Business context and reporting period
The Joint Corp. (NASDAQ: JYNT) filed this unaudited Form 10-Q for the quarter ended September 30, 2020. It franchises, develops, owns, operates and manages chiropractic clinics. At quarter-end, its system had 560 clinics: 497 franchised and 63 company-owned or managed.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $15.41 million | $12.73 million | $41.64 million | $34.58 million |
| Operating income | $1.71 million | $0.64 million | $2.72 million | $2.07 million |
| Net income | $1.60 million | $0.62 million | $2.53 million | $2.03 million |
| Diluted EPS | $0.11 | $0.04 | $0.17 | $0.14 |
- Q3 revenue grew 21.1%; operating income rose 166.3%. Approximate operating margin increased to 11.1% from 5.0%, and net margin to 10.4% from 4.8%.
- Nine-month revenue grew 20.4%; operating income increased 31.2% and net income 24.7%. Approximate operating margin was 6.5% versus 6.0%; net margin was 6.1% versus 5.9%.
- For the first nine months, operating cash flow was $6.91 million, versus $4.71 million. Investing used $2.23 million and financing provided $5.12 million. Cash and restricted cash totaled $18.45 million at period-end, including $18.31 million unrestricted cash.
- Current assets were $22.02 million and current liabilities $15.93 million. Total liabilities were $42.63 million. Credit Agreement and PPP borrowings totaled approximately $4.73 million; operating lease liabilities were a further $13.56 million. The company reported compliance with Credit Agreement covenants.
Changes versus comparable periods
Growth reflected expansion of both company clinics and the franchise system. Company-clinic revenue rose 23.1% in Q3 and 23.6% year to date; royalty revenue rose 21.0% and 14.6%, respectively. The franchise network increased to 497 clinics from 430 a year earlier. Q3 system-wide sales grew 21%, comparable sales rose 12%, and comparable sales at mature clinics open at least 48 months rose 7%. Nine-month system-wide sales were $182.4 million, up 16%.
COVID-19 depressed patient traffic, spending and franchise sales particularly in Q2; Q3 results improved. Costs also grew: nine-month G&A increased 20.8%, depreciation and amortization 57.6%, and selling and marketing 12.2%. The company recorded no goodwill or long-lived-asset impairment in the periods presented.
Outlook, risks and unusual items
- Management said approximately 99% of clinics had reopened by the report date, though some operated reduced hours. It cited improvement in sales, patient traffic and conversion after promotional campaigns, while warning that COVID-19’s duration and effects remain uncertain and could hurt results for the rest of 2020.
- No specific revenue or earnings guidance was provided. Management expected cash, operating cash flows and credit availability to cover short-term needs and stated it believed liquidity could fund requirements for at least 12 months from issuance of the statements. It deferred most planned 2020 capital spending and planned to resume measured clinic acquisition and development in 2021 and beyond.
- The company drew $2.0 million under its revolving facility and received a $2.7 million PPP loan. PPP forgiveness is uncertain; loans above $2 million are subject to SBA review, and an adverse determination could require repayment. The credit facilities are secured by substantially all company assets and contain financial covenants.
- COVID-related franchisee accommodations included waiving minimum royalties for the remainder of 2020, waiving software fees for certain clinics closed at least 16 days in a month, and waiving minimum local marketing spend during Q2. Further accommodations could reduce revenue.
- Washington regulators were investigating complaints involving three chiropractors at franchisee-managed clinics, including allegations concerning fee-splitting and the company’s royalty model. The company said the investigations were at an early stage. Litigation is also possible over healthcare regulation, chiropractic scope of practice, and franchisor or joint-employer liability; the Texas chiropractic-practice ruling was under review.
- Management reported disclosure controls were not effective at September 30 due to a previously disclosed material weakness in internal control over financial reporting. Remediation was underway, with completion expected before year-end 2020.
Important facts for investors to verify
- Whether the SBA forgives the PPP loan, and any review findings or repayment obligation.
- Whether post-Q3 clinic sales and patient trends persist amid COVID-19, and any renewed closures or franchisee accommodations.
- Progress on internal-control remediation and the outcome of the Washington investigations and other regulatory or legal matters.
- Compliance with credit covenants and availability of the development line; the filing states that $5.5 million of development-line capacity was not available for general corporate purposes.
- Future corporate-clinic spending and cash generation, including execution of management’s stated 2021-and-beyond growth plans.