The Joint Corp. (NASDAQ: JYNT) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results are compared with prior-year figures, which the company restated. The Joint operates and franchises chiropractic clinics; at quarter-end it had 914 clinics in operation: 778 franchised and 136 company-owned or managed.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $29.5 million | $26.4 million | $87.1 million | $73.6 million |
| Operating income (loss) | $(0.9) million | $0.7 million | $(1.9) million | $(0.6) million |
| Net income (loss) | $(0.7) million | $0.7 million | $1.3 million | $(0.1) million |
| Adjusted EBITDA | $2.9 million | $3.1 million | $8.2 million | $7.5 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $11.3 million | $3.0 million |
- Q3 revenue rose 11.4%; nine-month revenue rose 18.4%. Company-owned or managed clinic revenue increased 12.9% in Q3 and 23.0% year to date. Franchise royalties increased 8.2% and 11.3%, respectively.
- Q3 operating loss reflected higher operating costs and a $0.9 million loss on disposition or impairment, including charges for clinics designated for sale. Nine-month operating loss widened despite revenue growth.
- Q3 Adjusted EBITDA decreased from the prior year; nine-month Adjusted EBITDA increased. This non-GAAP measure excludes, among other items, the ERC-related income and disposition or impairment losses.
- Nine-month net income included $3.8 million of ERC income, net of consulting fees. Without that unusual item, reported net income would have been materially lower; the filing does not present an adjusted net-income figure.
- At September 30, cash and cash equivalents were $16.1 million, plus $1.1 million restricted cash. The company reported $18 million of available Revolver capacity and $2.0 million outstanding under its credit facility, bearing 7.09% interest. It was in compliance with covenants.
- Nine-month investing cash outflow was $4.9 million, primarily capital expenditures of $3.8 million and a $1.1 million clinic acquisition. Cash, cash equivalents and restricted cash increased $6.6 million during the period.
- Total liabilities were $63.3 million and equity was $35.3 million at quarter-end. Operating lease liabilities totaled $22.6 million, in addition to the $2.0 million credit-facility debt.
Material changes and unusual items
- Comparisons use restated 2022 financial statements. The company identified prior accounting errors involving reacquired regional developer rights, upfront developer fees and transfer-pricing/tax matters; it concluded the errors were material to the 2022 interim period and restated prior figures.
- In March 2023, the company received $4.8 million from the IRS for Employee Retention Credits. It recognized $3.8 million net of consulting fees as other income and recorded a $0.9 million tax effect as a discrete item. ERC eligibility remains subject to IRS audit for five years.
- During Q3, the company designated clinics representing under 10% of its corporate clinic portfolio for sale, recording a $0.8 million nine-month valuation allowance. Related assets held for sale were $4.0 million and liabilities to be disposed of were $3.0 million at September 30. Two subsequent letters of intent covered clinics for a combined $185,000.
- On November 6, 2023, the board authorized a plan to re-franchise the majority of company-owned or managed clinics while retaining a small number of high-performing locations. Management said the financial impact could not yet be estimated.
- System-wide comparable sales were flat in Q3 for clinics open at least 13 months; comparable sales at clinics open 48 months or more fell 5%. System-wide sales across all clinics increased 8%.
Outlook, risks and controls
Management expects a volatile macroeconomic environment and elevated, though lower than 2022, cost inflation in 2023. Labor shortages and wage increases have pressured clinic costs; higher interest rates may affect patients, franchisee financing and borrowing costs. Management believed cash, operating cash flow and available credit would cover operating and investment needs for at least 12 months, while cautioning that economic and capital-market conditions could change.
Key risks include labor and inflation pressures, discretionary demand, franchise development and clinic profitability, regulation of chiropractic practice and prepaid services, cybersecurity and data privacy, and access to financing. The company reported disclosure controls were not effective at the reasonable-assurance level: material weaknesses in controls over complex accounting, including income taxes, revenue recognition and asset acquisitions, remained unremediated. Management described remediation efforts, but said effectiveness must be demonstrated through testing over time.
Important facts for investors to verify
- How much of reported nine-month profit and cash generation depended on the ERC, and the outcome of any IRS audit.
- Progress, timing, proceeds and operating consequences of clinic sales and the planned re-franchising initiative.
- Whether corporate clinic profitability improves as labor, marketing, depreciation and other costs rise.
- Remediation and independent testing of the disclosed material weaknesses, and whether future filings avoid further restatements.
- Liquidity and covenant headroom under changing interest rates and operating conditions; the filing reports $18 million of available Revolver capacity but does not provide a quantified covenant cushion.