Business context and reporting period
The Joint Corp. franchises, develops, operates and manages chiropractic clinics. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. At quarter-end, the system had 413 operating clinics: 365 franchised and 48 company-owned or managed. An additional 117 clinic licenses had been sold but not yet developed.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $7.56 million | $6.00 million | $14.65 million | $11.51 million |
| Operating loss | $0.10 million | $1.00 million | $0.54 million | $2.70 million |
| Net loss | $42,778 | $1.02 million | $429,682 | $2.79 million |
| Operating margin | (1.3%) | (16.6%) | (3.7%) | (23.5%) |
Revenue increased 25.9% in Q2 and 27.4% in the first half. Net losses narrowed substantially; reported basic and diluted loss per share was $0.00 (rounded) in Q2 and $0.03 for the six months of 2018. Margins above are calculated from reported revenue and operating loss.
- Growth and segments: Management reported first-half system-wide sales growth of 29% and same-store sales growth of 25%. First-half corporate clinic revenue rose 29% to $6.68 million; franchise operations revenue rose to $7.98 million. Franchise operations generated $3.79 million in segment operating income, while corporate clinics reported $25,000 of segment operating income. Unallocated corporate costs kept consolidated operations loss-making.
- Cash flow: First-half operating cash flow was positive $613,210, versus negative $788,634 in 2017. Investing cash outflow was $366,933, including $370,757 of property and equipment purchases; financing cash inflow was $141,607. Cash and cash equivalents were $4.58 million at June 30, with another $124,899 restricted.
- Liquidity and debt: Current assets were $7.23 million and current liabilities $5.57 million, a current ratio of about 1.30. Notes payable totaled $1.10 million, including $1.00 million noncurrent and $100,000 current. The company had drawn $1.00 million of its $5.00 million revolving facility, which carries 10% interest and is secured by assets of company-owned or managed clinics.
- Lease commitments: Future minimum operating lease payments totaled $13.45 million. These are contractual commitments, not reported debt.
Material changes, outlook and risks
- Management attributed revenue growth to expansion and sales growth in company clinics and the franchise network. Higher franchise royalties, largely reflecting more clinics and stronger sales, supported franchise operations; higher regional developer royalties and local clinic marketing costs also increased expenses.
- Q2 included a $250,704 loss on disposition or impairment, primarily associated with lease exits. The lease exit liability rose from $299,400 at year-end 2017 to $525,762 at June 30, 2018.
- In April, the company reacquired one operating San Diego franchise for a net purchase price of $87,002 after deferred revenue, and mutually terminated a second franchise agreement. The transaction produced a $75,264 bargain purchase gain.
- The company adopted ASC 606 retrospectively. It now recognizes initial franchise and regional developer fees over the agreement terms rather than generally recognizing franchise fees at clinic opening. The adoption materially increased deferred franchise revenue and reduced December 31, 2017 stockholders’ equity by $3.745 million; comparative 2017 results were adjusted.
- On August 7, 2018, the board approved moving from internally developed IT to a third-party SaaS CRM platform. Management expected an approximately $500,000 impairment of capitalized software costs in Q3 2018.
- Management’s stated priorities were accelerating franchise sales, developing regional territories and selectively expanding clustered company clinics. It reported progress toward sustainable profitability but gave no specific numerical earnings or revenue guidance in the provided filing text.
- Risks cited include clinic-site availability and lease terms, franchise sales and clinic profitability, recruiting qualified chiropractors, competition, acquisitions, regulatory issues involving professional practice and joint-employer matters, and reputational risk. The company also noted operating-result fluctuations. It reported disclosure controls effective at the reasonable-assurance level and said it was party to litigation from time to time in the ordinary course.
- Adoption of lease accounting standard ASC 842 was expected to materially increase balance-sheet assets and liabilities beginning in 2019; management did not expect a material effect on income or cash flows.
Important facts for investors to verify
- Whether sales and clinic growth continue to translate into sustained consolidated profitability after unallocated corporate costs.
- The Q3 timing and final amount of the expected approximately $500,000 software impairment, and the costs or execution risks of the SaaS transition.
- Liquidity and working-capital trends, including the distinction between unrestricted and restricted cash, and terms and use of the revolving credit facility.
- Clinic-level economics, closures and development pace, including whether sold-but-undeveloped licenses convert into operating clinics.
- Effects of ASC 606 and the forthcoming lease-standard adoption on reported comparisons, deferred revenue and the balance sheet.