The Joint Corp

A Franchise Concept…
That Even Jim Chanos May Like

Ticker: JYNT
Price as of 2/25/19: $10.98
1-year Target Price: $15.16

Connor Haley
[email protected]
1
Business Overview
High-Level • The Joint Corp. (JYNT) is a $150M mkt cap franchisor and operator of
Thesis chiropractic clinics in the U.S. with excellent unit economics, a long
growth runway with high incremental margins, and a near-term
catalyst. It is the clear industry leader, has the opportunity to quadruple
its store base with 35%+ ROIs on new stores, and has increased SSS in
excess of 20% for 6 straight years. Today, you can invest at just 9.3x my
estimate of 2022 FCF.
Industry • ~$15B annual U.S. market, highly fragmented with 39,000 chiropractic
locations in the U.S., mostly solo practices
• Most chiropractic locations have expensive equipment, rely on insurance
reimbursements, and do little digital marketing
JYNT • No equipment→ focus on basic back adjustments requiring 5-10 min.
Business • Cash pay only → paid upfront by consumers through a recurring monthly
Model membership (76% of consumer rev) vs. insurance reimbursements
• Avg. JYNT store sees 1,000 patients/month vs. < 600 at avg. chiropractor JYNT Model: Cheaper + More Convenient
• Greater volume + lower costs = a cheaper + more convenient experience • JYNT average spend/visit is $26 vs industry
average copay of $32 ($74 total bill)
Unit • 442 stores at end of 2018 (TAM = 1,700). Avg. store size is 1,200 sq. ft.
Economics • No appointment required-- consumers can
• $225K total cost to build (incl. license fee, building cost, working capital)
generally get in and out within 10 minutes
• Average monthly fixed expenses of $23,000 (almost no variable costs)
• Stores are located in high-traffic retail
• Franchisees pay: 7% royalty fee on gross sales, $20-$40K/store license storefronts and are open 7 days/week and late
• 35%+ 2-year franchisee cash on cash return on weekdays

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The JYNT model is clearly working and rapidly improving

Rapid Store Growth Excellent SSS Growth Increasingly better unit

economics

Franchised 442 Fiscal System- Sales / Avg. Same-Store Months for new stores to reach breakeven
399 48 Year wide Sales Store Sales ($20-25K monthly gross sales)
Company-Owned 370
47 2013 22.3 M 174 K 50% 18-24
312 61 20
2014 46.2 M 219 K 37%
246 47
4 2015 70.1 M 251 K 34%
394 9
352 2016 98.6 M 289 K 28%
309 6
242 265 2017 126.9 M 330 K 21%
175
82 2018 158.1 M 376 K 26%
12 26 Pre-2016 2016 2017 2018
2010 2011 2012 2013 2014 2015 2016 2017 2018 Even stores 48+ months old have consistently average cohort cohort cohort
posted SSS Growth in the high-teens

3
 JYNT franchise unit growth will significantly accelerate in 2019

New Licensee Sales are a strong The number of regional The company’s minimum
leading indicator of future developers is a second leading contractually obligated openings
openings indicator of future openings also suggests an acceleration

New franchise Next 12 months Number of regional developers

FY
licenses sold new franchises
21

398
18
2016 22 43

8
2017 37 42
units that RDs are contractually
obligated to open in next 10 years
2018E ~80 ?
2016 2017 2018

4
Base Case Model Output
Key Assumptions:
2019 overall revenue grows 24.6% in base case.
• Franchise biz (55% of total sales) grows rev: 22%
through 14% unit growth and 9% rev/unit growth.
• Corporate biz (45% of total sales) grows rev: 28%
through 8% unit growth and 20% rev/unit growth.

G&A is nearly fixed. Regional Developer program + unit

sales leads to significant leverage of G&A, similar to trend of
recent years.

JYNT has $25M+ of Federal NOL’s to shield taxes through

2021. 2020 fwd P/E is ~31x ignoring tax benefit or ~25x
FCFE assuming no tax shield.

25x Fwd P/E multiple applied to EPS. ~40%+ upside on

2020E. ~30% IRR to FY 2022 estimates assuming March 31,
2022 exit.

No value given to cash build and FCFE consistently exceeds

net income due to upfront fees.

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Conclusion

➢ 442 stores today versus a stated TAM of 1,700

The Joint Corp. (JYNT) is an attractive business model with
➢ Even at 1,700 stores, the company would only represent
1 excellent unit economics disrupting a large and fragmented
4.4% of the U.S. chiropractor market
industry with a long runway for growth
➢ Six consecutive years of 20%+ same store sales growth

The company is on the verge of meaningfully scaling free ➢ Multiple leading indicators (franchise licensees sold, # of
2 cash flow/EPS due to accelerated store openings, continued new regional developers, and improved unit economics)
SSS increases, and largely fixed SG&A all suggest a near-term inflection in store openings

The dramatic increase in profitability is not yet properly ➢ The JYNT is a likely long-term compounder as even by FY
3 understood by the market. With conservative assumptions, 2022, the company will still have the opportunity to more
JYNT can provide a 30%+ IRR over the next several years. than double its store base

The company’s Q4 earnings call (March 7) is likely the first ➢ Alta Fox expectation is for 65 franchise openings next year
4 catalyst as the company will guide for 2019 store openings and HSD number of corporate openings

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 Appendix
1. Unit Economics of a JYNT store
a. New Franchisee Economics…………………………………………………………………………………………………………………………………………………………………………………………………………Pg. 8-10
b. 2017 Store Performance by Quintiles (from Franchise Disclosure Document)……………………………………………………………………………………………………………………………….Pg. 11-12
2. Competition
a. Competitor Analysis……………………………………………………………………………………………………………………………………………………………………………………………………………………Pg. 13-15
3. Industry Stats and Trends
a. Price and Reimbursement Trends……………………………………………………………………………………………………………………………………………………………………………………………….Pg. 16-18
4. Model/Valuation
a. Alta Fox Base Case vs Consensus…………………………………………………………………………………………………………………………………………………………………………………………………Pg. 19-20
b. Full Revenue Build (Base Case)…………………………………………………………………………………………………………………………………………………………………………………………………...Pg. 21
c. Bull, Base, Bear Scenarios (FY 2022 forecast)………………………………………………………………………………………………………………………………....................................................................Pg. 22
d. Comparable Companies (Multiples, fundamentals, ultimate margin structure)………………………………………………………………………………………………………………………….......Pg. 23-24
e. Base Case Income Statement.…………………………………………………………………………………………………………………………………………………………………………………………………........Pg. 25
f. Base Case Cash Flow Statement.…………………………………………………………………………………………………………………………………………………………………………………………………..Pg. 26
g. Base Case Balance Sheet.……………………………………………………………………………………………………………………………………………………………………………………………………………..Pg. 27
5. Management Team/Holders
a. Management team.……………………………………………………………………………………………………………………………………………………………………………………………………………………...Pg. 28
b. Board of Directors.………………………………………………………………………………………………………………………………………………………………………………………………………………………Pg. 29
c. Current Stock Ownership.……………………………………………………………………………………………………………………………………………………………………………………………………………Pg. 30
6. Risks
a. Major risks.…………………………………………………………………………………………………………………………………………………………………………………………………………………………………Pg. 31
b. Durability of competitive advantage…………………………………………………………………………………………………………………………………………………………………………………………….Pg. 32
7. Other
a. Stock price chart, accounting notes, patient demographics, current analyst coverage, other.………………………………………………………….………………………………………………Pg. 33-38

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New Franchisee Economics (1/3)

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 New Franchisee Economics (2/3)

• This analysis uses JYNT’s disclosed 2017 cohort to estimate sales for months 12-24.
Historical ramp in sales then applied to years 3-5.
• IRR calculation assumes EBITDA grow 4%/year beyond year 5

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 New Franchisee Economics (3/3)
Average Opex by line item from 2017 Franchise Disclosure Document

Cost Breakout Source

Labor 164,559 2017 FDD
Facilities Expense 56,360 2017 FDD
Insurance 5,563 2017 FDD
Other Operating Expense 68,065 2017 FDD
Total Opex 294,547

The below is a labor adjustment for total opex assuming just one chiropractor

Estimated annual opex for a

JYNT with one chiropractor Source
Labor $114,250 Table to right Labor Breakout Notes
Facilities Expense 56,360 2017 FDD
Insurance 5,563 2017 FDD Chiropractor $70,000 $65K base
Other Operating Expense 68,065 2017 FDD Wellness coordinator $44,250 ~$15/hour
Total Opex $244,238 Consistent with mgt. commentary Total $114,250

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 2017 Franchisee Store Performance by Quartile
Total Total (All Clinics) Quartile 1 (Best) Quartile 2 Quartile 3 Quartile 4 (Worst)

Average Gross Sales $368,612 $550,512 $435,281 $264,852 $184,365

Labor Expense $164,559 $222,227 $182,824 $135,361 $115,795

Facilities Expense $56,360 $57,667 $54,599 $59,272 $60,849

Insurance $5,563 $6,707 $6,110 $4,537 $4,435

Other Operating
$68,065 $89,291 $75,446 $55,471 $50,124
Expense

Total Clinic Profit $74,066 $174,570 $116,302 $10,210 ($46,838)

Note: FY 2022 base case has rev/avg clinic of $428K for corporate stores and $502K for franchise
stores. JYNT should be able to grow pricing MSD per year consistent with chiropractic trends. Source: 2017 JYNT Franchise Disclosure
Document (FDD)

11
Q3-18 Trends

12
List of Competitors

HealthSource Chiropractic is the only

competitor with any scale, but it has a
different model and is shrinking rapidly.

13
Traditional Chiropractor: Medical Office Setting

14
JYNT Office Setting: open/inviting in a high-traffic retail storefront

15
 Chiropractor Industry Overview
• The chiropractic industry is a large, growing, and fragmented market
• ~35 million U.S. Adults (~11% of U.S. population) seek chiropractic care each year. The cumulative spend
on chiropractic care is ~$15.0 billion annually.
• Growing MSD % per year
• The top 50 companies delivering chiropractic care in the U.S. generated less than 10% of all industry
revenues (First Research, JYNT company filings).
• The market is extremely fragmented with mostly mom and pop local players
• Wide variety of quality of service, different treatment methods
• Operate mostly on referrals, little web presence.
• Labor market
• There are more than 70,000 chiropractors in the United States who are required to pass a series of four
national board exams and be state licensed. Roughly another 3,000 chiropractors work in academic and
management roles. There are ~39,000 chiropractic locations in the U.S.
• There are approximately 10,000 chiropractic students in 18 nationally accredited, chiropractic doctoral
graduate education programs across the United States with 2,500 chiropractors entering the workforce
every year.
• Chiropractors are educated in nationally accredited, four-year doctoral graduate school programs
through a curriculum that includes a minimum of 4,200 hours of classroom, laboratory and clinical
internship, with the average DC program equivalent in classroom hours to allopathic (MD) and
osteopathic (DO) medical schools.

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 Chiropractic Industry Trends
2018 2017 2016

Avg. Gross Fees $77 $68 $63

y/y % change 13.2% 7.3%

Avg. Reimbursement $38 $44 $44

y/y % change -13.6% 0.0%

Avg. Patient co-pay $39 $24 $19

y/y % change 62.5% 23.7%

Avg. Reimbursement Rate 49% 65% 69%

Key takeaway: Chiropractic gross pricing is increasing HSD-LDD and

reimbursement rates are falling. This leads to struggling chiropractic centers
which attempt to upsell consumers to pricier treatments and much higher co-
pays for consumers. This is a significant tailwind for JYNT.

While patient copays in the industry have increased 21.5% from 2016-2018, the Source: Chiropractic Economics annual
JYNT has not changed their prices since 2016. survey- 280 respondents

17
JYNT vs a traditional chiropractor

18
 Alta Fox Base Case: Variance vs Consensus

Small changes in revenue lead to large variances in EBITDA/EPS due

to largely fixed G&A.

19
Consensus Numbers

20
Base Case: Clinic Openings & Revenue Output

21
 FY 2022 Valuation Scenarios and Output
Current (FY 2018) FY 2022 Estimates Base Case Assumption Notes
Bear Base Bull
Corporate Clinics (EoP) 48 48 84 103 openings: 6 in 2019, 10/yr 2020-2022. A useful sanity check for FY
Corporate Clinics (average) 48 48 79 93
Rev/Avg. Corp. Clinic (mm) $0.299 $0.380 $0.428 $0.498 18% in 2019, 10% in 2020, 5% in 2021, 4% 2022. 2022 gross rev/clinic is
Corporate Clinic Revenue $14.2 $18.2 $33.8 $46.3 comparing the output to the
Franchise Clinics (EoP) 394 664 714 769 openings: 80 in 2019 and 2020. 85 in 2021, 90 in 2022. better current performing
Franchise Clinics (Average) 0 627 669 714 stores based on quartile
Franchise Gross Sales (mm) $143.9 $282.4 $335.6 $400.8
analysis from the 2017 FDD.
Gross Rev/Avg. Clinic (mm) $0.386 $0.451 $0.502 $0.561 9.2% in 2019, 5% in 2020-2022.

JYNT Franchise Operations Revenue $17.1 $32.2 $37.6 $44.2 Combines royalty rate with license fees & other
1st quartile: $550K rev/store
Total Revenue $31.3 $50.5 $71.4 $90.5
2nd quartile: $435K/store
EBITDA $3.0 $13.1 $23.0 $35.2
EBITDA margin % 9.7% 26.0% 32.2% 38.9% Key driver: G&A as % of sales drops from 61% to 41% of sales.

Net Income $0.7 $9.3 $13.2 $21.2 FCFE will consistently exceed net income due to upfront payments. See slide 11 for more details.
FDSO 13.6 14.3 14.3 14.3 Likely conservative-- co. should be able to keep this flat/reduce SC.
EPS $0.05 $0.65 $0.92 $1.48

Fwd P/E Multiple 20.0x 25.0x 30.0x PLNT has consistently traded 30-40x fwd earnings.
Value/Share $13.05 $23.06 $44.48 Even by FY 2022, company is still <50% penetrated of 1,700 TAM.

Current Price $9.17 $10.98 $10.98 $10.98

% Upside/Downside 19% 110% 305%
IRR from current price 5.7% 27.1% 57.2% Assumes exit as of 3/2022, when company will give guidance for the year.

Other
FCFE $2.80 $13.0 $16.9 $24.4
Net Cash $6.0 $44.0 $54.2 $71.8
Net Cash/Share $0.44 $3.08 $3.79 $5.01 Low ongoing capital requirements, conservatively not factored into valuation.

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Comparable Companies (1/2)

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 Comparable Companies (2/2)
PLNT DNKN WING QSR DPZ Average Median JYNT*
Current Fwd P/E 38.5x 23.5x 73.5x 22.3x 26.2x 36.8x 26.2x 36.4x
5-year avg Fwd P/E 29.9x 22.6x 51.7x 27.7x 29.0x 32.2x 29.0x N/A
TTM Gross Margin % 71.6% 94.1% 78.3% 58.2% 37.9% 68.0% 71.6% 86.2%
TTM EBITDA Margin % 39.9% 34.4% 31.8% 40.6% 18.1% 32.9% 34.4% 4.4%

FY 2020 Est. Rev 12.1% 3.6% 11.1% 5.4% 9.8% 8.4% 9.8% 25.9%
Growth
FY 2020 Est. EPS 21.4% 8.9% 26.1% 9.9% 17.0% 16.7% 17.0% 101.0%
Growth

*JYNT numbers represent the Alta Fox Base Case. All other
figures represent Bloomberg’s estimate of consensus

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Base Case– Income Statement

25
Base Case– Cash Flow Statement

26
Base Case– Balance Sheet

27
Current Management Team

28
Board of Directors

29
Current Top Holders
Holder Notes

Sanders Morris: SMA accounts,

holder since IPO

Bandera Partners: Run by Jeff

Gramm, occasional activist and
CBS adjunct professor

Nantahala: $1.7B in reported

assets

John Leonisio: founder of

Massage Envy, former JYNT
executive

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 Risks
• Acceleration in unit expansion and rev/unit does not materialize
• Undisciplined expansion of corporate stores
• After the company’s IPO in 2015, the company went through a painful period in its corporate history in which it over
expanded corporate clinics under a previous CEO. The company went from 47 corporate clinics at the end of 2015 to
61 by the end of 2016 but had to almost immediately shutter them.
• The company’s previous CEO, formerly an executive at SBUX, opened up a large collection of stores in the Chicago
market in the winter without finding staff for the locations ahead of time. These stores struggled, put the company’s
balance sheet in a precarious situation, and Peter Holt was brought in during 2016 to turn the company around with a
franchise strategy.
• The company just announced this month that they just opened up their first new greenfield store since 2016. I believe
the company is in a much more sound financial position and has a solid strategy for disciplined corporate expansion,
but overexpansion remains a risk.
• Increased competition
• There is nothing preventing others from opening up cash-pay chiropractic clinics or converting existing ones to a JYNT-
like model. However, JYNT already has a significant first mover advantage and is capitalizing on many years of
accumulated best practices to further cement their lead in the industry.
• Changes in insurance reimbursement rates
• Falling reimbursement rates for chiropractic care along with the increased prevalence of high-deductible health plans
has been a tailwind for JYNT’s cash-pay model. If these trends reverse, it could be a headwind.
• Potential negative news headlines damaging JYNT’s brand value
• Massage Envy, a franchise concept in a fragmented and similarly sized market, suffered from negative headlines
surrounding inappropriate actions by one of their employees. JYNT has a much lower risk given all adjustments are
done in an open-bay, chiropractors require 4 years of school, and no clothes are removed for a back adjustment.

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 Durability of Competitive Advantage
• What separates a successful franchise roll-out story like Planet Fitness (PLNT) versus an unsuccessful one like Regis Corp (RGS)? What takeaways are there for JYNT?
• Planet Fitness (PLNT)
• Membership-based model
• Low cost provider of gym memberships
• Model: provide a basic gym experience that is convenient, cheap, and has the necessities for the average person to get a good workout.
• Low cost + basic equipment = low prices = more members/location = national advertising advantage = more locations.
• Regis Corp (RGS)
• Walk-in provider of low-end haircuts (Supercuts).
• Customer loyalty is extremely low given there is no membership and labor turnover is high. As a result, there are few best practices that a corporate HQ can pass
along to a franchisee to give it an advantage versus the mom and pop competitor across the street.
• It is difficult to get an advantage via throughput versus a local competitor because you are naturally constrained by labor. The average haircut takes longer and is
lower value than a back adjustment.
• Key Takeaway
• For a franchise concept to be successful, it needs to have some structural advantage versus a local competitor across the street to offset the higher cost
of royalty payments. In a recurring membership model such as PLNT, a franchise can optimize cost of customer acquisition versus lifetime value of a customer
through digital marketing and advertising campaigns, retention tactics, and other best practices that can be passed down from years of learning and analysis from
a centralized corporate HQ.
• JYNT is much closer to a PLNT than a RGS.
• Membership-based model.
• JYNT’s corporate office has done a great job of passing along best practices from the highest performing franchisees to the rest of the franchise base. The
company’s successful initiative in reducing the number of months for a new store to breakeven from 20 in 2016 to 6 in 2018 is a prime example. The
company leveraged best practices from
• The company is investing to further its lead over the industry. JYNT is switching to a new software system this year which will provide them more insights
on customer trends and allow consumers to check wait times, book appointments, be reminded about upcoming sessions, etc. It is uneconomical for
anyone else in the industry to make these investments.
• There are also regulatory complexities associated with hiring and managing chiropractic care that raise the barrier of entry relative to a low-end salon.

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Stock Chart since IPO

33
TAM Map

34
JYNT Current Pricing

35
Patient Demographic

36
JYNT Analyst Coverage

37
HealthSource Chiropractic List of Services

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