The Joint Corp. (NASDAQ: JYNT) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. The company franchises, develops, owns, operates, supports and manages chiropractic clinics. At quarter-end, its network had 539 operating clinics: 477 franchised and 62 company-owned or managed.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $12.59 million | $11.17 million | $26.23 million | $21.85 million |
| Operating income | $0.26 million | $0.49 million | $1.01 million | $1.43 million |
| Net income | $0.12 million | $0.46 million | $0.93 million | $1.41 million |
| Diluted earnings per share | $0.01 | $0.03 | $0.06 | $0.10 |
- Revenue grew 12.7% in Q2 and 20.1% in the first half. Company-clinic revenue increased 18.7% and 24.0%, respectively; first-half royalty revenue rose 11.1%, while Q2 royalty revenue was nearly flat.
- Operating income fell 47.0% in Q2 and 29.3% in the first half. Approximate operating margins were 2.1% versus 4.4% in Q2 and 3.9% versus 6.5% for the first half.
- Net income declined 75.0% in Q2 and 34.2% in the first half. Management cited pandemic-related revenue shortfalls and higher expenses, particularly payroll, depreciation and amortization, and corporate costs. General and administrative expense was 68% of revenue in Q2 and 66% for the first half, compared with 65% and 63% in 2019.
- Operating cash flow was $3.04 million for the first half, versus $2.84 million. Investing cash outflow was $1.91 million, including $1.99 million of property and equipment purchases. Cash and restricted cash increased by $6.17 million to $14.81 million; unrestricted cash was $14.57 million.
- At June 30, current assets were $18.82 million and current liabilities $14.84 million. The company reported $4.73 million of credit-agreement and PPP debt, including $1.21 million current and $3.52 million long-term. Operating lease liabilities totaled $14.18 million and finance lease liabilities $0.24 million.
Changes, outlook and risks
- COVID-19 reduced patient traffic and spending, caused membership freezes and cancellations, and pressured franchisee sales and royalty revenue. About 10% of system clinics were closed in April; approximately 99% had reopened by the filing date, with some operating reduced hours. Q2 system-wide sales increased 2%, while comparable sales declined 6% overall and 10% for clinics open at least 48 months.
- Management reported incremental improvement in sales, comparable sales, patient traffic and new-patient conversion after reopening and promotions, but said substantial uncertainty remained. It did not expect to provide 2020 financial guidance until it had better visibility into the pandemic’s effects.
- The company drew $2.0 million on its revolver in March and received an approximately $2.7 million PPP loan in April. The $5.5 million development line is intended for clinic acquisition and development, not general corporate purposes. Management expected liquidity to cover short-term needs and stated it believed resources could meet requirements for at least 12 months from issuance of the statements, while noting that pandemic effects and future capital needs create uncertainty.
- Management deferred most planned 2020 capital expenditures and said it currently planned to resume company-clinic acquisitions and development in 2021 and beyond. It waived franchise minimum royalties for the rest of 2020, software fees for certain clinics closed at least 16 days in a month, and minimum local advertising requirements in Q2; further accommodations could reduce revenue.
- PPP forgiveness is not assured. The company intended to use an eight-week covered period and was required to meet eligible-use and staffing conditions. Loans above $2 million are subject to SBA review; an adverse finding could require repayment and create legal, reputational and liquidity costs.
- The company reported compliance with credit-facility covenants at June 30. The facility is secured by substantially all company assets and includes financial covenants; a breach could accelerate repayment.
- Washington regulators were investigating complaints involving three chiropractors at franchisee-managed clinics, including allegations of fee-splitting that may question the company’s business model. The company said the investigations were at an early stage. It also cited risks from COVID-19, franchisee performance, clinic expansion, staffing, competition, impairment of goodwill or long-lived assets, and evolving rules on corporate practice and joint employment.
- No goodwill or long-lived-asset impairment was recorded for the period; the company said it found no second-quarter triggering event after first-quarter pandemic-related impairment assessments. Management concluded disclosure controls were ineffective because of a previously disclosed material weakness and expected remediation before fiscal year-end 2020.
Important facts for investors to verify
- Whether patient traffic, comparable sales, memberships and franchisee royalty collections recovered after quarter-end, and whether further franchisee concessions were made.
- PPP loan forgiveness status, eligibility review and any potential repayment obligation.
- Liquidity and covenant headroom, including the availability and permitted use of the development line and the impact of lease commitments.
- Progress toward remediating the material weakness in internal controls, and developments in the Washington investigations and other regulatory or litigation matters.
- Whether lower clinic cash flows lead to impairment charges or alter the timing of planned 2021 expansion and capital spending.