Business context and reporting period
The Joint Corp. (NASDAQ: JYNT) filed this Form 10-K for the fiscal year ended December 31, 2020; it reports annual results, not a standalone fourth-quarter income statement. The company develops, franchises, operates and manages cash-based chiropractic clinics. At year-end, its network had 579 operating clinics: 515 franchised and 64 company-owned or managed. It also reported 212 sold-but-undeveloped clinic licenses and 41 letters of intent.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $58.7 million | $48.5 million |
| Operating income | $5.5 million | $3.4 million |
| Net income | $13.2 million | $3.3 million |
| Diluted EPS | $0.90 | $0.23 |
| Operating cash flow | $11.2 million | $7.5 million |
| Adjusted EBITDA | $9.1 million | $6.2 million |
- Revenue grew 21.1%; operating income grew 60.8%. Operating margin was approximately 9.4%, compared with 7.0% in 2019.
- Net income included a $7.8 million income tax benefit, primarily from releasing the valuation allowance on deferred tax assets. Pre-tax income was $5.4 million; the tax benefit materially boosted reported net income and should not be treated as recurring operating earnings.
- Revenue from company-owned or managed clinics was $31.8 million, up 23.1%; royalty fees were $15.9 million, up 17.2%. Franchise operations remained the larger contributor to operating income.
- System-wide sales rose 18% to $260 million. Comparable sales increased 9% for clinics open at least 13 months and 5% for clinics open at least 48 months. The system recorded approximately 8.3 million patient visits and more than 584,000 new patients.
- Cash and cash equivalents were $20.6 million, versus $8.5 million a year earlier. Current assets were $25.1 million and current liabilities $18.7 million. Cash used in investing was $4.6 million; financing provided $5.6 million.
- Year-end debt was $4.7 million: $2.0 million drawn on the revolving credit facility and $2.7 million under the Paycheck Protection Program (PPP). Operating lease liabilities were $13.6 million. The company had a $7.5 million credit facility, including a $5.5 million development line not available for general corporate purposes.
Material changes versus 2019
- Revenue, operating income, operating cash flow and Adjusted EBITDA increased. The clinic network expanded from 513 to 579 locations; franchised clinics increased from 453 to 515.
- The COVID-19 pandemic reduced patient traffic and spending, led to temporary closures and membership freezes or cancellations, and pressured franchise royalty and advertising revenue. About 10% of system clinics were closed in April; approximately 99% had reopened by the filing date, though some operated reduced hours.
- Cash increased substantially, reflecting operating cash generation and new borrowing, including the $2.0 million revolver draw and PPP loan. The company also exercised cost controls and deferred much of its planned 2020 capital spending.
- Deferred tax assets of $8.0 million were recognized at year-end after the company released most of its valuation allowance. The prior-year balance included a $9.6 million valuation allowance.
- Management said it remediated the material weakness in IT general controls identified in 2019 and concluded internal control over financial reporting was effective at December 31, 2020. The auditor did not provide an opinion on internal control effectiveness.
Outlook, risks and unusual items
- Management plans to continue franchise expansion and accelerate development and selective acquisition of company-owned or managed clinics in 2021. Its stated target is 1,000 clinics by the end of 2023. The filing gives no specific financial forecast or numerical 2021 guidance.
- Management believed available cash, operating cash flows and the credit facility would support short-term needs and expected liquidity to be sufficient for at least twelve months from issuance of the financial statements, while noting pandemic-related uncertainty and possible need for future capital.
- The company repaid the approximately $2.7 million PPP loan, including accrued interest, on March 4, 2021, after year-end.
- Major risks include further COVID-19 effects on visits and spending; execution of clinic growth and site selection; dependence on franchisees and regional developers; competition; recruitment of chiropractors; lease commitments; and cybersecurity and information-system implementation.
- Regulatory scrutiny of the management-services model is a significant contingency. Washington regulators were investigating complaints against three chiropractors involving alleged fee-splitting; the company said those investigations were at an early stage. The filing also describes past or potential scrutiny in several other states and uncertainty around corporate practice of chiropractic and franchisor joint-employer rules.
- Other notable items include the December 2020 repurchase of North Carolina regional development rights for approximately $1.0 million and the January 2021 repurchase of Georgia rights for approximately $1.4 million. No goodwill or long-lived asset impairment was recorded in 2020.
Important facts for investors to verify
- How much of 2020 earnings growth reflects recurring clinic and franchise operations versus the one-time deferred-tax valuation-allowance release.
- Whether patient traffic, memberships, franchisee sales and royalty collections remain resilient as pandemic effects and any government restrictions change.
- Progress toward the 1,000-clinic target, including opening rates for the 212 sold-but-undeveloped licenses and the profitability and funding needs of company-owned or managed clinics.
- Developments in the Washington investigation and other state regulatory matters, and any changes to laws or interpretations affecting the management-services model.
- Repayment of the PPP loan, compliance with credit-facility covenants, and the company’s capacity to fund expansion alongside lease and other commitments.