The Joint Corp. (NASDAQ: JYNT) — Q1 2019 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2019. The Joint franchises, develops, owns, operates and manages chiropractic clinics. At quarter-end, its network included 454 clinics: 404 franchised and 50 company-owned or managed. Financial statements are unaudited.
The company restated 2018 comparative financial information to consolidate certain professional corporations (PCs) that it determined it controls as variable interest entities. This increased reported clinic revenue and expenses; the company said the correction was immaterial and generally did not affect net income, except for deferred revenue on prepaid treatment packages. Comparisons below use the restated 2018 figures.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $10.68 million | $8.65 million |
| Operating income (loss) | $1.05 million | ($0.08 million) |
| Net income (loss) | $0.95 million | ($0.03 million) |
| Diluted earnings (loss) per share | $0.07 | ($0.00) |
| Operating cash flow | $0.46 million | ($0.03 million) |
- Revenue grew 23.5% year over year. Company-owned or managed clinic revenue increased 17.3%; royalty revenue increased 33.1%. Management attributed growth to clinic expansion and higher sales across the system.
- Cost of revenue rose 24.0% to $1.21 million; selling and marketing expense rose 36.6% to $1.51 million. General and administrative expense increased 4.5% to $6.55 million, while depreciation and amortization declined 5.6% to $0.37 million.
- Calculated from reported figures, operating margin was approximately 9.8% versus negative 1.0%; net margin was approximately 8.9% versus negative 0.4%. Gross margin, calculated as revenue less cost of revenue, was approximately 88.7% versus 88.8%.
- Operating cash flow improved by about $0.49 million. Investing activities used $1.20 million, including $0.68 million to reacquire and terminate regional developer rights and $0.53 million for property and equipment. Financing activities provided $0.08 million. Cash and restricted cash decreased $0.66 million to $8.20 million; unrestricted cash and cash equivalents were $8.09 million.
- Current assets were $10.90 million and current liabilities $10.86 million at March 31, 2019. Current notes payable were $1.00 million. The company reported $1.00 million drawn on its $5.00 million revolving facility, leaving $4.00 million undrawn, subject to facility terms.
- Adoption of ASC 842 added an operating lease right-of-use asset of $9.98 million and operating lease liabilities of $10.86 million. Finance lease liabilities were $0.08 million. These lease obligations are distinct from the company’s notes payable.
Material changes and unusual items
- Clinic count increased from 406 to 454 year over year. Q1 included 12 new franchised clinics and two company-owned or managed greenfield openings; the company also acquired one franchise clinic and closed or sold one company clinic.
- System-wide gross sales for clinics open for any amount of time grew 32% to $48.9 million. Comparable sales increased 25% for clinics open at least 13 months and 18% for mature clinics open at least 48 months.
- The company paid $681,500 to reacquire regional developer rights in South Carolina and Georgia. It also acquired a West Covina, California franchise for $30,000 cash consideration before deferred-revenue adjustments, and recorded a $19,298 bargain purchase gain.
- Q1 2019 includes a $105,193 loss on sale of fixed assets in the cash-flow reconciliation. The filing does not indicate that this was a recurring item.
- ASC 842 was adopted January 1, 2019 using a transition method that left comparative periods under prior lease accounting; balance-sheet comparisons therefore include a new lease asset and liabilities in 2019.
Outlook, commentary and risks
Management provided no specific numerical earnings or revenue guidance. It said it expects available cash and operating cash flows, together with potential financing or asset-sale proceeds, to meet short-term working-capital needs. Long-term funding for acquisitions and other initiatives may depend on access to debt or equity markets; management cautioned that future cash generation and access to capital are not assured. The company plans measured expansion of company-owned or managed clinics, targeting geographic clusters, while continuing franchise and regional-developer growth.
- The revolving credit facility carries 10% interest, includes a $200,000 minimum aggregate interest requirement over its term, and is scheduled to terminate in December 2019 unless earlier terminated.
- Regulatory uncertainty around the company’s management-services model is a material risk. In North Carolina, the state chiropractic board issued probable-cause findings concerning approximately 15 chiropractors at franchisee-managed clinics; the chiropractors disputed the findings and sought changes to proposed settlement terms. The board had not replied as of the filing. An Arkansas bill that could have challenged non-chiropractor ownership or management of chiropractic corporations was withdrawn, but similar legislation may be introduced.
- Other stated risks include securing sites and favorable leases, clinic profitability and staffing, franchise sales, acquisition execution, competition, changes in regulation and public-company costs. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of March 31, 2019.
Important facts for investors to verify
- Track whether comparable-sales growth and clinic expansion continue, and whether new clinics produce sustainable profitability and cash flow.
- Review the North Carolina board matter and any further state action affecting the PC or management-services model.
- Confirm repayment, renewal or replacement of the $1.00 million credit-facility draw before the facility’s December 2019 termination date, and assess funding needs for planned growth.
- Assess lease commitments and the cash requirements of clinic expansion and regional-rights reacquisitions alongside reported cash balances.
- Review the VIE consolidation restatement and ASC 842 transition when comparing results and balance sheets across periods.