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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 001-36724
The Joint Corp.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
90-0544160
(IRS Employer Identification No.)
16767 N. Perimeter Drive, Suite 110, Scottsdale
Arizona
(Address of principal executive offices)
85260
(Zip Code)
(480) 245-5960
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share
JYNT
The NASDAQ Capital Market LLC

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

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


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



Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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 portion1,032,930 994,587 
Prepaid expenses and other current assets
2,732,467 2,281,765 
Assets held for sale243,387  
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 portion5,621,297 5,505,420 
Intangible assets, net
10,162,506 5,403,390 
Goodwill
8,493,407 5,085,203 
Deferred tax assets9,115,231 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 portion4,969,470 4,613,843 
Finance lease liability, current portion24,175 49,855 
Deferred franchise and regional developer fee revenue, current portion2,974,993 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 of223,287  
Total current liabilities
21,637,706 21,438,399 
Operating lease liability, net of current portion17,427,096 16,872,093 
Finance lease liability, net of current portion69,713 87,939 
Debt under the Credit Agreement2,000,000 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 
1

Table of Contents

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

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

Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenues:
Revenues from company-owned or managed clinics
$15,836,327 $11,634,009 $42,936,298 $32,537,942 
Royalty fees6,604,653 5,714,637 19,024,799 15,816,500 
Franchise fees642,405 648,598 1,970,256 1,967,680 
Advertising fund revenue1,881,367 1,627,693 5,417,840 4,521,342 
Software fees1,109,753 840,969 3,166,732 2,387,543 
Regional developer fees153,181 209,651 524,923 642,041 
Other revenues375,314 316,064 1,058,008 885,335 
Total revenues26,603,000 20,991,621 74,098,856 58,758,383 
Cost of revenues:
Franchise and regional development cost of revenues2,141,945 1,907,874 6,219,646 5,319,278 
IT cost of revenues348,331 392,248 1,010,446 784,698 
Total cost of revenues2,490,276 2,300,122 7,230,092 6,103,976 
Selling and marketing expenses3,539,287 2,881,575 10,666,500 8,503,617 
Depreciation and amortization2,011,768 1,662,255 5,341,420 4,275,140 
General and administrative expenses17,796,806 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 impairment264,391 (3,540)360,140 16,967 
Income from operations500,472 1,338,878 797,253 5,345,305 
Other expense, net(25,235)(16,139)(60,668)(54,050)
Income before income tax (benefit) expense475,237 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 shares14,512,856 14,388,905 14,474,323 14,286,818 
Diluted weighted average shares14,829,629 14,970,328 14,878,050 14,931,759 

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

Table of Contents
THE JOINT CORP. AND SUBSIDIARY AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Common StockAdditional
Paid In
Capital
Treasury StockAccumulated
Deficit
Total The Joint Corp.
stockholders'
equity
Non-controlling
interest
Total
SharesAmountSharesAmount
Balances, December 31, 202114,451,355 $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 stock36,722 37 (37)— — — — —  
Exercise of stock options4,972 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 stock28,758 29 (29)— — — — —  
Exercise of stock options4,610 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 stock2,845 3 (3)— — — — —  
Exercise of stock options32,283 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 StockAdditional
Paid In
Capital
Treasury StockAccumulated
Deficit
Total The Joint Corp.
stockholders'
equity
Non-controlling
interest
SharesAmountSharesAmountTotal
Balances, December 31, 2020, as revised14,174,237 $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 stock7,879 8 (8)— — — — —  
Exercise of stock options105,995 106 620,670 — — — 620,776 — 620,776 
Purchases of treasury stock under employee stock plans— — — 13,619 (618,154)— (618,154)— (618,154)
Net income— — — — — 2,314,287 2,314,287 — 2,314,287 
Balances, March 31, 2021, 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 stock4,218 4 (4)— — — — —  
Exercise of stock options113,819 113 641,674 — — — 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 stock4,280 $4 $(4)— $— $— $— $— $ 
Exercise of stock options34,554 $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,
20222021
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 amortization5,341,420 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 taxes73,403 (1,909,241)
Stock based compensation expense969,562 826,908 
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 payable50,702 (49,415)
Accrued expenses(571,447)164,866 
Payroll liabilities(1,118,259)1,329,785 
Deferred revenue636,470 2,410,202 
Other liabilities360,791 852,926 
Net cash provided by operating activities5,682,415 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 options362,029 1,480,634 
Repayment of debt under the Paycheck Protection Program (2,727,970)
Net cash provided by (used in) financing activities312,318 (2,014,349)
Decrease in cash, cash equivalents and restricted cash(8,944,196)(827,347)
Cash, cash equivalents and restricted cash, beginning of period19,912,338 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 cash696,030 449,597 
$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)
ReportedAdjustmentsAdjustmentsAdjustmentsAs Adjusted
ASSETS
Accounts receivable, net1,850,499 — 212,722 — 2,063,221 
Total current assets25,133,704 — 212,722 — 25,346,426 
Deferred tax assets8,007,633 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 clinics3,905,200 296,348 (524,993)3,676,555 
Total current liabilities18,685,644 296,348 — (524,993)18,456,999 
Total liabilities44,981,760 296,348 — (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' equity20,750,983 (274,194)168,050 481,314 21,126,152 
Total equity20,751,083 (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:2022202120222021
Clinics open at beginning of period662 555 610 515 
Opened during the period33 28 91 76 
Acquired during the period1  1  
Sold during the period(4) (8)(8)
Closed during the period(2) (4) 
Clinics in operation at the end of the period690 583 690 583 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Company-owned or managed clinics:2022202120222021
Clinics open at beginning of period107 78 96 64 
Opened during the period5 5 12 11 
Acquired during the period4  8 8 
Sold during the period(1) (1) 
Closed during the period    
Clinics in operation at the end of the period115 83 115 83 
Total clinics in operation at the end of the period805 666 805 666 
Clinic licenses sold but not yet developed212 252 212 252 
Licenses for future clinics subject to executed letters of intent40 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 $