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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 March 31, 2021 
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 240, 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 May 3, 2021, the registrant had 14,226,700 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
(unaudited)
March 31,
2021
December 31,
2020
ASSETS
(unaudited)
Current assets:
Cash and cash equivalents
$17,834,526 $20,554,258 
Restricted cash
172,624 265,371 
Accounts receivable, net
2,292,507 1,850,499 
Deferred franchise and regional development costs, current portion910,008 897,551 
Prepaid expenses and other current assets
1,950,402 1,566,025 
Total current assets
23,160,067 25,133,704 
Property and equipment, net
9,338,838 8,747,369 
Operating lease right-of-use asset
13,010,941 11,581,435 
Deferred franchise and regional development costs, net of current portion4,467,579 4,340,756 
Intangible assets, net
3,444,538 2,865,006 
Goodwill
4,625,604 4,625,604 
Deferred tax assets8,426,443 8,007,633 
Deposits and other assets
433,549 431,336 
Total assets$66,907,559 $65,732,843 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$1,154,803 $1,561,648 
Accrued expenses
830,714 770,221 
Co-op funds liability
172,623 248,468 
Payroll liabilities
2,559,016 2,776,036 
Debt under the Credit Agreement2,000,000  
Operating lease liability, current portion3,125,921 2,918,140 
Finance lease liability, current portion75,992 70,507 
Deferred franchise and regional developer fee revenue, current portion3,045,868 3,000,369 
Deferred revenue from company clinics ($2.7 million and $2.6 million attributable to VIE)
3,971,067 3,905,200 
Debt under the Paycheck Protection Program 2,727,970 
Other current liabilities
707,763 707,085 
Total current liabilities
17,643,767 18,685,644 
Operating lease liability, net of current portion12,246,741 10,632,672 
Finance lease liability, net of current portion114,887 132,469 
Debt under the Credit Agreement 2,000,000 
Deferred franchise and regional developer fee revenue, net of current portion
13,560,449 13,503,745 
Other liabilities
27,230 27,230 
Total liabilities
43,593,074 44,981,760 
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding, as of March 31, 2021 and December 31, 2020
  
Common stock, $0.001 par value; 20,000,000 shares authorized, 14,288,111 shares issued and 14,257,325 shares outstanding as of March 31, 2021 and 14,174,237 shares issued and 14,157,070 outstanding as of December 31, 2020
14,288 14,174 
Additional paid-in capital
42,217,157 41,350,001 
Treasury stock 30,786 shares as of March 31, 2021 and 17,167 shares as of December 31, 2020, at cost
(761,265)(143,111)
Accumulated deficit
(18,155,795)(20,470,081)
Total The Joint Corp. stockholders' equity
23,314,385 20,750,983 
Non-controlling Interest
100 100 
Total equity
23,314,485 20,751,083 
Total liabilities and stockholders' equity
$66,907,559 $65,732,843 
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
March 31,
20212020
Revenues:
Revenues from company-owned or managed clinics
$9,470,860 $7,294,295 
Royalty fees4,769,246 3,718,230 
Franchise fees695,427 512,751 
Advertising fund revenue1,374,741 1,057,618 
Software fees760,537 645,725 
Regional developer fees217,956 207,642 
Other revenues259,198 208,225 
Total revenues17,547,965 13,644,486 
Cost of revenues:
Franchise and regional development cost of revenues1,624,572 1,417,491 
IT cost of revenues140,745 68,664 
Total cost of revenues1,765,317 1,486,155 
Selling and marketing expenses2,489,279 2,055,289 
Depreciation and amortization1,169,866 654,249 
General and administrative expenses10,087,060 8,694,250 
Total selling, general and administrative expenses
13,746,205 11,403,788 
Net loss on disposition or impairment64,767 1,193 
Income from operations1,971,676 753,350 
Other expense, net(21,537)(4,337)
Income before income tax benefit1,950,139 749,013 
Income tax benefit(364,148)(65,934)
Net income and comprehensive income $2,314,287 $814,947 
Less: income attributable to the non-controlling interest  
Net income attributable to The Joint Corp. stockholders
$2,314,287 $814,947 
Earnings per share:
Basic earnings per share$0.16 $0.06 
Diluted earnings per share$0.16 $0.06 
Basic weighted average shares14,178,542 13,890,673 
Diluted weighted average shares14,854,809 14,483,584 

The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Table of Contents
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Common StockAdditional
Paid In
Capital
Treasury StockAccumulated
Deficit
Total The Joint Corp.
stockholders'
equity
Non-controlling
interest
Total
SharesAmountSharesAmount
Balances, December 31, 202014,174,237 $14,174 $41,350,001 17,167 $(143,111)$(20,470,081)$20,750,983 $100 $20,751,083 
Stock-based compensation expense— — 246,494 — — — 246,494 — 246,494 
Issuance of restricted stock7,879 8 (8)— — — — —  
Exercise of stock options105,995 106 620,670 — — — 620,776 — 620,776 
Purchases of treasury stock under employee stock plans— — — 13,619 (618,154)— (618,154)— (618,154)
Net income— — — — — 2,314,287 2,314,287 — 2,314,287 
Balances, March 31, 2021 (unaudited)14,288,111 $14,288 $42,217,157 30,786 $(761,265)$(18,155,795)$23,314,385 $100 $23,314,485 

Common StockAdditional
Paid In
Capital
Treasury StockAccumulated
Deficit
Total The Joint Corp.
stockholders'
equity
Non-controlling
interest
SharesAmountSharesAmountTotal
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 
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 



The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Table of Contents
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
20212020
Cash flows from operating activities:
Net income$2,314,287 $814,947 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization1,169,866 654,249 
Net loss on disposition or impairment (non-cash portion)99,022 1,193 
Net franchise fees recognized upon termination of franchise agreements(69,702)(14,862)
Deferred income taxes(418,810)(34,406)
Stock based compensation expense246,494 250,392 
Changes in operating assets and liabilities:
Accounts receivable(442,008)809,563 
Prepaid expenses and other current assets(384,377)(18,073)
Deferred franchise costs(204,112)(104,483)
Deposits and other assets(3,313)(4,378)
Accounts payable(443,463)(80,682)
Accrued expenses60,493 205,601 
Payroll liabilities(217,020)(1,727,021)
Deferred revenue329,383 339,523 
Other liabilities234,708 380,259 
Net cash provided by operating activities2,271,448 1,471,822 
Cash flows from investing activities:
Purchase of property and equipment(951,641)(1,261,213)
Reacquisition and termination of regional developer rights(1,388,700) 
Payments received on notes receivable 39,720 
Net cash used in investing activities(2,340,341)(1,221,493)
Cash flows from financing activities:
Payments of finance lease obligation(18,238)(7,214)
Purchases of treasury stock under employee stock plans(618,154)(3,774)
Proceeds from exercise of stock options620,776 140,899 
Proceeds from the Credit Agreement, net of related fees 1,947,352 
Repayment of debt under the Paycheck Protection Program(2,727,970) 
Net cash (used in) provided by financing activities(2,743,586)2,077,263 
(Decrease) increase in cash, cash equivalents and restricted cash(2,812,479)2,327,592 
Cash, cash equivalents and restricted cash, beginning of period20,819,629 8,641,877 
Cash, cash equivalents and restricted cash, end of period$18,007,150 $10,969,469 
Reconciliation of cash, cash equivalents and restricted cash:March 31,
2021
March 31,
2020
Cash and cash equivalents$17,834,526 $10,712,846 
Restricted cash172,624 256,623 
$18,007,150 $10,969,469 

5

Table of Contents
During the three months ended March 31, 2021 and 2020, cash paid for income taxes was $0 for both periods. During the three months ended March 31, 2021 and 2020, cash paid for interest was $35,533 and $0, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Table of Contents
Supplemental disclosure of non-cash activity:
As of March 31, 2021, accounts payable include property and equipment purchases of $36,618. As of December 31, 2020, accounts payable and accrued expenses include property and equipment purchases of $126,239, and $163,434, respectively.
In connection with the Company’s reacquisition and termination of regional developer rights during the three months ended March 31, 2021, the Company had deferred revenue of $35,679 representing fees collected upon the execution of the regional developer agreement. The Company netted this amount against the aggregate purchase price.
As of March 31, 2021, the Company had $49,360 of proceeds from the exercise of stock options included in accounts receivable.


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 March 31, 2021 and 2020 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 March 31, 2021 and 2020 is unaudited.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other (expenses) income that are reported in the condensed consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. For a discussion of significant estimates and judgments made in recognizing revenue, accounting for leases, and accounting for income taxes, see Note 1, "Nature of Operations and Summary of Significant Accounting Policies".
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 (“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 months ended March 31, 2021 and 2020.
Nature of Operations
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The Joint Corp., a Delaware corporation, was formed on March 10, 2010 for the principal purpose of franchising, developing, selling regional developer rights, supporting the operations of franchised chiropractic clinics, and operating and managing corporate chiropractic clinics at locations throughout the United States of America. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.
The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three months ended March 31, 2021 and 2020:

Three Months Ended
March 31,
Franchised clinics:20212020
Clinics open at beginning of period515 453 
Opened during the period12 16 
Sold during the period  
Closed during the period  
Clinics in operation at the end of the period527 469 
Three Months Ended
March 31,
Company-owned or managed clinics:20212020
Clinics open at beginning of period64 60 
Opened during the period1 1 
Acquired during the period  
Closed during the period  
Clinics in operation at the end of the period65 61 
Total clinics in operation at the end of the period592 530 
Clinic licenses sold but not yet developed223 176 
Executed letters of intent for future clinic licenses37 36 
Variable Interest Entities
An entity 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 prohibit the “corporate practice of medicine,” which restricts business corporations from practicing chiropractic care through the direct employment of chiropractic doctors or from exercising control over clinical decisions by chiropractic doctors. In states which prohibit the corporate practice of medicine, the Company typically enters into long-term management agreements with professional corporations ("PCs") that are owned by licensed chiropractic doctors, which, in turn, employ or contract with doctors who provide professional chiropractic care in its clinics. Under these management agreements with PCs, the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice. Such PCs are VIEs, as fees paid by the PCs to the Company as its management service provider are considered variable interests because they are liabilities on the PC’s books and the fees do not meet all the following criteria: 1) The fees are compensation for services provided and are commensurate with the level of effort required to provide those services; 2) The decision maker or service provider does not hold other interests in the VIE that individually, or in the aggregate, would absorb more than an insignificant amount of the VIE’s expected losses or receive more than an insignificant amount of the VIE’s expected residual returns; 3) The service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length. 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 March 31, 2021, and December 31, 2020, except for amounts collected in advance for membership
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and wellness packages, which are recorded as deferred revenue. The VIE's deferred revenue liability balance as of March 31, 2021, and December 31, 2020 was $2.7 million and $2.6 million, respectively.
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 March 31, 2021 and December 31, 2020.
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. While such cash balance is not legally-segregated and restricted as to withdrawal or usage, the Company's accounting policy is to classify these funds as restricted cash.
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 March 31, 2021 and December 31, 2020, the Company had an allowance for doubtful accounts of $0.
Deferred Franchise Costs 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. 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 three to five years.
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The FASB issued in August 2018 an update to accounting guidance related to implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred under such arrangements with the requirements for capitalizing costs incurred to develop or obtain internal-use software. Accordingly, implementation costs incurred in connection with a cloud computing arrangement that is a service contract are capitalized and such costs were included in prepaid expenses in the Company’s condensed consolidated balance sheet.
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 clinics 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 one to eight years. In the case of regional developer rights, the Company generally amortizes the re-acquired regional developer rights over one to seven years. The fair value of customer relationships is amortized over their estimated useful life of two to four years.
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions of franchises. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. As required, the Company performs an annual impairment test of goodwill as of the first day of the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets are recoverable. The Company records an impairment loss when the carrying amount of the asset is not recoverable and exceeds its fair value. During the three months ended March 31, 2021, certain operating lease right-of-use assets related to closed clinics with a total carrying amount of $0.5 million was written down to its fair value of $0.4 million. As a result, the Company recorded a noncash impairment loss of approximately $0.1 million during the three months ended March 31, 2021. No impairments of long-lived assets were recorded for the three months ended March 31, 2020.
Advertising Fund
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The Company has established an advertising fund for national or regional marketing and advertising of services offered by its clinics. The monthly marketing fee is 2% of clinic sales. The Company segregates the marketing funds collected which are included in restricted cash on its consolidated balance sheets. As amounts are expended from the fund, the Company recognizes a related expense.
Co-Op Marketing Funds
Some franchises have established regional Co-Ops for advertising within their local and regional markets. The Company maintains a custodial relationship under which the marketing funds collected are segregated and used for the purposes specified by the Co-Ops’ officers. The marketing funds are included in restricted cash on the Company’s condensed consolidated balance sheets.
Revenue Recognition
The Company generates revenue primarily through its company-owned and managed clinics, royalties, franchise fees, advertising fund contributions, IT related income and computer software fees from our franchisees.
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 (or a deferred revenue liability) related to the prepaid treatment plans for which the Company has an ongoing performance obligation. The Company recognizes this contract liability, and recognizes revenue, as the patient consumes his or her visits related to the package and the Company transfers its services. Based on a historical lag analysis 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 from its franchisees, as stipulated in the franchise agreement, equal to 7% of gross sales and a marketing and advertising fee currently equal to 2% of gross sales. Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the term of the franchise agreement. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which generally requires reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price). As 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, such royalties are recognized as franchisee clinic level sales occur. Royalties 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 from its franchisees 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. The Company has a regional developer program where regional developers are granted exclusive geographical territory and commit to 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
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the regional developer and as such are considered to represent a single performance obligation. In addition, regional developers receive fees which are funded by the initial franchise fees collected from franchisees upon the sale of franchises within their exclusive geographical territory and a royalty of 3% of sales generated by franchised clinics in their exclusive geographical territory. Fees related to the sale of franchises within their exclusive geographical territory are initially deferred as deferred franchise costs and are recognized as an expense in franchise cost of revenues when the respective revenue is recognized, which is generally over the term of the related franchise agreement. Royalties of 3% of sales generated by franchised clinics in their regions are also recognized as franchise cost of revenues as franchisee clinic level sales occur, 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 one regional developer agreement during the three months ended March 31, 2020 for which it received approximately $201,000. This fee was deferred as of the transaction date and is 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 did not enter into any new regional developer agreements during the three months ended March 31, 2021.
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 $850,656 and $658,673 for the three months ended March 31, 2021, and 2020, respectively.
Income Taxes
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date pre-tax income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected pre-tax income for the year and permanent differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
Earnings per Common Share
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
March 31,
20212020
Net Income$2,314,287 $814,947 
Weighted average common shares outstanding - basic14,178,542 13,890,673 
Effect of dilutive securities:
Unvested restricted stock and stock options676,267 592,911 
Weighted average common shares outstanding - diluted14,854,809 14,483,584 
Basic earnings per share$0.16 $0.06 
Diluted earnings per share$0.16 $0.06 
Potentially dilutive securities excluded from the calculation of diluted net income per common share as the effect would be anti-dilutive were as follows:
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Three Months Ended
March 31,
Weighted average potentially dilutive securities:20212020
Unvested restricted stock1,698  
Stock options14,801 101,692 
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 Not Yet Adopted

In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 becomes effective on January 1, 2023 for the Company. Early adoption is permitted. The Company is currently evaluating the potential impact of Topic 326 on the Company’s consolidated financial statements.
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
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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. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which generally requires reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price).
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 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 months ended March 31, 2021 and 2020. Other revenues primarily consist of merchant income associated with credit card transactions.
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Rollforward of Contract Liabilities and Contract Assets
Changes in the Company's contract liability for deferred franchise and regional development fees during the three months ended March 31, 2021 were as follows:
Deferred Revenue
short and long-term
Balance at December 31, 2020$16,504,114 
Recognized as revenue during the three months ended March 31, 2021(939,062)
Fees received and deferred during the three months ended March 31, 20211,041,265 
Balance at March 31, 2021$16,606,317 
Changes in the Company's contract assets for deferred franchise and regional development costs during the three months ended March 31, 2021 were as follows:
Deferred Franchise and Development Costs
short and long-term
Balance at December 31, 2020$5,238,307 
Recognized as cost of revenue during the three months ended March 31, 2021(294,915)
Costs incurred and deferred during the three months ended March 31, 2021434,195 
Balance at March 31, 2021$5,377,587 
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 March 31, 2021:
Contract liabilities expected to be recognized inAmount
2021 (remainder)$2,317,749 
20222,758,710 
20232,460,622 
20241,984,982 
20251,768,199 
Thereafter5,316,055 
Total$16,606,317 

Note 3: Property and Equipment
Property and equipment consist of the following:
March 31,
2021
December 31,
2020
Office and computer equipment$2,360,065 $2,194,348 
Leasehold improvements8,986,704 8,391,675 
Software developed1,193,007 1,193,007 
Finance lease assets258,253 282,027 
12,798,029 12,061,057 
Accumulated depreciation and amortization(7,246,632)(6,890,837)
5,551,397 5,170,220 
Construction in progress3,787,441 3,577,149 
Property and equipment, net$9,338,838 $8,747,369 
Depreciation expense was $376,465 and $287,076 for the three months ended March 31, 2021 and 2020, respectively.
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Amortization expense related to finance lease assets was $19,913 and $10,554 for the three months ended March 31, 2021 and 2020, respectively.
Construction in progress at March 31, 2021 and December 31, 2020 principally relates to development costs for software to be used by the Company and all clinics for operations, including point-of-sales system.
Note 4: Fair Value Measurements
The Company’s financial instruments include cash, restricted cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of its financial instruments approximate their fair value due to their short maturities. 
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 March 31, 2021, and December 31, 2020, the Company did not have any financial instruments that were measured on a recurring basis as Level 1, 2 or 3.
The Company’s non-financial assets, which primarily consist of goodwill, intangible assets, property, plant and equipment, and operating lease right-of-use assets, are not required to be measured at fair value on a recurring basis, and instead are reported at their carrying amount. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable (and at least annually for goodwill), non-financial assets are assessed for impairment. If the fair value is determined to be lower than the carrying amount, an impairment charge is recorded to write down the asset to its fair value, which is considered Level 3 within the fair value hierarchy.
During the three months ended March 31, 2021, certain operating lease right-of-use assets related to closed clinics with a total carrying amount of $0.5 million was written down to its fair value of $0.4 million. Fair value of the Company's operating lease right-of-use assets was determined based on the discounted cash flows of the estimated market rents. As a result, the Company recorded a noncash impairment loss of approximately $0.1 million during the three months ended March 31, 2021. No impairments of long-lived assets were recorded for the three months ended March 31, 2020.
Note 5: Intangible Assets
On January 1, 2021, the Company entered into an agreement under which the Company repurchased the right to develop franchises in various counties in Georgia. The total consideration for the transaction was $1,388,700. The Company carried a deferred revenue balance associated with this transaction of $35,679, representing the unrecognized fee collected upon the execution of the regional developer agreement. The Company accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price. The Company recognized the net amount of $1,353,021 as reacquired development rights in January 2021, which is amortized over the remaining original contract period of approximately 13 months.
Intangible assets consist of the following:
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As of March 31, 2021
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
Intangible assets subject to amortization:
Reacquired franchise rights
$3,246,894 $(2,270,916)$975,978 
Customer relationships
1,351,975 (1,199,337)152,638 
Reacquired development rights
4,406,221 (2,090,299)2,315,922 
$9,005,090 $(5,560,552)$3,444,538 

As of December 31, 2020
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Value
Intangible assets subject to amortization:
Reacquired franchise rights$3,246,894 $(2,107,730)$1,139,164 
Customer relationships1,351,975 (1,130,800)221,175 
Reacquired development rights3,053,201 (1,548,534)1,504,667 
$7,652,070 $(4,787,064)$2,865,006 
Amortization expense related to the Company’s intangible assets was $773,488 and $356,619 for the three months ended March 31, 2021 and 2020, respectively.
Estimated amortization expense for 2021 and subsequent years is as follows:
Amount
2021 (remainder)$2,189,279 
20221,144,739 
202390,521 
202419,999 
Total$3,444,538 

Note 6: Debt
Credit Agreement
On February 28, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”), with JPMorgan Chase Bank, N.A., individually, and as Administrative Agent and Issuing Bank (“JPMorgan Chase” or the “Lender”). The Credit Agreement provides for senior secured credit facilities (the "Credit Facilities") in the amount of $7,500,000, including a $2,000,000 revolver (the "Revolver") and $5,500,000 development line of credit (the "Line of Credit"). The Revolver includes amounts available for letters of credit of up to $1,000,000 and an uncommitted additional amount of $2,500,000. All outstanding principal and interest on the Revolver are due on February 28, 2022. Principal and interest outstanding on the Line of Credit at the end of the first year are converted to a term loan payable in 36 monthly payments with a final maturity date of March 31, 2024. Principal amounts on the Line of Credit borrowed during the second year plus interest thereon which are outstanding at the end of the second year are converted to a second term loan payable in 36 monthly payments with a final maturity date of March 31, 2025. Borrowings under the Credit Facilities bear interest at a rate equal to an applicable margin, which is a one-, three- or six-month reserve adjusted Eurocurrency rate plus 2.00% or, at the election of the Company, an alternative base rate plus 1.00%. The alternative base rate is the greatest of the prime rate, the Federal Reserve Bank of New York rate plus 0.50% and the one-month reserve adjusted Eurocurrency plus 1.00%. Unused portions of the Credit Facilities bear interest at a rate equal to 0.25% per annum. If the current Eurocurrency rate is no longer available or representative, the loan agreement provides a mechanism for replacing that benchmark
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rate. The Credit Facilities are pre-payable at any time without penalty, other than customary breakage fees, and any voluntary repayments made by the Company would reduce the future required repayment amounts. The interest rate on funds borrowed under the Revolver as of March 31, 2021 was 2.25%.

The Credit Facilities contain customary events of default, including but not limited to nonpayment; material inaccuracy of
representations and warranties; violations of covenants; certain bankruptcies and liquidations; cross-default to material indebtedness; certain material judgments; and certain fundamental changes such as a merger or sale of substantially all assets (as further defined in the Credit Facilities). The Credit Facilities require the Company to comply with customary affirmative, negative and financial covenants, including minimum interest coverage and maximum net leverage. A breach of any of these operating or financial covenants would result in a default under the Credit Facilities. If an event of default occurs and is continuing, the lenders could elect to declare all amounts then outstanding, together with accrued interest, to be immediately due and payable. The Credit Facilities are collateralized by substantially all of the Company’s assets, including the assets in the Company’s company-owned or managed clinics. The Company intends to use the Revolver for general working capital needs and the Line of Credit for acquiring and developing new chiropractic clinics.
On March 18, 2020, the Company drew down $2,000,000 under the Revolver as a precautionary measure in order to further
strengthen its cash position and provide financial flexibility in light of the uncertainty in the global markets resulting from the COVID-19 outbreak. As of March 31, 2021, the Company was in compliance with all applicable financial and non-financial covenants under the Credit Agreement and the full $2,000,000 remains outstanding as of March 31, 2021.

Paycheck Protection Program Loan

On April 10, 2020, the Company received a loan in the amount of approximately $2.7 million from JPMorgan Chase Bank, N.A. (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) administered by the United States Small Business Administration. The PPP is part of the Coronavirus Aid, Relief, and Economic Security Act, which provides for forgiveness of up to the full principal amount and accrued interest of qualifying loans guaranteed under the PPP. The Loan was granted pursuant to a Note dated April 9, 2020 issued by the Company. The Note had a maturity date of April 11, 2022 and bore interest at a rate of 0.98% per annum. On March 4, 2021, the Company elected to repay the full principal and accrued interest on the PPP loan of approximately $2.7 million from JPMorgan Chase Bank, N.A. without prepayment penalty, in accordance with the terms of the PPP loan.
Note 7: Stock-Based Compensation 
The Company grants stock-based awards under its 2014 Incentive Stock Plan (the “2014 Plan”) and the 2012 Stock Plan (the “2012 Plan”). The 2014 Plan replaced the 2012 Plan, but the 2012 plan remains in effect for the administration of awards made prior to its replacement by the 2014 Plan. The shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.
The Company may grant the following types of incentive awards under the 2014 Plan: (i) non-qualified stock options; (ii) incentive stock options; (iii) stock appreciation rights; (iv) restricted stock; and (v) restricted stock units. Each award granted under the 2014 Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, and such other terms and conditions as the plan committee determines. Awards granted under the 2014 Plan are classified as equity awards, which are recorded in stockholders’ equity in the Company’s consolidated balance sheets.
Stock Options
The Company’s closing price on the date of grant is 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, the Company uses available historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term. The Company uses the simplified method to calculate the expected term of stock option grants to employees as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. Accordingly, the expected life of the options granted is based on the average of the vesting term, which is generally four years and the contractual term, which is generally ten years. The Company will continue to evaluate the appropriateness of utilizing such method. The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term.
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The Company has computed the fair value of all options granted using the Black-Scholes-Merton model during the three months ended March 31, 2021 and 2020, using the following assumptions:
Three Month Ended March 31,
20212020
Expected volatility57%53%
Expected dividendsNoneNone
Expected term (years)77
Risk-free rate0.97%0.89%
Forfeiture rate5%5%
The information below summarizes the stock options activity for the three months ended March 31, 2021:
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Life
(Years)
Outstanding at December 31, 2020835,601 $6.65 6.6
Granted44,403 45.39 
Exercised(105,995)5.86 
Cancelled  
Outstanding at March 31, 2021774,009 $8.98 6.6
Exercisable at March 31, 2021532,573 $5.14 5.8
For the three months ended March 31, 2021 and 2020, stock-based compensation expense for stock options was $150,879 and $147,008, respectively. 
Restricted Stock
Restricted stocks granted to employees generally vest in four equal annual installments. Restricted stocks granted to non-employee directors typically vest in full one year after the date of grant.
The information below summarizes the restricted stock activity for the three months ended March 31, 2021:
Restricted Stock AwardsSharesWeighted Average
Grant-Date Fair
Value per Award
Non-vested at December 31, 202045,595 $13.13 
Granted5,095 45.39 
Vested(5,981)13.44 
Cancelled  
Non-vested at March 31, 202144,709 $16.77 
For the three months ended March 31, 2021 and 2020, stock-based compensation expense for restricted stock was $95,615 and $103,384, respectively.
Note 8: Income Taxes
During the three months ended March 31, 2021 and 2020, the Company recorded income tax benefit of $364,148 and $65,934, respectively. The Company’s effective tax rate differs from the federal statutory tax rate due to permanent differences and state taxes. The negative effective tax rate for the three months ended March 31, 2021 was primarily driven by excess tax benefits from exercise of stock options. The negative effective tax rate for the three months ended March 31, 2020 was due to a projected tax expense on a projected loss for the year at the time.
Note 9: Commitments and Contingencies
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Leases
The table below summarizes the components of lease expense and income statement location for the three months ended March 31, 2021 and 2020:
Line Item in the
Company’s Consolidated
Income Statements
Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
Finance lease costs:
Amortization of assetsDepreciation and amortization$19,913 $10,554 
Interest on lease liabilitiesOther expense, net2,623 2,283 
Total finance lease costs22,536 12,837 
Operating lease costsGeneral and administrative expenses941,037 $849,891 
Total lease costs$963,573 $862,728 
Supplemental information and balance sheet location related to leases is as follows:
March 31, 2021December 31, 2020
Operating Leases:
Operating lease right-of -use asset$13,010,941 $11,581,435 
Operating lease liability - current portion$3,125,921 $2,918,140 
Operating lease liability - net of current portion12,246,741 10,632,672 
Total operating lease liability$15,372,662 $13,550,812 
Finance Leases:
Property and equipment, at cost$258,253 $282,027 
Less accumulated amortization(82,547)(92,549)
Property and equipment, net$175,706 $189,478 
Finance lease liability - current portion75,992 70,507 
Finance lease liability - net of current portion114,887 132,469 
Total finance lease liabilities$190,879 $202,976 
Weighted average remaining lease term (in years):
Operating leases4.94.7
Finance lease3.94.1
Weighted average discount rate:
Operating leases8.3 %8.5 %
Finance leases5.3 %5.3 %
Supplemental cash flow information related to leases is as follows:
Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases$979,349 $765,093 
Operating cash flows from finance leases2,623 2,283 
Financing cash flows from finance leases18,238 7,214 
Non-cash transactions: ROU assets obtained in exchange for lease liabilities
Operating lease$2,191,809 $549,004 
Finance lease6,141 151,396 
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Maturities of lease liabilities as of March 31, 2021 are as follows:
Operating LeasesFinance Lease
2021 (remainder)$3,154,129 $62,585 
20224,318,485 50,882 
20233,593,576 27,600 
20242,996,026 27,600 
20252,585,425 27,600 
Thereafter2,095,334 11,500 
Total lease payments$18,742,975 $207,767 
Less: Imputed interest(3,370,313)(16,888)
Total lease obligations15,372,662 190,879 
Less: Current obligations(3,125,921)(75,992)
Long-term lease obligation$12,246,741 $114,887 
During the first quarter of 2021, the Company entered into various operating leases that have not yet commenced for spaces to be used by the Company’s new corporate clinics. These leases are expected to result in additional ROU assets and liabilities of approximately $2.2 million. These leases are expected to commence during the second and the third quarter of 2021, with lease terms of five to ten years.
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.
Note 10: Segment Reporting
An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”) to evaluate performance and make operating decisions. The Company has identified its CODM as the Chief Executive Officer.
The Company has two operating business segments and one non-operating business segment. The Corporate Clinics segment is composed of the operating activities of the company-owned or managed clinics. As of March 31, 2021, the Company operated or managed 65 clinics under this segment. The Franchise Operations segment is composed of the operating activities of the franchise business unit. As of March 31, 2021, the franchise system consisted of 527 clinics in operation. Corporate is a non-operating segment that develops and implements strategic initiatives and supports the Company’s two operating business segments by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, legal and human resources. Corporate also provides the necessary administrative functions to support the Company as a publicly-traded company. A portion of the expenses incurred by Corporate are allocated to the operating segments.

The tables below present financial information for the Company’s two operating business segments.

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Three Months Ended
March 31,
Revenues:
20212020
Corporate clinics
$9,470,860 $7,294,295 
Franchise operations
8,077,105 6,350,191 
Total revenues
$17,547,965 $13,644,486 
Depreciation and amortization:
Corporate clinics1,093,833 577,543 
Franchise operations342 342 
Corporate administration75,691 76,364 
Total depreciation and amortization$1,169,866 $654,249 
Segment operating income:
Corporate clinics
$1,349,057 $783,706 
Franchise operations
3,847,773 2,844,298 
Total segment operating income
$5,196,830 $3,628,004 
Reconciliation of total segment operating income to consolidated earnings before income taxes:
Total segment operating income$5,196,830 $3,628,004 
Unallocated corporate
(3,225,154)(2,874,654)
Consolidated income from operations1,971,676 753,350 
Other expense, net21,537 4,337 
Income before income tax benefit$1,950,139 $749,013 

Segment assets:March 31,
2021
December 31,
2020
Corporate clinics$27,788,949 $24,928,311 
Franchise operations10,192,4659,744,375
Total segment assets37,981,41434,672,686
Unallocated cash and cash equivalents and restricted cash18,007,15020,819,629
Unallocated property and equipment999,4681,063,815
Other unallocated assets9,919,5279,176,713
Total assets$66,907,559 $65,732,843 
“Unallocated cash and cash equivalents and restricted cash” relates primarily to corporate cash and cash equivalents and restricted cash (see Note 1), “unallocated property and equipment” relates primarily to corporate fixed assets, and “other unallocated assets” relates primarily to deposits, prepaid and other assets.
Note 11: Other Comments
COVID-19 Update

The Company's business remained healthy and resilient during the first quarter of 2021 despite the ongoing pandemic. However, the extent to which the COVID-19 pandemic will impact the Company's business and operations will depend on future developments that are highly uncertain. The Company's 2020 revenue and earnings were negatively impacted compared to its pre-COVID-19 pandemic expectations, and the pandemic may have a negative impact on the Company's revenue and net income in
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2021. Even as government restrictions are lifted, the ongoing economic impacts and health concerns associated with the pandemic may continue to affect patient behavior and spending levels and could result in reduced visits and patient spending trends that adversely impact the Company's financial position and results of operations. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state, or local authorities, or that it determines are in the best interests of its employees and patients.

Note 12: Subsequent Events
On April 1, 2021, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the seller two operating franchises in Phoenix, Arizona. The Company operates the franchises as company-owned clinics. The total purchase price for the transaction was $1,925,000, less $29,417 of net deferred revenue resulting in total purchase consideration of $1,895,583.
On April 1, 2021, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the seller six operating franchises in North Carolina. The Company operates the franchises as company-managed clinics. The total purchase price for the transaction was $2,600,000, less $43,728 of net deferred revenue resulting in total purchase consideration of $2,556,272.
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, 2020 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, 2020 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, 2020 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:
major public health concerns, including the outbreak of epidemic or pandemic contagious disease, may adversely affect revenue at our clinics and disrupt financial markets, adversely affecting our stock price;
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the impact of the COVID-19 pandemic on the economy and our operations, including the measures taken by governmental authorities to address it, may precipitate or exacerbate other risks and/or uncertainties;
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;

we have limited experience operating company-owned or managed clinics in those geographic areas where we currently have few or no clinics, and we may not be able to duplicate the success of some of our franchisees;

we may not be able to acquire operating clinics from existing franchisees or develop company-owned or managed clinics on attractive terms;

we may fail to successfully design and maintain our proprietary and third-party management information systems or implement new systems;

we may fail to properly maintain the integrity of our data or to strategically implement, upgrade or consolidate existing information systems;

increases in the number of franchisee acquisitions that we make could disrupt our business and harm our financial condition;

we may not be able to continue to sell regional developer licenses to qualified regional developers or sell franchises to qualified franchisees, and our regional developers and franchisees may not succeed in developing profitable territories and clinics;

we may not be able to identify, recruit and train enough qualified chiropractors to staff our clinics;

new clinics may not reach the point of profitability, and we may not be able to maintain or improve revenues and franchise fees from existing franchised clinics;

the chiropractic industry is highly competitive, with many well-established independent competitors, which could prevent us from increasing our market share or result in reduction in our market share;

administrative actions and rulings regarding the corporate practice of chiropractic and joint employer responsibility may jeopardize our business model;

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, could adversely impact our operations and financial position;

our security systems may be breached, and we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract and retain patients; and