Business context and reporting period
The Joint Corp. (NASDAQ: JYNT) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company franchises and supports chiropractic clinics and operates or manages clinics directly. At quarter-end, its network had 468 clinics: 417 franchised and 51 company-owned or managed.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $11.17 million | $8.80 million | $21.85 million | $17.45 million |
| Operating income (loss) | $488,000 | ($64,000) | $1.43 million | ($148,000) |
| Net income (loss) | $462,000 | ($51,000) | $1.41 million | ($82,000) |
| Diluted EPS | $0.03 | $0.00 | $0.10 | ($0.01) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.84 million | $613,000 |
Revenue rose 26.9% year over year in Q2 and 25.2% for the first half. Q2 operating and net margins were approximately 4.4% and 4.1%; first-half margins were approximately 6.5% and 6.5%. First-half investing cash outflow was $2.21 million, primarily for property and equipment and reacquired regional developer rights. Financing cash flow was $129,000. Cash and cash equivalents were $9.49 million at June 30; current assets were $12.41 million versus current liabilities of $11.88 million.
The company had drawn $1.0 million of its $5.0 million revolving credit facility; the facility bears 10% interest and is scheduled to terminate in December 2019. It reported compliance with covenants. Adoption of ASC 842 brought $10.03 million of operating lease right-of-use assets and $10.88 million of operating lease liabilities onto the balance sheet; these are lease obligations, distinct from borrowings.
Material changes versus the prior comparable period
- Q2 company-clinic revenue increased 23.7%; royalties increased 34.8%, reflecting a larger franchise base and higher clinic sales. Franchised clinics increased to 417 from 365 a year earlier.
- Management reported comparable sales growth of 25% for clinics open at least 13 months and 18% for clinics open at least 48 months. First-half system-wide sales increased 33% to $101.6 million; these sales include franchisee sales and are not company revenue.
- Operating results improved to profit from a prior-year loss. Management cited revenue growth and improved operating-expense leverage; higher marketing and administrative costs partly offset the improvement. General and administrative expense was 65% of revenue in Q2 versus 67% a year earlier.
- Operating cash flow increased to $2.84 million from $613,000, with improvement attributed primarily to operating income and, in part, higher deferred revenue.
Outlook, risks and unusual items
- No formal quantitative earnings or revenue guidance is provided. Management said it expected available cash and operating cash flow to cover short-term working-capital needs, while long-term needs, including acquisitions, may depend on access to debt or equity financing. It plans measured expansion of company clinics and continued franchise development.
- In July and August 2019, after quarter-end, the company acquired five franchised clinics for approximately $2.8 million. Management intends to file separate acquisition financial statements and pro forma information.
- The company began consolidating professional corporations (VIEs) in 2019 after reassessing its control. It restated 2018 comparative statements; the correction was described as immaterial and generally increased clinic revenue and G&A expense. Treatment-package revenue is recognized as visits are used. Comparisons should therefore use the restated figures.
- A February 2019 Arkansas bill that could have affected chiropractic ownership and management was withdrawn; the company said similar legislation could be introduced. In North Carolina, the state board issued findings concerning 16 chiropractors at franchisee-managed clinics: 13 reportedly accepted proposed settlement terms, while three were expected to face a hearing in September 2019. The company noted possible business-model concerns; outcomes and broader effects were uncertain.
- The company cited risks including franchise and clinic growth execution, site availability and lease terms, staffing, competition, acquisitions, regulation of its management model, and the ability to obtain future capital. It stated that routine litigation was not expected to have a material adverse effect. Management assessed disclosure controls as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether clinic same-store and system-wide sales growth translates into sustainable company revenue, earnings, and cash generation.
- The effects of the 2018 VIE restatement and deferred patient-package revenue on period-to-period comparability.
- The December 2019 credit-facility maturity, renewal or repayment plans, and the cost and availability of financing.
- Lease commitments, including the new corporate office lease expected to add approximately $2.1 million of right-of-use assets and liabilities when it commences.
- Final outcomes of the North Carolina proceedings and any further state or regulatory action affecting the company’s clinic-management model.
- Purchase price, integration, and subsequent financial contribution of the five post-quarter acquisitions.