jynt-20220930

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, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________

Commission file number: 001-36724

The Joint Corp.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)			90-0544160 (IRS Employer Identification No.)


16767 N. Perimeter Drive, Suite 110, Scottsdale Arizona (Address of principal executive offices)			85260 (Zip Code)

(480) 245-5960

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☑

Accelerated filer

☐

Non- accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

As of November 1, 2022, the registrant had 14,529,679 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, 2022 (unaudited) and December 31, 2021	1
	Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

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, 2022		December 31, 2021
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	10,272,112	$	19,526,119
Restricted cash	696,030		386,219
Accounts receivable, net	3,945,046		3,700,810
Deferred franchise and regional development costs, current portion	1,032,930		994,587
Prepaid expenses and other current assets	2,732,467		2,281,765
Assets held for sale	243,387		—
Total current assets	18,921,972		26,889,500
Property and equipment, net	16,210,051		14,388,946
Operating lease right-of-use asset	19,046,081		18,425,914
Deferred franchise and regional development costs, net of current portion	5,621,297		5,505,420
Intangible assets, net	10,162,506		5,403,390
Goodwill	8,493,407		5,085,203
Deferred tax assets	9,115,231		9,188,634
Deposits and other assets	720,853		567,202
Total assets	$	88,291,398	$	85,454,209

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,982,237	$	1,705,568
Accrued expenses	1,555,992		1,809,460
Co-op funds liability	696,030		386,219
Payroll liabilities ($0.8 million and $0.4 million attributable to VIE)	2,788,058		3,906,317
Operating lease liability, current portion	4,969,470		4,613,843
Finance lease liability, current portion	24,175		49,855
Deferred franchise and regional developer fee revenue, current portion	2,974,993		3,191,892
Deferred revenue from company clinics ($3.7 million and $3.5 million attributable to VIE)	5,900,964		5,235,745
Other current liabilities	522,500		539,500
Liabilities to be disposed of	223,287		—
Total current liabilities	21,637,706		21,438,399
Operating lease liability, net of current portion	17,427,096		16,872,093
Finance lease liability, net of current portion	69,713		87,939
Debt under the Credit Agreement	2,000,000		2,000,000
Deferred franchise and regional developer fee revenue, net of current portion	15,604,180		15,458,921
Other liabilities	27,230		27,230
Total liabilities	56,765,925		55,884,582
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, 2022 and December 31, 2021	—		—
Common stock, $0.001 par value; 20,000,000 shares authorized, 14,561,545 shares issued and 14,529,679 shares outstanding as of September 30, 2022 and 14,451,355 shares issued and 14,419,712 outstanding as of December 31, 2021	14,561		14,450
Additional paid-in capital	45,231,637		43,900,157
Treasury stock 31,866 shares as of September 30, 2022 and 31,643 shares as of December 31, 2021, at cost	(856,642)		(850,838)
Accumulated deficit	(12,889,083)		(13,519,142)
Total The Joint Corp. stockholders' equity	31,500,473		29,544,627
Non-controlling Interest	25,000		25,000
Total equity	31,525,473		29,569,627
Total liabilities and stockholders' equity	$	88,291,398	$	85,454,209

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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,
	2022		2021		2022		2021
Revenues:
Revenues from company-owned or managed clinics	$	15,836,327	$	11,634,009	$	42,936,298	$	32,537,942
Royalty fees	6,604,653		5,714,637		19,024,799		15,816,500
Franchise fees	642,405		648,598		1,970,256		1,967,680
Advertising fund revenue	1,881,367		1,627,693		5,417,840		4,521,342
Software fees	1,109,753		840,969		3,166,732		2,387,543
Regional developer fees	153,181		209,651		524,923		642,041
Other revenues	375,314		316,064		1,058,008		885,335
Total revenues	26,603,000		20,991,621		74,098,856		58,758,383
Cost of revenues:
Franchise and regional development cost of revenues	2,141,945		1,907,874		6,219,646		5,319,278
IT cost of revenues	348,331		392,248		1,010,446		784,698
Total cost of revenues	2,490,276		2,300,122		7,230,092		6,103,976
Selling and marketing expenses	3,539,287		2,881,575		10,666,500		8,503,617
Depreciation and amortization	2,011,768		1,662,255		5,341,420		4,275,140
General and administrative expenses	17,796,806		12,812,331		49,703,451		34,513,378
Total selling, general and administrative expenses	23,347,861		17,356,161		65,711,371		47,292,135
Net loss (gain) on disposition or impairment	264,391		(3,540)		360,140		16,967
Income from operations	500,472		1,338,878		797,253		5,345,305
Other expense, net	(25,235)		(16,139)		(60,668)		(54,050)
Income before income tax (benefit) expense	475,237		1,322,739		736,585		5,291,255
Income tax (benefit) expense	(15,876)		(614,356)		106,527		(1,644,496)
Net income	$	491,113	$	1,937,095	$	630,058	$	6,935,751
Earnings per share:
Basic earnings per share	$	0.03	$	0.13	$	0.04	$	0.49
Diluted earnings per share	$	0.03	$	0.13	$	0.04	$	0.46
Basic weighted average shares	14,512,856		14,388,905		14,474,323		14,286,818
Diluted weighted average shares	14,829,629		14,970,328		14,878,050		14,931,759

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, 2021	14,451,355	$	14,450	$	43,900,157	31,643	$	(850,838)	$	(13,519,141)	$	29,544,628	$	25,000	$	29,569,628
Stock-based compensation expense	—	—		323,556		—	—		—		323,556		—		323,556
Issuance of restricted stock	36,722	37		(37)		—	—		—		—		—		—
Exercise of stock options	4,972	5		49,618		—	—		—		49,623		—		49,623
Purchases of treasury stock under employee stock plans	—	—		—		74	(2,598)		—		(2,598)		—		(2,598)
Net loss	—	—		—		—	—		(205,797)		(205,797)		—		(205,797)
Balances, March 31, 2022 (unaudited)	14,493,049	$	14,492	$	44,273,294	31,717	$	(853,436)	$	(13,724,938)	$	29,709,412	$	25,000	$	29,734,412
Stock-based compensation expense	—	—		340,191		—	—		—		340,191		—		340,191
Issuance of restricted stock	28,758	29		(29)		—	—		—		—		—		—
Exercise of stock options	4,610	5		64,045		—	—		—		64,050		—		64,050
Net income	—	—		—		—	—		344,742		344,742		—		344,742
Balances, June 30, 2022 (unaudited)	14,526,417	$	14,526	$	44,677,501	31,717	$	(853,436)	$	(13,380,196)	$	30,458,395	$	25,000	$	30,483,395
Stock-based compensation expense	—	—		305,815		—	—		—		305,815		—		305,815
Issuance of restricted stock	2,845	3		(3)		—	—		—		—		—		—
Exercise of stock options	32,283	32		248,324		—	—		—		248,356		—		248,356
Purchases of treasury stock under employee stock plans	—	—		—		149	(3,206)		—		(3,206)		—		(3,206)
Net income	—	—		—		—	—		491,113		491,113		—		491,113
Balances, September 30, 2022 (unaudited)	14,561,545	$	14,561	$	45,231,637	31,866	$	(856,642)	$	(12,889,083)	$	31,500,473	$	25,000	$	31,525,473

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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, December 31, 2020, as revised	14,174,237	$	14,174	$	41,350,001	17,167	$	(143,111)	$	(20,094,912)	$	21,126,152	$	100	$	21,126,252
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	—	—		—		—	—		2,314,287		2,314,287		—		2,314,287
Balances, March 31, 2021, as revised (unaudited)	14,288,111	$	14,288	$	42,217,157	30,786	$	(761,265)	$	(17,780,625)	$	23,689,555	$	100	$	23,689,655
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	—	—		—		—	—		2,683,962		2,683,962		—		2,683,962
Balances, June 30, 2021, as revised (unaudited)	14,406,148	$	14,405	$	43,142,391	30,786	$	(761,265)	$	(15,096,663)	$	27,298,868	$	100	$	27,298,968
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 non-controlling interest	—	$	—	$	(24,900)	—	$	—	$	—	$	(24,900)	$	24,900	$	—
Net income	—	—		—		—	—		1,937,095		1,937,095				1,937,095
Balances, September 30, 2021, as revised (unaudited)	14,444,982	$	14,444	$	43,632,373	31,643	$	(850,839)	$	(13,159,568)	$	29,636,410	$	25,000	$	29,661,410

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

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THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	630,058	$	6,935,751
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,341,420		4,275,140
Net loss on disposition or impairment	360,140		109,871
Net franchise fees recognized upon termination of franchise agreements	(15,218)		(98,196)
Deferred income taxes	73,403		(1,909,241)
Stock based compensation expense	969,562		826,908
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(244,236)		(1,069,864)
Prepaid expenses and other current assets	(450,702)		13,079
Deferred franchise costs	(186,618)		(1,245,049)
Deposits and other assets	(153,651)		(95,176)
Accounts payable	50,702		(49,415)
Accrued expenses	(571,447)		164,866
Payroll liabilities	(1,118,259)		1,329,785
Deferred revenue	636,470		2,410,202
Other liabilities	360,791		852,926
Net cash provided by operating activities	5,682,415		12,451,587

Cash flows from investing activities:
Acquisition of AZ clinics	(6,861,256)		(1,925,000)
Acquisition of NC clinics	(1,105,000)		(2,568,028)
Purchase of property and equipment	(4,322,673)		(5,382,857)
Reacquisition and termination of regional developer rights	(2,650,000)		(1,388,700)
Net cash used in investing activities	(14,938,929)		(11,264,585)

Cash flows from financing activities:
Payments of finance lease obligation	(43,907)		(59,285)
Purchases of treasury stock under employee stock plans	(5,804)		(707,728)
Proceeds from exercise of stock options	362,029		1,480,634
Repayment of debt under the Paycheck Protection Program	—		(2,727,970)
Net cash provided by (used in) financing activities	312,318		(2,014,349)

Decrease in cash, cash equivalents and restricted cash	(8,944,196)		(827,347)
Cash, cash equivalents and restricted cash, beginning of period	19,912,338		20,819,629
Cash, cash equivalents and restricted cash, end of period	$	10,968,142	$	19,992,282

Reconciliation of cash, cash equivalents and restricted cash:	September 30, 2022		September 30, 2021
Cash and cash equivalents	$	10,272,112	$	19,542,685
Restricted cash	696,030		449,597
	$	10,968,142	$	19,992,282

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During the nine months ended September 30, 2022 and 2021, cash paid for income taxes was $69,274 and $592,695, respectively. During the nine months ended September 30, 2022 and 2021, cash paid for interest was $43,938 and $58,533, 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, 2022, accounts payable included property and equipment purchases of $225,967. As of December 31, 2021, accounts payable and accrued expenses included property and equipment purchases of $158,293, and $152,501, respectively.

In connection with the acquisition of franchised clinics during the nine months ended September 30, 2022, the Company acquired $383,906 of property and equipment and intangible assets of $4,988,707 in exchange for $8,284,235 (of which $317,979 is included in accounts payable as of September 30, 2022) to the sellers. Additionally, at the time of this transaction, the Company carried net deferred revenue of $115,372, 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 acquisition of franchised clinics 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, 2022, the Company had deferred revenue of $452,918, representing fees collected upon the execution of the regional developer agreement. The Company netted this amount against the aggregate purchase price.

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.

THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Basis of Presentation

These unaudited financial statements represent the condensed consolidated financial statements of The Joint Corp. (“The Joint”), its variable interest entities (“VIEs”), and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC (collectively, the “Company”). The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles ("GAAP"). Such unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with The Joint Corp. and Subsidiary and Affiliates consolidated financial statements and the notes thereto as set forth in The Joint’s Form 10-K for the year ended December 31, 2021, which included all disclosures required by U.S. GAAP. The results of operations for the periods ended September 30, 2022 and 2021 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, 2022 and 2021 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."

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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 were the same for the three and nine months ended September 30, 2022 and 2021.

Correction of Immaterial Error

During the third and the fourth quarter of 2021, the Company identified immaterial errors in the following: (i) the calculation of deferred revenue related to wellness packages, (ii) the calculation of software fee revenue, and (iii) the calculation of breakage revenue related to wellness packages. Management assessed the materiality of the errors and determined the impact on the Company’s 2020 consolidated financial statements was not material. The December 31, 2020 balance sheet was revised to correct the errors.

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


	December 31, 2020
	As Previously		(i)		(ii)		(iii)
	Reported		Adjustments		Adjustments		Adjustments		As Adjusted
ASSETS
Accounts receivable, net	1,850,499		—		212,722		—		2,063,221
Total current assets	25,133,704		—		212,722		—		25,346,426
Deferred tax assets	8,007,633		22,154		(44,672)		(43,679)		7,941,436
Total assets	$	65,732,843	$	22,154	$	168,050	$	(43,679)	$	65,879,368

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue from company clinics	3,905,200		296,348				(524,993)		3,676,555
Total current liabilities	18,685,644		296,348		—		(524,993)		18,456,999
Total liabilities	44,981,760		296,348		—		(524,993)		44,753,115
Stockholders' equity:
Accumulated deficit	(20,470,081)		(274,194)		168,050		481,314		(20,094,912)
Total The Joint Corp. stockholders' equity	20,750,983		(274,194)		168,050		481,314		21,126,152
Total equity	20,751,083		(274,194)		168,050		481,314		21,126,252
Total liabilities and stockholders' equity	$	65,732,843	$	22,154	$	168,050	$	(43,679)	$	65,879,368

Nature of Operations

The Joint Corp., a Delaware corporation, was formed on March 10, 2010 for the principal purpose of franchising and developing chiropractic clinics, selling regional developer rights, supporting the operations of franchised chiropractic clinics, and operating

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and managing corporate chiropractic clinics at locations throughout the United States of America. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.

The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,		Nine Months Ended September 30,
Franchised clinics:	2022	2021	2022	2021
Clinics open at beginning of period	662	555	610	515
Opened during the period	33	28	91	76
Acquired during the period	1	—	1	—
Sold during the period	(4)	—	(8)	(8)
Closed during the period	(2)	—	(4)	—
Clinics in operation at the end of the period	690	583	690	583

	Three Months Ended September 30,		Nine Months Ended September 30,
Company-owned or managed clinics:	2022	2021	2022	2021
Clinics open at beginning of period	107	78	96	64
Opened during the period	5	5	12	11
Acquired during the period	4	—	8	8
Sold during the period	(1)	—	(1)	—
Closed during the period	—	—	—	—
Clinics in operation at the end of the period	115	83	115	83

Total clinics in operation at the end of the period	805	666	805	666

Clinic licenses sold but not yet developed	212	252	212	252
Licenses for future clinics subject to executed letters of intent	40	43	40	43

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 three PCs, including one in Kansas, in connection with the opening of company-managed clinics in August 2022. 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 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 was immaterial as of September 30, 2022 and December 31,

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2021, except for their payroll liability balances and amounts collected in advance for membership and wellness packages, which are recorded as deferred revenue. The VIEs’ payroll liability balances as of September 30, 2022 and December 31, 2021 were $0.8 million and $0.4 million, respectively. The VIE's deferred revenue liability balances as of September 30, 2022 and December 31, 2021 were $3.7 million and $3.5 million, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and credit quality of, the financial institutions with which it invests. As of the balance sheet date and periodically throughout the period, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has invested substantially all its cash in short-term bank deposits. The Company had no cash equivalents as of September 30, 2022 and December 31, 2021.

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 records an allowance for credit losses as a reduction to its accounts receivables for amounts that the Company does not expect to recover. An allowance for credit losses is determined through assessments of collectability based on historical trends, the financial condition of the Company’s franchisees, including any known or anticipated bankruptcies, and an evaluation of current economic conditions, as well as the Company’s expectations of conditions in the future. Actual losses ultimately could differ materially in the near term from the amounts estimated in determining the allowance. As of September 30, 2022 and December 31, 2021, the Company had credit losses 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, which is generally three to ten 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, including costs to implement cloud computing arrangements that is a service contract. 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

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three to five years. Capitalized implementation costs incurred in connection with a cloud computing arrangement that is a service contract are included in prepaid expenses in the Company’s consolidated balance sheets.

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. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at the Company’s sole discretion and, as such, the Company typically determines that exercise of these renewal options is not reasonably certain. As a result, the Company does not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. 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. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred and are also included in general and administrative expenses on the 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 identifiable 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.

Assets Held for Sale

The Company classifies assets and related liabilities as held for sale when the following criteria are met: when management has committed to a plan to sell the asset, the asset is available for immediate sale, there is an active program to locate a buyer and the sale and transfer of the asset is probable within one year. Assets and liabilities are presented separately on the condensed consolidated balance sheet with a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less costs to sell. Depreciation and amortization for property, plant and equipment, finite-lived intangible assets, and ROU assets are not recorded while these assets are classified as held for sale. Assets held for sale are tested for recoverability each period that they are classified as held for sale.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets are recoverable. The Company records an impairment loss when the carrying amount of the asset is not recoverable and exceeds its fair value. During the three and nine months ended September 30, 2022, an

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operating lease ROU asset related to a closed clinic with a total carrying amount of approximately $250,000 was written down to zero. As a result, the Company recorded a noncash impairment loss of approximately $250,000 during the three and nine months ended September 30, 2022. During the nine months ended September 30, 2021, certain operating lease ROU assets related to closed clinics with a total carrying amount of $0.5 million were written down to their 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.

In connection with the sale of two company managed clinics to franchisees the Company reclassified $288,192 of property and equipment and $359,807 of ROU assets to Assets held for sale and reclassified $428,593 of ROU liability and $54,351 of deferred revenue from company clinics to Liabilities to be disposed of, in the consolidated balance sheet as of June 30, 2022. Long-lived assets that meet the held for sale criteria are reported at the lower of their carrying value or fair value, less estimated costs to sell. As a result, the Company recorded a valuation allowance of $60,580 to adjust the carrying value of the disposal group to fair value less cost to sell during the nine months ended September 30, 2022. One of the two clinics was sold during August 2022, and the second clinic was sold in October 2022.

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 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 consolidated income statements.

Co-Op Marketing Funds

Some franchises have established regional Co-Ops for advertising within their local and regional markets. The Company maintains a custodial relationship under which the Co-Op Marketing Funds collected are segregated and used for the purposes specified by the Co-Ops’ officers. The Co-Op Marketing Funds are included in restricted cash on the Company’s consolidated balance sheets.

Revenue Recognition

The Company generates revenue primarily through its company-owned and managed clinics and through royalties, franchise fees, advertising fund contributions, IT related income and computer software fees from its 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. If the Company determines that it is not subject to unclaimed property laws for the portion of wellness package that it does not expect to be redeemed (referred to as “breakage”) then it recognizes breakage revenue in proportion to the pattern of exercised rights by the patient.

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 the 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

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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. Initial 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. This 3% fee is funded by the