The Joint Corp. (NASDAQ: JYNT) — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing provides annual results, not separate fourth-quarter financial results. The Joint is a franchisor and operator of cash-pay chiropractic clinics; all 246 clinics in operation at year-end were reported as franchisee-operated, before the year-end acquisition is reflected in operating results.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $7.12 million | $5.96 million | +19.4% |
| Operating income (loss) | $(1.63) million | $0.44 million | Turned to loss |
| Net income (loss) | $(3.03) million | $0.16 million | Turned to loss |
| Operating cash flow | $(0.44) million | $0.42 million | Turned negative |
| Cash and cash equivalents, year-end | $20.80 million | $3.52 million | + $17.28 million |
| Total liabilities, year-end | $12.93 million | $10.99 million | + $1.94 million |
Cost of revenues was 32% of revenue, compared with 34% in 2013. Revenue less cost of revenues therefore represented approximately 68% of revenue, before selling, marketing, depreciation, and general and administrative expenses. Operating and net margins were approximately (22.9)% and (42.6)%, respectively, versus approximately 7.4% and 2.6% in 2013. The filing reports no interest expense and no borrowings on the balance sheet; it does not present a debt balance. Year-end current assets were $23.40 million against current liabilities of $4.26 million.
Business and material changes
- Clinics in operation increased from 175 to 246; 73 opened in 2014 versus 93 in 2013. Another 268 franchise licenses had been granted for clinics not yet operating.
- Royalty revenue more than doubled to $3.19 million, reflecting clinic growth and maturing locations. Franchise fees fell 23.8% and regional developer fees fell 35.6%, largely because fewer clinics opened.
- Selling, general and administrative expenses increased to $6.50 million from $3.51 million. Management cited staffing and infrastructure growth, stock-based compensation, executive additions, IPO-related costs, and higher accounting and legal fees.
- The November 2014 IPO and over-allotment generated approximately $19.78 million in net proceeds. Financing cash flow was $19.78 million; investing cash outflow was $2.06 million, including clinic and regional developer acquisitions and capital expenditures.
- On December 31, 2014, the company paid $900,000 to acquire six Los Angeles County franchises, including four operating clinics; it planned to retain four as company-operated and relocate the other two. No post-acquisition results were included in 2014 operations.
Outlook, risks, and unusual items
- Management planned to make company-owned clinic development and selective acquisitions a principal growth focus, using IPO proceeds. It expected to repurchase or develop up to 50 company-operated clinics and open approximately 60–65 new franchised clinics during the 12 months beginning January 1, 2015; these are plans, not guarantees.
- Subsequent to year-end, the company reacquired the Los Angeles County regional developer rights for $507,500 and disclosed additional franchise acquisitions and repurchases through March 2015. As of March 11, 2015, it reported acquiring 11 clinics and two regional developer licenses.
- Operating cash flow was negative despite higher revenue. The $3.03 million net loss included a $1.34 million income tax provision, principally affected by a valuation allowance against deferred tax assets; management reported a 79.3% effective tax rate for 2014.
- Management identified material weaknesses in financial reporting controls, including inadequate segregation of duties and ineffective accounting and reporting for complex transactions. Disclosure controls were deemed ineffective at year-end. A CFO was hired and remediation was planned; the independent auditor did not opine on internal control effectiveness.
- Key risks include executing the shift to company-operated clinics, obtaining suitable sites and qualified chiropractors, clinic profitability, franchisee opening delays and performance, competition, and compliance with franchise, privacy, and corporate-practice-of-chiropractic rules. The filing notes 160 of 268 sold-but-unopened franchises had missed contractual opening timetables.
- The company disclosed one malpractice claim, which it was defending and did not expect to have a material adverse effect, plus ordinary-course litigation that management did not expect to be material. There was no specific earnings guidance. The company did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether the planned company-owned clinic expansion and subsequent acquisitions produce sustainable clinic-level profits and positive operating cash flow.
- Progress in remediating the disclosed material weaknesses and improving the reliability of financial reporting.
- Actual opening and performance of the 268 sold-but-not-yet-operating franchises, including the 160 behind timetable.
- Cash deployment after the IPO, acquisition costs, and ongoing lease commitments; year-end contractual obligations were $1.80 million.
- Tax-asset realizability and the effects of the valuation allowance, as well as franchisee receivable concentration: six franchisees represented 56% of accounts receivable at year-end.