Business context and reporting period
The Joint Corp. filed this unaudited Form 10-Q for the quarter ended September 30, 2018. It franchises, develops, operates and manages chiropractic clinics. At quarter-end, the system had 422 operating clinics: 374 franchised and 48 company-owned or managed, compared with 389 a year earlier.
Financial performance and liquidity
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $8.06 million, up 23.3% | $22.72 million, up 25.9% |
| Gross profit and margin | $6.98 million; 86.5% | $19.61 million; 86.3% |
| Operating loss | $0.19 million; 2.4% of revenue | $0.73 million; 3.2% of revenue |
| Net loss | $0.15 million; loss per share $0.01 | $0.58 million; loss per share $0.04 |
| Operating cash flow | $1.89 million for nine months, versus use of $1.59 million in the prior-year period |
Revenue growth reflected higher company-clinic revenue and management fees, royalties, franchise fees and regional developer fees. Nine-month system-wide sales grew 31% and comparable sales at clinics open at least 13 months rose 26%, according to management. Segment operating income for nine months was $0.47 million for corporate clinics and $5.92 million for franchise operations; unallocated corporate costs drove the consolidated operating loss.
At September 30, cash and cash equivalents were $5.61 million, plus $0.19 million of restricted cash; total current assets were $8.42 million and current liabilities $6.19 million. Total assets were $19.80 million, liabilities $18.47 million and stockholders’ equity $1.33 million. The company had $1.0 million drawn under a $5.0 million revolving facility and $0.1 million of other notes payable. Future minimum operating lease payments totaled $12.73 million. Cash and restricted cash together increased to $5.80 million from $4.32 million at year-end 2017.
Changes, outlook and notable items
- Nine-month net loss improved by $2.64 million year over year; operating loss improved by $2.38 million. General and administrative expense rose 9.3% for the nine months, mainly from payroll, bonuses and professional services.
- In August, the company changed its IT strategy to use a third-party SaaS CRM platform rather than continue internal platform development. It recorded a $343,000 impairment of capitalized software costs in Q3.
- In April, it repurchased one San Diego franchise and terminated another franchise agreement for $100,000 cash, recognizing a $75,264 bargain-purchase gain. In July, it reacquired Las Vegas regional development rights for $278,250. Two California and Florida regional developer agreements generated $450,000 cash in October, after quarter-end.
- ASC 606 was adopted retrospectively from January 1, 2018. Comparative figures are adjusted; adoption materially increased deferred franchise revenue and reduced opening equity. Investors should consider this when comparing reported results with earlier filings.
- Management described a strategy of expanding franchise sales, executing the regional developer program and selectively growing clustered company clinics. It provided no quantified financial guidance. The company said it would preserve cash and expand at a measured pace.
- Risks highlighted include clinic-site availability and profitability, franchise sales and growth execution, staffing qualified chiropractors, competition, regulation of the corporate practice model and joint-employer issues, and potential reputation damage. Lease obligations and the company’s continuing losses are also important considerations. Management reported disclosure controls effective at the reasonable assurance level; ordinary-course litigation is noted without further detail.
Important facts for investors to verify
- Whether same-store sales and clinic growth can sustain royalty and company-clinic revenue growth, and whether segment gains can cover corporate overhead.
- The cash needs and economics of clinic acquisitions, development, lease commitments and the remaining $4.0 million revolving-credit availability; confirm facility terms and required interest payments.
- The effect of the third-party IT transition, including any further impairment or implementation costs.
- How ASC 606’s deferred recognition of franchise and regional developer fees affects revenue comparisons, cash receipts and future recognized revenue.
- Progress toward sustained profitability, given the accumulated deficit of $36.59 million and stockholders’ equity of $1.33 million.