111,041)$(33,637,395)$5,720,400 $100 $5,720,500 
Stock-based compensation expense— — 250,392 — — — 250,392 — 250,392 
Issuance of restricted stock15,578 16 (16)— — — — —  
Exercise of stock options35,500 35 140,864 — — — 140,899 — 140,899 
Purchases of treasury stock under employee stock plans— — — 251 (3,774)— (3,774)— (3,774)
Net income— — — — — 814,947 814,947 — 814,947 
Balances, March 31, 2020 (unaudited)13,949,772 $13,950 $39,846,177 16,013 $(114,815)$(32,822,448)$6,922,864 $100 $6,922,964 
Stock-based compensation expense— — 216,081 — — — 216,081 — 216,081 
Issuance of restricted stock30,882 31 (31)— — — — —  
Exercise of stock options62,200 62 246,959 — — — 247,021 — 247,021 
Net income— — — — — 115,584 115,584 — 115,584 
Balances, June 30, 2020 (unaudited)14,042,854 14,043 40,309,186 16,013 (114,815)(32,706,864)7,501,550 100 7,501,650 
Stock-based compensation expense— — 212,234 — — — 212,234 — 212,234 
Issuance of restricted stock4,281 4 (4)— — — — —  
Exercise of stock options26,109 26 103,712 — — — 103,738 — 103,738 
Purchases of treasury stock under employee stock plans— — — 30 (488)— (488)— (488)
Net income— — — — — 1,603,959 1,603,959 — 1,603,959 
Balances, September 30, 2020 (unaudited)14,073,244 $14,073 $40,625,128 16,043 $(115,303)$(31,102,905)$9,420,993 $100 $9,421,093 








The accompanying notes are an integral part of these condensed consolidated financial statements.













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THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common StockAdditional
Paid In
Capital
Treasury StockAccumulated
Deficit
Total The Joint Corp.
stockholders'
equity
Non-controlling
interest
SharesAmountSharesAmountTotal
Balances, December 31, 2018 (as adjusted)13,757,200 $13,757 $38,189,251 14,670 $(90,856)$(37,384,651)$727,501 $100 $727,601 
Stock-based compensation expense— — 171,771 — — — 171,771 — 171,771 
Exercise of stock options42,804 43 220,201 — — — 220,244 — 220,244 
Net income— — — — — 952,646 952,646 — 952,646 
Balances, March 31, 2019 (unaudited)13,800,004 $13,800 $38,581,223 14,670 $(90,856)$(36,432,005)$2,072,162 $100 $2,072,262 
Stock-based compensation expense— — 178,953 — — — 178,953 — 178,953 
Issuance of restricted stock33,012 33 (33)— — — — —  
Exercise of stock options5,000 5 19,395 — — — 19,400 — 19,400 
Net income— — — — — 462,261 462,261 — 462,261 
Balances, June 30, 2019 (unaudited)13,838,016 13,838 38,779,538 14,670 (90,856)(35,969,744)2,732,776 100 2,732,876 
Stock-based compensation expense— — 186,020 — — — 186,020 — 186,020 
Issuance of restricted stock5,277 5 (5)— — — — —  
Exercise of stock options51,328 52 288,064 — — — 288,116 — 288,116 
Purchases of treasury stock under employee stock plans1,092 (20,184)(20,184)(20,184)
Net income— — — — — 616,980 616,980 — 616,980 
Balances, September 30, 2019 (unaudited)13,894,621 $13,895 $39,253,617 15,762 $(111,040)$(35,352,764)$3,803,708 $100 $3,803,808 



The accompanying notes are an integral part of these condensed consolidated financial statements.
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THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net income$2,534,491 $2,031,887 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization2,061,937 1,308,515 
Loss on disposition or impairment1,193 116,775 
Net franchise fees recognized upon termination of franchise agreements(54,174)(89,007)
Bargain purchase gain (19,298)
Deferred income taxes(17,022)(1,449)
Stock based compensation expense678,706 536,744 
Changes in operating assets and liabilities:
Accounts receivable831,401 (533,149)
Prepaid expenses and other current assets200,919 (172,845)
Deferred franchise costs(247,127)(884,895)
Deposits and other assets(4,602)425,851 
Accounts payable(379,342)223,210 
Accrued expenses677,308 (48,637)
Payroll liabilities(259,620)(75,122)
Deferred revenue417,221 2,148,195 
Other, net466,156 (261,567)
Net cash provided by operating activities6,907,445 4,705,208 
Cash flows from investing activities:
Acquisition of business, net of cash acquired (3,072,332)
Purchase of property and equipment(2,344,344)(2,312,257)
Reacquisition and termination of regional developer rights (681,500)
Payments received on notes receivable118,398 110,605 
Net cash used in investing activities(2,225,946)(5,955,484)
Cash flows from financing activities:
Payments of finance lease obligation(40,168)(16,259)
Purchases of treasury stock under employee stock plans(4,262)(20,184)
Proceeds from exercise of stock options491,658 527,760 
Proceeds from the Credit Agreement, net of related fees1,947,352  
Proceeds from the Paycheck Protection Program2,727,970  
Repayments on notes payable (100,000)
Net cash provided by financing activities5,122,550 391,317 
Increase (decrease) in cash9,804,049 (858,959)
Cash and restricted cash, beginning of period8,641,877 8,854,952 
Cash and restricted cash, end of period$18,445,926 $7,995,993 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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During the nine months ended September 30, 2020 and 2019, cash paid for income taxes was $167,620 and $34,396, respectively. During the nine months ended September 30, 2020 and 2019, cash paid for interest was $31,458 and $75,000, respectively.
Supplemental disclosure of non-cash activity:
As of September 30, 2020, accounts payable include property and equipment purchases of $93,026. As of September 30, 2019, accounts payable and accrued expenses include property and equipment purchases of $206,201 and $103,136, respectively. As of December 31, 2019, accounts payable and accrued expenses include property and equipment purchases of $196,671, and $15,250, respectively.
In connection with the acquisition of franchised clinics during the nine months ended September 30, 2019, the Company acquired $149,542 of property and equipment and intangible assets of $1,989,169, in exchange for $3,072,332 in cash to the sellers. Additionally, at the time of these transactions, the Company carried net deferred revenue of $36,695, representing net franchise fees collected upon the execution of the franchise agreement. The Company netted this amount against the purchase price of the acquisitions.
In connection with the Company’s reacquisition and termination of regional developer rights during the nine months ended September 30, 2019, the Company had deferred revenue of $44,334 representing license fees collected upon the execution of the regional developer agreements.  The Company netted these amounts against the aggregate purchase price of the acquisitions.

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
These unaudited financial statements represent the condensed consolidated financial statements of The Joint Corp. (“The Joint”), its variable interest entities (“VIEs”), and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC (collectively, the “Company”). The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles ("GAAP"). Such unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with The Joint Corp. and Subsidiary and Affiliates consolidated financial statements and the notes thereto as set forth in The Joint’s Form 10-K, which included all disclosures required by U.S. GAAP. The results of operations for the periods ended September 30, 2020 and 2019 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, 2020 and 2019 is unaudited.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other (expenses) income that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue and accounting for leases, see Note 2, Revenue Disclosures and Note 10, Commitments and Contingencies, respectively.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of The Joint and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC, which was dormant for all periods presented. The Company consolidates VIEs in which the Company is the primary beneficiary in accordance with Accounting Standards Codification 810, Consolidations
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(“ASC 810”). Non-controlling interests represent third-party equity ownership interests in VIEs. All significant inter-affiliate accounts and transactions between The Joint and its VIEs have been eliminated in consolidation.
Comprehensive Income
Net income and comprehensive income are the same for the three and nine months ended September 30, 2020 and 2019.
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, 2020 and 2019:

Three Months Ended
September 30,
Nine Months Ended
September 30,
Franchised clinics:2020201920202019
Clinics open at beginning of period477 417 453 394 
Opened during the period21 21 49 47 
Sold during the period (6) (7)
Closed during the period(1)(2)(5)(4)
Clinics in operation at the end of the period497 430 497 430 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Company-owned or managed clinics:2020201920202019
Clinics open at beginning of period62 51 60 48 
Opened during the period1 1 3 4 
Acquired during the period 6  7 
Closed during the period   (1)
Clinics in operation at the end of the period63 58 63 58 
Total clinics in operation at the end of the period560 488 560 488 
Clinic licenses sold but not yet developed178 179 178 179 
Future clinic licenses under executed letters of intent40 29 40 29 
Variable Interest Entities
An entity deemed to hold the controlling interest in a voting interest entity or deemed to be the primary beneficiary of a VIE is required to consolidate the VIE in its financial statements. An entity is deemed to be the primary beneficiary of a VIE if it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb the majority of losses of the VIE or the right to receive the majority of benefits from the VIE.
Certain states in which the Company manages clinics regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. In these states, the Company has entered into management services agreements with PCs under which the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice. Such PCs are VIEs, as fees paid by the PCs to the Company as its management service provider are considered variable interests because they are liabilities on the PC’s books and the fees do not meet all the following criteria: 1) The fees are compensation for services provided and are commensurate with the level of effort required to
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provide those services; 2) The decision maker or service provider does not hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns; 3) The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. The Company assessed the governance structure and operating procedures of the PCs and determined that the Company has the power to control certain significant non-clinical activities of the PCs, as defined by ASC 810, therefore, the Company is the primary beneficiary of the VIEs, and per ASC 810, must consolidate the VIEs. The carrying amount of VIE assets and liabilities are immaterial as of September 30, 2020, and December 31, 2019.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and credit quality of, the financial institutions with which it invests. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has invested substantially all its cash in short-term bank deposits. The Company had no cash equivalents as of September 30, 2020 and December 31, 2019.
Restricted Cash
Restricted cash relates to cash that franchisees and company-owned or managed clinics contribute to the Company’s National Marketing Fund and cash that franchisees provide to various voluntary regional Co-Op Marketing Funds. Cash contributed by franchisees to the National Marketing Fund is to be used in accordance with the Company’s Franchise Disclosure Document with a focus on regional and national marketing and advertising. 
Accounts Receivable
Accounts receivable primarily represent amounts due from franchisees for royalty fees. The Company considers a reserve for doubtful accounts based on the creditworthiness of the entity. The provision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management’s best estimate of uncollectible amounts and is determined based on specific identification and historical performance that the Company tracks on an ongoing basis. Actual losses ultimately could differ materially in the near term from the amounts estimated in determining the allowance. As of September 30, 2020 and December 31, 2019, the Company had an allowance for doubtful accounts of $0.
Deferred Franchise and Regional Development Costs
Deferred franchise and regional development costs represent commissions that are direct and incremental to the Company and are paid in conjunction with the sale of a franchise license or regional development rights. These costs are recognized as an expense, in franchise and regional development cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise or regional development agreement.
Property and Equipment
Property and equipment are stated at cost, or for property acquired as part of franchise acquisitions, at fair value at the date of closing. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the assets.
Maintenance and repairs are charged to expense as incurred; major renewals and improvements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.
Capitalized Software
The Company capitalizes certain software development costs. These capitalized costs are primarily related to software used by clinics for operations and by the Company for the management of operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized as assets in progress until the software is substantially complete and ready for its intended use.
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Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Software developed is recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, which is generally five years.
Leases
The Company leases property and equipment under operating and finance leases. The Company leases its corporate office space and the space for each of the company-owned or managed clinic in the portfolio. The Company recognizes a right-of-use ("ROU") asset and lease liability for all leases. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain and if the optional period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, all relevant economic factors are considered that would compel the Company to exercise or not exercise an option. When available, the Company uses the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of its leases. In such cases, the Company estimates its incremental borrowing rate as the interest rate it would pay to borrow an amount equal to the lease payments over a similar term, with similar collateral as in the lease, and in a similar economic environment. The Company estimates these rates using available evidence such as rates imposed by third-party lenders to the Company in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to the Company’s estimated creditworthiness.
For operating leases that include rent holidays and rent escalation clauses, the Company recognizes lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. Pre-opening costs are recorded as incurred in general and administrative expenses. The Company records the straight-line lease expense and any contingent rent, if applicable, in general and administrative expenses on the condensed consolidated income statements. Many of the Company’s leases also require it to pay real estate taxes, common area maintenance costs and other occupancy costs which are also included in general and administrative expenses on the condensed consolidated income statements.
Intangible Assets
Intangible assets consist primarily of re-acquired franchise and regional developer rights and customer relationships.  The Company amortizes the fair value of re-acquired franchise rights over the remaining contractual terms of the re-acquired franchise rights at the time of the acquisition, which generally range from three to eight years. In the case of regional developer rights, the Company generally amortizes the re-acquired regional developer rights over seven years. The fair value of customer relationships is amortized over their estimated useful life of two years.
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions of franchises. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are tested for impairment annually and more frequently if a triggering event occurs that makes it more likely than not that the fair value of a reporting unit is below carrying value. As required, the Company performs an annual impairment test of goodwill as of the first day of the fourth quarter or more frequently if a triggering event occurs.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates step 2 of the current goodwill impairment test that requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provision of this ASU is effective for years beginning after December 15, 2022 for smaller reporting companies, as defined by the SEC, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company adopted this ASU provision on January 1, 2020. As a result of the COVID-19 pandemic and its impact on the Company's projected cash flows, the Company tested goodwill for impairment at the end of the first quarter of 2020. The Company did not identify any triggering event during the third quarter of 2020. No impairments of goodwill were recorded for the three and nine months ended September 30, 2020 and 2019.
Long-Lived Assets
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The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets are recoverable. As a result of the current COVID-19 pandemic, the Company evaluated whether the carrying values of the long-lived assets in certain corporate clinics were recoverable at the end of the first quarter of 2020. The Company did not identify any triggering event during the third quarter of 2020. No impairments of long-lived assets were recorded for the three and nine months ended September 30, 2020 and 2019.
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 gross sales. The Company segregates the marketing funds collected which are included in restricted cash on its condensed consolidated balance sheets. As amounts are expended from the fund, the Company recognizes a related expense.
Co-Op Marketing Funds
Some franchises have established regional Co-Ops for advertising within their local and regional markets. The Company maintains a custodial relationship under which the Co-Op Marketing Funds collected are segregated and used for the purposes specified by the Co-Ops’ officers. The Co-Op Marketing Funds are included in restricted cash on the Company’s condensed consolidated balance sheets.
Revenue Recognition
The Company generates revenue primarily through its company-owned and managed clinics, royalties, franchise fees, advertising fund, and through IT related income and computer software fees.
Revenues from Company-Owned or Managed Clinics.  The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  In those states where the Company owns and operates or manages the clinic, revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing.  Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed. Any unused visits associated with monthly memberships are recognized on a month-to-month basis. The Company recognizes a contract liability related to the prepaid treatment plans for which the Company has an ongoing performance obligation. The Company recognizes this contract liability, and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. Based on a historical lag analysis and an evaluation of legal obligation by jurisdiction, the Company concluded that any remaining contract liability that exists after 12 to 24 months from transaction date will be deemed breakage. Breakage revenue is recognized only at that point, when the likelihood of the patient exercising his or her remaining rights becomes remote.
Royalties and Advertising Fund Revenue. The Company collects royalties, as stipulated in the franchise agreement, equal to 7% of gross sales and a marketing and advertising fee equal to 2% of gross sales. Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the term of the franchise agreement. The franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to the Company’s performance obligation under the franchise agreement and are recognized as franchisee clinic level sales occur. Royalties and marketing and advertising fees are collected semi-monthly, two working days after each sales period has ended.
Franchise Fees. The Company requires the entire non-refundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of ten years. Initial franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement. The Company’s services under the franchise agreement include: training of franchisees and staff, site selection, construction/vendor management and ongoing operations support. The Company provides no financing to franchisees and offers no guarantees on their behalf. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
Software Fees.  The Company collects a monthly fee for use of its proprietary chiropractic software, computer support, and internet services support. These fees are recognized ratably on a straight-line basis over the term of the respective franchise agreement.
Regional Developer Fees. During 2011, the Company established a regional developer program to engage independent contractors to assist in developing specified geographical regions. Under the historical program, regional developers paid a license
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fee for each franchise they received the right to develop within the region. In 2017, the program was revised to grant exclusive geographical territory and establish a minimum development obligation within that defined territory. Regional developer fees paid to the Company are non-refundable and are recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to begin upon the execution of the agreement. The Company’s services under regional developer agreements include site selection, grand opening support for the clinics, sales support for identification of qualified franchisees, general operational support and marketing support to advertise for ownership opportunities. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation. In addition, regional developers receive fees which are funded by the initial franchise fees collected from franchisees upon the sale of franchises within their exclusive geographical territory and a royalty of 3% of gross sales generated by franchised clinics in their exclusive geographical territory. Fees related to the sale of franchises within their exclusive geographical territory are initially deferred as deferred franchise costs and are recognized as an expense in franchise cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise agreement. Royalties of 3% of gross sales generated by franchised clinics in their regions are also recognized as franchise cost of revenues as franchisee clinic level sales occur, which is funded by the 7% royalties collected from the franchisees in their regions. Certain regional developer agreements result 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 recognized over the remaining life of the respective franchise agreements.
The Company entered into two regional developer agreements for the nine months ended September 30, 2020 for which it received approximately $541,000. These fees were deferred as of the transaction date and will be recognized as revenue ratably on a straight-line basis over the term of the regional developer agreements, which is considered to begin upon the execution of the agreements.
Advertising Costs
Advertising costs are advertising and marketing expenses incurred by the Company, primarily through advertising funds. The Company expenses production costs of commercial advertising upon first airing and expenses the costs of communicating the advertising in the period in which the advertising occurs. Advertising expenses were $674,402 and $1,931,008 for the three and nine months ended September 30, 2020, respectively. Advertising expenses were $562,516 and $1,658,428 for the three and nine months ended September 30, 2019, 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, stock-based compensation and treatment of revenue for franchise fees and regional developer fees collected. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the condensed consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company has not identified any material uncertain tax positions as of September 30, 2020 and December 31, 2019. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses.
With exceptions due to the generation and utilization of net operating losses or credits, as of September 30, 2020 and December 31, 2019, the Company is no longer subject to federal and state examinations by taxing authorities for tax years before 2016 and 2015, respectively.
Earnings per Common Share
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Basic earnings per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by giving effect to all potentially dilutive common shares including restricted stock and stock options.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net Income$1,603,959 $616,980 $2,534,491 $2,031,887 
Basic weighted average common shares outstanding14,033,535 13,846,045 13,968,635 13,798,593 
Effect of dilutive securities:
Unvested restricted stock and stock options559,572 680,493 554,694 643,610 
Diluted weighted average common shares outstanding14,593,107 14,526,538 14,523,329 14,442,203 
Basic earnings per share$0.11 $0.04 $0.18 $0.15 
Diluted earnings per share$0.11 $0.04 $0.17 $0.14 
Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
Weighted average potentially dilutive securities:2020201920202019
Unvested restricted stock    
Stock options112,768 2,815 133,194 49,367 
Stock-Based Compensation
The Company accounts for share-based payments by recognizing compensation expense based upon the estimated fair
value of the awards on the date of grant. The Company determines the estimated grant-date fair value of restricted shares using
the closing price on the date of the grant and the grant-date fair value of stock options using the Black-Scholes-Merton model.
In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model,
including risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could
cause significant adjustments to the valuation. The Company recognizes compensation costs ratably over the period of service
using the straight-line method. Forfeitures are estimated based on historical and forecasted turnover, which is approximately 5%. 

Retirement Benefit Plan
Employees of the Company are eligible to participate in a defined contribution retirement plan, the Joint Corp. 401(k) Retirement Plan (“401(k) Plan”), under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, employees may contribute their eligible compensation, not to exceed the annual limits set by the IRS. The 401(k) Plan allows the Company to match participants’ contributions in an amount determined at the sole discretion of the Company.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Items subject to significant estimates and assumptions include the allowance for doubtful accounts, share-based compensation arrangements, fair value of stock options, useful lives and realizability of long-lived assets, classification of deferred revenue and revenue recognition related to breakage, classification of deferred franchise costs, calculation of ROU assets and liabilities related to leases, realizability of deferred tax assets, impairment of goodwill, intangible assets, and other long-lived assets, and purchase price allocations and related valuations.
Recent Accounting Pronouncements
On January 1, 2020, the Company early adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates step 2 of the current goodwill impairment test that requires a hypothetical
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purchase price allocation to measure goodwill impairment. The Company reviewed other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements upon future adoption.
Note 2: Revenue Disclosures
Company-owned or Managed Clinics
The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  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 or in accordance with the Company’s breakage policy as discussed in Note 1, Revenue Recognition.  
Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees
The Company currently franchises its concept across 32 states. The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement primarily consists of (a) initial franchise fees; (b) continuing franchise fees (royalties); (c) advertising fees; and (d) software fees. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required.
The Company recognizes the primary components of the transaction price as follows:
Franchise fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the execution of the franchise agreement. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time.
The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or, once billed, accounts receivable, on the balance sheet.
The Company is entitled to a software fee, which is charged monthly. The Company recognizes revenue related to software fees ratably on a straight-line basis over the term of the franchise agreement.
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does not require significant judgment as it is based on either the franchise term or the reported sales of the franchisee, none of which require estimation. The Company believes its franchising arrangements do not contain a significant financing component.
The Company recognizes advertising fees received under franchise agreements as advertising fund revenue.
Regional Developer Fees
The Company currently utilizes regional developers to assist in the development of the brand across certain geographic territories. The arrangement is documented in the form of a regional developer agreement. The arrangement between the Company and the regional developer requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the regional developer, but instead represent a single performance obligation, which is the transfer
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of the development rights to the defined geographic region. The intellectual property subject to the development rights is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the development rights is to provide the regional developer with access to the brand’s symbolic intellectual property over the term of the agreement. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation.
The transaction price in a standard regional developer arrangement primarily consists of the initial territory fees. The Company recognizes the regional developer fee as revenue ratably on a straight-line basis over the term of the regional developer agreement commencing with the execution of the regional developer agreement. As these fees are typically received in cash at or near the beginning of the term of the regional developer agreement, the cash received is initially recorded as a contract liability until recognized as revenue over time.
Disaggregation of Revenue
The Company believes that the captions contained on the condensed consolidated income statements appropriately reflect the disaggregation of its revenue by major type for the three and nine months ended September 30, 2020 and 2019. Other revenues primarily consist of merchant income associated with credit card transactions.
Rollforward of Contract Liabilities and Contract Assets
Changes in the Company's contract liability for deferred franchise and regional development fees during the nine months ended September 30, 2020 were as follows:
Deferred Revenue
short and long-term
Balance at December 31, 2019$15,107,276 
Recognized as revenue during the nine months ended September 30, 2020
(2,199,820)
Fees received and deferred during the nine months ended September 30, 2020
2,487,944 
Balance at September 30, 2020$15,395,400 
Changes in the Company's contract assets for deferred franchise and regional development costs during the nine months ended September 30, 2020 were as follows:
Deferred Franchise and Development Costs
short and long-term
Balance at December 31, 2019$4,392,733 
Recognized as cost of revenue during the nine months ended September 30, 2020
(625,066)
Costs incurred and deferred during the nine months ended September 30, 2020
818,974 
Balance at September 30, 2020$4,586,641 
The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of September 30, 2020:
Contract liabilities expected to be recognized inAmount
2020 (remainder)$752,271 
20212,882,481 
20222,502,259 
20232,177,666 
20241,700,429 
Thereafter5,380,294 
Total$15,395,400 
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Note 3: Notes Receivable
Effective April 29, 2017, the Company entered into a regional developer agreement for certain territories in the state of Florida in exchange for $320,000, of which $187,000 was funded through a promissory note. The note bore interest at 10% per annum for 42 months and required monthly principal and interest payments over 3 years, which began on November 1, 2017 and matured on October 1, 2020. The note was secured by the regional developer rights in the respective territory.
Effective October 10, 2017, the Company entered into a regional developer agreement for certain territories in Texas, Oklahoma and Arkansas in exchange for $170,000, of which $135,688 was funded through a promissory note. The note bore interest at 10% per annum for 3 years, required monthly principal and interest payments over 3 years, and matured on October 24, 2020. The note was secured by the regional developer rights in the territory.
Effective April 26, 2019, the Company entered into a promissory note valued at $31,086. The note bears interest at 0% per annum for 3 years and requires monthly principal payments over 3 years, beginning May 15, 2019 and maturing on May 15, 2022.
The outstanding balances of the notes as of September 30, 2020 and December 31, 2019 were $31,413 and $155,810, respectively. The allowance for uncollectible amounts on the outstanding notes as of September 30, 2020, and December 31, 2019 were $21,087, and $27,086, respectively. Maturities of notes receivable as of September 30, 2020 are as follows:

Amount (gross)
2020 (remaining)$12,727 
20219,600 
20229,086 
Total$31,413 

Note 4: Property and Equipment
Property and equipment consist of the following:
September 30,
2020
December 31,
2019
Office and computer equipment$2,128,697 $1,594,364 
Leasehold improvements8,219,767 7,154,156 
Software developed1,193,007 1,193,007 
Finance lease assets282,027 80,604 
11,823,498 10,022,131 
Accumulated depreciation and amortization(6,635,220)(5,671,366)
5,188,278 4,350,765 
Construction in progress2,826,398 2,230,823 
Property and equipment, net$8,014,676 $6,581,588 
Depreciation expense was $344,324 and $195,304 for the three months ended September 30, 2020 and 2019, respectively. Depreciation expense was $954,065 and $595,719 for the nine months ended September 30, 2020 and 2019, respectively.
Amortization expense related to finance lease assets was $18,850 and $6,169 for the three months ended September 30, 2020 and 2019, respectively. Amortization expense related to finance lease assets was $49,024 and $18,506 for the nine months ended September 30, 2020 and 2019, respectively.
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Construction in progress at September 30, 2020 and December 31, 2019 principally relate to development costs for software to be used by clinics for operations and by the Company for the management of operations.
Note 5: Fair Value Consideration
The Company’s financial instruments include cash, restricted cash, accounts receivable, notes receivable, accounts payable, accrued expenses and loan payable. The carrying amounts of its financial instruments approximate their fair value due to their short maturities. 
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1:    Observable inputs such as quoted prices in active markets;
Level 2:    Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:    Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
As of September 30, 2020, and December 31, 2019, the Company did not have any financial instruments that were measured on a recurring basis as Level 1, 2 or 3.
Note 6: Intangible Assets
Intangible assets consist of the following:
As of September 30, 2020
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
Intangible assets subject to amortization:
Reacquired franchise rights
$3,246,494 $(