The Joint Corp. (NASDAQ: JYNT) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report; the filing does not provide a clear standalone fourth-quarter income statement. 2018 comparisons below reflect restated figures where indicated.
Business context
The Joint develops, franchises, owns, operates and manages cash-based chiropractic clinics. It does not accept insurance or provide Medicare-covered services. At year-end, its network had 513 clinics across 34 states: 453 franchised and 60 company-owned or managed. The system recorded approximately 7.7 million patient visits and $220.3 million in system-wide sales during 2019.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $48.45 million | $36.66 million | +32.2% |
| Operating income | $3.41 million | $0.14 million | Up $3.27 million |
| Net income | $3.32 million | $0.15 million | Up $3.18 million |
| Diluted EPS | $0.23 | $0.01 | — |
| Adjusted EBITDA | $6.20 million | $2.93 million | — |
| Operating cash flow | $7.52 million | $5.45 million | Up $2.07 million |
- Operating margin was approximately 7.0%, versus 0.4% in 2018; net margin was approximately 6.9%, versus 0.4%.
- Revenue growth reflected the expanding company clinic portfolio and franchise base. Company-owned or managed clinic revenue rose 32.0% to $25.81 million; royalty revenue increased 33.7% to $13.56 million.
- Same-store sales increased 25% for clinics open at least 13 months and 19% for clinics open at least 48 months. System-wide sales grew 33%; the company reported more than 585,000 new patients, up 26%.
- Cash and cash equivalents were $8.46 million at year-end, compared with $8.72 million. Investing activities used $7.14 million, including $3.12 million for acquisitions and $3.48 million for property and equipment; financing activities used $0.60 million.
- The company repaid its $1.0 million borrowing under its prior credit facility in December 2019. Year-end liabilities included $14.21 million of operating lease obligations and $58,651 of finance lease liabilities. Current assets of $13.30 million were slightly below current liabilities of $13.57 million.
- In February 2020, the company entered a secured credit facility of up to $7.5 million: a $2.0 million revolver and a $5.5 million development line, subject to customary covenants.
Material changes and accounting
- The company acquired eight clinics for approximately $3.1 million and opened five new company clinics in 2019. The company clinic portfolio increased from 48 to 60; franchised clinics increased from 394 to 453.
- Comparable 2018 financial statements were restated to consolidate certain chiropractor-owned professional corporations as variable interest entities. The company said the prior accounting treatment was an immaterial error; consolidation increased reported revenue and expenses and reduced 2018 net income from $253,000 as originally reported to $147,000.
- The company also recorded an immaterial correction related to ASC 606 revenue accounting. It adopted the new lease standard in 2019, recognizing operating lease assets and liabilities on the balance sheet.
Outlook, risks and unusual items
- Management planned continued franchise growth and measured expansion of company-owned or managed clinics in 2020, including selective acquisitions and clustered development. No quantified financial guidance was provided.
- A material weakness in IT general controls—covering access, information-security policies and program change management—led management to conclude internal control over financial reporting was ineffective at year-end. The auditor issued an adverse opinion on internal controls, while issuing an unqualified opinion on the financial statements. Management planned remediation during 2020; no related financial-statement misstatement was identified.
- Washington’s chiropractic regulator began investigating complaints against three chiropractors associated with franchise-managed clinics, including questions about royalty arrangements and alleged fee-splitting. The company said the investigation was at an early stage and could challenge its operating model. North Carolina proceedings involving chiropractors ended in accepted settlement terms; other states have also scrutinized or could scrutinize the model.
- The filing identifies the coronavirus outbreak as a potential risk to patient traffic and financial markets. Other key risks include franchisee performance, clinic staffing and site availability, competition, discretionary consumer spending, long-term lease commitments, data security, and evolving corporate-practice and joint-employer rules.
- The company reported no material adverse effect expected from ordinary-course litigation. It does not expect to pay cash dividends in the foreseeable future.
Investor verification priorities
- Track remediation and testing of the IT-control material weakness, and any changes to the adverse internal-control opinion.
- Monitor the Washington investigation and other state actions for effects on management agreements, royalties or clinic operations.
- Assess whether same-store sales, clinic openings and franchise license development remain strong, and whether company-operated clinic growth supports margins and cash generation.
- Review liquidity and secured-credit facility usage, covenant compliance, and lease commitments alongside acquisition and development spending.
- Reconcile reported growth with the VIE consolidation and ASC 606 corrections; evaluate Adjusted EBITDA alongside GAAP earnings and operating cash flow.