jynt-20210930

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, 2021


☐			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 ☒ 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 ☒ 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 1, 2021, the registrant had 14,413,339 shares of Common Stock ($0.001 par value) outstanding.

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THE JOINT CORP.

FORM 10-Q

TABLE OF CONTENTS


		PAGE NO.
PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	1
	Condensed Consolidated Income Statements for the three and nine months ended September 30, 2021 and 2020 (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2021 and 2020 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 4.	Controls and Procedures	39

Part I, Item 3 – Not applicable

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	45

EXHIBIT INDEX		46

SIGNATURES		47

Part II, Items 3, 4, and 5 - Not applicable

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PART I: FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	September 30, 2021		December 31, 2020
ASSETS	(unaudited)		(as revised)
Current assets:
Cash and cash equivalents	$	19,542,685	$	20,554,258
Restricted cash	449,597		265,371
Accounts receivable, net	2,920,363		1,850,499
Deferred franchise and regional development costs, current portion	992,124		897,551
Prepaid expenses and other current assets	1,552,946		1,566,025
Total current assets	25,457,715		25,133,704
Property and equipment, net	13,353,986		8,747,369
Operating lease right-of-use asset	15,903,649		11,581,435
Deferred franchise and regional development costs, net of current portion	5,387,147		4,340,756
Intangible assets, net	5,280,024		2,865,006
Goodwill	5,085,202		4,625,604
Deferred tax assets	9,997,313		8,088,073
Deposits and other assets	513,862		431,336
Total assets	$	80,978,898	$	65,813,283

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,788,446	$	1,561,648
Accrued expenses	935,087		770,221
Co-op funds liability	449,597		248,468
Payroll liabilities	4,105,821		2,776,036
Debt under the Credit Agreement	2,000,000		—
Operating lease liability, current portion	3,874,451		2,918,140
Finance lease liability, current portion	64,944		70,507
Deferred franchise and regional developer fee revenue, current portion	3,198,750		3,000,369
Deferred revenue from company clinics ($3.1 million and $2.6 million attributable to VIEs as of September 30, 2021, and December 31, 2020)	4,637,740		4,201,548
Debt under the Paycheck Protection Program	—		2,727,970
Other current liabilities	404,901		707,085
Total current liabilities	21,459,737		18,981,992
Operating lease liability, net of current portion	14,977,426		10,632,672
Finance lease liability, net of current portion	93,887		132,469
Debt under the Credit Agreement	—		2,000,000
Deferred franchise and regional developer fee revenue, net of current portion	15,349,878		13,503,745
Other liabilities	27,231		27,230
Total liabilities	51,908,159		45,278,108
Commitments and contingencies (Note 10)
Stockholders' equity:
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding, as of September 30, 2021 and December 31, 2020	—		—
Common stock, $0.001 par value; 20,000,000 shares authorized, 14,444,982 shares issued and 14,413,339 shares outstanding as of September 30, 2021 and 14,174,237 shares issued and 14,157,070 outstanding as of December 31, 2020	14,444		14,174
Additional paid-in capital	43,657,273		41,350,001
Treasury stock 31,643 shares as of September 30, 2021 and 17,167 shares as of December 31, 2020, at cost	(850,839)		(143,111)
Accumulated deficit	(13,775,139)		(20,685,989)
Total The Joint Corp. stockholders' equity	29,045,739		20,535,075
Non-controlling Interest	25,000		100
Total equity	29,070,739		20,535,175
Total liabilities and stockholders' equity	$	80,978,898	$	65,813,283

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 INCOME STATEMENTS

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Revenues from company-owned or managed clinics	$	11,634,009	$	8,403,844	$	32,537,942	$	22,554,946
Royalty fees	5,714,637		4,170,692		15,816,500		11,157,575
Franchise fees	648,598		519,131		1,967,680		1,555,846
Advertising fund revenue	1,627,693		1,187,666		4,521,342		3,176,080
Software fees	840,969		688,046		2,387,543		1,964,968
Regional developer fees	209,651		222,908		642,041		643,974
Other revenues	316,064		218,266		885,335		591,443
Total revenues	20,991,621		15,410,553		58,758,383		41,644,832
Cost of revenues:
Franchise and regional development cost of revenues	1,907,874		1,588,707		5,319,278		4,281,389
IT cost of revenues	392,248		123,539		784,698		284,653
Total cost of revenues	2,300,122		1,712,246		6,103,976		4,566,042
Selling and marketing expenses	2,881,575		1,845,601		8,503,617		5,684,556
Depreciation and amortization	1,662,255		714,288		4,275,140		2,061,937
General and administrative expenses	12,812,331		9,433,062		34,513,378		26,668,420
Total selling, general and administrative expenses	17,356,161		11,992,951		47,292,135		34,414,913
Net (gain) loss on disposition or impairment	(3,540)		—		16,967		(53,413)
Income from operations	1,338,878		1,705,356		5,345,305		2,717,290
Other expense, net	(16,139)		(25,667)		(54,050)		(55,248)
Income before income tax (benefit) expense	1,322,739		1,679,689		5,291,255		2,662,042
Income tax (benefit) expense	(614,356)		75,730		(1,644,496)		127,551
Net income	$	1,937,095	$	1,603,959	$	6,935,751	$	2,534,491
Earnings per share:
Basic earnings per share	$	0.13	$	0.11	$	0.49	$	0.18
Diluted earnings per share	$	0.13	$	0.11	$	0.46	$	0.17
Basic weighted average shares	14,388,905		14,033,535		14,286,818		13,968,635
Diluted weighted average shares	14,970,328		14,593,107		14,931,759		14,523,329

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

(unaudited)


	Common Stock			Additional Paid In Capital		Treasury Stock			Accumulated Deficit		Total The Joint Corp. stockholders' equity		Non-controlling interest		Total
	Shares	Amount				Shares	Amount
Balances, December 31, 2020 as adjusted	14,174,237	$	14,174	$	41,350,001	17,167	$	(143,111)	$	(20,685,989)	$	20,535,075	$	100	$	20,535,175
Stock-based compensation expense	—	—		246,494		—	—		—		246,494		—		246,494
Issuance of restricted stock	7,879	8		(8)		—	—		—		—		—		—
Exercise of stock options	105,995	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	—	—		—		—	—		2,314,694		2,314,694		—		2,314,694
Balances, March 31, 2021 as adjusted (unaudited)	14,288,111	$	14,288	$	42,217,157	30,786	$	(761,265)	$	(18,371,295)	$	23,098,885	$	100	$	23,098,985
Stock-based compensation expense	—	—		283,564		—	—		—		283,564		—		283,564
Issuance of restricted stock	4,218	4		(4)		—	—		—		—		—		—
Exercise of stock options	113,819	113		641,674		—	—		—		641,787		—		641,787
Net income	—	—		—		—	—		2,683,961		2,683,961		—		2,683,961
Balances, June 30, 2021 as adjusted (unaudited)	14,406,148	14,405		43,142,391		30,786	(761,265)		(15,687,334)		26,708,197		100		26,708,297
Stock-based compensation expense	—	—		296,850		—	—		—		296,850		—		296,850
Issuance of restricted stock	4,280	4		(4)		—	—		—		—		—		—
Exercise of stock options	34,554	35		218,036		—	—		—		218,071		—		218,071
Purchases of treasury stock under employee stock plans	—	—		—		857	(89,574)		—		(89,574)		—		(89,574)
Change in redemption value of noncontrolling interest	—	—		—		—	—		(24,900)		(24,900)		24,900		—
Net income	—	—		—		—	—		1,937,095		1,937,095				1,937,095
Balances, September 30, 2021 (unaudited)	14,444,982	14,444		43,657,273		31,643	(850,839)		(13,775,139)		29,045,739		25,000		29,070,739

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	Common Stock			Additional Paid In Capital		Treasury Stock			Accumulated Deficit		Total The Joint Corp. stockholders' equity		Non-controlling interest
	Shares	Amount				Shares	Amount								Total
Balances, January 1, 2020 as adjusted	13,898,694	$	13,899	$	39,454,937	15,762	$	(111,041)	$	(33,853,303)	$	5,504,492	$	100	$	5,504,592
Stock-based compensation expense	—	—		250,392		—	—		—		250,392		—		250,392
Issuance of restricted stock	15,578	16		(16)		—	—		—		—		—		—
Exercise of stock options	35,500	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 as adjusted (unaudited)	13,949,772	$	13,950	$	39,846,177	16,013	$	(114,815)	$	(33,038,356)	$	6,706,956	$	100	$	6,707,056
Stock-based compensation expense				216,081							216,081				216,081
Issuance of restricted stock	30,882	31		(31)							—				—
Exercise of stock options	62,200	62		246,959							247,021				247,021
Net income									115,584		115,584				115,584
Balances, June 30, 2020 as adjusted (unaudited)	14,042,854	$	14,043	$	40,309,186	16,013	$	(114,815)	$	(32,922,772)	$	7,285,642	$	100	$	7,285,742
Stock-based compensation expense	—	$	—	$	212,234	—	$	—	$	—	$	212,234			$	212,234
Issuance of restricted stock	4,281	$	4	$	(4)	—	$	—	$	—	$	—			$	—
Exercise of stock options	26,109	$	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 as adjusted (unaudited)	14,073,244	$	14,073	$	40,625,128	16,043	$	(115,303)	$	(31,318,813)	$	9,205,085	$	100	$	9,205,185

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

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(unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	6,935,751	$	2,534,491
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,275,140		2,061,937
Net loss on disposition or impairment (non-cash portion)	109,871		1,193
Net franchise fees recognized upon termination of franchise agreements	(98,196)		(54,174)
Deferred income taxes	(1,909,241)		(17,022)
Stock based compensation expense	826,908		678,706
Changes in operating assets and liabilities:
Accounts receivable	(1,069,864)		831,401
Prepaid expenses and other current assets	13,079		200,919
Deferred franchise costs	(1,245,049)		(247,127)
Deposits and other assets	(95,176)		(4,602)
Accounts payable	(49,415)		(379,342)
Accrued expenses	164,866		677,308
Payroll liabilities	1,329,785		(259,620)
Deferred revenue	2,410,202		417,221
Other liabilities	852,926		466,156
Net cash provided by operating activities	12,451,587		6,907,445

Cash flows from investing activities:
Acquisition of AZ clinics	(1,925,000)		—
Acquisition of NC clinics	(2,568,028)		—
Purchase of property and equipment	(5,382,857)		(2,344,344)
Reacquisition and termination of regional developer rights	(1,388,700)		—
Payments received on notes receivable	—		118,398
Net cash used in investing activities	(11,264,585)		(2,225,946)

Cash flows from financing activities:
Payments of finance lease obligation	(59,285)		(40,168)
Purchases of treasury stock under employee stock plans	(707,728)		(4,262)
Proceeds from exercise of stock options	1,480,634		491,658
Proceeds from the Credit Agreement, net of related fees	—		1,947,352
Proceeds from the Paycheck Protection Program	—		2,727,970
Repayment of debt under the Paycheck Protection Program	(2,727,970)		—
Net cash (used in) provided by financing activities	(2,014,349)		5,122,550

(Decrease) increase in cash, cash equivalents and restricted cash	(827,347)		9,804,049
Cash, cash equivalents and restricted cash, beginning of period	20,819,629		8,641,877
Cash, cash equivalents and restricted cash, end of period	$	19,992,282	$	18,445,926

Reconciliation of cash, cash equivalents and restricted cash:	September 30, 2021		September 30, 2020
Cash and cash equivalents	$	19,542,685	$	18,305,526
Restricted cash	449,597		140,400
	$	19,992,282	$	18,445,926

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During the nine months ended September 30, 2021 and 2020, cash paid for income taxes was $592,695 and $167,620, respectively. During the nine months ended September 30, 2021 and 2020, cash paid for interest was $58,533 and $31,458, respectively.

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

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Supplemental disclosure of non-cash activity:

As of September 30, 2021, accounts payable include property and equipment purchases of $276,213. 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 acquisitions during the nine months ended September 30, 2021, the Company acquired $528,974 of property and equipment and intangible assets of $3,766,972, in exchange for $4,493,028 in cash to the sellers. Additionally, at the time of these transactions, the Company carried net deferred revenue of $87,858, representing net franchise fees collected upon the execution of the franchise agreements. 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, 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 of $1,388,700.

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 the financial statements and 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, 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 September 30, 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 and nine months ended September 30, 2021 and 2020.

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Correction of Immaterial Error

During the quarter ended September 30, 2021, the Company identified an immaterial error in the calculation of deferred revenue related to wellness packages. Management assessed the materiality of the error and determined the impact on the Company’s condensed consolidated financial statements was not material. December 31, 2020 balance sheet has been revised to correct the error as of January 1, 2020.

The table below sets forth the impact of the revision on the previously issued consolidated balance sheet:


	December 31, 2020
	As Previously
	Reported		Adjustments		As Adjusted
ASSETS
Deferred tax assets	8,007,633		80,440		8,088,073
Total assets	$	65,732,843	$	80,440	$	65,813,283

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue from company clinics	3,905,200		296,348		4,201,548
Total current liabilities	18,685,644		296,348		18,981,992
Total liabilities	44,981,760		296,348		45,278,108
Stockholders' equity:
Accumulated deficit	(20,470,081)		(215,908)		(20,685,989)
Total The Joint Corp. stockholders' equity	20,750,983		(215,908)		20,535,075
Total equity	20,751,083		(215,908)		20,535,175
Total liabilities and stockholders' equity	$	65,732,843	$	80,440	$	65,813,283

Nature of Operations

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.

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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, 2021 and 2020:


	Three Months Ended September 30,		Nine Months Ended September 30,
Franchised clinics:	2021	2020	2021	2020
Clinics open at beginning of period	555	477	515	453
Opened during the period	28	21	76	49
Sold during the period	—	—	(8)	—
Closed during the period	—	(1)	—	(5)
Clinics in operation at the end of the period	583	497	583	497

	Three Months Ended September 30,		Nine Months Ended September 30,
Company-owned or managed clinics:	2021	2020	2021	2020
Clinics open at beginning of period	78	62	64	60
Opened during the period	5	1	11	3
Acquired during the period	—	—	8	—
Closed during the period	—	—	—	—
Clinics in operation at the end of the period	83	63	83	63

Total clinics in operation at the end of the period	666	560	666	560

Clinic licenses sold but not yet developed	252	178	252	178
Executed letters of intent for future clinic licenses	43	40	43	40

Variable Interest Entities

Certain states prohibit the “corporate practice of chiropractic,” which restricts business corporations from practicing chiropractic care by exercising control over clinical decisions by chiropractic doctors. In states which prohibit the corporate practice of chiropractic, 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. The Company has entered into such management agreements with two PCs, including one in North Carolina, in connection with the acquisition on April 1, 2021 (reference Note 3).

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. In accordance with relevant accounting guidance, these PCs were determined to be VIEs. 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. Additionally, the Company has determined that it has the ability to direct the activities that most significantly impact the performance of these PCs and have an obligation to absorb losses or receive benefits which could potentially be significant to the PCs. Accordingly, the PCs are variable interest entities for which the Company is the primary beneficiary and are consolidated by the Company. The carrying amount of the VIEs’ assets and liabilities are immaterial as of September 30, 2021 and December 31, 2020, except for amounts collected in advance for membership and wellness packages, which are recorded as deferred revenue. The VIEs’ deferred revenue liability balance as of September 30, 2021 and December 31, 2020 was $3.1 million and $2.6 million, respectively.

Cash and Cash Equivalents

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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, 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 September 30, 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.

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.

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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 nine 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 nine months ended September 30, 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 nine months ended September 30, 2021. No impairments of long-lived assets were recorded for the three months ended September 30, 2021 and for the three and nine months ended September 30, 2020.

Advertising Fund

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 condensed consolidated balance sheets. As amounts are expended from the fund, the Company recognizes a related expense. Such costs are included in selling and marketing expenses on the condensed consolidated income statements.

Co-Op Marketing Funds

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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, and 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. 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 derecognizes 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 a 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. Renewal franchise fees, as well as transfer fees, are also recognized as revenue on a straight-line basis over the term of the respective franchise agreement.

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 an 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 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

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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 nine months ended September 30, 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 nine months ended September 30, 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 $1,170,668 and $3,147,885 for the three and nine months ended September 30, 2021, respectively. Advertising expenses were $674,402 and $1,931,008 for the three and nine months ended September 30, 2020, respectively.

Income Taxes

Income tax expense during interim periods is calculated by 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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net Income	$	1,937,095	$	1,603,959	$	6,935,751	$	2,534,491

Weighted average common shares outstanding - basic	14,388,905		14,033,535		14,286,818		13,968,635
Effect of dilutive securities:
Unvested restricted stock and stock options	581,423		559,572		644,941		554,694
Weighted average common shares outstanding - diluted	14,970,328		14,593,107		14,931,759		14,523,329

Basic earnings per share	$	0.13	$	0.11	$	0.49	$	0.18
Diluted earnings per share	$	0.13	$	0.11	$	0.46	$	0.17

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:	2021	2020	2021	2020
Unvested restricted stock	—	—	—	—
Stock options	601	112,768	35,293	133,194

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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 December 31, 2021 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 35 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.

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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:

•Initial and renewal franchise fees, as well as transfer fees, are recognized as revenue ratably on a straight-line basis over the term of the respective franchise agreement commencing with the execution of the franchise, renewal, or transfer agreement. As these fees are typically received in cash at or near the beginning of the contract 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 and renewal territory fees. The Company recognizes the regional developer fee as revenue ratably on a straight-line basis over the term of the respective 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, 2021 and 2020. Other revenues primarily consist of merchant income associated with credit card transactions.

Rollforward of Contract Liabilities and Contract Assets

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Changes in the Company's contract liability for deferred franchise and regional development fees during the nine months ended September 30, 2021 were as follows:


	Deferred Revenue short and long-term
Balance at December 31, 2020	$	16,504,114
Revenue recognized that was included in the contract liability at the beginning of the year	(2,605,401)
Net increase during the nine months ended September 30, 2021(1)	4,649,915
Balance at September 30, 2021	$	18,548,628

(1) Includes deferred revenues derecognized in connection with the acquisitions of $115,894

Changes in the Company's contract assets for deferred franchise and regional development costs during the nine months ended September 30, 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 nine months ended September 30, 2021	(817,877)
Net increase during the nine months ended September 30, 2021(1)	1,958,841
Balance at September 30, 2021	$	6,379,271

(1) Includes deferred cost of revenues derecognized in connection with the acquisitions of $28,036

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, 2021:


Contract liabilities expected to be recognized in	Amount
2021 (remainder)	$	836,890
2022	3,089,736
2023	2,793,482
2024	2,332,747
2025	2,131,559
Thereafter	7,364,214
Total	$	18,548,628

Note 3: Acquisitions

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 “AZ Clinics Purchase”). 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. Based on the terms of the purchase agreement, the AZ Clinics Purchase has been treated as a business combination under U.S. GAAP using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The allocation of the purchase price was as follows:

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Property and equipment	$	4,928
Operating lease right-of-use asset	651,197
Intangible assets	1,579,500
Total assets acquired	2,235,625
Goodwill	459,597
Deferred revenue	(123,974)
Operating lease liability - current portion	(49,303)
Operating lease liability - net of current portion	(626,362)
Net purchase consideration	$	1,895,583

Intangible assets in the table above consist of reacquired franchise rights of $1,376,400 amortized over an estimated useful lives of eight to nine years and customer relationships of $203,100 amortized over an estimated useful life of three years.

Goodwill represents the excess of the purchase consideration over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included synergies and benefits expected to be gained from leveraging the Company’s existing operations and infrastructures, as well as the expected associated revenue and cash flow projections. Goodwill has been allocated to the Company’s Corporate Clinics segment based on such expected benefits. Goodwill related to the acquisition is expected to be deductible for income tax purposes over the next 15 years. The purchase price allocation is preliminary, and the Company expects to finalize the allocation during the fourth quarter of 2021.

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 “NC Clinics Purchase”). The Company operates the franchises as company-managed clinics. The total purchase price for the transaction was $2,568,028, less $58,441 of net deferred revenue, resulting in total purchase consideration of $2,509,587. Based on the terms of the purchase agreement, the NC Clinics Purchase has been treated as an asset purchase under U.S. GAAP as there were no outputs or processes to generate outputs acquired as part of this transaction. Under an asset purchase, assets are recognized based on their cost to the acquiring entity. Cost is allocated to the individual assets acquired or liabilities assumed based on their relative fair values and does not give rise to goodwill.

The allocation of the purchase price was as follows:


Property and equipment	$	524,046
Operating lease right-of-use asset	865,813
Intangible assets	2,187,472
Total assets acquired	3,577,331
Deferred revenue	(244,998)
Operating lease liability - current portion	(185,181)
Operating lease liability - net of current portion	(637,565)
Net purchase consideration	$	2,509,587

Intangible assets in the table above consist of reacquired franchise rights of $1,195,327 amortized over an estimated useful lives of three to four years and customer relationships of $992,145 amortized over an estimated useful life of three years.

Pro Forma Results of Operations (Unaudited)

The following table summarizes selected unaudited pro forma condensed consolidated income statements for the three and nine months ended September 30, 2021 and 2020 as if both the AZ Clinics Purchase and the NC Clinics Purchase in 2021 had been completed on January 1, 2020.

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	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020		2021		2020
Revenues, net	$	16,241,551	$	59,369,874	$	43,972,250
Net income	1,599,294		6,605,749		2,437,978

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the purchases had taken place on January 1, 2020 or of results that may occur in the future. For 2021, this information includes actual data recorded in the Company’s financial statements for the period subsequent to the date of the acquisition.

The Company’s condensed consolidated income statements for the three and nine months ended September 30, 2021 include net revenue and net income of the acquired clinics in Arizona and North Carolina as follows:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2021		2021
Revenues, net	$	938,103	$	1,944,837
Net income	$	163,546	$	477,263

Note 4: Property and Equipment

Property and equipment consist of the following:


	September 30, 2021		December 31, 2020
Office and computer equipment	$	3,243,782	$	2,194,348
Leasehold improvements	12,000,474		8,391,675
Software developed	5,034,989		1,193,007
Finance lease assets	267,252		282,027
	20,546,497		12,061,057
Accumulated depreciation and amortization	(8,417,607)		(6,890,837)
	12,128,890		5,170,220
Construction in progress	1,225,096		3,577,149
Property and equipment, net	$	13,353,986	$	8,747,369

Depreciation expense was $700,953 and $344,324 for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense was $1,506,660 and $954,065 for the nine months ended September 30, 2021 and 2020, respectively.

Amortization expense related to finance lease assets was $21,797 and $18,850 for the three months ended September 30, 2021 and 2020, respectively. Amortization expense related to finance lease assets was $63,506 and $49,024 for the nine months ended September 30, 2021 and 2020, respectively.

Construction in progress at September 30, 2021 and December 31, 2020 principally relates to development and construction costs for the Company-owned or managed clinics.

Note 5: 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.

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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, 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.

The assets and liabilities resulting from the AZ Clinics Purchase (reference Note 3) were recorded at fair values on a non-recurring basis and are considered Level 3 within the fair value hierarchy.

During the nine months ended September 30, 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 nine months ended September 30, 2021. No impairments of long-lived assets were recorded for the nine months ended September 30, 2020.

Note 6: 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.

On April 1, 2021, the Company recognized $2,571,727 and $1,195,245 of reacquired franchise rights and customer relationships, respectively, from the acquisitions (reference Note 3).

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Intangible assets consist of the following:


	As of September 30, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Intangible assets subject to amortization:
Reacquired franchise rights	$	5,818,621	$	(2,841,022)	$	2,977,599
Customer relationships	2,547,220		(1,477,187)		1,070,033
Reacquired development rights	4,406,221		(3,173,829)		1,232,392
	$	12,772,062	$	(7,492,038)	$	5,280,024


	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 relationships	1,351,975		(1,130,800)		221,175
Reacquired development rights	3,053,201		(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 $939,505 and $351,114 for the three months ended September 30, 2021 and 2020, respectively. Amortization expense was $2,704,974 and $1,058,848 for the nine months ended September 30, 2021 and 2020, respectively.

Estimated amortization expense for 2021 and subsequent years is as follows:


	Amount
2021 (remainder)	$	931,145
2022	2,042,537
2023	988,325
2024	468,505
2025	203,738
Thereafter	645,774
Total expected amortization expense	$	5,280,024

Note 7: 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

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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 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 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 September 30, 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 September 30, 2021. The interest rate on funds borrowed under the Revolver as of September 30, 2021 was 2.25%.

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 without prepayment penalty, in accordance with the terms of the PPP loan.

Note 8: 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 condensed 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. Forfeitures are estimated based on historical and forecasted turnover, which is approximately 5%.

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The Company has computed the fair value of all options granted using the Black-Scholes-Merton model during the nine months ended September 30, 2021 and 2020, using the following assumptions:


	Nine Months Ended September 30,
	2021	2020
Expected volatility	56.6% to 56.9%	53% to 58%
Expected dividends	None	None
Expected term (years)	7	7
Risk-free rate	0.97% to 1.15%	0.42% to 1.65%

The information below summarizes the stock options activity for the nine months ended September 30, 2021:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Outstanding at December 31, 2020	835,601	$	6.65	6.6
Granted	47,109	46.12
Exercised	(254,368)	5.82
Cancelled	(12,716)	24.09
Outstanding at September 30, 2021	615,626	$	9.66	6.2
Exercisable at September 30, 2021	398,276	$	5.04	5.2

For the three months ended September 30, 2021 and 2020, stock-based compensation expense for stock options was $179,111 and $122,922, respectively. For the nine months ended September 30, 2021 and 2020, stock-based compensation expense for stock options was $506,159 and $398,582, 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 nine months ended September 30, 2021:


Restricted Stock Awards	Shares	Weighted Average Grant-Date Fair Value per Award
Non-vested at December 31, 2020	45,595	$	13.13
Granted	9,313	57.03
Vested	(26,143)	13.61
Cancelled	—	—
Non-vested at September 30, 2021	28,765	$	26.92

For the three months ended September 30, 2021 and 2020, stock-based compensation expense for restricted stock was $117,739 and $89,312, respectively. For the nine months ended September 30, 2021 and 2020, stock-based compensation expense for restricted stock was $320,749 and $280,124, respectively.

Note 9: Income Taxes

During the three months ended September 30, 2021 and 2020, the Company recorded income tax (benefit) expense of $(614,356) and $75,730, respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded income tax (benefit) expense of $(1,644,496) and $127,551, 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 rates for the three and nine months ended September 30, 2021 were primarily driven by excess tax benefits from exercise of stock options.

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Note 10: Commitments and Contingencies

Leases

The table below summarizes the components of lease expense and income statement location for the three and nine months ended September 30, 2021 and 2020:


	Line Item in the Company’s Condensed Consolidated Income Statements	Three Months Ended September 30, 2021		Three Months Ended September 30, 2020		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Finance lease costs:
Amortization of assets	Depreciation and amortization	$	21,797	$	18,850	$	63,506	$	49,024
Interest on lease liabilities	Other expense, net	2,132		3,066		7,225		8,779
Total finance lease costs		23,929		21,916		70,731		57,803
Operating lease costs	General and administrative expenses	1,201,547		891,603		3,221,145		2,659,569
Total lease costs		$	1,225,476	$	913,519	$	3,291,876	$	2,717,372

Supplemental information and balance sheet location related to leases is as follows:


	September 30, 2021			December 31, 2020
Operating Leases:
Operating lease right-of -use asset	$	15,903,649		$	11,581,435
Operating lease liability - current portion	$	3,874,451		$	2,918,140
Operating lease liability - net of current portion	14,977,426			10,632,672
Total operating lease liability	$	18,851,877		$	13,550,812
Finance Leases:
Property and equipment, at cost	$	267,252		$	282,027
Less accumulated amortization	(126,140)			(92,549)
Property and equipment, net	$	141,112		$	189,478
Finance lease liability - current portion	64,944			70,507
Finance lease liability - net of current portion	93,887			132,469
Total finance lease liabilities	$	158,831		$	202,976
Weighted average remaining lease term (in years):
Operating leases	5.3			4.7
Finance lease	3.6			4.1
Weighted average discount rate:
Operating leases	7.7		%	8.5		%
Finance leases	5.1		%	5.3		%

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Supplemental cash flow information related to leases is as follows:


	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases	$	3,069,797	$	2,517,613
Operating cash flows from finance leases	7,225		8,779
Financing cash flows from finance leases	59,285		40,168

Non-cash transactions: ROU assets obtained in exchange for lease liabilities
Operating lease	$	6,232,875	$	919,607
Finance lease	15,140		201,423

Maturities of lease liabilities as of September 30, 2021 are as follows:


	Operating Leases		Finance Lease
2021 (remainder)	$	1,242,724	$	22,824
2022	5,149,264		54,371
2023	4,491,076		27,600
2024	3,915,068		27,600
2025	3,470,504		27,600
Thereafter	4,445,546		11,500
Total lease payments	$	22,714,182	$	171,495
Less: Imputed interest	(3,862,305)		(12,664)
Total lease obligations	18,851,877		158,831
Less: Current obligations	(3,874,451)		(64,944)
Long-term lease obligation	$	14,977,426	$	93,887

During the third 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 $1.4 million. These leases are expected to commence during the fourth quarter of 2021 and the first quarter of 2022, 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. Such matters are subject to many uncertainties and to outcomes of which the financial impacts are not predictable with assurance and that may not be known for extended periods of time. A liability is established once management determines a loss is probable and an amount that can be reasonably estimated.

Note 11: 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 September 30, 2021, the Company operated or managed 83 clinics under this segment. The Franchise Operations segment is composed of the operating activities of the franchise business unit. As of September 30, 2021, the franchise system consisted of 583 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

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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 business segments.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Revenues:	2021		2020		2021		2020
Corporate clinics	$	11,634,009	$	8,403,844	$	32,537,942	$	22,554,946
Franchise operations	9,357,612		7,006,709		26,220,441		19,089,886
Total revenues	$	20,991,621	$	15,410,553	$	58,758,383	$	41,644,832

Depreciation and amortization:
Corporate clinics	1,538,251		636,734		3,879,786		1,828,643
Franchise operations	165,475		342		166,159		1,027
Corporate administration	(41,471)		77,212		229,195		232,267
Total depreciation and amortization	$	1,662,255	$	714,288	$	4,275,140	$	2,061,937

Segment operating income:
Corporate clinics	$	1,241,081	$	1,313,717	$	4,415,793	$	2,662,643
Franchise operations	4,156,829		3,404,723		11,887,071		8,778,537
Total segment operating income	$	5,397,910	$	4,718,440	$	16,302,864	$	11,441,180

Reconciliation of total segment operating income to consolidated earnings before income taxes:

Total segment operating income	$	5,397,910	$	4,718,440	$	16,302,864	$	11,441,180
Unallocated corporate	(4,059,032)		(3,013,084)		(10,957,559)		(8,723,890)
Consolidated income from operations	1,338,878		1,705,356		5,345,305		2,717,290
Other expense, net	16,139		25,667		54,050		55,248
Income before income tax benefit	$	1,322,739	$	1,679,689	$	5,291,255	$	2,662,042


Segment assets:	September 30, 2021		December 31, 2020
Corporate clinics	$	36,778,871	$	24,928,311
Franchise operations	12,257,569		9,744,375
Total segment assets	49,036,440		34,672,686

			(As Revised)
Unallocated cash and cash equivalents and restricted cash	19,992,282		20,819,629
Unallocated property and equipment	913,988		1,063,815
Other unallocated assets	11,036,188		9,257,153
Total assets	$	80,978,898	$	65,813,283

“Unallocated cash and cash equivalents and restricted cash” relates 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.

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Note 12: Other Comments

COVID-19 Update

The Company's business remained healthy and resilient during the first nine months of 2021, despite the ongoing pandemic and the resurgence in COVID-19 cases in the third quarter of 2021. While the business continued to show strong year on year growth in revenues, and the Company expects this momentum to continue for the remainder of 2021, the COVID-19 outbreak continues to be fluid, and the extent to which the pandemic will impact the Company's business remains 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 the remainder of 2021. Public health officials and medical professionals have warned that a resurgence of COVID-19 cases may continue, particularly if vaccination rates do not increase or if additional potent variants emerge, which may impact the general economic recovery. 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 13: Subsequent Events

On November 1, 2021, the Company entered into an Asset and Franchise Purchase Agreement under which the Company repurchased from the seller four operating franchises in North Carolina. The Company operates the franchises as company-owned

clinics. The total purchase price for the transaction was $1,284,212, less $46,681 of net deferred revenue resulting in total purchase consideration of $1,237,531. The purchase price is subject to post-closing price adjustments.

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

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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;

•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 not be able to identify, recruit and train enough qualified chiropractors and other personnel to staff our clinics, particularly in light of the current nationwide labor shortage, which might limit our ability to implement our growth strategy;

•short-selling strategies and negative opinions posted on the internet may drive down the market price of our common stock and could result in class action lawsuits;

•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;

•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;

•state administrative actions and rulings regarding the corporate practice of chiropractic and federal and state laws and regulations regarding 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

• legislation, regulations, as well as new medical procedures and techniques, could reduce or eliminate our competitive advantages.

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Overview

Our principal business is to develop, own, operate, support and manage chiropractic clinics through direct ownership,

management arrangements, franchising and the sale of regional developer rights throughout the United States.

We seek to be the leading provider of chiropractic care in the markets we serve and to become the most recognized brand in our industry through the rapid and focused expansion of chiropractic clinics in key markets throughout North America and potentially abroad.

Key Performance Measures. We receive monthly performance reports from our system and our clinics which include key performance indicators per clinic, including gross sales, comparable same-store sales growth, or “Comp Sales,” number of new patients, conversion percentage, and member attrition. In addition, we review monthly reporting related to system-wide sales, clinic openings, clinic license sales, adjusted EBITDA, and various earnings metrics in the aggregate and per clinic. We believe these indicators provide us with useful data with which to measure our performance and to measure our franchisees’ and clinics’ performance. Comp Sales include the sales from both company-owned or managed clinics and franchised clinics that in each case have been open at least 13 full months and exclude any clinics that have closed. System-wide sales include sales at all clinics, whether operated by us or by franchisees. While franchised sales are not recorded as revenues by us, management believes the information is important in understanding the overall brand’s financial performance, because these sales are the basis on which we calculate and record royalty fees and are indicative of the financial health of the franchisee base. Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, and (gain) loss on disposition or impairment. There was no bargain purchase gain for the nine months ended September 30, 2021 and 2020.

Key Clinic Development Trends. As of September 30, 2021, we and our franchisees operated or managed 666 clinics, of which 583 were operated or managed by franchisees and 83 were operated as company-owned or managed clinics. Of the 83 company-owned or managed clinics, 34 were constructed and developed by us, and 49 were acquired from franchisees.

Our current strategy is to grow through the sale and development of additional franchises, build upon our regional developer strategy, and continue to expand our corporate clinic portfolio within clustered locations. The number of franchise licenses sold for the year ended December 31, 2020 was 121, compared with 126 and 99 licenses for the years ended December 31, 2019 and 2018, respectively. We ended the first nine months of 2021 with 21 regional developers who were responsible for 82% of the 132 licenses sold during the period. This strong result reflects the power of the regional developer program to accelerate the number of clinics sold, and eventually opened, across the country.

In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned or managed clinics through the accelerated development of greenfield clinics and the further selective acquisition of existing franchised clinics. We will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other clinics and additional suitability factors. During the nine months ended September 30, 2021, we opened eleven greenfield clinics, and as of September 30, 2021, we executed 18 leases for future greenfield clinic locations and had 19 additional letters-of-intent in place for further greenfield expansion.

We believe that The Joint has a sound concept, which has been further validated through its continuing resiliency during the pandemic and will benefit from the fundamental changes taking place in the manner in which Americans access chiropractic care and their growing interest in seeking effective, affordable natural solutions for general wellness. These trends join with the preference we have seen among chiropractic doctors to reject the insurance-based model to produce a combination that benefits the consumer and the service provider alike. We believe that these forces create an important opportunity to accelerate the growth of our network.

COVID-19 Update

The COVID-19 pandemic and related governmental control measures severely disrupted our business during the second quarter of 2020. During this period, we experienced a significant reduction in patient traffic and spending trends. With the easing to varying degrees of restrictive public health orders in May 2020, patient traffic recovered substantially throughout the year following a low point in April 2020. For the remainder of 2020, steadily improving key metrics, including gross sales, Comp Sales, patient traffic, and new patient conversion rate, drove our 2020 full year operating income to an all-time high.

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The U.S. economy continued on a path to recovery in the first half of 2021 with millions of Americans receiving the COVID-19 vaccine and the easing of government-imposed restrictions. During the third quarter of 2021, however, the U.S. saw a resurgence in COVID-19 cases, particularly as a result of a new variant of COVID-19. As mentioned in our results of operations, our business has remained healthy and resilient despite the ongoing pandemic.

While our business continues to show strong year on year growth in revenues, and we expect this momentum to continue for the remainder of 2021, the COVID-19 outbreak continues to be fluid, and the extent to which the pandemic will impact our business remains uncertain. Our 2020 revenue and earnings were negatively impacted compared to our pre-COVID-19 pandemic expectations, and the pandemic may have a negative impact on our revenue and net income in the remainder of 2021. Public health officials and medical professionals have warned that the resurgence of COVID-19 cases may continue, particularly if vaccination rates do not increase or if additional potent variants emerge, which may impact the general economic recovery. 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 our financial position and results of operations. In addition, the impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including new or more restrictive stay-at-home orders and other new or revised public health requirements recommended or imposed by federal, state and local authorities. 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.

In spite of these challenges, and other factors, which may individually or in combination slow the recovery from the COVID-19 pandemic-induced disruptions, we believe we are well-positioned to operate effectively through the present environment, as we continue to conduct business as usual with modifications to employee travel and employee work locations, and with our new sanitary and safety measures in our clinics. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and patients.

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Other Significant Events and/or Recent Developments

For the three months ended September 30, 2021:

•Comp Sales of clinics that have been open for at least 13 full months increased 27%.

•Comp Sales for mature clinics open 48 months or more increased 21%.

•System-wide sales for all clinics open for any amount of time grew 37%.

For the nine months ended September 30, 2021:

•System-wide sales for all clinics open for any amount of time grew 42%.

•76 new franchised clinics and eleven company-owned or managed greenfields were opened, for a total of 666 clinics.

On January 1, 2021, we entered into an agreement under which we repurchased the right to develop franchises in various counties in Georgia. The total consideration for the transaction was $1,388,700. We carried a deferred revenue balance associated with this transaction of $35,679, representing the fee collected upon the execution of the regional developer agreement. We 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. We 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.

On March 4, 2021, we 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.

On April 1, 2021, we entered into an Asset and Franchise Purchase Agreement under which we repurchased from the seller two operating franchises in Phoenix, Arizona. We operate 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, we entered into an Asset and Franchise Purchase Agreement under which we repurchased from the seller six operating franchises in North Carolina. We operate the franchises as company-managed clinics. The total purchase price for the transaction was $2,568,028, less $58,441 of net deferred revenue, resulting in total purchase consideration of $2,509,587

On November 1, 2021, we entered into an Asset and Franchise Purchase Agreement under which we repurchased from the seller four operating franchises in North Carolina. We operate the franchises as company-owned clinics. The total purchase price for the transaction was $1,284,212, less $46,681 of net deferred revenue resulting in total purchase consideration of $1,237,531. The purchase price is subject to post-closing price adjustments.

Effective as of December 31, 2021, we will be a large accelerated filer and will no longer qualify as a “smaller reporting company,” as defined in the Exchange Act. This is due to our public float (the market value of our common shares held by non-affiliates) being greater than $700 million as of June 30, 2021. Compliance with the “large accelerated filer” filing requirements will begin with our Form 10-K for the fiscal year ending December 31, 2021, which will now include an attestation by our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002. Compliance with increased disclosure obligations due to the change in our smaller reporting company status will begin with our quarterly report for the three-month period ending March 31, 2022. These additional disclosure obligations will include, but not be limited to, fuller and more detailed disclosures regarding executive compensation and three years (instead of two years) of audited income, cash flow and stockholders’ equity statements. Compliance with additional filing and disclosure requirements will increase our costs and demands on management.

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2021 Full Year Outlook

•We expect our revenues to be between $80 million and $81 million, compared to $58.7 million in 2020.

•We expect our adjusted EBITDA to be between $13 million and $14 million, compared to $9.1 million in 2020.

•We expect franchised clinic openings to be between 105 and 115, compared to 70 in 2020.

•We expect Company-owned or managed clinics, through a combination of both greenfields and buybacks, to increase by between 25 and 35, compared to 4 in 2020.

We believe we are well positioned for the remainder of 2021 due to, among other things, our resilient business model, planned new clinic openings and expansion of company-owned or managed clinics, and current positive economic trends. However, the long-term impact of COVID-19 on our operational and financial performance will depend on certain developments including the duration, spread, severity, and trajectory of the virus. These potential developments are uncertain and cannot be predicted and as such, the extent to which COVID-19 will impact our business, operations, financial condition and results of operations over the long term is unknown.

Factors Affecting Our Performance

Our operating results may fluctuate significantly as a result of a variety of factors, including the timing of new clinic sales, openings, and closures and related expenses, the markets in which our clinics operate, general economic conditions, consumer confidence in the economy, consumer preferences, competitive factors, and disease epidemics and other health-related concerns, such as the current COVID-19 outbreak.

Significant Accounting Polices and Estimates

There were no changes in our significant accounting policies and estimates during the nine months ended September 30, 2021 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Results of Operations

The following discussion and analysis of our financial results encompasses our consolidated results and results of our two business segments: Corporate Clinics and Franchise Operations.

Total Revenues - three months ended September 30, 2021 compared with three months ended September 30, 2020

Components of revenues were as follows:


	Three Months Ended September 30,
Revenues	2021		2020		Change from Prior Year		Percent Change from Prior Year
Revenues from company-owned or managed clinics	$	11,634,009	$	8,403,844	$	3,230,165	38.4	%
Royalty fees	5,714,637		4,170,692		1,543,945		37.0	%
Franchise fees	648,598		519,131		129,467		24.9	%
Advertising fund revenue	1,627,693		1,187,666		440,027		37.0	%
IT related income and software fees	840,969		688,046		152,923		22.2	%
Regional developer fees	209,651		222,908		(13,257)		(5.9)	%
Other revenues	316,064		218,266		97,798		44.8	%
Total revenues	$	20,991,621	$	15,410,553	$	5,581,068	36.2	%

Consolidated Results

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•Total revenues increased by $5.6 million, primarily due to the continued expansion and revenue growth of our franchise base and the continued revenue growth and expansion of our corporate-owned or managed clinics portfolio.

Corporate Clinics

•Revenues from company-owned or managed clinics increased, primarily due to improved same-store sales growth, as well as due to the expansion of our corporate-owned or managed clinics portfolio.

Franchise Operations

•Royalty fees and advertising fund revenue increased due to an increase in the number of franchised clinics in operation during the current period, along with continued sales growth in existing franchised clinics. As of September 30, 2021 and 2020, there were 583 and 497 franchised clinics in operation, respectively.

•Franchise fees increased due to an increase in executed franchise agreements, as these fees are recognized ratably over the term of the respective franchise agreement.

•Software fee revenue increased due to an increase in our franchised clinic base and the related revenue recognition over the term of the franchise agreement as described above.

•Other revenues primarily consist of merchant income associated with credit card transactions.

Total Revenues - nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Components of revenues were as follows:


	Nine Months Ended September 30,
Revenues	2021		2020		Change from Prior Year		Percent Change from Prior Year
Revenues from company-owned or managed clinics	$	32,537,942	$	22,554,946	$	9,982,996	44.3	%
Royalty fees	15,816,500		11,157,575		4,658,925		41.8	%
Franchise fees	1,967,680		1,555,846		411,834		26.5	%
Advertising fund revenue	4,521,342		3,176,080		1,345,262		42.4	%
IT related income and software fees	2,387,543		1,964,968		422,575		21.5	%
Regional developer fees	642,041		643,974		(1,933)		(0.3)	%
Other revenues	885,335		591,443		293,892		49.7	%
Total revenues	$	58,758,383	$	41,644,832	$	17,113,551	41.1	%

Consolidated Results

•Total revenues increased by $17.1 million, primarily due to the continued expansion and revenue growth of our franchise base, continued same-store sales growth and expansion of our corporate-owned or managed clinics portfolio, and the negative impact of the pandemic during the second quarter of 2020 relative to the same quarter of 2021, which decline is reflected in total revenues for the nine months ended September 30, 2020.

Corporate Clinics

•Revenues from company-owned or managed clinics increased, primarily due to improved same-store sales growth, as well as due to the expansion of our corporate-owned or managed clinics portfolio and the negative impact of the same-store sale decline due to the pandemic in the second quarter of 2020 relative to the same quarter of 2021, which decline is included in the revenues for company-owned or managed clinics for the nine months ended September 30, 2020.

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Franchise Operations

•Royalty fees and advertising fund revenue increased due to an increase in the number of franchised clinics in operation during the current period along with continued sales growth in existing franchised clinics and the negative impact of the same-store sale decline due to the pandemic in the second quarter of 2020 relative to the same quarter of 2021, which decline is included in the revenues for franchised clinics for the nine months ended September 30, 2020. As of September 30, 2021 and 2020, there were 583 and 497 franchised clinics in operation, respectively.

•Franchise fees increased due to an increase in executed franchise agreements, as these fees are recognized ratably over the term of the respective franchise agreement.

•Software fees revenue increased due to an increase in our franchised clinic base and the related revenue recognition over the term of the franchise agreement as described above.

•Other revenues primarily consist of merchant income associated with credit card transactions.


Cost of Revenues	2021		2020		Change from Prior Year		Percent Change from Prior Year

Three Months Ended September 30,	$	2,300,122	$	1,712,246	$	587,876	34.3	%
Nine Months Ended September 30,	6,103,976		4,566,042		1,537,934		33.7	%

For the three months ended September 30, 2021, as compared with the three months ended September 30, 2020, the total cost of revenues increased due to an increase in regional developer royalties and sales commissions of $0.3 million and due to an increase in website hosting cost of $0.3 million. For the nine months ended September 30, 2021, as compared with the nine months ended September 30, 2020, the total cost of revenues increased due to an increase in regional developer royalties and sales commissions of $1.0 million and due to an increase in website hosting cost of $0.5 million.


Selling and Marketing Expenses	2021		2020		Change from Prior Year		Percent Change from Prior Year

Three Months Ended September 30,	$	2,881,575	$	1,845,601	$	1,035,974	56.1	%
Nine Months Ended September 30,	8,503,617		5,684,556		2,819,061		49.6	%

Selling and marketing expenses increased for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020, driven by an increase in advertising fund expenditures from a larger franchise base, the timing of the national marketing fund spend, and an increase in local marketing expenditures by the company-owned or managed clinics.


Depreciation and Amortization Expenses	2021		2020		Change from Prior Year		Percent Change from Prior Year

Three Months Ended September 30,	$	1,662,255	$	714,288	$	947,967	132.7	%
Nine Months Ended September 30,	4,275,140		2,061,937		2,213,203		107.3	%

Depreciation and amortization expenses increased for the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020, primarily due to: (i) the development rights reacquired in December 2020 and January 2021 for a total net consideration of $2.4 million, which are amortized over the remaining original contract periods of approximately 13 to 25 months, (ii) amortization of intangibles related to the 2021 clinic acquisitions, (iii) depreciation expenses associated with the expansion of our corporate-owned or managed clinics portfolio in 2020 and 2021, and (iv) depreciation expenses associated with the new IT platform used by clinics for operations and for the management of operations, which went live in July 2021.

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General and Administrative Expenses	2021		2020		Change from Prior Year		Percent Change from Prior Year

Three Months Ended September 30,	$	12,812,331	$	9,433,062	$	3,379,269	35.8	%
Nine Months Ended September 30,	34,513,378		26,668,420		7,844,958		29.4	%

General and administrative expenses increased during the three and nine months ended September 30, 2021 compared to the three months and nine months ended September 30, 2020, primarily due to an increase in payroll, professional fees, and IT expenses to support continued clinic count and revenue growth. As a percentage of revenue, general and administrative expenses during the nine months ended September 30, 2021 and 2020 were 59% and 64%, respectively, reflecting improved leverage in the operating model, which is not expected to continue in following quarters, as five greenfields were opened at the end of September 2021 and more are anticipated to be opened in the fourth quarter of 2021.

Income from Operations - three months ended September 30, 2021 compared with three months ended September 30, 2020


Three Months Ended September 30,	2021		2020		Change from Prior Year		Percent Change from Prior Year

Income from Operations	$	1,338,878	$	1,705,356	$	(366,478)	(21.5)	%

Consolidated Results

Consolidated income from operations decreased by $0.4 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to the increase in operating expenses in the corporate clinics and unallocated corporate segments discussed below, which more than offset the increase in revenue.

Corporate Clinics

Our corporate clinics segment had income from operations of $1.2 million for the three months ended September 30, 2021, a decrease of $0.1 million compared to income from operations of $1.3 million for the prior year period. The decrease was primarily due to:

•An increase in revenues of $3.2 million from company-owned or managed clinics; more than offset by

•A $3.3 million increase in operating expenses primarily driven by: (i) an increase in payroll-related expenses due to a higher head count to support the expansion of our corporate clinic portfolio, (ii) an increase in depreciation and amortization expense related to the reacquired development rights, 2021 acquisitions, and new IT platform discussed above, and (iii) an increase in selling and marketing expenses due to increased local marketing expenditures by the company-owned or managed clinics.

Franchise Operations

Our franchise operations segment had income from operations of $4.2 million for the three months ended September 30, 2021, an increase of $0.8 million, compared to income from operations of $3.4 million for the prior year period. This increase was primarily due to:

•An increase of $2.4 million in total revenues; partially offset by

•An increase of $1.6 million in total expenses due to: (i) an increase in cost of revenue due to an increase in regional developer royalties and sales commissions and website hosting, and (ii) an increase of $1.0 million in operating expenses, primarily due to an increase in selling and marketing expenses resulting from a larger franchise base, as well as due to an increase in payroll-related expenses due to a higher head count.

Unallocated Corporate

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Unallocated corporate expenses for the three months ended September 30, 2021 increased by $1.0 million compared to the prior year period, primarily due to higher payroll, professional fees, and IT expenses to support continued clinic count and revenue growth in both operating segments.

Income from Operations - nine months ended September 30, 2021 compared with nine months ended September 30, 2020


Nine Months Ended September 30,	2021	2020	Change from Prior Year		Percent Change from Prior Year

Income from Operations	5,345,305	2,717,290	$	2,628,015	96.7	%

Consolidated Results

Consolidated income from operations increased by $2.6 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to the improved operating income in both the corporate clinics and the franchise operations segments, partially offset by increased expenses in the unallocated corporate segment discussed below. In addition, consolidated income from operations for the nine months ended September 30, 2020 included the negative impact of the same-store sale decline during the second quarter of 2020 due to the pandemic as discussed above, which contributed to the amount of the increase of consolidated income from operations for the nine months ended September 30, 2021 relative to the nine months ended September 30, 2020.

Corporate Clinics

Our corporate clinics segment had income from operations of $4.4 million for the nine months ended September 30, 2021, an increase of $1.8 million compared to income from operations of $2.7 million for the prior year period. The increase was primarily due to:

•An increase in revenues of $10.0 million from company-owned or managed clinics; partially offset by

•A $8.2 million increase in operating expenses primarily driven by: (i) an increase in payroll-related expenses due to a higher head count to support the expansion of our corporate clinics portfolio, (ii) an increase in depreciation and amortization expense related to the reacquired development rights, 2021 acquisitions, expansion of our corporate-owned or managed clinics portfolio in 2020 and 2021, and new software discussed above, (iii) an increase in selling and marketing expenses due to increased local marketing expenditures by the company-owned or managed clinics, and (iv) an increase in overhead expenses associated with the expansion of our corporate-owned or managed clinics portfolio in 2021.

Franchise Operations

Our franchise operations segment had income from operations of $11.9 million for the nine months ended September 30, 2021, an increase of $3.1 million, compared to income from operations of $8.8 million for the prior year period. This increase was primarily due to:

•An increase of $7.1 million in total revenues; partially offset by

•An increase of $4.0 million in total expenses due to: (i) an increase in cost of revenue due to an increase in regional developer royalties and sales commissions and website hosting, and (ii) an increase of $2.5 million in operating expenses, primarily due to an increase in selling and marketing expenses resulting from a larger franchise base, as well as due to an increase in payroll-related expenses due to a higher head count.

Unallocated Corporate

Unallocated corporate expenses for the nine months ended September 30, 2021 increased by $2.2 million compared to the prior year period, primarily due to higher payroll and overhead expenses, as well as professional fees to support continued clinic count and revenue growth in both operating segments.

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Non-GAAP Financial Measures

The table below reconciles net income to Adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020.


(unaudited)	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Non-GAAP Financial Data:
Net income	$	1,937,095	$	1,603,959	$	6,935,751	$	2,534,491
Net interest expense	16,139		25,668		54,050		55,248
Depreciation and amortization expense	1,662,255		714,288		4,275,140		2,061,937
Income tax (benefit) expense	(614,356)		75,730		(1,644,496)		127,551
EBITDA	3,001,133		2,419,645		9,620,445		4,779,227
Stock compensation expense	296,850		212,234		826,908		678,706
Acquisition related expenses	3,000		—		48,346		—
(Gain) loss on disposition or impairment	(3,540)		—		16,967		(53,413)
Adjusted EBITDA	$	3,297,443	$	2,631,879	$	10,512,666	$	5,404,520

Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, and (gain) loss on disposition or impairment. There was no bargain purchase gain for the three and nine months ended September 30, 2021 and 2020. We have provided Adjusted EBITDA because it is a non-GAAP measure of financial performance commonly used for comparing companies in our industry. You should not consider Adjusted EBITDA as a substitute for operating profit as an indicator of our operating performance or as an alternative to cash flows from operating activities as a measure of liquidity. We may calculate Adjusted EBITDA differently from other companies.

We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other outpatient medical clinics, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same manner.

Liquidity and Capital Resources

As of September 30, 2021, we had unrestricted cash and short-term bank deposits of $19.5 million and available capacity of $5.5 million under the development line of credit. While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our development line of credit will be sufficient to fund our anticipated operating and investment needs for at least the next twelve months.

While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created uncertainty as to general economic conditions for the remainder of 2021 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. For the remainder of 2021, we expect to use or redeploy our cash resources to support our business within the context of prevailing market conditions, which, given the ongoing uncertainty surrounding the COVID-19 pandemic, could rapidly and materially deteriorate or otherwise change. Our long-term capital requirements, primarily for acquisitions and other corporate initiatives, could be dependent on our ability to access additional funds through the debt and/or equity markets. From time to time, we consider and evaluate transactions related to our portfolio and capital structure, including debt financings, equity issuances, purchases and sales of assets, and other transactions. Due to the ongoing COVID-19 pandemic, the levels of our cash flows from operations for 2021 may be impacted. There can be no assurance that we will be able to generate sufficient cash flows or obtain the capital necessary to meet our short and long-term capital requirements.

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Analysis of Cash Flows

Net cash provided by operating activities increased by $5.5 million to $12.5 million for the nine months ended September 30, 2021, compared to $6.9 million for the nine months ended September 30, 2020. The increase was primarily attributable to an increase in revenue over the prior year period, which was partially offset by an increase in operating expenses over the prior year period.

Net cash used in investing activities was $11.3 million and $2.2 million for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, this included acquisitions of $4.5 million, purchases of property and equipment of $5.4 million, and reacquisition and termination of regional developer rights for $1.4 million. For the nine months ended September 30, 2020, this included purchases of property and equipment of $2.3 million.

Net cash used in financing activities for the nine months ended September 30, 2021 was $2.0 million, compared with net cash provided by financing activities of $5.1 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, this included repayment of the PPP loan of $2.7 million and purchases of treasury stock for $0.7 million, which were partially offset by the proceeds from the exercise of stock options of $1.5 million. For the nine months ended September 30, 2020, this included proceeds from: (i) the credit facility, net of related fees of $1.9 million, (ii) the loan under the CARES Act Paycheck Protection Program of $2.7 million, and (iii) the exercise of stock options of $0.5 million.

Recent Accounting Pronouncements

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.

Off-Balance Sheet Arrangements

During the nine months ended September 30, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving such objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our management concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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In the normal course of business, we are a party to litigation from time to time.

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ITEM 1A. RISK FACTORS

We documented our risk factors in Item 1A of Part I of our Form 10-K for the year ended December 31, 2020. Other than the updates identified below, which should be read in conjunction with the risk factors as they appear in such Form 10-K, there have been no material changes to our risk factors since the filing of that report.

The following risks related to our business have been added, updated or replaced:

A new risk under the category of “RISKS RELATED TO OPERATING OUR BUSINESS” has been added as follows:

The nationwide labor shortage has negatively impacted our ability to recruit chiropractors and other qualified personnel.

The current nationwide labor shortage has negatively impacted our ability and the ability of our franchisees to recruit and retain qualified chiropractors, wellness coordinators and other qualified personnel. This shortage may limit our ability to open new clinics, require us to enhance wages and benefits, or reduce clinic operating hours, all of which could reduce our net revenues.

The following risk under “STATE REGULATION ON THE CORPORATE PRACTICE OF CHIROPRACTIC” has been revised as follows:

The disclosures in the risk factor under the heading “Our management services agreements, according to which we provide non-clinical services to affiliated PCs, could be challenged by a state or chiropractor under laws regulating the practice of chiropractic. Some state chiropractic boards have made inquiries concerning our business model or have proposed or adopted changes to their rules that could be interpreted to pose a threat to our business model” have been updated below with regard to the State of Washington:

In February 2020, the State of Washington Chiropractic Quality Assurance Commission delivered notices that it was investigating complaints made against three chiropractors who own clinics, or are (or were) employed by clinics, in Washington. These clinics receive management services from our franchisees that are not owned by chiropractors. The notices contained allegations of fee-splitting, specifically targeting a provision in our Franchise Disclosure Document providing for the payment of royalty fees based on revenue derived from the furnishing of chiropractic care. The notices appeared to question our business model. The Commission posed a number of questions to the chiropractors and requested documentation describing the fee structure and related matters. All three chiropractors responded to the Commission, and the Commission has since closed the investigations with respect to two of the chiropractors, finding that the evidence did not support any claim of violation. The third investigation remains outstanding.

The following risks under “RISKS RELATED TO OTHER LEGAL AND REGULATORY MATTERS” have been revised as follows:

The risk factor under the heading “Expected new federal regulations under the Biden administration expanding the meaning of “joint employer” and evolving state laws increase our potential liability for employment law violations by our franchisees and the likelihood that we may be required to participate in collective bargaining with our franchisees’ employees” has been updated and replaced in its entirety by the following:

Background

As a franchisor, we could be liable for certain employment law and other labor-related claims against our franchisees if we are found to be a joint employer of our franchisees’ employees.

A July 2014 decision by the United States National Labor Relations Board (NLRB) held that McDonald’s Corporation could be held liable as a “joint employer” for labor and wage violations by its franchisees under the Fair Labor Standards Act (FLSA). After this decision, the NLRB issued a number of complaints against McDonald’s Corporation in connection with these violations, although these complaints were ultimately settled without any admission of liability by McDonald’s. Additionally, an August 2015 decision by the NLRB held that Browning-Ferris Industries was a “joint employer” for purposes of collective bargaining under the National Labor Relations Act (NLRA) and, thus, obligated to negotiate with the Teamsters union over workers supplied by a contract staffing firm within one of its recycling plants.

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In an effort to effectively reverse the McDonald’s Corporation decision, in 2020, the Department of Labor (DOL) issued a final rule narrowing the meaning of “joint employer” in the FLSA. Much of the new rule relating to “joint employer” status was then vacated by the United States District Court for the Southern District of New York in a lawsuit brought by various state attorneys general, which decision was appealed by the DOL. Similarly, in an effort to effectively reverse the Browning-Ferris decision, in 2020, the NLRB issued a final rule, narrowing the meaning of “joint employer” in the collective bargaining context under the NLRA.

Current Status

The Protecting the Right to Organize (PRO) Act, supported by the Biden administration, was passed by the U.S. House of Representatives in March 2021 and will now move to the Senate for consideration. The PRO Act, among other things, seeks to codify for purposes of the NLRA the Browning-Ferris expansive definition of “joint employer.” The PRO Act requires the NLRB and courts to consider not only an entity’s direct control, but to also consider an entity’s indirect control, over an individual’s terms and conditions of employment, including any reserved authority to control such terms and conditions, which standing alone, can be sufficient to make a finding of a “joint employer” relationship.

The PRO Act's revision of the joint employer rule could subject franchisors to potential liability under the NLRA for actions taken by their franchisees, depending on the degree of control exercised by the franchisor over the franchisee’s employees. Under the NLRA, a joint employer may be required to bargain with a union representing jointly employed workers, may be subject to joint liability for unfair labor practices committed by the other employer and may be subject to labor picketing that otherwise would be unlawful.

In addition, effective on September 28, 2021, the DOL withdrew the joint employer final rules under the Fair Labor Standards Act (FLSA), which had narrowed the definition of “joint employer” under the FLSA. Key provisions of the joint employer final rules had already been vacated by the United States District Court for the Southern District of New York in a lawsuit brought by various state attorneys general. The DOL has not proposed to replace the withdrawn rule with any new guidance, reverting to a legal landscape which includes a more expansive definition of “joint employer.” Under a more expansive definition, a franchisor could be jointly liable with its franchisee for minimum wages and overtime pay violations, depending on the extent of control and supervision the franchisor is able to exercise over the franchisee’s employees.

In September 2021, the Service Employees International Union (SEIU) filed a lawsuit seeking to strike down the NLRB final rule, which narrowed the meaning of “joint employer” in the collective bargaining context under the NLRA.

In addition to efforts to expand the definition of “joint employer” through the withdrawal of the FLSA rule and the SEIU lawsuit with respect to the NLRB rule, it is expected that the Equal Opportunity Employment Commission (EEOC), which enforces anti-discrimination laws, will issue rules which include an expansive definition of “joint employer.”

The following disclosure remains materially unchanged from Item 1A of Part I of our Form 10-K for the year ended December 31, 2020:

California adopted Assembly Bill 5, or AB-5, which took effect on January 1, 2020. This legislation codified the standard established in a California Supreme Court case (Dynamex Operations West v. Superior Court) for determining whether workers should be classified as employees or independent contractors, with a strict test that put the burden of proof on employers to establish that workers are not employees. The law was aimed at the so-called “gig economy” where workers in many industries are treated as independent contractors, rather than employees, and lack the protections of wage and hour laws, although California voters recently approved a ballot initiative, now under court review, to exclude app-based drivers from the application of AB-5. AB-5 is not a franchise-specific law and does not address joint employer liability; however, a significant concern exists in the franchise industry that an expansive interpretation of AB-5 or similar law could be used to hold franchisors jointly liable for the labor law violations of its franchisees. Courts addressing this issue have come to differing conclusions, and while it remains uncertain as to how the joint employer issue will finally be resolved in California, potential new federal laws or regulations may ultimately be controlling on this issue.

AB-5 has been the subject of widespread national discussion. Other states are considering similar approaches. Some states have adopted similar laws in narrower contexts, and a handful of other states have adopted similar laws for broader purposes. All of these laws or proposed laws may similarly raise concerns with respect to the expansion of joint liability to the franchise industry. Furthermore, there have been private lawsuits in which parties have alleged that a franchisor and its franchisee

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“jointly employ” the franchisee’s staff, that the franchisor is responsible for the franchisees’ staff (under theories of apparent agency, ostensible agency, or actual agency), or otherwise.

Evolving labor and employment laws, rules and regulations, and theories of liability could result in expensive litigation and potential claims against us as a franchisor for labor and employment-related and other liabilities that have historically been borne by franchisees. This could negatively impact the franchise business model, which could materially and adversely affect our business, financial condition and results of operations.

The following risk under “RISKS RELATED TO INFORMATION TECHNOLOGY, CYBERSECURITY AND DATA PRIVACY” has been revised as follows:

The risk factor under the heading “If our security systems are breached, 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” has been updated and replaced in its entirety by the follows:

Techniques used to gain unauthorized access to corporate data systems are constantly evolving, and there is a potential for increased cyber-attacks and security challenges as our employees and employees of our vendors and franchisees work remotely from non-corporate managed networks during the ongoing COVID-19 pandemic and beyond. We may be unable to anticipate or prevent unauthorized access to data pertaining to our patients, including credit card and debit card information and other personally identifiable information. Our systems, which are supported by our own systems and those of third-party vendors, are vulnerable to computer malware, trojans, viruses, worms, break-ins, phishing attacks, denial-of-service attacks, attempts to access our servers in an unauthorized manner, or other attacks on and disruptions of our and third-party vendor computer systems, any of which could lead to system interruptions, delays, or shutdowns, causing loss of critical data or the unauthorized access to personally identifiable information. If an actual or perceived breach of security occurs on our systems or a vendor’s systems, we may face civil liability and reputational damage, either of which would negatively affect our ability to attract and retain patients. We also would be required to expend significant resources to mitigate the breach of security and to address related matters.

We may not be able to effectively control the unauthorized actions of third parties who may have access to the patient data we collect. Any failure, or perceived failure, by us to maintain the security of data relating to our patients and employees, and to comply with our posted privacy policy, laws and regulations, rules of self-regulatory organizations, industry standards and contractual provisions to which we may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others, all of which could result in litigation and financial losses, and could potentially cause us to lose patients, revenue and employees.

A new risk under the category of “GENERAL RISK FACTORS” has been added as follows:

Short-selling strategies and negative opinions posted on the internet may drive down the market price of our common stock and could result in class action lawsuits.

Short selling occurs when an investor borrows a security and sells it on the open market, with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares. Because it is in the short seller's best interests for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding an issuer, its business prospects, and similar matters calculated to, or which may create a negative depiction of the company. This information is often widely distributed, including through platforms that mainly serve as hosts seeking advertising revenue. Issuers who have limited trading volumes and are thus susceptible to higher volatility levels than large-cap stocks can be particularly vulnerable to such short seller attacks.

These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S. and are not subject to certification requirements imposed by the U.S. Securities and Exchange Commission. Accordingly, the opinions they express may be based on distortions or omissions of facts or fabrications. In light of the limited risks involved in publishing such information, and the significant profits that can be made from running successful short attacks, short sellers will likely continue to issue such reports.

We may be subject to short selling strategies that may drive down the market price of our common stock. We were recently the target of negative allegations posted on an internet platform designed to advise short sellers, which precipitated a decline in the price of our stock. Shortly thereafter, several plaintiffs' law firms announced investigations into potential securities

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laws violations based on these allegations. While we believe these allegations are without merit, and no litigation has yet been commenced regarding such allegations, we still face the potential for litigation to be initiated against us. While we would vigorously defend against any such litigation, regardless of outcome, litigation can be costly and time-consuming, divert the attention of our management team, adversely impact our reputation and brand, and if a plaintiff claim were successful, could result in significant liability, all of which could harm our business and financial condition.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Use of Proceeds from Registered Securities

None.

ITEM 6. EXHIBITS

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EXHIBIT INDEX


Exhibit Number						Description of Document
3.1						Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (Commission File No. 333-198860) filed with the Securities and Exchange Commission on September 19, 2014)
3.2						Second Amended and Restated Bylaws of The Joint Corp. (incorporated by reference to Exhibit 3.(II)1 to the Company’s Current Report on Form 8-K (Commission File No. 001-36724) filed with the Securities and Exchange Commission on August 9, 2018)
31.1*						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, (filed herewith).
31.2*						Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, (filed herewith).
32**						Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS						XBRL Instance Document.
101.SCH						XBRL Taxonomy Extension Schema Document.
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB						XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith

** Furnished herewith, not filed

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THE JOINT CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE JOINT CORP.


Dated: November 5, 2021	By:	/s/ Peter D. Holt
		Peter D. Holt President and Chief Executive Officer (Principal Executive Officer)

Dated: November 5, 2021	By:	/s/ Jake Singleton
		Jake Singleton Chief Financial Officer (Principal Financial Officer)