THE JOINT CORP. The following discussion and analysis of the results of operations and financial condition ofThe Joint Corp. for the years endedDecember 31, 2021 and 2020 should be read in conjunction with the consolidated financial statements and the notes thereto, and other financial information contained elsewhere in this Form 10-K. Overview
Our principal business is to develop, own, operate, support and manage
chiropractic clinics through franchising and regional developers and through
direct ownership and management arrangements throughout
We seek to be the leading provider of chiropractic care in the markets we serve and to become the most recognized brand in our industry through the rapid and focused expansion of chiropractic clinics in key markets throughoutNorth America and potentially abroad. We saw over 807,000 new patients in 2021, despite the continued pandemic, with approximately 36% of those new patients visiting a chiropractor for the first time. We are not only increasing our percentage of market share, but are expanding the chiropractic market. Key Performance Measures. We receive monthly performance reports from our system and our clinics which include key performance indicators per clinic, including gross sales, comparable same-store sales growth, or "Comp Sales," number of new patients, conversion percentage, and member attrition. In addition, we review monthly reporting related to system-wide sales, clinic openings, clinic license sales, and various earnings metrics in the aggregate and per clinic. We believe these indicators provide us with useful data with which to measure our performance and to measure our franchisees' and clinics' performance. System-wide Comp Sales include the sales from both company-owned or managed clinics and franchised clinics that in each case have been open at least 13 full months and exclude any clinics that have closed. While franchised sales are not recorded as revenues by us, management believes the information is important in understanding the overall brand's financial performance, because these sales are the basis on which we calculate and record royalty fees and are indicative of the financial health of the franchisee base. Key Clinic Development Trends. As ofDecember 31, 2021 , we and our franchisees operated or managed 706 clinics, of which 610 were operated or managed by franchisees and 96 were operated as company-owned or managed clinics. Of the 96 company-owned or managed clinics, 43 were constructed and developed by us, and 53 were acquired from franchisees. Our current strategy is to grow through the sale and development of additional franchises and continue to expand our corporate clinic portfolio within clustered locations. The number of franchise licenses sold for the year endedDecember 31, 2021 was 156, compared with 121 and 126 licenses for the years endedDecember 31, 2020 and 2019, respectively. We ended 2021 with 22 regional developers who were responsible for 81% of the 156 licenses sold during the year. This strong result 31
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reflects the power of the regional developer program to accelerate the number of clinics sold, and eventually opened, across the country.
In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned or managed clinics through the accelerated development of greenfield clinics and the further selective acquisition of existing franchised clinics. We will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other clinics and additional suitability factors. We believe that The Joint has a sound concept, which was further validated through its resiliency during the pandemic and will benefit from the fundamental changes taking place in the manner in which Americans access chiropractic care and their growing interest in seeking effective, affordable natural solutions for general wellness. These trends join with the preference we have seen among chiropractic doctors to reject the insurance-based model to produce a combination that benefits the consumer and the service provider alike. We believe that these forces create an important opportunity to accelerate the growth of our network.
COVID-19 Pandemic Update
The COVID-19 pandemic and related governmental control measures severely disrupted our business during the second quarter of 2020. During this period, we experienced a significant reduction in patient traffic and spending trends. With the easing to varying degrees of restrictive public health orders inMay 2020 , patient traffic recovered substantially throughout the year, following a low point inApril 2020 . For the remainder of 2020, steadily improving key metrics, including gross sales, Comp Sales, patient traffic, and new patient conversion rate, drove our 2020 full year operating income to an all-time high. TheU.S. economy continued on a path to recovery in the first half of 2021 with millions of Americans receiving the COVID-19 vaccine and the easing of government-imposed restrictions. During the second half of 2021, however, theU.S. saw a resurgence in COVID-19 cases, particularly as a result of a new variant of COVID-19. As mentioned in our results of operations, our business has remained healthy and resilient despite the ongoing pandemic. While our business continued to show strong year on year growth in revenues, the COVID-19 outbreak continues to be fluid, and the extent to which the pandemic will impact our business remains uncertain. Our 2020 revenue and earnings were negatively impacted compared to our pre-COVID-19 pandemic expectations, and the pandemic may have a negative impact on our revenue and net income in 2022. Public health officials and medical professionals have warned that the resurgence of COVID-19 cases may continue, particularly if vaccination rates do not increase or if additional potent variants emerge, which may impact the general economic recovery. The ongoing economic impacts and health concerns associated with the pandemic may continue to affect patient behavior and spending levels and could result in reduced visits and patient spending trends that adversely impact our financial position and results of operations. In addition, the impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including new or more restrictive stay-at-home orders and other new or revised public health requirements recommended or imposed by federal, state and local authorities. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies. In spite of these challenges, and other factors, which may individually or in combination slow the recovery from the COVID-19 pandemic-induced disruptions, we believe we are well-positioned to operate effectively through the present environment, as we continue to conduct business as usual with modifications to employee travel and employee work locations, and with our new sanitary and safety measures in our clinics. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and patients.
Significant Events and/or Recent Developments
We continue to deliver on our strategic initiatives and to progress toward sustained profitability.
For the year ended
•Comp Sales of clinics that have been open for at least 13 full months increased 29%.
•Comp Sales for mature clinics open 48 months or more increased 23%.
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•System-wide sales for all clinics open for any amount of time grew 39% to
We saw over 807,000 new patients in 2021, compared with 584,000 new patients in 2020, with approximately 36% of those new patients having never been to a chiropractor before. We are not only increasing our percentage of market share, but expanding the chiropractic market. These factors, along with continued leverage of our operating expenses, drove improvement in our bottom line. OnJanuary 1, 2021 , we entered into an agreement under which we repurchased the right to develop franchises in various counties inGeorgia . The total consideration for the transaction was$1,388,700 . We carried a deferred revenue balance associated with this transaction of$35,679 , representing the fee collected upon the execution of the regional developer agreement. We accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price. We recognized the net amount of$1,353,021 as reacquired development rights inJanuary 2021 , which is amortized over the remaining original contract period of approximately 13 months at the time of the purchase.
On
OnApril 1, 2021 , we entered into an Asset and Franchise Purchase Agreement under which we repurchased from the seller two operating franchises inPhoenix, Arizona . We operate the franchises as company-owned clinics. The total purchase price for the transaction was$1,925,000 , less$29,417 of net deferred revenue, resulting in total purchase consideration of$1,895,583 . OnApril 1, 2021 , we entered into an Asset and Franchise Purchase Agreement under which we repurchased from the seller six operating franchises inNorth Carolina . We operate the franchises as company-managed clinics. The total purchase price for the transaction was$2,568,028 , less$58,441 of net deferred revenue, resulting in total purchase consideration of$2,509,587 . OnNovember 1, 2021 , we entered into an Asset and Franchise Purchase Agreement under which we repurchased from the seller four operating franchises inNorth Carolina . We operate the franchises as company-managed clinics. The total purchase price for the transaction was$1,284,212 , less$46,681 of net deferred revenue resulting in total purchase consideration of$1,225,426 .
For the year ended
Because our public float (the market value of our common shares held by non-affiliates) was greater than$700 million as ofJune 30, 2021 , we became a large accelerated filer and no longer qualify as a "smaller reporting company," as defined in the Exchange Act. Compliance with the "large accelerated filer" filing requirements begins with this Annual Report on Form 10-K, which now includes an attestation by our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002. Compliance with increased disclosure obligations due to the change in our smaller reporting company status will begin with our quarterly report for the three-month period endingMarch 31, 2022 . These additional disclosure obligations will include, but not be limited to, fuller and more detailed disclosures regarding executive compensation and three years (instead of two years) of audited income, cash flow and stockholders' equity statements. Compliance with additional filing and disclosure requirements will increase our costs and demands on management.
2022 Full Year Outlook
•We expect our revenues to be between$102 million and$106 million , compared to$80.9 million in 2021. •We expect our adjusted EBITDA to be between$15 million and$17 million , compared to$12.6 million in 2021. •We expect franchised clinic openings to be between 110 and 130, compared to 110 in 2021. •We expect Company-owned or managed clinics, through a combination of both greenfields and buybacks, to increase by between 30 and 40, compared to 32 in 2021. We believe we are well positioned to achieve our goal to have 1,000 clinics by the end of 2023 due to, among other things, our resilient business model, planned new clinic openings and expansion of company-owned or managed clinics, and current 33 -------------------------------------------------------------------------------- Table of Contents positive economic trends. However, the long-term impact of COVID-19 on our operational and financial performance will depend on certain developments including the duration, spread, severity, and trajectory of the virus. These potential developments are uncertain and cannot be predicted, and as such, the extent to which COVID-19 will impact our business, operations, financial condition and results of operations over the long term is unknown.
Factors Affecting Our Performance
Our operating results may fluctuate significantly as a result of a variety of factors, including the timing of new clinic sales, openings, and closures and related expenses, the markets in which our clinics operate, general economic conditions, consumer confidence in the economy, consumer preferences, competitive factors, and disease epidemics and other health-related concerns, such as the current COVID-19 outbreak.
Significant Accounting Polices and Estimates
The preparation of consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our accounting estimates on historical experience and other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. We have discussed the development and selection of significant accounting policies and estimates with our Audit Committee.
Intangible Assets
Intangible assets consist primarily of re-acquired franchise and regional developer rights and customer relationships. We amortize the fair value of re-acquired franchise rights over the remaining contractual terms of the re-acquired franchise rights at the time of the acquisition, which range from one to nine years. In the case of regional developer rights, we amortize the acquired regional developer rights over the remaining contractual terms at the time of the acquisition, which range from two to seven years. The fair value of customer relationships is amortized over their estimated useful life which ranges from two to four years.
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the acquisitions of franchises treated as a business combination underU.S. GAAP.Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. As required, we perform an annual impairment test of goodwill as of the first day of the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. No impairments of goodwill were recorded for the years endedDecember 31, 2021 and 2020.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. We look primarily to estimated undiscounted future cash flows in its assessment of whether or not long-lived assets are recoverable. During the year endedDecember 31, 2021 , certain operating lease right-of-use assets related to closed clinics with a total carrying amount of$0.5 million were written down to their fair value of$0.4 million . As a result, we recorded a noncash impairment loss of approximately$0.1 million during the year endedDecember 31, 2021 . No impairments of long-lived assets were recorded for the year endedDecember 31, 2020 . Stock-Based Compensation We account for share-based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of restricted shares using the closing price on the date of the grant and the grant-date fair value of stock options using the Black-Scholes-Merton model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the period of service using the straight-line method. Forfeitures are estimated based on historical and forecasted turnover, which is approximately 5%.
Revenue Recognition
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We generate revenue primarily through our company-owned and managed clinics and through royalties, franchise fees, advertising fund contributions, IT related income and computer software fees from our franchisees. Revenues from Company-Owned orManaged Clinics . We earn revenue from clinics that we own and operate or manage throughoutthe United States . In those states where we own and operate the clinic, revenues are recognized when services are performed. We offer a variety of membership and wellness packages which feature discounted pricing as compared with our single-visit pricing. Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed. Any unused visits associated with monthly memberships are recognized on a month-to-month basis. We recognize a contract liability (or a deferred revenue liability) related to the prepaid treatment plans for which we have an ongoing performance obligation. We recognize this contract liability, and recognize revenue, as the patient consumes his or her visits related to the package and we perform the services. If we determine that it is not subject to unclaimed property laws for the portion of wellness package that we do not expect to be redeemed (referred to as "breakage") then we recognize breakage revenue in proportion to the pattern of exercised rights by the patient. Royalties and Advertising Fund Revenue. We collect royalties from our franchisees, as stipulated in the franchise agreement, equal to 7% of gross sales and a marketing and advertising fee currently equal to 2% of gross sales. Royalties, including franchisee contributions to advertising funds, are calculated as a percentage of clinic sales over the term of the franchise agreement. The revenue accounting standard provides an exception for the recognition of sales-based royalties promised in exchange for a license (which generally requires a reporting entity to estimate the amount of variable consideration to which it will be entitled in the transaction price). The franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchisee clinic level sales occur. Royalties and marketing and advertising fees are collected bi-monthly two working days after each sales period has ended. Franchise Fees. We require the entire non-refundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of ten years. Initial franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement. Our services under the franchise agreement include training of franchisees and staff, site selection, construction/vendor management and ongoing operations support. We provide no financing to franchisees and offer no guarantees on their behalf. The services we provide are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
Software Fees. We collect a monthly fee from our franchisees for use of our proprietary chiropractic software, computer support, and internet services support. These fees are recognized ratably on a straight-line basis over the term of the respective franchise agreement.
Regional Developer Fees. We have a regional developer program where regional
developers are granted an exclusive geographical territory and commit to a
minimum development obligation within that defined territory. Regional developer
fees are non-refundable and are recognized as revenue ratably on a straight-line
basis over the term of the regional developer agreement, which is considered to
begin upon the execution of the agreement. Our services under regional developer
agreements include site selection, grand opening support for the clinics, sales
support for identification of qualified franchisees, general operational support
and marketing support to advertise for ownership opportunities. The services we
provide are highly interrelated with the development of the territory and the
resulting franchise licenses sold by the regional developer and as such are
considered to represent a single performance obligation. In addition, we pay
regional developers fees which are funded by the initial franchise fees
collected from franchisees upon the sale of franchises within their exclusive
geographical territory and a royalty of 3% of sales generated by franchised
clinics in their exclusive geographical territory. Fees related to the sale of
franchises within their exclusive geographical territory are initially deferred
as deferred franchise costs and are recognized as an expense in franchise cost
of revenues when the respective revenue is recognized, which is generally over
the term of the related franchise agreement. Royalties of 3% of gross sales
generated by franchised clinics in their regions are also recognized as
franchise cost of revenues as franchisee clinic level sales occur, which is
funded by the 7% royalties we collect from the franchisees in their regions.
Certain regional developer agreements result in the regional developer acquiring
the rights to existing royalty streams from clinics already open in the
respective territory. In those instances, the revenue associated from the sale
of the royalty stream is recognized over the remaining life of the respective
franchise agreements.
Leases
The accounting guidance for leases requires lessees to recognize a right-of-use
("ROU") asset and a lease liability in the balance sheet for most leases. The
lease liability is measured at the present value of the fixed lease payments
over the lease term
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and the ROU asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs. Certain leases include one or more renewal options, generally for the same period as the initial term of the lease. The exercise of lease renewal options is generally at our sole discretion and, as such, we typically determine that exercise of these renewal options is not reasonably certain. As a result, we do not include the renewal option period in the expected lease term and the associated lease payments are not included in the measurement of the right-of-use asset and lease liability. When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. In such cases, we estimate our incremental borrowing rate as the interest rate we would pay to borrow an amount equal to the lease payments over a similar term, with similar collateral as in the lease, and in a similar economic environment. We estimate these rates using available evidence such as rates imposed by third-party lenders in recent financings or observable risk-free interest rate and credit spreads for commercial debt of a similar duration, with credit spreads correlating to our estimated creditworthiness. For operating leases that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date it takes possession of the leased property. Pre-opening costs are recorded as incurred in general and administrative expenses. Variable lease payments, such as percentage rentals based on location sales, periodic adjustments for inflation, reimbursement of real estate taxes, any variable common area maintenance and any other variable costs associated with the leased property are expensed as incurred and are also included in general and administrative expenses on the consolidated income statements.
Income Taxes
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in the overall assessment. In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing temporary differences, the carry back of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation involves assumptions about future activity. The actual realization of deferred tax assets may differ from the amounts we have recorded. In 2019, we continued to maintain a full valuation allowance on the deferred tax assets, due to cumulative losses as ofDecember 31, 2019 . As ofDecember 31, 2020 , we recorded an income tax benefit of$7.8 million primarily due to the reduction in the valuation allowance. The valuation allowance was reduced because the weight of evidence regarding the future realizability of the deferred tax assets had become predominately positive and realization of the deferred tax assets was more likely than not. The positive evidence considered in our assessment of the realizability of the deferred tax assets included the generation of significant positive cumulative income for the three-year period endedDecember 31, 2020 and projections of future taxable income. Based on our earnings performance trend and expected continued profitability, management determined it was more likely than not that all of our deferred tax assets would be realized. The negative evidence considered included historical loss in 2017, marginal pre-tax income generated in 2018, and general economic uncertainties related to the impact of the pandemic. However, management has concluded that positive evidence outweighed this negative evidence. Significant judgment is also required in evaluating our uncertain tax positions. We establish accruals for uncertain tax positions when we believe that the full amount of the associated tax benefit may not be realized. If we prevail in matters for which accruals have been established previously or pay amounts in excess of reserves, there could be an effect on our income tax provisions in the period in which such determination is made. We regularly assess the tax risk of our tax return filing positions, and we have not identified any material uncertain tax positions as ofDecember 31, 2021 and 2020, respectively. Loss Contingencies 36
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Accounting Standards Codification 450, Contingencies ("ASC 450"), governs the
disclosure of loss contingencies and accrual of loss contingencies in respect of
litigation and other claims. We record an accrual for a potential loss when it
is probable that a loss will occur and the amount of the loss can be reasonably
estimated. When the reasonable estimate of the potential loss is within a range
of amounts, the minimum of the range of potential loss is accrued, unless a
higher amount within the range is a better estimate than any other amount within
the range. Moreover, even if an accrual is not required, we provide additional
disclosure related to litigation and other claims when it is reasonably possible
(i.e., more than remote) that the outcomes of such litigation and other claims
include potential material adverse impacts on us. Legal costs to be incurred in
connection with a loss contingency are expensed as such costs are incurred.
Results of Operations
The following discussion and analysis of our financial results encompasses our consolidated results and results of our two business segments:Corporate Clinics and Franchise Operations. Total Revenues
Components of revenues for the year ended
Year Ended
December 31, Change from Percent Change
2021 2020 Prior Year from Prior Year
Revenues:
Revenues from company-owned or managed
clinics $ 44,348,234 $ 31,757,207 $ 12,591,027 39.6 %
Royalty fees 22,062,989 15,886,051 6,176,938 38.9 %
Franchise fees 2,659,097 2,100,800 558,297 26.6 %
Advertising fund revenue 6,298,924 4,506,413 1,792,511 39.8 %
Software fees 3,383,856 2,694,520 689,336 25.6 %
Regional developer fees 848,640 876,804 (28,164) (3.2) %
Other revenues 1,257,913 861,181 396,732 46.1 %
Total revenues $ 80,859,653 $ 58,682,976 $ 22,176,677 37.8 %
The reasons for the significant changes in our components of total revenues were as follows:
Consolidated Results •Total revenues increased by$22.2 million , primarily due to the continued expansion and revenue growth of our franchise base, continued same-store sales growth and expansion of our corporate-owned or managed clinics portfolio, and the negative impact of the pandemic during the second quarter of 2020 relative to the same quarter of 2021, which decline was reflected in total revenues for the year ended 2020.Corporate Clinics •Revenues from company-owned or managed clinics increased, primarily due to improved same-store sales growth, as well as due to the expansion of our corporate-owned or managed clinics portfolio and the negative impact of the same-store sale decline due to the pandemic in the second quarter of 2020 relative to the same quarter of 2021, which decline was included in the revenues for company-owned or managed clinics for the year ended 2020.
Franchise Operations
•Royalty fees and advertising fund revenue increased due to an increase in the number of franchised clinics in operation during 2021, along with continued sales growth in existing franchised clinics and the negative impact of the same-store sale decline due to the pandemic in the second quarter of 2020 relative to the same quarter of 2021, which decline is included in the revenues for franchised clinics for the year ended 2020. As ofDecember 31, 2021 , and 2020, there were 610 and 515 franchised clinics in operation, respectively. 37
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•Franchise fees increased due to an increase in executed franchise agreements, as these fees are recognized ratably over the term of the respective franchise agreement. For the year endedDecember 31, 2021 , there were executed franchise license sales or letters-of-intent for 156 franchise licenses, compared to 121 for the year endedDecember 31, 2020 .
•Software fees revenue increased due to an increase in our franchised clinic base and the related revenue recognition over the term of the franchise agreement as described above.
•Other revenues primarily consisted of merchant income associated with credit
card transactions.
Cost of Revenues
Year Ended December 31, Change from Percent Change
2021 2020 PriorYear from Prior Year
Cost of Revenues 8,513,777 6,507,468$ 2,006,309 30.8 % For the year endedDecember 31, 2021 , as compared with the year endedDecember 31, 2020 , the total cost of revenues increased due to an increase in regional developer royalties and sales commissions of$1.3 million and due to an increase in website hosting costs of$0.7 million .
Selling and Marketing Expenses
Year Ended December 31, Change from Percent Change
2021 2020 Prior Year from Prior Year
Selling and Marketing Expenses 11,424,416 7,804,420 $ 3,619,996 46.4 %
Selling and marketing expenses increased
Depreciation and Amortization Expenses
Year Ended December 31, Change from Percent Change
2021 2020 Prior Year from Prior Year
Depreciation and Amortization Expenses 6,088,947 2,734,462 $ 3,354,485 122.7 %
Depreciation and amortization expenses increased for the year ended December 31,
2021 , as compared to the year ended December 31, 2020 , primarily due to: (i) the
development rights reacquired in December 2020 and January 2021 for a total net
consideration of $2.4 million , which are amortized over the remaining original
contract periods of approximately 13 to 25 months, (ii) amortization of
intangibles related to the 2021 clinic acquisitions, (iii) depreciation expenses
associated with the expansion of our corporate-owned or managed clinics
portfolio in 2020 and 2021, and (iv) depreciation expenses associated with the
new IT platform used by clinics for operations and for the management of
operations, which went live in July 2021 .
General and Administrative Expenses
Year Ended December 31, Change from Percent Change
2021 2020 Prior Year from Prior Year
General and Administrative Expenses 49,453,305 36,195,817 $ 13,257,488 36.6 %
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General and administrative expenses increased during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , primarily due to the increases in the following to support continued clinic count and revenue growth in both operating segments: (i) payroll and related expenses of$8.5 million , (ii) general overhead and administrative expenses of$3.6 million , (iii) professional and advisory fees of$0.9 million , and (iv) software and maintenance expense of$0.3 million . General and administrative expenses for the year endedDecember 31, 2021 also included a non-recurring net expense of$0.5 million related to a settlement of a legal claim. As a percentage of revenue, general and administrative expenses during the year endedDecember 31, 2021 and 2020 were 61% and 62%, respectively. General and administrative expenses as a percentage of revenue improved modestly compared to the prior year as the improved leverage from the increase in revenue was partially offset by the costs associated with greenfields clinics opened during 2021. During 2021, we opened 20 greenfield clinics compared with three greenfield clinics in the prior year period. Income from Operations Year Ended December 31, Change from Percent Change 2021 2020 Prior Year from Prior Year Income from Operations 5,352,419 5,492,130$ (139,711) (2.5) % Consolidated Results Consolidated income from operations decreased by$0.1 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , as the improved operating income in the franchise operations segment was more than offset by increased expenses in the corporate clinics and the unallocated corporate segments discussed below. In addition, consolidated income from operations for the year ended 2020 included the negative impact of the same-store sale decline during the second quarter of 2020 due to the pandemic as discussed above, which is reflected in the consolidated income from operations for the year ended 2021 relative to the prior year period.
Our corporate clinics segment had income from operations of$4.4 million for the year endedDecember 31, 2021 , a decrease of$0.1 million compared to income from operations of$4.5 million for the year endedDecember 31, 2020 . This decrease was primarily due to: •An increase in revenues of$12.6 million from company-owned or managed clinics primarily due to improved same-store growth, as well as the expansion of our corporate-owned or managed clinics portfolio; more than offset by •A$12.7 million increase in operating expenses primarily driven by the increases in: (i) payroll-related expenses due to a higher head count to support the expansion of our corporate clinics portfolio of$5.9 million , (ii) depreciation and amortization expense related to the reacquired development rights, 2021 acquisitions, expansion of our corporate-owned or managed clinics portfolio in 2020 and 2021, and new software discussed above of$2.9 million , (iii) selling and marketing expenses due to increased local marketing expenditures by the company-owned or managed clinics of$1.8 million , and (iv) general overhead and administrative expenses associated with the expansion of our corporate-owned or managed clinics portfolio in 2021 of$2.1 million .
Franchise Operations
Our franchise operations segment had income from operations of$16.7 million for the year endedDecember 31, 2021 , an increase of$4.1 million , compared to income from operations of$12.6 million for the year endedDecember 31, 2020 . This increase was primarily due to: •An increase of$9.6 million in total revenues due to an increase in the number of franchised clinics in operation along with continued sales growth in existing franchised clinics; partially offset by •An increase of$5.4 million in total expenses primarily driven by the increases in: (i) cost of revenue due to an increase in regional developer royalties and sales commissions and website hosting costs of$2.0 million , (ii) 39
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selling and marketing expenses resulting from a larger franchise base of$1.9 million , (iii) payroll-related expenses due to a higher head count to support a larger franchise base of$1.0 million , and (iv) higher depreciation expense related to the new software discussed above of$0.3 million .
Unallocated Corporate
Unallocated corporate expenses for the year endedDecember 31, 2021 increased by$4.2 million compared to the prior year period, primarily due to support continued clinic count and revenue growth in both operating segments. The$4.2 million increase is primarily driven by the increases in: (i) payroll-related expenses of$1.5 million , (ii) professional and advisory fees of$1.0 million , (iii) general overhead and administrative expenses of$1.3 million , and (iv) maintenance expenses for our new software discussed above of$0.3 million . General and administrative expenses for the year endedDecember 31, 2021 also included a non-recurring net expense of$0.5 million related to a settlement of a legal claim and$0.3 million related to a recognition of certain contingent liabilities. Like many industries, we are experiencing wage growth in our chiropractic and wellness coordinator labor. These increasing labor costs could have an impact to our profitability, and may result in price increases to offset the impact of this tight labor market. Income Tax Benefit Year Ended December 31, Change from Percent Change 2021 2020 Prior Year from Prior Year Income tax benefit (1,293,229) (7,754,662)$ 6,461,433 (83.3) % For the years endedDecember 31, 2021 and 2020, the effective tax rates were (24.5)% and (143.3)%, respectively. The fluctuation in the effective rate was primarily attributable to the reversal of the valuation allowance on deferred tax assets onDecember 31, 2020 and stock-based compensation. Please see Note 9, "Income Taxes" in the Notes to consolidated financial statements included in Item 8 of this report for further discussion. Non-GAAP Financial Measures The table below reconciles net income to Adjusted EBITDA for the years endedDecember 31, 2021 and 2020. Year Ended December 31, 2021 2020 Non-GAAP Financial Data: Net income$ 6,575,770 $ 13,167,314 Net interest 69,878 79,478 Depreciation and amortization expense 6,088,947 2,734,462 Income tax benefit (1,293,229) (7,754,662) EBITDA 11,441,366 8,226,592 Stock compensation expense 1,056,015 885,975 Acquisition related expenses 68,716
41,716
Net loss (gain) on disposition or impairment 26,789 (51,321) Adjusted EBITDA
$ 12,592,886 $ 9,102,962 Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, and (gain) loss on disposition or impairment. We have provided Adjusted EBITDA because it is a non-GAAP measure of financial performance commonly used for comparing companies in our industry. You should not consider Adjusted EBITDA as a substitute for operating profit as an indicator of our operating performance or as an alternative to cash flows from operating activities as a measure of liquidity. We may calculate Adjusted EBITDA differently from other companies. 40
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We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other outpatient medical clinics, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating Adjusted EBITDA, in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same manner. Our management does not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of Adjusted EBITDA is that it excludes significant expenses and income that are required by GAAP to be recorded in our financial statements. Some of these limitations are:
a.Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
b.Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
c.Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
d.Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
e.Adjusted EBITDA does not reflect the bargain purchase gain, which represents the excess of the fair value of net assets acquired over the purchase consideration; and
f.Adjusted EBITDA does not reflect the (gain) loss on disposition or impairment, which represents the impairment of assets as of the reporting date. We do not consider this to be indicative of our ongoing operations. Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. You should review the reconciliation of net income to Adjusted EBITDA above and not rely on any single financial measure to evaluate our business.
Liquidity and Capital Resources
Sources of Liquidity
As ofDecember 31, 2021 , we had cash and short-term bank deposits of$19.5 million . We generated$15.2 million of cash flow from operating activities in the year endedDecember 31, 2021 . While the ongoing COVID-19 pandemic creates potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations, and amounts available under our development line of credit will be sufficient to fund our anticipated operating and investment needs for at least the next twelve months. While the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created uncertainty as to general economic conditions for 2022 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements to conduct our operations, fund capital expenditure investments, and meet other needs in the ordinary course of our business. For 2022, we expect to use or redeploy our cash resources to support our business within the context of prevailing market conditions, which, given the ongoing uncertainty surrounding the COVID-19 pandemic, could rapidly and materially deteriorate or otherwise change. Our long-term capital requirements, primarily for acquisitions and other corporate initiatives, could be dependent on our ability to access additional funds through the debt and/or equity markets. From time to time, we consider and evaluate transactions related to our portfolio and capital structure, including debt financings, equity issuances, purchases and sales of assets, and other transactions. Due to the ongoing COVID-19 pandemic, the levels of our cash flows from operations for 2022 may be impacted. There can be no assurance that we will be able to generate sufficient cash flows or obtain the capital necessary to meet our short and long-term capital requirements.
Analysis of Cash Flows
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Net cash provided by operating activities was$15.2 million for the year endedDecember 31, 2021 , compared to net cash provided by operating activities of$11.2 million for the year endedDecember 31, 2020 . The increase was primarily attributable to an increase in revenue over the prior year period, which was partially offset by an increase in operating expenses over the prior year period. Net cash used in investing activities was$14.1 million and$4.6 million during the years endedDecember 31, 2021 and 2020, respectively. For the year endedDecember 31, 2021 , this included clinic acquisitions for$5.8 million , purchases of property and equipment for$7.0 million , and reacquisition and termination of regional developer rights for$1.4 million . For the year endedDecember 31, 2020 , this included clinic acquisitions for$0.5 million , purchases of property and equipment for$3.2 million , and reacquisition and termination of regional developer rights for$1.0 million . Net cash (used in) provided by financing activities was$(2.0) million and$5.6 million during the years endedDecember 31, 2021 and 2020, respectively. For the year endedDecember 31, 2021 , this included repayment of the PPP loan of$2.7 million and purchases of treasury stock for$0.7 million , which were partially offset by the proceeds from the exercise of stock options of$1.5 million . For the year endedDecember 31, 2020 , this included proceeds from: (i) the credit facility, net of related fees of$1.9 million , (ii) the loan under the CARES Act Paycheck Protection Program of$2.7 million , and (iii) the exercise of stock options of$1.0 million .
The following table summarizes our material contractual obligations at
Material Contractual Cash Requirements
Payments Due by Fiscal Year
Total 2022 2023 2024 2025 2026 Thereafter
Operating leases $ 24,066,811 5,461,181 4,804,873 4,289,146 3,852,159 2,002,135 3,657,317
Recent Accounting Pronouncements
Please see Note 1, "Nature of Operations and Summary of Significant Accounting Policies" in the Notes to consolidated financial statements included in Item 8 of this report for information regarding recently issued accounting pronouncements that may impact our financial statements.
Off-Balance Sheet Arrangements
During the year endedDecember 31, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements.
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