UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2018

[ ]	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

90-0544160

(State or other jurisdiction of incorporation or

organization)

(IRS Employer Identification No.)

16767 N. Perimeter Drive, Suite 240, Scottsdale

Arizona

85260

(Address of principal executive offices)

(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)

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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:

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 ~~6, 2017,~~2, 2018, the registrant had ~~13,518,146~~13,734,193 shares of Common Stock ($0.001 par value) outstanding.

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, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017	1
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	2
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	3
		Notes to Unaudited Condensed Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2224

	Item 4.	Controls and Procedures	3032

Part I, Item 3 – Not applicable

PART II OTHER INFORMATION

	Item 1.	Legal Proceedings	3132

	Item 1A.	Risk Factors	3132

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3132

	Item 6.	Exhibits	3132

	SIGNATURES		3233

	EXHIBIT INDEX		3334

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

PART I: FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, December 31,
2017 2016
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,628,648 $ 3,009,864
Restricted cash 157,470 334,394
Accounts receivable, net 1,277,862 1,021,733
Income taxes receivable 3,054 42,014
Notes receivable - current portion 128,781 40,826
Deferred franchise costs - current portion 617,131 748,300
Prepaid expenses and other current assets 604,777 499,525
Total current assets 5,417,723 5,696,656
Property and equipment, net 3,849,952 4,724,706
Notes receivable, net of current portion and reserve 295,779 -
Deferred franchise costs, net of current portion 811,350 836,350
Intangible assets, net 1,888,607 2,338,922
Goodwill 2,750,338 2,750,338
Deposits and other assets 634,257 707,889
Total assets $ 15,648,006 $ 17,054,861

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 718,412 $ 1,054,946
Accrued expenses 131,665 299,997
Co-op funds liability 98,188 73,246
Payroll liabilities 533,881 750,421
Notes payable - current portion 100,000 331,500
Deferred rent - current portion 147,496 215,450
Deferred revenue - current portion 2,325,728 3,077,430
Other current liabilities 54,455 60,894
Total current liabilities 4,109,825 5,863,884
Notes payable, net of current portion 1,000,000 -
Deferred rent, net of current portion 840,163 1,400,790
Deferred revenue, net of current portion 4,233,334 2,231,712
Deferred tax liability 187,397 120,700
Other liabilities 583,915 512,362
Total liabilities 10,954,634 10,129,448
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding, as of September 30, 2017, and December 31, 2016 - -
Common stock, $0.001 par value; 20,000,000 shares authorized, 13,499,684 shares issued and 13,485,600 shares outstanding as of September 30, 2017 and 13,317,393 shares issued and 13,020,889 outstanding as of December 31, 2016 13,499 13,317
Additional paid-in capital 36,811,327 36,398,588
Treasury stock 14,084 shares as of September 30, 2017 and 296,504 shares as of December 31, 2016, at cost (86,045 ) (503,118 )
Accumulated deficit (32,045,409 ) (28,983,374 )
Total stockholders' equity 4,693,372 6,925,413
Total liabilities and stockholders' equity $ 15,648,006 $ 17,054,861

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

	September 30,			December 31,
	2018			2017
ASSETS	(unaudited)			(as adjusted)
Current assets:
Cash and cash equivalents	$	5,611,008		$	4,216,221
Restricted cash		185,396			103,819
Accounts receivable, net		1,204,957			1,138,380
Notes receivable - current portion		145,677			171,928
Deferred franchise costs - current portion		573,893			498,433
Prepaid expenses and other current assets		702,233			542,342
Total current assets		8,423,164			6,671,123
Property and equipment, net		3,269,739			3,800,466
Notes receivable, net of current portion and reserve		167,466			351,857
Deferred franchise costs, net of current portion		2,668,493			2,312,837
Intangible assets, net		1,765,322			1,760,042
Goodwill		2,916,426			2,916,426
Deposits and other assets		593,009			623,308
Total assets	$	19,803,619		$	18,436,059

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	911,618		$	1,068,669
Accrued expenses		103,801			86,959
Co-op funds liability		145,766			89,681
Payroll liabilities		1,288,436			867,430
Notes payable - current portion		100,000			100,000
Deferred rent - current portion		143,713			152,198
Deferred franchise revenue - current portion		2,165,112			1,994,182
Deferred revenue from company clinics		1,002,578			867,804
Other current liabilities		327,924			152,534
Total current liabilities		6,188,948			5,379,457
Notes payable, net of current portion		1,000,000			1,000,000
Deferred rent, net of current portion		724,651			802,492
Deferred franchise revenue, net of current portion		10,148,199			9,552,746
Deferred tax liability		-			136,434
Other liabilities		407,028			411,497
Total liabilities		18,468,826			17,282,626
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $0.001 par value; 50,000 shares authorized, 0 issued and outstanding as of September 30, 2018, and December 31, 2017		-			-
Common stock, $0.001 par value; 20,000,000 shares authorized, 13,748,678 shares issued and 13,734,008 shares outstanding as of September 30, 2018 and 13,600,338 shares issued and 13,586,254 outstanding as of December 31, 2017		13,749			13,600
Additional paid-in capital		37,997,377			37,229,869
Treasury stock 14,670 shares as of September 30, 2018 and 14,084 shares as of December 31, 2017, at cost		(90,856	)		(86,045	)
Accumulated deficit		(36,585,477	)		(36,003,991	)
Total stockholders' equity		1,334,793			1,153,433
Total liabilities and stockholders' equity	$	19,803,619		$	18,436,059

~~THE JOINT CORP. AND SUBSIDIARY~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(unaudited)~~

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Revenues:
Revenues and management fees from company clinics $ 2,929,850 $ 2,341,471 $ 8,106,121 $ 6,137,277
Royalty fees 1,958,249 1,540,264 5,518,409 4,337,643
Franchise fees 229,715 602,400 1,036,815 1,641,409
Advertising fund revenue 775,221 595,955 1,995,235 1,218,256
IT related income and software fees 290,250 235,925 839,788 686,459
Regional developer fees 259,230 123,921 455,859 496,538
Other revenues 103,336 63,654 282,289 225,086
Total revenues 6,545,851 5,503,590 18,234,516 14,742,668
Cost of revenues:
Franchise cost of revenues 715,610 660,126 2,103,619 2,023,712
IT cost of revenues 103,590 58,636 227,903 162,752
Total cost of revenues 819,200 718,762 2,331,522 2,186,464
Selling and marketing expenses 1,172,559 1,272,524 3,189,489 3,184,484
Depreciation and amortization 468,800 695,579 1,550,013 1,908,238
General and administrative expenses 4,462,922 5,435,219 13,694,690 16,749,945
Total selling, general and administrative expenses 6,104,281 7,403,322 18,434,192 21,842,667
Loss on disposition or impairment - - 417,971 -
Loss from operations (377,630 ) (2,618,494 ) (2,949,169 ) (9,286,463 )

Other (expense) income, net 9,907 5,877 (33,589 ) 5,200
Loss before income tax expense (367,723 ) (2,612,617 ) (2,982,758 ) (9,281,263 )

Income tax expense (36,085 ) (14,277 ) (79,277 ) (132,144 )

Net loss and comprehensive loss $ (403,808 ) $ (2,626,894 ) $ (3,062,035 ) $ (9,413,407 )

Loss per share:
Basic and diluted loss per share $ (0.03 ) $ (0.21 ) $ (0.23 ) $ (0.74 )

Basic and diluted weighted average shares 13,262,032 12,730,624 13,144,764 12,657,435

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

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~OPERATIONS

(unaudited)

Nine Months Ended
September 30,
2017 2016
Cash flows from operating activities:
Net loss $ (3,062,035 ) $ (9,413,407 )
Adjustments to reconcile net loss to net cash used in operating activities:
(Recovery) provision for bad debts - (10,830 )
Regional developer fees recognized upon acquisition of development rights - (138,500 )
Net franchise fees recognized upon termination of franchise agreements (46,115 ) (314,859 )
Depreciation and amortization 1,550,013 1,908,238
Gain on sale of fixed assets (34,355 ) -
Loss on disposition or impairment of assets 417,971 -
Deferred income taxes 66,697 -
Stock based compensation expense 412,512 1,012,700
Changes in operating assets and liabilities:
Restricted cash 176,924 (91,383 )
Accounts receivable (303,590 ) (1,108,181 )
Income taxes receivable 38,960 32,167
Prepaid expenses and other current assets (105,252 ) (525,905 )
Deferred franchise costs 139,369 194,300
Deposits and other assets 73,632 49,649
Accounts payable (336,534 ) (1,183,328 )
Accrued expenses (168,332 ) (119,990 )
Co-op funds liability 24,942 (95,893 )
Payroll liabilities (216,540 ) (1,079,085 )
Other liabilities (555,982 ) 33,837
Deferred rent (377,995 ) 912,730
Deferred revenue 889,213 (405,977 )
Net cash used in operating activities (1,416,497 ) (10,343,717 )

Cash flows from investing activities:
Cash paid for acquisitions - (811,450 )
Reacquisition and termination of regional developer rights - (325,000 )
Purchase of property and equipment (190,589 ) (1,497,874 )
Payments received on notes receivable 39,888 25,945
Net cash used in investing activities (150,701 ) (2,608,379 )

Cash flows from financing activities:
Borrowings on revolving credit note payable 1,000,000 -
Issuance of common stock, offering costs adjustment - (1,042 )
Purchases of treasury stock under employee stock plans (2,655 ) (83,391 )
Proceeds from sale of treasury stock 292,671 -
Proceeds from exercise of stock options 127,466 66,527
Repayments on notes payable (231,500 ) (436,350 )
Net cash provided by (used in) financing activities 1,185,982 (454,256 )

Net decrease in cash (381,216 ) (13,406,352 )
Cash at beginning of period 3,009,864 16,792,850
Cash at end of period $ 2,628,648 $ 3,386,498

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
				(as adjusted)						(as adjusted)
Revenues:
Revenues and management fees from company clinics	$	3,674,704		$	2,929,850		$	10,352,013		$	8,106,121
Royalty fees		2,588,666			1,958,249			7,283,839			5,518,409
Franchise fees		457,516			381,777			1,254,997			1,041,151
Advertising fund revenue		736,987			775,221			2,083,769			1,995,235
Software fees		324,250			290,250			947,635			839,788
Regional developer fees		142,651			99,215			415,075			262,102
Other revenues		137,776			103,336			379,970			282,289
Total revenues		8,062,550			6,537,898			22,717,298			18,045,095
Cost of revenues:
Franchise cost of revenues		1,005,162			735,554			2,855,712			2,071,394
IT cost of revenues		79,545			103,590			252,911			227,903
Total cost of revenues		1,084,707			839,144			3,108,623			2,299,297
Selling and marketing expenses		1,194,595			1,172,559			3,590,562			3,189,489
Depreciation and amortization		389,269			468,800			1,181,661			1,550,013
General and administrative expenses		5,242,026			4,462,922			14,973,261			13,694,691
Total selling, general and administrative expenses		6,825,890			6,104,281			19,745,484			18,434,193
Loss on disposition or impairment		343,255			-			593,960			417,971
Loss from operations		(191,302	)		(405,527	)		(730,769	)		(3,106,366	)

Other income (expense):
Bargain purchase gain		-			-			75,264			-
Other income (expense), net		(10,672	)		9,907			(33,556	)		(33,589	)
Total other income (expense)		(10,672	)		9,907			41,708			(33,589	)

Loss before income tax expense		(201,974	)		(395,620	)		(689,061	)		(3,139,955	)

Income tax benefit (expense)		50,171			(36,085	)		107,575			(79,277	)

Net loss and comprehensive loss	$	(151,803	)	$	(431,705	)	$	(581,486	)	$	(3,219,232	)

Loss per share:
Basic and diluted loss per share	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.24	)

Basic and diluted weighted average shares		13,727,712			13,262,032			13,646,599			13,144,764

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

THE JOINT CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended
	September 30,
	2018			2017
				(as adjusted)
Cash flows from operating activities:
Net loss	$	(581,486	)	$	(3,219,232	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,181,661			1,550,013
(Gain) loss on sale of fixed assets		974			(34,355	)
Loss on disposition or impairment of assets		593,960			417,971
Net franchise fees recognized upon termination of franchise agreements		(186,850	)		(46,115	)
Bargain purchase gain		(75,264	)		-
Deferred income taxes		(136,434	)		66,697
Stock based compensation expense		469,405			412,512
Changes in operating assets and liabilities:
Accounts receivable		(59,857	)		(303,590	)
Income taxes receivable		-			38,960
Prepaid expenses and other current assets		(159,891	)		(105,252	)
Deferred franchise costs		(510,266	)		110,145
Deposits and other assets		45,601			70,632
Accounts payable		(225,839	)		(336,535	)
Accrued expenses		14,628			(168,332	)
Co-op funds liability		56,085			24,942
Payroll liabilities		421,006			(216,540	)
Other liabilities		(79,783	)		(493,122	)
Deferred rent		(86,326	)		(377,995	)
Deferred revenue		1,207,089			1,015,775
Net cash provided by (used in) operating activities		1,888,413			(1,593,421	)

Cash flows from investing activities:
Acquisition of business, net of cash acquired		(100,000	)		-
Purchase of property and equipment		(531,162	)		(190,589	)
Reacquisition and termination of regional developer rights		(278,250	)		-
Payments received on notes receivable		210,642			39,888
Net cash used in investing activities		(698,770	)		(150,701	)

Cash flows from financing activities:
Borrowings on revolving credit note payable		-			1,000,000
Purchases of treasury stock under employee stock plans		(4,811	)		(2,655	)
Proceeds from sale of treasury stock		-			292,671
Proceeds from exercise of stock options		291,532			127,466
Repayments on notes payable		-			(231,500	)
Net cash provided by financing activities		286,721			1,185,982

Increase (decrease) in cash		1,476,364			(558,140	)
Cash and restricted cash, beginning of period		4,320,040			3,344,258
Cash and restricted cash, end of period	$	5,796,404		$	2,786,118

During the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, cash paid for income taxes was ~~$22,838~~$29,522 and ~~$10,466,~~$22,838, respectively. During the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, cash paid for interest was ~~$81,993~~$75,000 and ~~$15,262,~~$81,993, respectively.

Supplemental disclosure of non-cash activity:

As of September 30, ~~2016,~~2018, we had property and equipment purchases of ~~$7,105 which were~~$68,788 and $2,214 included in accounts payable and accrued expenses, respectively. As of December 31, 2017, we had property and equipment purchases of $50,474 included in accounts payable.

As of September 30, 2018, we had stock option exercise proceeds of $6,720 included in accounts receivable.

In connection with our acquisitions of franchises during the nine months ended September 30, ~~2016,~~2018, we acquired ~~$293,014~~$17,964 of property and equipment, intangible assets of ~~$339,000, goodwill~~$129,000, favorable leases of ~~$269,780 and assumed deferred revenue associated with membership packages paid in advance of $45,072~~$15,302, in exchange for ~~$839,000~~$100,000 in cash ~~and notes payable issued~~ to the ~~sellers for an aggregate amount of $186,000.~~sellers. Additionally, at the time of these transactions, we carried deferred revenue of ~~$29,000,~~$12,998, representing franchise fees collected upon the execution of the franchise ~~agreements, and deferred costs of $1,450, related to our acquisition of undeveloped franchises. We~~agreement. In accordance with ASC-952-605, we netted ~~these amounts~~this amount against the aggregate purchase price of the acquisitions (Note 2). and a bargain purchase gain of $75,264 was recognized.

In connection with our reacquisition and termination of regional developer rights during the nine months ended September 30, ~~2016,~~2018, we had deferred revenue of ~~$224,750~~$26,934 representing license fees collected upon the execution of the regional developer agreements. In accordance with ASC-952-605, we netted these amounts against the aggregate purchase price of the acquisitions.

In connection with our sale of the regional developer territories in Central Florida, Maryland/Washington DC, and Minnesota we issued notes receivable in the amount of $423,622 with revenue to be recognized over the anticipated number of clinics to be opened in the respective territories. We have recognized $9,412 of revenue related to these notes in the nine months ended September 30, 2017.

(Note 8)

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

THE JOINT CORP. AND SUBSIDIARY

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”) and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC (collectively, the “Company”). These unaudited condensed consolidated financial statements should be read in conjunction with The Joint Corp. and Subsidiary consolidated financial statements and the notes thereto as set forth in The Joint Corp.’s Form 10-K, which included all disclosures required by generally accepted accounting ~~principles.~~principles (“GAAP”). In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position on a consolidated basis and the consolidated results of operations and cash flows for the interim periods presented. The results of operations for the periods ended September 30, ~~2017~~2018 and ~~2016~~2017 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, ~~2017~~2018 and ~~2016~~2017 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 under the new revenue standard, see Note 3, Revenue Disclosures. Certain balances were reclassified from general and administrative expenses to other expense, net, as well as certain balances from other revenues to revenues and management fees from Company clinics for the period ended September 30, 2017 to conform to the current year presentation and align with the segment footnote presentation.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of The Joint Corp. and its wholly owned subsidiary, The Joint Corporate Unit No. 1, LLC, which was dormant for all periods presented.

All significant intercompany accounts and transactions between The Joint Corp. and its subsidiary have been eliminated in consolidation. Certain balances were reclassified from general and administrative expenses to other (expense) income, net, as well as certain balances from other revenues to revenues and management fees from company clinics for the three and nine months ended September 30, 2016 to conform to the current year presentation and align with the segment footnote presentation.

Comprehensive Loss

Net loss and comprehensive loss are the same for the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017.

Nature of Operations

The Joint, a Delaware corporation, was formed on March 10, 2010 for the principal purpose of franchising, developing and managing chiropractic clinics, selling regional developer rights and supporting the operations of franchised chiropractic clinics at locations throughout the United States of America. The franchising of chiropractic clinics is regulated by the Federal Trade Commission and various state authorities.

The following table summarizes the number of clinics in operation under franchise agreements and as company-owned or managed clinics for the three and nine months ended September 30, ~~2017~~2018 and ~~2016:~~2017:

	Three Months Ended				Nine Months Ended						Three Months Ended					Nine Months Ended
	September 30,				September 30,						September 30,					September 30,
Franchised clinics:	2017		2016		2017			2016			2018			2017		2018			2017
Clinics open at beginning of period		336		280		309			265			365			336		352			309
Opened or Purchased during the period		6		13		35			38
Opened or purchased during the period												10			6		25			35
Acquired during the period		-		-		-			(6	)		-			-		(1	)		-
Closed during the period		-		-		(2	)		(4	)		(1	)		-		(2	)		(2	)
Clinics in operation at the end of the period		342		293		342			293			374			342		374			342

	Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
	September 30,				September 30,					September 30,				September 30,
Company-owned or managed clinics:	2017		2016		2017			2016		2018		2017		2018		2017
Clinics open at beginning of period		47		61		61			47		48		47		47		61
Opened during the period		-		-		-			8		-		-		-		-
Acquired during the period		-		-		-			6		-				1		-
Closed or Sold during the period		-		-		(14	)		-
Closed or sold during the period											-		-		-		(14	)
Clinics in operation at the end of the period		47		61		47			61		48		47		48		47

Total clinics in operation at the end of the period		389		354		389			354		422		389		422		389

Clinics licenses sold but not yet developed		105		134		105			134
Clinic licenses sold but not yet developed											126		105		126		105
Executed letters of intent for future clinic licenses		5		-		5			-		12		5		12		5

Variable Interest Entities

An entity deemed to hold the controlling interest in a voting interest entity or deemed to be the primary beneficiary of a variable interest entity (“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. Investments where the Company does not hold the controlling interest and is not the primary beneficiary are accounted for under the equity method.

Certain states in which the Company manages clinics regulate the practice of chiropractic care and require that chiropractic services be provided by legal entities organized under state laws as professional corporations or PCs. Such PCs are VIEs. In these states, the Company has entered into management services agreements with such PCs under which the Company provides, on an exclusive basis, all non-clinical services of the chiropractic practice. The Company has analyzed its relationship with the PCs and has determined that the Company does not have the power to direct the activities of the PCs. As such, the activities of the PCs are not included in the Company’s condensed consolidated financial statements.

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, ~~2017~~2018 and December 31, ~~2016.~~2017.

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.

~~Concentrations of Credit Risk~~

From time to time, the Company grants credit in the normal course of business to franchisees and PCs related to the collection of royalties and other operating revenues. The Company periodically performs credit analysis and monitors the financial condition of the franchisees and PCs to reduce credit risk. As of September 30, 2017, one PC entity and four franchisees represented 19% of outstanding accounts receivable, compared to three PC entities and six franchisees representing 24% of outstanding accounts receivable as of December 31, 2016. The Company did not have any customers that represented greater than 10% of its revenues during the three or nine months ended September 30, 2017 and 2016.

Accounts Receivable

Accounts receivable represent amounts due from franchisees for initial franchise fees and royalty ~~fees, working capital advances due from PCs, and tenant improvement allowances due from landlords.~~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, ~~2017,~~2018, and December 31, ~~2016,~~2017, the Company had an allowance for doubtful accounts of ~~$0 and $131,830, respectively.~~

The Company writes off accounts receivable when it deems them uncollectible and records recoveries of accounts receivable previously written off when it receives them. In the nine months ended September 30, 2017, the Company determined that certain working capital advances from its PC entities in Illinois and New York were no longer collectible as a result of the sale or closure of the related clinics. Accordingly, the Company wrote-off approximately $47,000 of accounts receivable to loss on disposition or impairment related to these entities during the nine months ended September 30, 2017.$0.

Deferred Franchise Costs

Deferred franchise costs represent commissions that are direct and incremental to the Company and are paid in conjunction with the sale of a ~~franchise and~~franchise. These costs are recognized as an expense when the respective revenue is recognized, which is generally ~~upon~~over the ~~opening~~term of ~~a clinic.~~the related franchise 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.

Software Developed

The Company capitalizes certain software development costs. These capitalized costs are primarily related to proprietary 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, generally five years.

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 range from ~~six~~four to eight years. In the case of regional developer rights, the Company amortizes the acquired regional developer rights over seven years. The fair value of customer relationships is amortized over their estimated useful life of two years.

Goodwill

Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions ~~completed in the years ended December 31, 2014 through December 31, 2016.~~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. No impairments of goodwill were recorded for the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017.

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 have been impaired. No impairments of long-lived assets were recorded for the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017.

Advertising Fund

The Company has established an advertising fund for national/regional marketing and advertising of services offered by its clinics. The monthly marketing fee is 2% of clinic 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 ~~advertising fund revenue and~~ a related expense.

Co-Op Marketing Funds

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

Accounting for Costs Associated with Exit or Disposal Activities

The Company recognizes a liability for the cost associated with an exit or disposal activity that is measured initially at its fair value in the period in which the liability is incurred.

Costs to terminate an operating lease or other contracts are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity isshall be recognized at the cease-use date. In periods subsequent to initial measurement, changes to the liability are measured using the credit adjusted risk-free rate that was used to measure the ~~fair value of the~~ liability initially. The cumulative effect of a change resulting from a revision to either the timing or the amount of estimated cash flows isshall be recognized as an adjustment to the liability in the period of the change.

As of September 30, 2017, the Company maintained a lease exit liability of approximately $0.4 million classified in other liabilities on its condensed consolidated balance sheets related to remaining operating leases that will no longer provide economic benefit to the Company, net of estimated sublease income.

Lease exit liability at December 31, 2016 $ 338,151
Additions 883,146
Settlements (706,991 )
Net Accretion (66,030 )
Lease exit liability at September 30, 2017 $ 448,276
In the nine months ended September 30, 2017, the Company ceased use of eight clinic locations from its corporate clinics segment and recognized a liability for lease exit costs incurred based on the remaining lease rental due, reduced by estimated sublease rental income that could be reasonably obtained for the properties. The Company recognized the resulting expense of approximately $418,000 in loss on disposition or impairment in the accompanying condensed consolidated statement of operations.

Deferred Rent

The Company leases office space for its corporate offices and company-owned or managed clinics under operating leases, which may include rent holidays and rent escalation clauses. It recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the term of the lease. The Company records tenant improvement allowances as deferred rent and amortizes the allowance over the term of the lease, as a reduction to rent expense.

Revenue Recognition

The Company generates revenue primarily through ~~initial~~its company-owned and managed clinics, royalties, franchise fees, ~~regional developer fees, royalties,~~ advertising fund, ~~revenue,~~and through IT related income and computer software ~~fees, and from its company-owned and managed clinics.~~fees.
~~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 as revenue when the Company has substantially completed its initial services under the franchise agreement, which typically occurs upon opening of the clinic.  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.
~~Regional Developer Fees~~. During 2011, the Company established a regional developer program to engage independent contractors to assist in developing specified geographical regions. Under the historical program, regional developers paid a license fee ranging from $7,250 to 25% of the then current franchise fee for each franchise they received the right to develop within the region. In 2017, the program was revised to grant exclusive geographical territory and establish a minimum development obligation within that defined territory. Regional developers receive fees ranging from $14,500 to $19,950 which are collected from franchisees upon the sale of franchises within their region and a royalty of 3% of sales generated by franchised clinics in their region. Regional developer fees paid to the Company are nonrefundable and are recognized as revenue when the Company has performed substantially all initial services required by the regional developer agreement, which generally is considered to be upon the opening of each franchised clinic. Accordingly, revenue is recognized on a pro-rata basis determined by the number of franchised clinics to be opened in the area covered by the regional developer agreement. Upon the execution of a regional developer agreement, the Company estimates the number of franchised clinics to be opened, which is typically consistent with the contracted minimum. The Company reassesses the number of clinics expected to be opened as the regional developer performs under its regional developer agreement. When a material change to the original estimate becomes apparent, the amount of revenue to be recognized per clinic is revised on a prospective basis, and the unrecognized fees are allocated among, and recognized as revenue upon the opening of, the expected remaining unopened franchised clinics within the region. The franchisor’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. Several of the regional developer agreements grant the Company the option to repurchase the regional developer’s license.
For the nine months ended September 30, 2017, the Company entered into eight regional developer agreements for which it received approximately $1.7 million, which was deferred as of the respective transaction dates and will be recognized on a pro-rata basis over the estimated number of franchised clinics to be opened in the respective regions. Certain of these regional developer agreements resulted 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 being recognized over the remaining life of the respective franchise agreements.
9

Revenues and Management Fees from Company Clinics.  The Company earns revenues from clinics that it owns and operates or manages throughout the United States. In those states where the Company owns and operates the clinic, revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing. Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed.  In other states where state law requires the chiropractic practice to be owned by a licensed chiropractor, the Company enters into a management agreement with the doctor’s PC. Under the management agreement, the Company provides administrative and business management services to the doctor’s PC in return for a monthly management fee. ~~When~~Due to certain implicit variable consideration in these management agreement contracts, and based on past practices between the ~~collectability~~parties, the Company determined that it cannot meet the probable threshold if it includes all of the ~~full management fee is uncertain,~~variable consideration in the transaction price. Therefore, the Company recognizes ~~management fee~~ revenue under these contracts only ~~to the extent~~when it has a high degree of ~~fees expected to~~confidence that revenue will not be ~~collected from the PCs.~~ reversed in a subsequent reporting period.

~~Royalties.~~Royalties and Advertising Fund Revenue. The Company collects royalties, as stipulated in the franchise agreement, equal to 7% of gross sales, and a marketing and advertising fee currently equal to 2% of gross sales. ~~Certain franchisees with franchise agreements acquired during~~Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the ~~formation~~term of the ~~Company pay a monthly flat fee. Royalties~~franchise agreement. The franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to the Company’s performance obligation under the franchise agreement and are recognized as ~~revenue when earned.~~franchisee clinic level sales occur. Royalties are collected bi-monthly two working days after each sales period has ended.

~~IT Related Income~~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.
Regional Developer Fees. During 2011, the Company established a regional developer program to engage independent contractors to assist in developing specified geographical regions. Under the historical program, regional developers paid a license fee for each franchise they received the right to develop within the region. In 2017, the program was revised to grant exclusive geographical territory and establish a minimum development obligation within that defined territory. Regional developers receive fees which are collected from franchisees upon the sale of franchises within their region and a royalty of 3% of sales generated by franchised clinics in their region. Regional developer fees paid to the Company are nonrefundable and are recognized as revenue ratably on a straight-line basis over the term of the regional developer agreement, which is considered to be 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 franchise license and as such are considered to represent a single performance obligation.
8
Software Fees.  The Company collects a monthly fee for use of its proprietary chiropractic software, computer support, and internet services support. These fees are recognized ratably on a ~~monthly~~straight-line basis as services are provided. IT related revenue represents a flat fee to purchase a clinic’s computer equipment, operating software, preinstalled chiropractic system software, key card scanner (patient identification card), credit card scanner and credit card receipt printer. These fees are recognized as revenue upon receiptover the term of ~~equipment by~~ the ~~franchisee.~~respective franchise agreement.
Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses were $377,679 and $1,259,373 for the three and nine months ended September 30, 2018, respectively. Advertising expenses were $314,695 and $961,106 for the three and nine months ended September 30, 2017, respectively. ~~Advertising expenses were $600,804 and $1,770,699 for the three and nine months ended September 30, 2016, respectively.~~

Income Taxes

The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income (loss), permanent tax differences and statutory tax rates. Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate principally to depreciation of property and equipment, amortization of goodwill, accounting for leases, and treatment of revenue for franchise fees and regional developer fees collected. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the condensed consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
At The Company has not identified any material uncertain tax positions as of September 30, ~~2017~~2018 and December 31, 2016, the Company maintained a liability for income taxes for uncertain tax positions of approximately $27,000 and $40,000, respectively, of which $26,000 and $27,000, respectively, represent penalties and interest and are recorded in the “other liabilities” section of the accompanying condensed consolidated balance sheets.2017. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses.
The ~~Company’s~~Company's tax returns for tax years subject to examination by tax authorities ~~include 2013~~included 2014 through the current period for state and ~~2014~~2015 through the current period for federal reporting purposes.

The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Company has completed its determination of the accounting implications of the 2017 Tax Act on its accruals. During the quarter, an income tax benefit of approximately $85,000 was recorded due to the change in the valuation allowance against the net deferred tax asset.
10

Loss per Common Share

Basic loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is computed by giving effect to all potentially dilutive common shares including preferred stock, restricted stock, stock options and ~~stock options.~~warrants.

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

Net loss $ (403,808 ) $ (2,626,894 ) $ (3,062,035 ) $ (9,413,407 )

Weighted average common shares outstanding - basic 13,262,032 12,730,624 13,144,764 12,657,435
Effect of dilutive securities:
Stock options - - - -
Weighted average common shares outstanding - diluted 13,262,032 12,730,624 13,144,764 12,657,435

Basic and diluted loss per share $ (0.03 ) $ (0.21 ) $ (0.23 ) $ (0.74 )
9
Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(as adjusted) (as adjusted)
Net loss $ (151,803 ) $ (431,705 ) $ (581,486 ) $ (3,219,232 )

Weighted average common shares outstanding - basic 13,727,712 13,262,032 13,646,599 13,144,764
Effect of dilutive securities:
Unvested restricted stock, stock options and warrants - - - -
Weighted average common shares outstanding - diluted 13,727,712 13,262,032 13,646,599 13,144,764

Basic and diluted loss per share $ (0.01 ) $ (0.03 ) $ (0.04 ) $ (0.24 )
Anti-Dilutive shares:
Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
     Unvested restricted stock 51,134 63,700 51,134 63,700
     Stock options 960,213 1,011,686 960,213 1,011,686
     Warrants 90,000 90,000 90,000 90,000

~~The following table summarizes the potential shares of common stock that were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive:~~
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Unvested restricted stock 63,700 92,415 63,700 92,415
Stock options 1,011,686 899,370 1,011,686 899,370
Warrants 90,000 90,000 90,000 90,000
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 quoted market prices and the grant-date fair value of stock options using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, 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.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~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 deferred franchise costs, ~~uncertain tax positions,~~lease exit liabilities, realizability of deferred tax assets, impairment of goodwill and intangible assets and purchase price allocations.

Recent Accounting Pronouncements

~~In May 2014, the Financial~~ Accounting Standards ~~Board (FASB) issued~~Adopted Effective January 1, 2018
On January 1, 2018, the Company adopted the guidance of Accounting Standards ~~Update (ASU) No. 2014-09, “~~Codification 606 - Revenue from Contracts with Customers~~” which requires an entity~~ (“ASC 606”). The Company adopted this change in accounting principles using the full retrospective method to ~~recognize~~all contracts at the ~~amount~~date of ~~revenue~~initial application. Accordingly, previously reported financial information has been restated to ~~which it expects~~reflect the application of ASC 606 to ~~be entitled~~all comparative periods presented. The Company utilized all of the practical expedients for adoption allowed under the full retrospective method. The Company believes utilization of the practical expedients did not have a significant impact on the consolidated financial statements for the ~~transfer~~periods presented herein.
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Adoption of ~~promised goods or services to customers. The standard also calls for additional disclosures around~~ASC 606 impacted the ~~nature, amount, timing and uncertainty of~~Company’s previously reported consolidated balance sheet as follows (in thousands):
THE JOINT CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of December
31, 2017 Adjustments Due
to ASC 606
Adoption As of December
31, 2017
ASSETS (as reported) (as adjusted)
Current assets:
Deferred franchise costs - current portion $ 484 $ 14 $ 498
Total current assets 6,657 14 6,671
Deferred franchise costs, net of current portion 813 1,500 2,313
Deposits and other assets 612 12 623
Total assets $ 16,910 $ 1,526 $ 18,436

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred franchise revenue - current portion $ 1,686 $ 308 $ 1,994
Other current liabilities 49 104 153
Total current liabilities 4,967 412 5,379
Deferred revenue, net of current portion 4,693 4,859 9,553
Total liabilities 12,011 5,271 17,283
Stockholders' equity:
Accumulated deficit (32,259 ) (3,745 ) (36,004 )
Total stockholders' equity 4,899 (3,745 ) 1,153
Total liabilities and stockholders' equity $ 16,910 $ 1,526 $ 18,436
The revenue and ~~cash flows arising from contracts with customers. The ASU will replace most existing revenue recognition guidance~~deferred cost adjustments are due to the change in ~~U.S. GAAP when it becomes effective. The new standard becomes effective for the Company on January 1, 2018. The Company has performed a preliminary review~~method of ~~ASU 2014-09 and does not expect the adoption of ASU 2014-09 to have a material impact on its revenues and management fees from company clinics or~~recognizing franchise ~~royalty revenues, which are based on a percent of sales. The Company expects the adoption of Topic 606 to impact its accounting for initial franchise fees~~ and regional developer fees. ~~Currently,~~See Note 3, Revenue Disclosures, for a description of these changes. The change in other current liabilities relates to the ~~Company recognizes revenue from initial franchise fees and regional developer fees upon the opening~~Company’s classification of a franchised clinic when the Company has performed all of its material obligations and initial services under the respective agreements. Upon the adoption of Topic 606, the Company expects to recognize the revenuefunds received related to ~~initial franchise fees~~letters of intent for future clinic licenses.
Adoption of ASC 606 impacted the Company’s previously reported condensed consolidated statement of operations for the three and regional developer fees over the term of the related franchise agreement or regional developer agreement. The Company is in the process of implementing this standard and has drafted certain accounting policies. The Company will be finalizing accounting policies, selecting its transition method, quantifying the impact of adopting this standard, and designing internal controls during the fourth quarter of the year ending December 31, 2017. The Company is currently unable to estimate the impact on its consolidated financial statements.nine months ended September 30, 2017, as follows (in thousands, except per share data):
THE JOINT CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30, 2017 Three Months Ended
Adjustments Due
to ASC 606
Adoption Three Months Ended
September 30, 2017
(as reported) (as adjusted)
Revenues:
Franchise fees $ 230 $ 152 $ 382
Regional developer fees 259 (160 ) 99
Total revenues 6,546 (8 ) 6,538
Cost of revenues:
Franchise cost of revenues 716 20 736
Total cost of revenues 819 20 839
Loss from operations (378 ) (28 ) (406 )
Loss before income tax expense (368 ) (28 ) (396 )
Net loss and comprehensive loss $ (404 ) $ (28 ) $ (432 )

Loss per share:
Basic and diluted loss per share $ (0.03 ) $ (0.00 ) $ (0.03 )

11

~~In February 2016, the FASB issued ASU No. 2016-02, “~~~~Leases (Topic 842).~~” The ASU requires that substantially all operating leases be recognized as assets and liabilities on the Company’s balance sheet, which is a significant departure from the current standard, which classifies operating leases as off-balance sheet transactions and accounts for only the current year operating lease expense in the statement of operations. The right to use the leased property is to be capitalized as an asset and the expected lease payments over the life of the lease will be accounted for as a liability. The effective date is for fiscal years beginning after December 31, 2018. While the Company has not yet quantified the impact that this standard will have on its financial statements, it will result in a significant increase in the assets and liabilities reflected on the Company’s balance sheet and in the interest expense and depreciation and amortization expense reflected in its statement of operations, while reducing the amount of rent expense. This could potentially decrease the Company’s reported net income.
Nine Months Ended
September 30, 2017 Nine Months Ended
Adjustments Due
to ASC 606
adoption Nine Months Ended
September 30, 2017
(as reported) (as adjusted)
Revenues:
Franchise fees $ 1,037 $ 4 $ 1,041
Regional developer fees 456 (194 ) 262
Total revenues 18,235 (189 ) 18,045
Cost of revenues:
Franchise cost of revenues 2,104 (32 ) 2,071
Total cost of revenues 2,332 (32 ) 2,299
Loss from operations (2,949 ) (157 ) (3,106 )
Loss before income tax expense (2,983 ) (157 ) (3,140 )
Net loss and comprehensive loss $ (3,062 ) $ (157 ) $ (3,219 )

Loss per share:
Basic and diluted loss per share $ (0.23 ) $ (0.01 ) $ (0.24 )

~~In April 2016,~~The revenue and deferred cost adjustments are due to the ~~FASB issued ASU No. 2016-10, “~~change in method of recognizing franchise and regional developer fees. See Note 3, Revenue ~~from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,~~Disclosures~~” to clarify the following two aspects~~, for a description of ~~Topic 606: 1) identifying performance obligations, and 2) the licensing implementation guidance. The effective date and transition requirements for~~ these ~~amendments are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact of this amendment on its consolidated financial statements.~~
~~In May 2016, the FASB issued ASU No. 2016-12, “~~~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,~~” to clarify certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact of this amendment on its consolidated financial statements.
~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”~~ This update addresses how certain cash inflows and outflows are classified in the statement of cash flows to eliminate existing diversity in practice. This update is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated financial statements.changes.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted ~~Cash”~~Cash (a(a consensus of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The ~~amendments should~~Company retrospectively adopted the standard on January 1, 2018 and reclassified restricted cash to be ~~applied using~~included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. Accordingly, the Company reclassified $176,924 of restricted cash into cash, cash equivalents, and restricted cash as of September 30, 2017, which resulted in an increase in net cash used in operating activities in the condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The adoption of the guidance also requires the Company to make disclosures about the nature of restricted cash balances. See previous discussion in Note 1. ‘Restricted Cash’ for these disclosures.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a ~~retrospective transition method, and are~~measurement period not to extend beyond one year form the enactment date. SAB 118 was codified by the FASB as part of ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The Company has completed its determination of the accounting implications of the 2017 Tax Act on its accruals. During the quarter, an income tax benefit of approximately $85,000 was recorded due to the change in the valuation allowance against the net deferred tax asset.
Additional new accounting guidance became effective for ~~fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The~~the Company ~~is currently evaluating~~effective January 1, 2018 that the ~~impact of these amendments~~Company reviewed and concluded was either not applicable to the Company's operations or had no material effect on ~~its~~the Company's consolidated financial statements.

Newly Issued Accounting Standards Not Yet Adopted
In ~~January 2017,~~February 2016, the FASB issued ASU No. ~~2017-01, “~~2016-02, ~~Business Combinations~~Leases (Topic ~~805): Clarifying the Definition~~842). The new guidance will require lessees to recognize a right-of-use asset and a lease liability for virtually all leases, other than leases with a term of ~~a Business,”~~12 months or less, and to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments should be applied prospectively, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.provide additional disclosures about leasing arrangements. Accounting by lessors is largely unchanged from existing accounting guidance. The Company will be required to adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2019. Early adoption is ~~currently evaluating the impact of these amendments on its consolidated financial statements.~~ permitted.

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~~In January 2017,~~While the ~~FASB issued ASU 2017-04, “~~~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~.” This update simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. This update is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is ~~currently~~still in the process of evaluating the impact ~~this standard will have~~of the new guidance on ~~the Company's~~its consolidated financial statements and disclosures, the Company expects adoption of the new guidance will have a material impact on its consolidated balance sheets due to recognition of the right-of-use asset and lease liability related ~~disclosures.~~to its operating leases. While the new guidance is also expected to impact the measurement and presentation of elements of expenses and cash flows related to leasing arrangements, the Company does not presently believe there will be a material impact on its consolidated statements of operations or consolidated statements of cash flows. Recognition of a lease liability related to operating leases will not impact any covenants related to the Company's long-term debt because the debt agreements specify that covenant ratios be calculated using U.S. GAAP in effect at the time the debt agreements were entered into.

~~In May 2017, the FASB~~The Company reviewed other newly issued ~~ASU No. 2017-09,~~ ~~“Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”~~ ~~to provide clarity~~accounting pronouncements and ~~reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change~~concluded that they either are not applicable to the ~~terms~~Company's operations or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718.The amendments are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoptionthat no material effect is ~~permitted, including adoption in an interim period. The Company is currently evaluating the impact this standard will have~~expected on the Company's ~~consolidated~~ financial statements ~~and related disclosures.~~upon future adoption.

~~In August 2017, the FASB issued ASU No. 2017-12,~~~~“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,”~~ to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. Specifically, the guidance creates better alignment of hedge accounting with risk management activities, eliminates the separate measurement and recording of hedge ineffectiveness, simplifies effectiveness assessments, and improves presentation and disclosure. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively. The Company is currently evaluating the impact of this amendment on its financial statements.
Note 2: ~~Acquisitions~~Acquisition

~~During the nine months ended September 30, 2016,~~On April 6, 2018, the Company entered into ~~a series of unrelated transactions with existing franchisees to re-acquire~~ an ~~aggregate of six developed franchises~~Asset and Franchise Purchase Agreement under which (i) the Company repurchased from the seller one ~~undeveloped~~operating franchise ~~throughout~~in San Diego, California and ~~New Mexico~~(ii) the parties agreed to terminate a second franchise agreement for an ~~aggregate purchase price of $1,025,000, subject to certain adjustments, consisting of cash of $839,000 and notes payable of $186,000. The Company is~~ operating ~~the six developed franchises as company-owned or managed clinics and has terminated the undeveloped clinic license. At the time these transactions were consummated, the Company carried~~ ~~a deferred revenue balance of $29,000, representing franchise fees collected upon the execution of the franchise agreements, and deferred franchise costs of $1,450, related to an undeveloped~~ franchise. The Company ~~accounted for~~intends to operate the ~~franchise rights associated with the undeveloped~~remaining franchise as a ~~cancellation, and~~company-managed clinic. The total purchase price for the ~~respective~~transaction was $100,000, less $12,998 of deferred revenue ~~and deferred franchise costs were netted against the aggregate~~resulting in total purchase ~~price.  The remaining $997,450 was accounted for as~~ consideration ~~paid for the acquired franchises.~~of $87,002.

The Company incurred approximately ~~$64,000~~$3,250 of transaction costs related to ~~these acquisitions for the nine months ended September 30, 2016,~~this acquisition, which are included in general and administrative expenses in the accompanying statements of operations.
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Purchase Price Allocation

The following summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed during ~~2016~~2018 as of the acquisition date:

Property and equipment $ 293,014 $ 17,964
Intangible assets 339,000 129,000
Favorable leases 140,728 15,302
Goodwill 269,780
Total assets acquired 1,042,522 162,266
Deferred membership revenue (45,072 )
Bargain purchase gain (75,264 )
Net purchase price $ 997,450 $ 87,002

Intangible assets in the table above consist of reacquired franchise rights of ~~$181,000~~$85,000 amortized over an estimated useful life of four years and customer relationships of ~~$158,000, and will be~~$44,000 amortized over ~~their~~an estimated useful ~~lives ranging from six to eight years and~~life of two ~~years, respectively.~~
Goodwill recorded in connection with these acquisitions was attributable to the workforce of the clinics and synergies expected to arise from cost savings opportunities. All of the recorded goodwill is tax-deductible. years.

Pro Forma Results of Operations (Unaudited)

The following table summarizes selected unaudited pro forma condensed consolidated statements of operations data for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 as if the ~~acquisitions~~acquisition in ~~2016~~2018 had been completed on January 1, ~~2016.~~2017.
Pro Forma for the Three Months Ended Pro Forma for the Nine Months Ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Revenues, net $ 8,062,550 $ 6,619,945 $ 22,791,369 $ 18,283,261
Net income (loss) $ (211,974 ) $ (432,669 ) $ (689,141 ) $ (2,790,165 )

Pro Forma for the Three Months Ended Pro Forma for the Nine Months Ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Revenues, net $ - $ 5,503,590 $ - $ 14,723,514
Net loss $ - $ (2,614,518 ) $ - $ (9,475,157 )
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This selected unaudited pro forma ~~condensed~~ consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the ~~acquisitions~~acquisition had been completed on that date. Moreover, this information is not indicative of what the Company’s future operating results will be. The information for ~~2016~~2017 and 2018 prior to the acquisition is included based on prior accounting records maintained by the acquired ~~companies.~~company. In some cases, accounting policies differed materially from accounting policies adopted by the Company following the ~~acquisitions.~~acquisition. For ~~2016,~~2018, this information includes actual data recorded in the Company’s ~~condensed consolidated~~ financial statements for the period subsequent to the date of the ~~acquisitions.~~acquisition. The Company’s condensed consolidated statement of operations for the three months ended September 30, ~~2016~~2018 includes net revenue and net income of approximately ~~$2.1 million~~$67,000 and ~~$0.1 million,~~$23,000, respectively, attributable to the ~~acquisitions.~~acquisition. The Company’s condensed consolidated statement of operations for the nine months ended September 30, ~~2016~~2018 includes net revenue and net income of approximately ~~$5.6 million~~$129,000 and ~~$0.5 million,~~$40,000, respectively, attributable to the ~~acquisitions.~~acquisition.

The pro forma amounts included in the table above reflect the application of accounting policies and adjustment of the results of the clinics to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied from January 1, ~~2016, together~~2017.
Note 3: Revenue Disclosures
Company-owned or Managed Clinics
The Company earns revenues from clinics that it owns and operates or manages throughout the United States. In those states where the Company owns and operates the clinic, revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing. Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed.  In other states where state law requires the chiropractic practice to be owned by a licensed chiropractor, the Company enters into a management agreement with the ~~consequential tax impacts.~~doctor’s PC. Under the management agreement, the Company provides administrative and business management services to the doctor’s PC in return for a monthly management fee. Due to certain implicit variable consideration in these management agreement contracts, and based on past practices between the parties, the Company determined that it cannot meet the probable threshold if it includes all of the variable consideration in the transaction price. Therefore, the Company recognizes revenue under these contracts only when it has a high degree of confidence that revenue will not be reversed in a subsequent reporting period.
Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees
The Company currently franchises its concept across 30 states. The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement primarily consists of (a) initial franchise fees; (b) continuing franchise fees (royalties); (c) advertising fees; and (d) software fees. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required.
The Company recognizes the primary components of the transaction price as follows:
Franchise fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the execution of the franchise agreement. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;
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• 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 monthly 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.
Prior to the adoption of ASC 606, the Company generally recognized the entire franchise fee as revenue at the clinic opening date. The impact on the Company's previously reported financial statements of the change from that policy to the policy described above is presented in Note 1, Nature of Operations and Summary of Significant Accounting Policies.
Under ASC 606, the Company will record advertising fees received under franchise agreements as advertising fund revenue. Under previously issued accounting guidance for franchisors, advertising revenue and expense were recognized in the same amount in each period. That guidance was superseded by ASC 606 such that advertising expense may now be different than the advertising revenue recognized as described above. The impact of these changes with respect to advertising fees and advertising expenses on the Company's previously reported financial statements was not material.
Regional Developer Fees
The Company currently utilizes eighteen regional developers to assist in the development of the brand across certain geographic territories. The arrangement is documented in the form of a regional developer agreement. The arrangement between the Company and the regional developer requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the regional developer, but instead represent a single performance obligation, which is the transfer of the development rights to the defined geographic region. The intellectual property subject to the development rights is symbolic intellectual property as it does not have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the development rights is to provide the regional developer with access to the brand’s symbolic intellectual property over the term of the agreement. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation.
The transaction price in a standard regional developer arrangement primarily consists of the initial territory fees. The Company recognizes the regional developer fee as revenue ratably on a straight-line basis over the term of the regional developer agreement commencing with the execution of the regional developer agreement. As these fees are typically received in cash at or near the beginning of the term of the regional developer agreement, the cash received is initially recorded as a contract liability until recognized as revenue over time.
Disaggregation of Revenue
The Company believes that the captions contained on the condensed consolidated statements of operations appropriately reflect the disaggregation of its revenue by major type for the three and nine months ended September 30, 2018 and 2017.

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Rollforward of Contract Liabilities and Contract Assets
Changes in the Company's contract liability for deferred franchise and regional development fees during the nine months ended September 30, 2018 were as follows (in thousands):
Deferred Revenue
short and long-term
Balance at December 31, 2017 $ 11,547
Recognized as revenue during the nine months ended September 30, 2018 (1,665 )
Fees received and deferred during the nine months ended September 30, 2018 2,431
Balance at September 30, 2018 $ 12,313
Changes in the Company's contract assets for deferred franchise costs during the nine months ended September 30, 2018 are as follows (in thousands):
Deferred Franchise Costs
short and long-term
Balance at December 31, 2017 $ 2,811
Recognized as cost of revenue during the nine months ended September 30, 2018 (468 )
Costs incurred and deferred during the nine months ended September 30, 2018 899
Balance at September 30, 2018 $ 3,242
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, 2018 (in thousands):
Contract liabilities expected to be recognized in Amount
2018 (remainder) $ 546
2019 2,165
2020 2,167
2021 2,042
2022 1,603
Thereafter 3,790
Total $ 12,313
Note 4. Restricted Cash
The table below reconciles the cash and cash equivalents balance and restricted cash balances from The Company’s condensed consolidated balance sheet to the amount of cash reported on the condensed consolidated statement of cash flows:
September 30, September 30,
2018 2017
Cash and cash equivalents $ 5,611,008 $ 2,628,648
Restricted cash 185,396 157,470
Total cash, cash equivalents and restricted cash $ 5,796,404 $ 2,786,118
Note 3:5: Notes Receivable
Effective July 2012, the Company sold a company-owned clinic, including the license agreement, equipment, and customer base, in exchange for a $90,000 unsecured promissory note. The note bore interest at 6% per annum for fifty-four months and required monthly principal and interest payments over forty-two months, beginning on August 2013. The note matured in January 2017 and was paid in full upon maturity.
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Effective July 2015, the Company entered into two license transfer agreements, in exchange for $10,000 and $29,925 in separate unsecured promissory notes. The non-interest-bearing notes require monthly principal payments over 24 months, beginning on September 1, 2015. The note was settled in full in 2017.
Effective May 2016, the Company entered into three license transfer agreements, in exchange for three separate $7,500 unsecured promissory notes. The non-interest-bearing notes require monthly principal payments over six months, beginning on May 1, 2017. The note matured in October, 2017 and was paid in full upon maturity.

Effective April 29, 2017, the Company entered into a regional developer agreement for certain territories in the state of Florida in exchange for $320,000, of which $187,000 was funded through a promissory note. The note bears interest at 10% per annum for 42 months and requires monthly principal and interest payments over 36 months, beginning November 1, 2017 and maturing on October 1, 2020. The note is ~~secured~~collateralized by the regional developer rights in the ~~respective~~ territory.

Effective August 31, 2017, the Company entered into a regional developer agreement for certain territories in Maryland/Washington DC in exchange for $220,000, of which $117,475 was funded through a promissory note. The note bears interest at 10% per annum for 36 months and requires monthly principal and interest payments over 36 months, beginning September 1, 2017 and maturing on August 1, 2020. The note is ~~secured~~collateralized by the regional developer rights in the ~~respective~~ territory.
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Effective September 22, 2017, the Company entered into a regional developer and asset purchase agreement for certain territories in Minnesota in exchange for $228,293, of which $119,147 was funded through a promissory note. The note bears interest at 10% per annum for 36 months and requires monthly principal and interest payments over 36 months, beginning October 1, 2017 and maturing on September 1, 2020. The note is ~~secured~~collateralized by the regional developer rights in the ~~respective~~territory. The note was paid in full on September 28, 2018.
Effective October 10, 2017, the Company entered into a regional developer agreement for certain territories in Texas, Oklahoma and Arkansas in exchange for $170,000, of which $135,688 was funded through a promissory note. The note bears interest at 10% per annum for 36 months and requires monthly principal and interest payments over 36 months, beginning September 24, 2017 and maturing on October 24, 2020. The note is collateralized by the regional developer rights in the territory.

The net outstanding balances of the notes as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 were ~~$424,560~~$313,143 and ~~$40,826,~~$523,785, respectively.
Maturities of notes receivable as of September 30, 2018 are as follows:

2018 (remaining) $ 35,071
2019 149,349
2020 128,723
Total $ 313,143
Note 4:6: Property and Equipment

Property and equipment ~~consists~~consist of the following:

September 30, December 31, September 30, December 31,
2017 2016 2018 2017

Office and computer equipment $ 1,126,758 $ 1,083,039 $ 1,214,801 $ 1,137,970
Leasehold improvements 5,099,374 5,085,366 5,361,821 5,117,379
Software developed 1,048,697 891,192 1,145,742 1,066,454
7,274,829 7,059,597 7,722,364 7,321,803
Accumulated depreciation (3,664,357 ) (2,566,172 ) (4,665,685 ) (3,928,349 )
3,610,472 4,493,425 3,056,679 3,393,454
Construction in progress 239,480 231,281 213,060 407,012
$ 3,849,952 $ 4,724,706 $ 3,269,739 $ 3,800,466

Depreciation expense was $258,007 and $806,625 for the three and nine months ended September 30, 2018, respectively. Depreciation expense was $340,238 and $1,099,698 for the three and nine months ended September 30, 2017, respectively. ~~Depreciation expense was $492,076~~
In August 2018, the Board of Directors approved a change in strategy as it relates to the development of the Company’s IT platform. The Company will move away from internal development and ~~$1,356,176~~utilize a third party software-as-a-service CRM platform as the basis for its IT infrastructure. Based on this decision, the Company recorded an impairment of approximately $343,000 of previously capitalized software development costs during the three ~~and nine~~ months ended September 30, ~~2016, respectively.~~ 2018.

In December 2016, the Company determined that 14 clinics from its Corporate Clinics segment met the criteria for classification as held for sale. Accordingly, in December 2016, the Company recognized a $2.4 million impairment charge to lower the carrying costs of the property and equipment to its estimated fair value less cost to sell which was recorded in the loss on disposition or impairment line of the 2016 consolidated statement of operations. The Company completed the sale of the property in the first quarter of 2017 for nominal consideration.
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Note 5:7: Fair Value Consideration

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.

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks.

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

As of September 30, ~~2017,~~2018, and December 31, ~~2016,~~2017, the Company did not have any financial instruments that were measured on a recurring basis as Level 1, 2 or 3.
The intangible assets resulting from the acquisition (reference Note 2) were recorded at fair value on a non-recurring basis and are considered Level 3 within the fair value hierarchy.
Note 6:8: Intangible Assets
On July 26, 2018, the Company entered into an agreement under which it repurchased the regional development rights to develop franchises in Las Vegas, Nevada. The total consideration for the transaction was $278,250, paid in cash.The Company carried a deferred revenue balance associated with these transactions of $26,934, representing license fees collected upon the execution of the regional developer agreements.  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.
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Intangible assets consist of the following:

As of September 30, 2017 As of September 30, 2018
Gross Carrying Accumulated Net Carrying Gross Carrying Accumulated Net Carrying
Amount Amortization Value Amount Amortization Value
Amortized intangible assets:
Reacquired franchise rights $ 1,673,000 $ 596,129 $ 1,076,871 $ 1,758,000 $ 854,011 $ 903,989
Customer relationships 701,000 649,417 51,583 745,000 711,999 33,001
Reacquired development rights 1,162,000 401,847 760,153 1,413,316 584,984 828,332
$ 3,536,000 $ 1,647,393 $ 1,888,607 $ 3,916,316 $ 2,150,994 $ 1,765,322

As of December 31, 2016 As of December 31, 2017
Gross Carrying Accumulated Net Carrying Gross Carrying Accumulated Net Carrying
Amount Amortization Value Amount Amortization Value
Amortized intangible assets:
Reacquired franchise rights $ 1,673,000 $ 410,688 $ 1,262,312 $ 1,673,000 $ 657,943 $ 1,015,057
Customer relationships 701,000 509,042 191,958 701,000 674,667 26,333
Reacquired development rights 1,162,000 277,348 884,652 1,162,000 443,348 718,652
$ 3,536,000 $ 1,197,078 $ 2,338,922 $ 3,536,000 $ 1,775,958 $ 1,760,042

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Amortization expense was $131,262 and $375,036 for the three and nine months ended September 30, 2018, respectively. Amortization expense was $128,562 and $450,315 for the three and nine months ended September 30, 2017, respectively. ~~Amortization expense was $203,503 and $552,062 for the three and nine months ended September 30, 2016, respectively.~~

Estimated amortization expense for ~~2017~~2018 and subsequent years is as follows:

2017 (remaining) $ 128,564
2018 439,589
2018 (remainder) $ 131,262
2019 413,256 525,048
2020 413,256 508,551
2021 348,034 437,830
2022 150,418
Thereafter 145,908 12,213
Total $ 1,888,607 $ 1,765,322

Note 7:9: Debt

Notes Payable

During 2015, the Company ~~delivered~~issued 12 notes payable, which matured through February 2017, totaling $800,350 as a portion of the consideration paid in connection with the Company’s various acquisitions. Interest rates ~~range~~ranged from 1.5% to 5.25% ~~with maturities through February 2017.~~.

During 2016, the Company ~~delivered~~issued two notes payable totaling $186,000 as a portion of the consideration paid in connection with the Company’s various acquisitions. Interest rates for both notes are 4.25% with maturities through May of 2017. ~~The remaining~~There is one outstanding note ~~payable is expected to~~which will be ~~settled in~~paid upon execution of a final settlement and release agreement between the ~~quarter ended December 31, 2017.~~parties.

Maturities of notes payable are as follows as of September 30, ~~2017:~~2018:

2017 (remaining) $ 100,000
Thereafter -
Total $ 100,000
2018 (remainder) $ 100,000
Total $ 100,000
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Credit and Security Agreement

On January 3, 2017, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) and signed a revolving credit note payable to the lender. Under the Credit Agreement, the Company is able to borrow up to an aggregate of $5,000,000 under revolving loans. Interest on the unpaid outstanding principal amount of any revolving loans is at a rate equal to 10% per annum, provided that the minimum amount of interest paid in the aggregate on all revolving loans granted over the term of the Credit Agreement is $200,000. Interest is due and payable on the last day of each fiscal quarter in an amount determined by the Company, but not less than $25,000. The ~~lender’s lending commitments under the~~ Credit Agreement ~~terminate~~terminates in December 2019, unless sooner terminated in accordance with the provisions of the Credit Agreement. The Credit Agreement is collateralized by the assets in the Company’s company-owned or managed clinics. The Company is using the credit facility for general working capital needs. As of September 30, ~~2017,~~2018, the Company had drawn $1,000,000 of the $5,000,000 available under the Credit Agreement.
Note 8:10: Equity

Stock Options

In the nine months ended September 30, ~~2017,~~2018, the Company granted ~~195,286~~110,792 stock options to employees with exercise prices ranging from ~~$2.65~~$4.92 - ~~$3.88.~~$8.25.
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Upon the completion of the Company’s IPO in November 2014, its stock trading price became 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, it will rely upon the volatilities from publicly traded companies with similar business models until its common stock has accumulated enough trading history for it to utilize its own historical volatility. The expected life of the options granted is based on the average of the vesting term and the contractual term of the option. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury 10-year yield curve in effect at the date of the grant.

The Company has computed the fair value of all options granted during the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, using the following assumptions:

Nine Months Ended September 30, Nine Months Ended September 30,
2017 2016 2018 2017
Expected volatility 42% 43% - 45% 35% 42%
Expected dividends None None None None
Expected term (years) 5.5 to 7 7 7 5.5 - 7
Risk-free rate 1.98% to 2.14% 1.19% to 1.68% 2.53% to 2.90% 1.98% to 2.14%
Forfeiture rate 20% 20% 20% 20%

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The information below summarizes the stock options activity:

Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Number of Exercise Fair Remaining Number of Exercise Fair Remaining
Shares Price Value Contractual Life Shares Price Value Contractual Life
Outstanding at December 31, 2016 953,075 $ 3.66 $ 1.86 6.9 953,075 $ 3.66 $ 1.86 6.9
Granted at market price 195,286 3.70 295,286 4.31
Exercised (106,221 ) 1.20 (206,875 ) 1.76
Cancelled (30,454 ) 5.21 (37,570 ) 5.11
Outstanding at September 30, 2017 1,011,686 $ 3.87 $ 1.76 7.4
Exercisable at September 30, 2017 370,634 $ 4.67 $ 2.17 5.6
Outstanding at December 31, 2017 1,003,916 $ 4.18 $ 1.87 8.1
Granted at market price 110,792 6.97
Exercised (86,640 ) 3.44
Cancelled (67,855 ) 3.37
Outstanding at Sepember 30, 2018 960,213 $ 4.63 $ 2.05 7.0
Exercisable at September 30, 2018 476,189 $ 4.74 $ 2.08 7.0
The intrinsic value of the Company’s stock options outstanding was ~~$1,405,592~~$ 3,815,537 at September 30, ~~2017.~~2018.

For the three and nine months ended September 30, 2018, stock-based compensation expense for stock options was $62,951 and $271,764, respectively. For the three and nine months ended September 30, 2017, stock-based compensation expense for stock options was $125,588 and $261,471, respectively. ~~For the three and nine months ended September 30, 2016, stock based compensation expense for stock options was $183,608, and $522,519, respectively.~~ Unrecognized stock-based compensation expense for stock options as of September 30, ~~2017~~2018 was ~~$716,667,~~$792,031, which is expected to be recognized ratably over the next ~~2.2~~2.77 years.

Restricted Stock

The information below summaries the restricted stock activity:

Restricted Stock Awards Shares
Outstanding at December 31, ~~2016~~2017 ~~92,415~~63,700
Awards granted ~~59,700~~50,134
Awards vested (~~76,070~~61,700 )
Awards forfeited (~~12,345~~1,000 )
Outstanding at September 30, ~~2017~~2018 ~~63,700~~51,134
For the three and nine months ended September 30, 2018, stock-based compensation expense for restricted stock was $59,825 and $197,641, respectively. For the three and nine months ended September 30, 2017, stock-based compensation expense for restricted stock was $59,804 and $151,041, respectively. ~~For the three and nine months ended September 30, 2016, stock based compensation expense for restricted stock was $71,698, and $490,181, respectively.~~ Unrecognized ~~stock based~~stock-based compensation expense for restricted stock awards as of September 30, ~~2017~~2018 was ~~$206,502~~$316,807, which is expected to be recognized ratably over the next ~~year.~~ 2.06 years.

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~~Treasury Stock~~
In December 2013, the Company exercised its right of first refusal under the terms of a Stockholders Agreement dated March 10, 2010 to repurchase 534,000 shares of the Company’s common stock. The shares were purchased for $0.45 per share or $240,000 in cash along with the issuance of an option to repurchase the 534,000 shares. The repurchased shares were recorded as treasury stock, at cost in the amount of $791,638. The option is classified in equity as it is considered indexed to the Company’s stock and meets the criteria for classification in equity.  The option was granted to the seller for a term of 8 years.  The option contained the following exercise prices:
Year 1 $ 0.56
Year 2 $ 0.68
Year 3 $ 0.84
Year 4 $ 1.03
Year 5 $ 1.28
Year 6 $ 1.59
Year 7 $ 1.97
Year 8 $ 2.45
Consideration given in the form of the option was valued using a Binomial Lattice-Based model resulting in a fair value of $1.03 per share option for a total fair value of $551,638. The option was valued using the Binomial Lattice-Based valuation methodology because that model embodies all of the relevant assumptions that address the features underlying the instrument.
During December 2016, the option holder partially exercised the call option and purchased 250,872 shares at a total repurchase price of $210,000. The Company reduced the cost of treasury shares by approximately $113,000 related to the transaction, reduced the value of the option by approximately $259,000, and reduced additional paid-in-capital by approximately $162,000.
During September 2017, the option holder exercised the remainder of the call option and purchased 283,128 shares at a total repurchase price of $292,671. The Company reduced the cost of treasury shares by approximately $127,000 related to the transaction, reduced the value of the option by approximately $292,000, and reduced additional paid-in-capital by approximately $127,000.
Note 9:11: Income Taxes

~~For~~During the three and nine months ended September 30, 2018, the Company recorded income tax benefits of approximately $50,000 and $108,000, respectively. The Company’s effective tax rate differs from the federal statutory tax rate due to permanent differences, state taxes and changes in the valuation allowance.
During the three and nine months ended September 30, 2017, the Company recorded an income tax expense of approximately $36,000 and $79,000, respectively, with the difference between the Company’s effective tax rate and the federal statutory tax rate due to state tax expense and a valuation allowance on the Company's deferred tax assets and the impact of certain permanent differences ~~and penalties related to state income tax filings pursuant to a voluntary disclosure agreement which was rejected by the tax authority.~~on taxable income.

For the three and nine months ended September 30, 2016, the Company recorded income tax expense of approximately $14,000 and $132,000, respectively, due to a revised estimate for the valuation allowance on the company’s deferred tax assets, as well as state tax expense as a result of current year state income taxes and a lower estimate of income tax refunds available through net operating loss (NOL) carrybacks.

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Note ~~10:~~12: Related Party Transactions

The Company entered into ~~consulting and~~a legal ~~agreements~~agreement with a certain common ~~stockholders~~stockholder related to services performed for the operations and transaction related activities of the Company. Amounts paid to or for the benefit of ~~these stockholders~~this stockholder was approximately $78,000 and $194,000 for the three and nine months ended September 30, 2018, respectively. Amounts paid to or for the benefit of this stockholder was approximately $56,000 and $169,000 for the three and nine months ended September 30, 2017, respectively. ~~Amounts paid to or for the benefit of these stockholders was approximately $111,000 and $421,000 for the three and nine months ended September 30, 2016, respectively.~~
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Note ~~11:~~13: Commitments and Contingencies

Operating Leases

The Company leases its corporate office space and the space for each of the company-owned or managed clinics in the portfolio.
Total rent expense for the three and nine months ended September 30, 2018 was $725,867 and $2,117,624, respectively.  Total rent expense for the three and nine months ended September 30, 2017 was $688,031 and $2,114,118, respectively. ~~Total rent expense for the three and nine months ended September 30, 2016 was $903,771 and $2,510,782, respectively.~~

Future minimum annual lease payments are as follows:

2017 (remaining) $ 599,401
2018 1,910,339
2018 (remainder) $ 658,905
2019 1,591,678 2,450,981
2020 1,321,133 2,192,597
2021 1,180,012 2,081,455
2022 1,072,743 1,972,180
Thereafter 3,060,963 3,377,973
Total $ 10,736,269 $ 12,734,091
The Company has recognized liabilities from costs associated with the termination of certain operating leases. The Company has recorded the cumulative effect of a change resulting from a revision to either the timing or the amount of estimated cash flows in the period as follows:
Lease exit liability at December 31, 2017 $ 299,400
Additions or changes in estimates 250,704
Settlements (153,220 )
Net accretion (36,614 )
Lease exit liability at September 30, 2018 $ 360,270

Note ~~12:~~14: 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. The Corporate Clinics segment is comprised of the operating activities of the company-owned or managed clinics. As of September 30, ~~2017,~~2018, the Company operated or managed 4748 clinics under this segment. The Franchise Operations segment is comprised of the operating activities of the franchise business unit. As of September 30, ~~2017,~~2018, the franchise system consisted of ~~342~~374 clinics in operation. Corporate is a non-operating segment that develops and implements strategic initiatives and supports the Company’s two operating business segments by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, legal and human resources. Corporate also provides the necessary administrative functions to support the Company as a ~~publicly traded~~publicly-traded company. A portion of the expenses incurred by Corporate are allocated to the operating segments.

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The tables below present financial information for the Company’s two operating business segments (in thousands):. The prior period comparatives have been adjusted to reflect the changes from ASC 606.
Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(as adjusted) (as adjusted)
Revenues:
Corporate clinics $ 3,675 $ 2,930 $ 10,352 $ 8,106
Franchise operations 4,387 3,608 12,365 9,939
Total revenues $ 8,062 $ 6,538 $ 22,717 $ 18,045

Segment operating (loss) income:
Corporate clinics $ 440 $ (196 ) $ 466 $ (1,651 )
Franchise operations 2,130 1,643 5,919 4,321
Total segment operating (loss) income $ 2,570 $ 1,447 $ 6,385 $ 2,670

Depreciation and amortization:
Corporate clinics $ 276 $ 379 $ 825 $ 1,222
Franchise operations - - - -
Corporate administration 113 90 357 328
Total depreciation and amortization $ 389 $ 469 $ 1,182 $ 1,550

Reconciliation of total segment operating income (loss) to consolidated earnings (loss) before income taxes (in thousands):
Total segment operating (loss) income $ 2,570 $ 1,447 $ 6,385 $ 2,670
Unallocated corporate (2,761 ) (1,853 ) (7,116 ) (5,776 )
Consolidated loss from operations (191 ) (406 ) (731 ) (3,106 )
Bargain purchase gain - - 75 -
Other (expense) income, net (11 ) 10 (33 ) (34 )
Loss before income tax expense $ (202 ) $ (396 ) $ (689 ) $ (3,140 )
For the nine months ended September 30, 2017, $418,000 of loss on disposition/impairment has been reclassified from unallocated corporate to the corporate clinic segment operating loss to align with current year presentation.
September 30, December 31,
2018 2017
Segment assets: (as adjusted)
Corporate clinics $ 8,906 $ 8,998
Franchise operations 4,221 3,888
Total segment assets $ 13,127 $ 12,886

Unallocated cash and cash equivalents and restricted cash $ 5,796 $ 4,320
Unallocated property and equipment 234 765
Other unallocated assets 647 465
Total assets $ 19,804 $ 18,436

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Revenues:
Corporate clinics $ 2,930 $ 2,341 $ 8,106 $ 6,137
Franchise operations 3,616 3,163 10,128 8,605
Total revenues $ 6,546 $ 5,504 $ 18,234 $ 14,743

Segment operating (loss) income:
Corporate clinics $ (196 ) $ (1,527 ) $ (1,233 ) $ (4,863 )
Franchise operations 1,671 1,195 4,479 3,197
Total segment operating (loss) income $ 1,475 $ (332 ) $ 3,246 $ (1,666 )

Depreciation and amortization:
Corporate clinics $ 379 $ 599 $ 1,222 $ 1,625
Franchise operations - - - -
Corporate administration 90 97 328 283
Total depreciation and amortization $ 469 $ 696 $ 1,550 $ 1,908

Reconciliation of total segment operating income (loss) to consolidated earnings (loss) before income taxes (in thousands):
Total segment operating (loss) income $ 1,475 $ (332 ) $ 3,246 $ (1,666 )
Unallocated corporate (1,853 ) (2,287 ) (6,195 ) (7,620 )
Consolidated loss from operations (378 ) (2,619 ) (2,949 ) (9,286 )
Other (expense) income, net 10 6 (34 ) 5
Loss before income tax expense $ (368 ) $ (2,613 ) $ (2,983 ) $ (9,281 )

September 30, December 31,
2017 2016
Segment assets:
Corporate clinics $ 9,250 $ 10,481
Franchise operations 2,353 2,003
Total segment assets $ 11,603 $ 12,484

Unallocated cash and cash equivalents and restricted cash $ 2,786 $ 3,344
Unallocated property and equipment 655 781
Other unallocated assets 604 446
Total assets $ 15,648 $ 17,055
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“Unallocated cash and cash equivalents and restricted cash” relates primarily to corporate cash and cash equivalents and restricted cash (see Note 1), “unallocated property and equipment” relates primarily to corporate fixed assets, and “other unallocated assets” relates primarily to deposits, prepaid and other assets.

The Company reclassified approximately $545,000 of assets from Other unallocated assets to Corporate clinics segment assets for the year ended December 31, 2016 to align with current period presentation of segment assets.
Note ~~13:~~15: Subsequent Events

OnEffective October ~~10, 2017,~~5, 2018, the Company entered into a regional developer agreement for ~~a number of counties~~certain territories in the state of ~~Texas, one county~~California in exchange for cash of $280,000.
Effective October 5, 2018, the Company entered into a regional developer agreement for certain territories in the state of ~~Arkansas, and the entire state~~Florida in exchange for cash of ~~Oklahoma. The party paid an initial development fee of~~ $170,000. The development schedule requires the opening and operating of a minimum of 22 clinics over a ten-year period. A portion of the development fee will be funded through a promissory note. The note will bear interest at 10% per annum for 36 months and requires monthly principal and interest payments, beginning November 24, 2017 and maturing on October 24, 2020.

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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, ~~2016~~2017 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 Item 1A of our Form 10-K for the year ended December 31, ~~2016 and in Part II, Item 1A of this Form 10-Q for the quarter ended September 30,~~ 2017. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider these risks and uncertainties and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. Some of the important factors contained in Item 1A of our Form 10-K for the year ended December 31, 2017 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:

• 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;

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• we have limited experience operating company-owned or managed clinics, and we may not be able to duplicate the success of some of our ~~franchisees, and in the case of certain company-owned or managed clinics that we have closed or may close, we were not able to duplicate the success of our most successful~~ franchisees;
• ~~we may not be able to continue to sell franchises to qualified franchisees;~~
• ~~we may not be able to identify, recruit and train enough qualified chiropractors to staff our clinics;~~
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• ~~new clinics may not be profitable, and we may not be able to maintain or improve revenues and franchise fees from existing franchised clinics;~~

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

• any acquisitions that we make could disrupt our business and harm our financial condition;

• we may not be able to continue to sell franchises to qualified franchisees;
• we may not be able to identify, recruit and train enough qualified chiropractors to staff our clinics;
• new clinics may not be profitable, 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 ~~competitors, which could prevent us from increasing our market share or result in reduction in our market share;~~competitors;

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

• we may face 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;

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

• we face increased costs as a result of being a public company.

Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the Securities and Exchange Commission. Any forward-looking statements in this report should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.

Overview

Our principal business is to develop, own, operate, support and manage chiropractic clinics through franchising and the sale of regional developer rights and through direct ownership and management arrangements throughout the United States.

We ~~seek~~strive to be the leading provider of chiropractic care in the markets we serve and to ~~become the most recognized~~increase brand recognition in our industry through the ~~rapid and focused~~ expansion of chiropractic clinics in key markets throughout North America and abroad.
We believe that we have an attractive business concept, benefiting 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 strong preference we have seen among chiropractic doctors to reject the insurance-based model, to produce a dynamic 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.

Key Performance Measures.  We receive both weekly and monthly performance reports from our clinics which include key performance indicators including gross clinic sales, total royalty income, and patient office visits. We believe these indicators provide us with useful data with which to measure our performance and to measure our franchisees’ and clinics’ performance.

Key Clinic Development Trends.   As of September 30, 2018, we and our franchisees operated 422 clinics. Of the 48 company-owned or managed clinics, 16 were constructed and developed by us, and 32 were acquired from franchisees.
Our current ~~growth~~ strategy is to grow through the sale and development of additional franchises and ~~regional developer territories and~~ to foster the growth of acquired and developed clinics that ~~are owned~~we own and manage. In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned or managed ~~by us.~~clinics through 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. Finally, we have executed one lease for a future greenfield clinic location, and have additional letters-of-intent in place for further greenfield expansion in the coming months.
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We believe that The Joint has a sound concept, benefiting 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 strong 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.
Significant Events and/or Recent Developments
We continue to deliver on our strategic initiatives and to progress toward sustained profitability. In 2018 to date, we have continued to follow or have implemented these three key strategies with the goal of accelerating growth: (1) continued acceleration of franchise sales; (2) continued execution of our regional developer strategy; and (3) expansion of our corporate clinics portfolio within clustered locations. Following these strategic initiatives, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, we ~~added a net of 33 franchised clinics and closed~~saw gross system-wide sales grow by 31%, system-wide comp sales – or ~~sold 14 company-owned or managed clinics in the Chicago area and in Upstate New York as part of our plan to improve cash usage and progress toward profitability. This brought the total number~~“same store” retail sales of clinics ~~to 389 as of September 30, 2017, up from 370 total clinics~~that have been open for at ~~December 31, 2016,~~least 13 full months – increase by 26%, and ~~354 at September 30, 2016.~~
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~~We recognize the critical importance of preserving cash~~our revenue grow by 26%. These factors drove improvement in our bottom line, and ~~strengthening clinics~~ we have already developed. Therefore, we will not actively pursue the addition of company-owned or managed clinics during the 2017 fiscal year, but will address strategic opportunities as they present themselves. Scaling back the launch of company-owned or managed clinics will allow us to continue to ~~focus on growing gross sales, streamlining operations across all company-owned or managed clinics and expanding franchise development. During~~drive toward sustainable profitability with our net loss decreasing by $2.6 million to $0.6 million for the nine months ended September 30, 2017, our company-owned or managed clinics continued to demonstrate improved performance. As of September 30, 2017, we had 47 company-owned or managed clinics which represented 12% of the clinic portfolio,2018 as compared to ~~61, or 17% of the clinic portfolio, at the same point of the previous year.~~
~~Recent Developments~~
In January 2017, we entered into a Credit and Security Agreement (the “Credit Agreement”) and signed a revolving credit note payable to the lender. Under the Credit Agreement, we are able to borrow up to an aggregate of $5,000,000 under revolving loans. Interest on the unpaid outstanding principal amount of any revolving loans is at a rate equal to 10% per annum, provided, however, that the minimum amount of interest paid in the aggregate on all revolving loans granted over the term of the Credit Agreement is $200,000. Interest is due and payable on the last day of each fiscal quarter in an amount determined by us, but not less than $25,000. The lender’s lending commitments under the Credit Agreement terminate in December 2019, unless sooner terminated in accordance with the provisions of the Credit Agreement. We are using the credit facility for general working capital needs. We have drawn $1,000,000 of the $5,000,000 available under the Credit Agreement.
In January 2017, we sold the assets of six of our 11 clinics in the Chicago area for a nominal amount to a limited liability company that includes existing franchisees. The purchaser operates the clinics as franchised locations pursuant to a franchise agreement. Concurrently, we sold regional developer rights to the Chicago area to the purchaser of our six Chicago clinics for $300,000. Pursuant to the regional developer agreement, the developer has agreed to open a minimum of 30 Chicago area clinics over the next 10 years, with plans to open five to 10 clinics over the 18 months following January 2017. We have closed the remaining five Chicago-area clinics, as well as three Company-managed clinics in upstate New York. We recognized an additional lease exit liability in the first quarter of 2017 of $739,000 related to these closures. These assets were designated as held for sale as of December 31, 2016, and we recognized a loss on disposition or impairment of approximately $3.5 million. We made these tactical decisions in the 4^th ~~quarter of 2016 to reduce our current cash usage, allowing us to focus on accelerating the point at which we believe we will achieve cash-flow breakeven.~~
In addition to the Chicago regional developer rights discussed above, during the first quarter of 2017, we sold regional developer territories for Philadelphia and Washington State for a total, including the Chicago area, of approximately $650,000. Their combined development schedule requires the opening and operating of a minimum of 70 clinics over a ten-year period. The revenues related to these sales will be recognized over the estimated number of franchised clinics to be opened in the respective territories.
During the three months ended June 30, 2017, we sold two regional developer territories for Central Florida and Ohio for a total of $620,000. Their combined development schedule requires the opening and operating of a minimum of 68 new clinics (34 in each territory) over a ten-year period.
During the three months ended September 30, 2017, we sold three regional developer territories for New Jersey, Maryland/Washington DC and Minnesota for a total of approximately $440,000. Their combined development schedule requires the opening and operating of a minimum of 50 new clinics over a ten-year period, with respect to New Jersey and Maryland/Washington DC and a five-year period for the Minnesota territory.
~~During~~ the nine months ended September 30, ~~2017, we terminated two franchise licenses that were in default. In conjunction with these terminations, during the nine months ended~~2017. Further, cash and cash equivalents increased to $5.6 million at September 30, ~~2017, we recognized $62,915 of revenue and $16,800 of costs, which were previously deferred.~~2018 compared to $4.2 million at December 31, 2017.
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Factors Affecting Our Performance

Our ~~quarterly~~ operating results may fluctuate significantly as a result of a variety of factors, including the timing of new clinic openings, markets in which ~~we operate~~they are contained and related expenses, general economic conditions, consumer confidence in the economy, consumer preferences, and competitive factors.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard also calls for additional disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP. We adopted the new standard effective January 1, 2018.

Significant Accounting Polices and Estimates

There were no changes in our significant accounting policies and estimates during the nine months ended September 30, ~~2017~~2018 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017, except as outlined in Note 1, Nature of Operations and Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report as it relates to revenue recognition under ASC 606.

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.

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Total Revenues – Three Months Ended September 30, ~~2017~~2018

Components of revenues for the three months ended September 30, ~~2017~~2018 as compared to the three months ended September 30, ~~2016, are~~2017, were as follows:

Three Months Ended Three Months Ended
September 30, September 30,
2017 2016 Change from
Prior Year Percent Change
from Prior Year 2018 2017 Change from
Prior Year Percent Change
from Prior Year
Revenues:
Revenues and management fees from company clinics $ 2,929,850 $ 2,341,471 $ 588,379 25.1 % $ 3,674,704 $ 2,929,850 $ 744,854 25.4 %
Royalty fees 1,958,249 1,540,264 417,985 27.1 % 2,588,666 1,958,249 630,417 32.2 %
Franchise fees 229,715 602,400 (372,685 ) (61.9 )% 457,516 381,777 75,739 19.8 %
Advertising fund revenue 775,221 595,955 179,266 30.1 % 736,987 775,221 (38,234 ) (4.9 )%
IT related income and software fees 290,250 235,925 54,325 23.0 % 324,250 290,250 34,000 11.7 %
Regional developer fees 259,230 123,921 135,309 109.2 % 142,651 99,215 43,436 43.8 %
Other revenues 103,336 63,654 39,682 62.3 % 137,776 103,336 34,440 33.3 %

Total revenues $ 6,545,851 $ 5,503,590 $ 1,042,261 18.9 % $ 8,062,550 $ 6,537,898 $ 1,524,652 23.3 %

The reasons for the significant changes in our components of total revenues ~~are~~were as follows:

Consolidated Results

Total revenues increased by ~~$1.0~~$1.5 million, primarily due to the continued revenue growth of our company-owned or managed clinics portfolio and continued expansion and revenue growth of our franchise base.

Corporate Clinics

Revenues and management fees from company-owned or managed clinics increased, primarily due ~~primarily~~ to improved same-store sales growth.

Franchise Operations

Royalty fees ~~have~~ 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, ~~2017,~~2018, and ~~2016,~~2017, there were ~~342~~374 and ~~293~~342 franchised clinics in operation, respectively.

Franchise fees ~~decreased~~increased due to ~~the timing of~~an increase in franchise license terminations and fewer clinic openings. In the three months ended September 30, 2017 and 2016, we recognized revenue of $63,000 and $196,000, respectively, from terminated licenses. In the three months ended September 30, 2017 and 2016, 6 and 13 new franchised clinics opened, respectively.
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agreements executed.

Regional developer fees increased due to the ~~timing~~sale of additional regional developer territories and the related revenue recognition onover the ~~clinic openings on specific RD territories.~~life of the regional developer agreement.

~~IT related income and software~~Software fees ~~and advertising fund~~ revenue increased due to an increase in our franchise clinic base as described above.

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Total Revenues – Nine Months Ended September 30, ~~2017~~2018

Components of revenues for the nine months ended September 30, ~~2017~~2018 as compared to the nine months ended September 30, ~~2016, are~~2017 were as follows:

Nine Months Ended Nine Months Ended
September 30, September 30,
2017 2016 Change from
Prior Year Percent Change
from Prior Year 2018 2017 Change from
Prior Year Percent Change
from Prior Year
Revenues:
Revenues and management fees from company clinics $ 8,106,121 $ 6,137,277 $ 1,968,844 32.1 % $ 10,352,013 $ 8,106,121 $ 2,245,892 27.7 %
Royalty fees 5,518,409 4,337,643 1,180,766 27.2 % 7,283,839 5,518,409 1,765,430 32.0 %
Franchise fees 1,036,815 1,641,409 (604,594 ) (36.8 )% 1,254,997 1,041,151 213,846 20.5 %
Advertising fund revenue 1,995,235 1,218,256 776,979 63.8 % 2,083,769 1,995,235 88,534 4.4 %
IT related income and software fees 839,788 686,459 153,329 22.3 %
Software fees 947,635 839,788 107,847 12.8 %
Regional developer fees 455,859 496,538 (40,679 ) (8.2 )% 415,075 262,102 152,973 58.4 %
Other revenues 282,289 225,086 57,203 25.4 % 379,970 282,289 97,681 34.6 %

Total revenues $ 18,234,516 $ 14,742,668 $ 3,491,848 23.7 % $ 22,717,298 $ 18,045,095 $ 4,672,203 25.9 %

The reasons for the significant changes in our components of total revenues ~~are~~were as follows:

Consolidated Results

Total revenues increased by ~~$3.5~~$4.7 million, primarily due to the continued revenue growth of our company-owned or managed clinics portfolio and continued expansion and revenue growth of our franchise base.

Corporate Clinics

Revenues and management fees from company-owned or managed clinics increased, primarily due ~~primarily~~ to improved same-store sales ~~growth, which includes contributions from clinics acquired in the second quarter of 2016.~~growth.

Franchise Operations

Royalty fees ~~have~~ 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, ~~2017,~~2018, and ~~2016,~~2017, there were ~~342~~374 and ~~293~~342 franchised clinics in operation, respectively.

Franchise fees ~~decreased~~increased due to an increase in franchise agreements executed.
Regional developer fees increased due to the ~~timing~~sale of ~~franchise license terminations. In~~additional regional developer territories and the ~~nine months ended September 30, 2017 and 2016, we recognized~~related revenue recognition over the life of ~~$63,000 and $477,000, respectively, from terminated licenses.~~the regional developer agreement.

~~IT related income and software~~Software fees and advertising fund revenue increased due to an increase in our franchise clinic base as described above.
Cost of Revenues

Cost of Revenues 2017 2016 Change from
Prior Year Percent Change
from Prior Year 2018 2017 Change from
Prior Year Percent Change
from Prior Year

Three Months Ended September 30, $ 819,200 $ 718,762 $ 100,438 14.0 % $ 1,084,707 $ 839,144 $ 245,563 29.3 %
Nine Months Ended September 30, 2,331,522 2,186,464 145,058 6.6 % 3,108,623 2,299,297 809,326 35.2 %
26

For the three months ended September 30, ~~2017,~~2018, as compared with the ~~same period last year,~~three months ended September 30, 2017, the total cost of revenues increased ~~slightly~~ due to an increase in regional developer royalties of ~~$149,000~~$0.2 million triggered by an increase ofin franchise royalty revenues of approximately ~~27% as compared to the same quarter in the prior year, offset by a reduction of $69,000 in regional developer commissions recognized in conjunction with franchise openings.~~ 32%.

For the nine months ended September 30, ~~2017,~~2018, as compared with the ~~same period last year,~~nine months ended September 30, 2017, the total cost of revenues increased ~~slightly~~ due to an increase in regional developer royalties of ~~$330,000~~$0.7 million triggered by an increase ofin franchise royalty revenues of approximately ~~27% as compared to the same quarter in the prior year, offset by a reduction~~32%, and an increase of ~~$178,000~~$0.1 million in regional developer ~~commissions recognized in conjunction with franchise openings.~~ commissions.
28

Selling and Marketing Expenses
Selling and Marketing Expenses 2017 2016 Change from
Prior Year Percent Change
from Prior Year 2018 2017 Change from
Prior Year Percent Change
from Prior Year

Three Months Ended September 30, $ 1,172,559 $ 1,272,524 $ (99,965 ) (7.9 )% $ 1,194,595 $ 1,172,559 $ 22,036 1.9 %
Nine Months Ended September 30, 3,189,489 3,184,484 5,005 0.2 % 3,590,562 3,189,489 401,073 12.6 %
Selling and marketing expenses decreased for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, due to the sale or closure of 14 company-owned or managed clinics, offset by an increase in the overall size of the national marketing fund due to the larger franchise clinic base, and the timing of national marketing fund expenditures.

Selling and marketing expenses increased ~~slightly~~ for the three and nine months ended September 30, 2018, as compared to the three and nine months ended September 30, 2017, ~~as compared to the nine months ended September 30, 2016, due to the~~driven by an increase in ~~the overall size of the national~~local marketing ~~fund due to~~expenditures by the ~~larger franchise clinic base, offset by lower spending on~~ company-owned or managed ~~clinics advertising and promotion due to the sale or closure of 14 clinics and due to the timing of the national conference occurring in the fourth quarter of 2017 versus the third quarter of 2016.~~clinics.

Depreciation and Amortization Expenses
Depreciation and Amortization Expenses 2017 2016 Change from
Prior Year Percent Change
from Prior Year 2018 2017 Change from
Prior Year Percent Change
from Prior Year

Three Months Ended September 30, $ 468,800 $ 695,579 $ (226,779 ) (32.6 )% $ 389,269 $ 468,800 $ (79,531 ) (17.0 )%
Nine Months Ended September 30, 1,550,013 1,908,238 (358,225 ) (18.8 )% 1,181,661 1,550,013 (368,352 ) (23.8 )%

Depreciation and amortization expenses decreased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, primarily due to assets reaching the end of their estimated depreciable lives during the period.
Depreciation and amortization expenses decreased for the nine months ended September 30, ~~2017~~2018, as compared to the ~~three and~~ nine months ended September 30, ~~2016,~~2017, primarily due to the sale or closure of 14 company-owned or managed clinics.

General and Administrative Expenses

General and Administrative Expenses 2017 2016 Change from
Prior Year Percent Change
from Prior Year 2018 2017 Change from
Prior Year Percent Change
from Prior Year

Three Months Ended September 30, $ 4,462,922 $ 5,435,219 $ (972,297 ) (17.9 )% $ 5,242,026 $ 4,462,922 $ 779,104 17.5 %
Nine Months Ended September 30, 13,694,690 16,749,945 (3,055,255 ) (18.2 )% 14,973,261 13,694,691 1,278,570 9.3 %

General and administrative expenses ~~decreased~~increased during the three months ended September 30, ~~2017~~2018 compared to the three months ended September 30, ~~2016,~~2017, primarily due to ~~the following:~~an increase in payroll and related expense due to headcount increases and accrued bonus of $0.6 million and an increase in professional services expense of $0.1 million.
• ~~A decrease of approximately $0.2 million in payroll related expenses;~~
•
~~A decrease of approximately $0.3 million in utilities and facilities related expenses due to the closure of 14 company-owned or managed clinics; and~~
• A decrease of approximately $0.3 million of other miscellaneous expenses as a result of certain legal settlements and expensing of real estate development expenses recognized in the three months ended September 30, 2016.
27

General and administrative expenses ~~decreased~~increased during the nine months ended September 30, ~~2017~~2018 compared to the nine months ended September 30, ~~2016,~~2017, primarily due to an increase of approximately $1.1 million in payroll related expenses due to wage merit increases and accrued bonus for the ~~following:~~2018 period and an increase in professional services of $0.1 million.
• ~~A decrease of approximately $1.0 million in payroll related expenses;~~
•
~~A decrease of approximately $0.5 million in legal and accounting related expenses;~~
•
~~A decrease of approximately $0.5 million in utilities and facilities related expenses; and~~
• A decrease of approximately $0.9 million of other miscellaneous expenses as a result of certain legal settlements and real estate development expenses recognized in the three months ended September 30, 2016.

Loss from Operations - Three Months Ended September 30, ~~2017~~2018
Loss from Operations 2018 2017 Change from
Prior Year Percent Change
from Prior Year

Three Months Ended September 30, $ (191,302 ) $ (405,527 ) $ 214,225 (52.8 )%

Profit (Loss) from Operations 2017 2016 Change from
Prior Year Percent Change
from Prior Year

Three Months Ended September 30, $ (377,630 ) $ (2,618,494 ) $ 2,240,864 (85.6 )%
29

Consolidated Results

Consolidated loss from operations decreased by ~~$2.2~~$0.2 million for the ~~three months~~period ended September 30, 2018 compared to the period ended September 30, 2017, ~~compared to the three months ended September 30, 2016,~~ primarily driven by the ~~$1.3~~$0.6 million ~~decrease~~improvement in operating loss in the corporate ~~clinic segment~~clinics discussed below ~~a decrease~~and an improvement in ~~corporate general and administrative expenses of $0.4 million, and increased net~~ income from ~~franchised~~ operations of $0.5 million in franchised operations discussed ~~below.~~below, offset by an increase in unallocated corporate overhead of $0.9 million driven by a $0.3 million loss from disposition or impairment due to the write-off of previously capitalized software development costs and a $0.6 million increase in general and administrative expenses.

Corporate Clinics

Our corporate clinics segment (i.e., company-owned or managed clinics) had net income from operations of $0.4 million for the period ended September 30, 2018, an improvement of $0.6 million compared to a loss from operations of $0.2 million for the ~~three months ended September 30, 2017, a decrease of $1.3 million compared to a loss from operations of $1.5 million for the~~ same period last year. This ~~decrease~~improvement was primarily due to:

• An increase in revenues of approximately ~~$0.6~~$0.7 million from company-owned or managed clinics; ~~and~~partially offset by

• A ~~decrease of approximately $0.3~~$0.1 million ~~of utilities~~increase in general and ~~facilities related expense, approximately $0.2 million~~administrative expenses in ~~selling and marketing expenses, and approximately $0.2 million in depreciation and amortization related to~~ the ~~sale or closure of company-owned or managed clinics.~~three months ended September 30, 2018.

Franchise Operations

Our franchise operations segment had net income from operations of ~~$1.7~~$2.1 million for the three months ended September 30, ~~2017,~~2018, an increase of $0.5 million, compared to net income from operations of ~~$1.2~~$1.6 million for the same period ended September 30, ~~2016. This increase was primarily due to:~~
• ~~An increase of approximately $0.3 million in total revenues (net of national marketing fund contributions), due primarily to an approximately 27% increase in franchise royalty revenues; and~~
• ~~A decrease of approximately $0.1 million in general and administrative expenses.~~
28
~~Loss from Operations - Nine Months Ended September 30, 2017~~
Profit (Loss) from Operations 2017 2016 Change from
Prior Year Percent Change
from Prior Year

Nine Months Ended September 30, (2,949,169 ) (9,286,463 ) 6,337,294 (68.2 )%
~~Consolidated Results~~
Consolidated loss from operations decreased by $6.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily driven by the $3.6 million decrease in operating loss in the corporate clinic segment, discussed below, a decrease in corporate general and administrative expenses of $1.4 million, and increased net income from franchised operations of $1.3 million discussed below.
~~Corporate Clinics~~
Our corporate clinics segment (i.e., company-owned or managed clinics) had a loss from operations of $1.2 million for the nine months ended September 30, 2017, a decrease of $3.6 million compared to a loss from operations of $4.8 million for the same period last year. This decrease was primarily due to:
• ~~An increase in revenues of approximately $2.0 million from company-owned or managed clinics; and~~
• A decrease of approximately $0.6 million of utilities and facilities expense, approximately $0.5 million in selling and marketing expenses and approximately $0.4 million in depreciation and amortization related to the sale or closure of company-owned or managed clinics.
~~Franchise Operations~~
Our franchise operations segment had net income from operations of $4.5 million for the nine months ended September 30, 2017, an increase of $1.3 million, compared to net income from operations of $3.2 million for the same period ended September 30, 2016.2017. This increase was primarily due to:

• An increase of approximately $0.7 million in total revenues (net of ~~national marketing~~advertising fund contributions), due primarily to an approximately ~~27%~~32% increase in franchise royalty revenues; ~~and~~offset by
• An increase of approximately $0.2 million in regional developer royalties.
Loss from Operations - Nine Months Ended September 30, 2018
Loss from Operations 2018 2017 Change from
Prior Year Percent Change
from Prior Year

Nine Months Ended September 30, $ (730,769 ) $ (3,106,366 ) $ 2,375,597 (76.5 )%
Consolidated Results
Consolidated loss from operations decreased by $2.4 million for the period ended September 30, 2018 compared to the period ended September 30, 2017, primarily driven by the $2.1 million improvement in operating income (loss) in the corporate clinic segment discussed below and an increase in net income from franchised operations of $1.6 million discussed below, offset by an increase in unallocated corporate overhead of $1.3 million.
Corporate Clinics
Our corporate clinics segment (i.e., company-owned or managed clinics) had income from operations of approximately $0.5 million for the period ended September 30, 2018, an improvement of $2.1 million, compared to a loss from operations of $1.6 million for the same period last year. This improvement was primarily due to:
An increase in revenues of approximately $2.2 million from company-owned or managed clinics; and
30

• A decrease of approximately ~~$0.6~~$0.2 million of loss from disposition or impairment due to lease exits in ~~general~~the nine months ended September 30, 2017, which was $0.4 million as compared to $0.2 million for the nine months ended September 30, 2018.  The decrease was offset by an increase of approximately $0.3 million increase in payroll related expenses due to merit increases and ~~administrative expenses.~~bonus accruals.

Franchise Operations
Our franchise operations segment had net income from operations of $5.9 million for the nine months ended September 30, 2018, an increase of $1.6 million, compared to net income from operations of $4.3 million for the same period ended September 30, 2017. This increase was primarily due to:
• An increase of approximately $2.3 million in total revenues (net of advertising fund contributions), due primarily to an approximately 32% increase in franchise royalty revenues; offset by
• An increase of $0.7 million in regional developer royalties.
Liquidity and Capital Resources

Sources of Liquidity

We used a significant amount of the net proceeds from our public offerings for the development of company-owned or managed clinics. We accomplished this by developing new clinics and by repurchasing existing franchises. In addition, we have used proceeds from our offerings to repurchase existing regional developer licenses, to continue to expand our franchised clinic business and for general business purposes. We are holding the remaining net proceeds in cash or short-term bank deposits.
As of September 30, ~~2017,~~2018, we had cash and short-term bank deposits of approximately ~~$2.6~~$5.6 million. ToWe provided approximately $1.9 million of cash flow from operating activities in the nine months ended September 30, 2018. We will continue to preserve cash, and while we ~~will not proactively pursue~~have resumed the ~~addition~~acquisition and development of ~~any~~ company-owned or managed clinics, ~~during the 2017 fiscal year. In addition, our tactical decisions made with respect~~we intend to ~~the clinics in Chicago~~progress at a measured pace and ~~New York in January 2017, as well as the cash infusion from the sale of regional developer territories, has significantly reduced our estimated net cash usage for 2017~~target geographic clusters where we are able to ~~approximately $2.0 million. Cash used in 2016 included expenditures for the acquisition or development of 14 company-owned or managed clinics~~increase efficiencies through a consolidated real estate penetration strategy, leverage cooperative advertisement and ~~working capital losses in the Chicago~~marketing and ~~New York markets of approximately $2.8 million. As we have no current plan to acquire or develop company-owned or managed clinics during 2017,~~attain general corporate and ~~have sold or closed 14 clinics in the Chicago and New York markets, our projected use of cash in 2017 is significantly lower than in 2016.~~
administrative operating efficiencies.
29

In January 2017, we executed a Credit and Security Agreement which provided a credit facility of up to $5.0 million. We have drawn $1.0 million under the credit facility. See Note 79 to our condensed consolidated financial statements included in this report for additional discussion of the credit facility.
Analysis of Cash Flows

Net cash ~~used in~~provided by (used in) operating activities ~~decreased~~increased by ~~$8,927,220~~$3,481,834 to ~~$1,416,497~~$1,888,413for the nine months ended September 30, 2018 compared to ($1,593,421) for the nine months ended September 30, ~~2017, compared to $10,343,717 for the nine months ended September 30, 2016.~~2017. The ~~decrease in cash used in operating activities~~change was attributable primarily to decreased expenses ~~caused by~~and decreased ~~operating losses and~~ working capital requirements of our company-owned or managed clinics.

Net cash used in investing activities was ~~$150,701~~$698,700 and ~~$2,608,380~~$150,701 for the nine months ended September 30, 2018 and 2017, respectively.  For the nine months ended September 30, 2018, this included an acquisition of $100,000, purchases of property and ~~2016, respectively.~~equipment of $531,162, reacquisition and termination of regional developer rights of $278,250 offset by payments received on notes receivable of $210,642.  For the nine months ended September 30, 2017, this primarily included purchases of ~~fixed assets~~property and equipment of ~~$0.2 million~~$190,589.
Net cash provided by financing activities was $286,721 and ~~payments received on notes receivable of $39,888.~~$1,185,982 for the nine months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, ~~2016,~~2018, this ~~includes acquisitions~~primarily included proceeds from exercise of ~~franchises~~stock options of ~~$0.8 million, the reacquisition and termination of regional developer rights of $0.3 million, purchases of property and equipment of $1.5 million and payments received on notes receivable of $26,000.~~
~~Net cash provided by (used in) financing activities was $1,185,982 and ($454,256) for the nine months ended September 30, 2017, and 2016, respectively.~~$291,532. For the nine months ended September 30, 2017, this included borrowings of ~~$1.0 million~~$1,000,000 on our revolving line of credit, proceeds from the sale of treasury stock of ~~$0.3 million,~~$292,671, proceeds from the exercise of stock options of ~~$0.1 million, partially~~$127,466, offset by ~~purchases of treasury stock under employee stock plans of $2,655 and~~ repayments on notes payable of $0.2 million. For the nine months ended September 30, 2016, this includes repayments on notes payable of $0.4 million, purchases of treasury stock under employee stock plans of $83,000 and offering costs adjustment of $1,000, partially offset by proceeds from exercise of stock options of $66,000.$231,500.

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.

31
Off-Balance Sheet Arrangements

During the nine months ended September 30, ~~2017,~~2018, 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 ~~with the participation of our Chief Executive Officer and Chief Financial Officer,~~ evaluated the effectiveness of our disclosure controls and procedures as of September 30, ~~2017.~~2018. 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 their 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, ~~2017,~~2018, our ~~Chief Executive Officer and Chief Financial Officer~~management concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
30

Changes in Internal Control over Financial Reporting

During the first quarter of 2018, we implemented new controls in connection with our adoption of the Accounting Standards Updates related to Topic 606, Revenue from Contracts with Customers. No ~~change~~other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the ~~quarter~~nine months ended September 30, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, the Company is party to litigation from time to time.

ITEM 1A. RISK FACTORS

~~We documented our risk factors in Item 1A of Part I of our annual report on Form 10-K for~~As a smaller reporting company, we are not required to provide the ~~year ended December 31, 2016. Other than the risk factor identified below, there have been no material changes to our risk factors since the filing of that report.~~
~~Our business model depends on proprietary and third party management~~ information systems that we use to, among other things, track financial and operating performance of our clinics, and any failure to successfully design and maintain these systems or implement new systems could materially harm our operations.
~~We depend on integrated management information systems, some of which are provided~~required by third parties, and standardized procedures for operational and financial information, as well as for patient records and our billing operations. We may experience unanticipated delays, complications, data breaches or expenses in implementing, integrating, and operating our systems. Our management information systems regularly require modifications, improvements or replacements that may require both substantial expenditures as well as interruptions in operations. Our ability to implement these systems is subject to the availability of skilled information technology specialists to assist us in creating, implementing and supporting these systems. Our failure to successfully design, implement and maintain all of our systems could have a material adverse effect on our business, financial condition and results of operations.this item.
In the nine months ended September 30, 2017, we have experienced unanticipated delays in the performance of our proprietary management information system when migrating the platform to a fully redundant cloud environment. We have incurred additional costs to improve system performance and have allocated additional resources to stabilize and monitor the system on an ongoing basis. Our failure to stabilize the system could result in us incurring additional expenses and in interruptions to our and our franchisees’ business operations, and our initiatives to upgrade our proprietary management information system may not succeed or may result in greater than anticipated delays and expenditures, either of which could have a material adverse effect on our and our franchisees’ business operations.

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

Use of Proceeds from Registered Securities

None.

ITEM 6. EXHIBITS

The Exhibit Index immediately following the Signatures to this Form 10-Q is hereby incorporated by reference into this Form 10-Q.

3132

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 ~~13, 2017~~9, 2018 By:   /s/ Peter D. Holt
Peter D. Holt
President and Chief Executive Officer
(Principal Executive ~~Officer )~~Officer)

Dated: November ~~13, 2017~~9, 2018 By:   /s/ ~~John P. Meloun~~Jake Singleton
~~John P. Meloun~~Jake Singleton
Chief Financial Officer
(Principal Financial Officer)


3233

EXHIBIT INDEX

Exhibit
Number
Description of Document
3(ii).1 Second Amended and Restated Bylaws of The Joint Corp. (incorporated by reference to Exhibit 3(ii).1 to the Registrant’s current report on Form 8-K filed on August 9, 2018 (File No. 001-36724))

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.

33
34

Lease exit liability at December 31, 2016	$	338,151
Additions		883,146
Settlements		(706,991	)
Net Accretion		(66,030	)
Lease exit liability at September 30, 2017	$	448,276

Anti-Dilutive shares:
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Unvested restricted stock		51,134		63,700		51,134		63,700
Stock options		960,213		1,011,686		960,213		1,011,686
Warrants		90,000		90,000		90,000		90,000

	As of December 31, 2017			Adjustments Due to ASC 606 Adoption			As of December 31, 2017
ASSETS	(as reported)						(as adjusted)
Current assets:
Deferred franchise costs - current portion	$	484		$	14		$	498
Total current assets		6,657			14			6,671
Deferred franchise costs, net of current portion		813			1,500			2,313
Deposits and other assets		612			12			623
Total assets	$	16,910		$	1,526		$	18,436

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred franchise revenue - current portion	$	1,686		$	308		$	1,994
Other current liabilities		49			104			153
Total current liabilities		4,967			412			5,379
Deferred revenue, net of current portion		4,693			4,859			9,553
Total liabilities		12,011			5,271			17,283
Stockholders' equity:
Accumulated deficit		(32,259	)		(3,745	)		(36,004	)
Total stockholders' equity		4,899			(3,745	)		1,153
Total liabilities and stockholders' equity	$	16,910		$	1,526		$	18,436

	Three Months Ended September 30, 2017			Three Months Ended Adjustments Due to ASC 606 Adoption			Three Months Ended September 30, 2017
	(as reported)						(as adjusted)
Revenues:
Franchise fees	$	230		$	152		$	382
Regional developer fees		259			(160	)		99
Total revenues		6,546			(8	)		6,538
Cost of revenues:
Franchise cost of revenues		716			20			736
Total cost of revenues		819			20			839
Loss from operations		(378	)		(28	)		(406	)
Loss before income tax expense		(368	)		(28	)		(396	)
Net loss and comprehensive loss	$	(404	)	$	(28	)	$	(432	)

Loss per share:
Basic and diluted loss per share	$	(0.03	)	$	(0.00	)	$	(0.03	)

	Nine Months Ended September 30, 2017			Nine Months Ended Adjustments Due to ASC 606 adoption			Nine Months Ended September 30, 2017
	(as reported)						(as adjusted)
Revenues:
Franchise fees	$	1,037		$	4		$	1,041
Regional developer fees		456			(194	)		262
Total revenues		18,235			(189	)		18,045
Cost of revenues:
Franchise cost of revenues		2,104			(32	)		2,071
Total cost of revenues		2,332			(32	)		2,299
Loss from operations		(2,949	)		(157	)		(3,106	)
Loss before income tax expense		(2,983	)		(157	)		(3,140	)
Net loss and comprehensive loss	$	(3,062	)	$	(157	)	$	(3,219	)

Loss per share:
Basic and diluted loss per share	$	(0.23	)	$	(0.01	)	$	(0.24	)

Property and equipment	$	293,014		$	17,964
Intangible assets		339,000			129,000
Favorable leases		140,728			15,302
Goodwill		269,780
Total assets acquired		1,042,522			162,266
Deferred membership revenue		(45,072	)
Bargain purchase gain					(75,264	)
Net purchase price	$	997,450		$	87,002

	Pro Forma for the Three Months Ended						Pro Forma for the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Revenues, net	$	8,062,550		$	6,619,945		$	22,791,369		$	18,283,261
Net income (loss)	$	(211,974	)	$	(432,669	)	$	(689,141	)	$	(2,790,165	)

•	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 monthly 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.

	Deferred Revenue
	short and long-term
Balance at December 31, 2017	$	11,547
Recognized as revenue during the nine months ended September 30, 2018		(1,665	)
Fees received and deferred during the nine months ended September 30, 2018		2,431
Balance at September 30, 2018	$	12,313

Contract liabilities expected to be recognized in	Amount
2018 (remainder)	$	546
2019		2,165
2020		2,167
2021		2,042
2022		1,603
Thereafter		3,790
Total	$	12,313

	As of September 30, 2017						As of September 30, 2018
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Value		Amount		Amortization		Value
Amortized intangible assets:
Reacquired franchise rights	$	1,673,000	$	596,129	$	1,076,871	$	1,758,000	$	854,011	$	903,989
Customer relationships		701,000		649,417		51,583		745,000		711,999		33,001
Reacquired development rights		1,162,000		401,847		760,153		1,413,316		584,984		828,332
	$	3,536,000	$	1,647,393	$	1,888,607	$	3,916,316	$	2,150,994	$	1,765,322

	As of December 31, 2016						As of December 31, 2017
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Value		Amount		Amortization		Value
Amortized intangible assets:
Reacquired franchise rights	$	1,673,000	$	410,688	$	1,262,312	$	1,673,000	$	657,943	$	1,015,057
Customer relationships		701,000		509,042		191,958		701,000		674,667		26,333
Reacquired development rights		1,162,000		277,348		884,652		1,162,000		443,348		718,652
	$	3,536,000	$	1,197,078	$	2,338,922	$	3,536,000	$	1,775,958	$	1,760,042

2017 (remaining)	$	128,564
2018		439,589
2018 (remainder)			$	131,262
2019		413,256		525,048
2020		413,256		508,551
2021		348,034		437,830
2022				150,418
Thereafter		145,908		12,213
Total	$	1,888,607	$	1,765,322

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
Expected volatility		42%		43%	-	45%		35%			42%
Expected dividends		None			None			None			None
Expected term (years)	5.5	to	7		7			7		5.5	-	7
Risk-free rate	1.98%	to	2.14%	1.19%	to	1.68%	2.53%	to	2.90%	1.98%	to	2.14%
Forfeiture rate		20%			20%			20%			20%

				Weighted		Weighted		Weighted					Weighted		Weighted		Weighted
				Average		Average		Average					Average		Average		Average
	Number of			Exercise		Fair		Remaining		Number of			Exercise		Fair		Remaining
	Shares			Price		Value		Contractual Life		Shares			Price		Value		Contractual Life
Outstanding at December 31, 2016		953,075		$	3.66	$	1.86		6.9		953,075		$	3.66	$	1.86		6.9
Granted at market price		195,286			3.70						295,286			4.31
Exercised		(106,221	)		1.20						(206,875	)		1.76
Cancelled		(30,454	)		5.21						(37,570	)		5.11
Outstanding at September 30, 2017		1,011,686		$	3.87	$	1.76		7.4
Exercisable at September 30, 2017		370,634		$	4.67	$	2.17		5.6
Outstanding at December 31, 2017											1,003,916		$	4.18	$	1.87		8.1
Granted at market price											110,792			6.97
Exercised											(86,640	)		3.44
Cancelled											(67,855	)		3.37
Outstanding at Sepember 30, 2018											960,213		$	4.63	$	2.05		7.0
Exercisable at September 30, 2018											476,189		$	4.74	$	2.08		7.0

Restricted Stock Awards	Shares
Outstanding at December 31, ~~2016~~2017		~~92,415~~63,700
Awards granted		~~59,700~~50,134
Awards vested		(~~76,070~~61,700	)
Awards forfeited		(~~12,345~~1,000	)
Outstanding at September 30, ~~2017~~2018		~~63,700~~51,134

Year 1	$	0.56
Year 2	$	0.68
Year 3	$	0.84
Year 4	$	1.03
Year 5	$	1.28
Year 6	$	1.59
Year 7	$	1.97
Year 8	$	2.45

2017 (remaining)	$	599,401
2018		1,910,339
2018 (remainder)			$	658,905
2019		1,591,678		2,450,981
2020		1,321,133		2,192,597
2021		1,180,012		2,081,455
2022		1,072,743		1,972,180
Thereafter		3,060,963		3,377,973
Total	$	10,736,269	$	12,734,091

Lease exit liability at December 31, 2017	$	299,400
Additions or changes in estimates		250,704
Settlements		(153,220	)
Net accretion		(36,614	)
Lease exit liability at September 30, 2018	$	360,270

Cost of Revenues	2017		2016		Change from Prior Year		Percent Change from Prior Year			2018		2017		Change from Prior Year		Percent Change from Prior Year

Three Months Ended September 30,	$	819,200	$	718,762	$	100,438		14.0	%	$	1,084,707	$	839,144	$	245,563		29.3	%
Nine Months Ended September 30,		2,331,522		2,186,464		145,058		6.6	%		3,108,623		2,299,297		809,326		35.2	%

Depreciation and Amortization Expenses	2017		2016		Change from Prior Year			Percent Change from Prior Year			2018		2017		Change from Prior Year			Percent Change from Prior Year

Three Months Ended September 30,	$	468,800	$	695,579	$	(226,779	)		(32.6	)%	$	389,269	$	468,800	$	(79,531	)		(17.0	)%
Nine Months Ended September 30,		1,550,013		1,908,238		(358,225	)		(18.8	)%		1,181,661		1,550,013		(368,352	)		(23.8	)%

	•	~~A decrease of approximately $0.2 million in payroll related expenses;~~

	•	~~A decrease of approximately $0.3 million in utilities and facilities related expenses due to the closure of 14 company-owned or managed clinics; and~~
	•	A decrease of approximately $0.3 million of other miscellaneous expenses as a result of certain legal settlements and expensing of real estate development expenses recognized in the three months ended September 30, 2016.

	•	~~A decrease of approximately $1.0 million in payroll related expenses;~~

	•	~~A decrease of approximately $0.5 million in legal and accounting related expenses;~~
	•	~~A decrease of approximately $0.5 million in utilities and facilities related expenses; and~~
	•	A decrease of approximately $0.9 million of other miscellaneous expenses as a result of certain legal settlements and real estate development expenses recognized in the three months ended September 30, 2016.

Profit (Loss) from Operations	2017			2016			Change from Prior Year		Percent Change from Prior Year

Three Months Ended September 30,	$	(377,630	)	$	(2,618,494	)	$	2,240,864		(85.6	)%

	•	An increase in revenues of approximately ~~$0.6~~$0.7 million from company-owned or managed clinics; ~~and~~partially offset by

	•	A ~~decrease of approximately $0.3~~$0.1 million ~~of utilities~~increase in general and ~~facilities related expense, approximately $0.2 million~~administrative expenses in ~~selling and marketing expenses, and approximately $0.2 million in depreciation and amortization related to~~ the ~~sale or closure of company-owned or managed clinics.~~three months ended September 30, 2018.

	•	~~An increase of approximately $0.3 million in total revenues (net of national marketing fund contributions), due primarily to an approximately 27% increase in franchise royalty revenues; and~~

	•	~~A decrease of approximately $0.1 million in general and administrative expenses.~~

	•	~~An increase in revenues of approximately $2.0 million from company-owned or managed clinics; and~~

	•	A decrease of approximately $0.6 million of utilities and facilities expense, approximately $0.5 million in selling and marketing expenses and approximately $0.4 million in depreciation and amortization related to the sale or closure of company-owned or managed clinics.

	•	An increase of approximately $0.7 million in total revenues (net of ~~national marketing~~advertising fund contributions), due primarily to an approximately ~~27%~~32% increase in franchise royalty revenues; ~~and~~offset by

	•	An increase of approximately $0.2 million in regional developer royalties.


	•	A decrease of approximately ~~$0.6~~$0.2 million of loss from disposition or impairment due to lease exits in ~~general~~the nine months ended September 30, 2017, which was $0.4 million as compared to $0.2 million for the nine months ended September 30, 2018. The decrease was offset by an increase of approximately $0.3 million increase in payroll related expenses due to merit increases and ~~administrative expenses.~~bonus accruals.

	•	An increase of approximately $2.3 million in total revenues (net of advertising fund contributions), due primarily to an approximately 32% increase in franchise royalty revenues; offset by

	•	An increase of $0.7 million in regional developer royalties.

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