Business context and reporting period
The Joint Corp. develops, franchises, operates and manages chiropractic clinics and sells regional developer rights. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods unless noted.
At quarter-end, the network had 383 operating clinics: 336 franchised and 47 company-owned or managed. The company added a net 27 franchised clinics and closed or sold 14 company clinics during the first half.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $6.015 million | $4.974 million | $11.689 million | $9.239 million |
| Operating loss | $0.985 million | $3.187 million | $2.572 million | $6.668 million |
| Net loss | $1.011 million | $3.261 million | $2.658 million | $6.787 million |
| Loss per share, basic and diluted | $0.08 | $0.26 | $0.20 | $0.54 |
| Cash used in operating activities | Not presented for quarter | $0.735 million | $8.055 million |
Revenue grew 20.9% in Q2 and 26.5% for the first half. Gross margin, calculated as revenue less cost of revenues, was approximately 87.2% in Q2 and 87.1% for the first half, versus 85.4% and 84.1%, respectively, in 2016. Operating loss was 16.4% of Q2 revenue and 22.0% of first-half revenue.
At June 30, cash and cash equivalents were $3.047 million, with a further $0.280 million in restricted cash. Current assets were $5.594 million and current liabilities $4.590 million. Total liabilities were $11.548 million and stockholders’ equity $4.578 million. The company had drawn $1.0 million on a $5.0 million revolving facility and had $0.1 million of current notes payable. The facility bears 10% interest and has a $200,000 minimum aggregate interest requirement over its term, with quarterly payments of at least $25,000.
First-half investing cash use was $0.080 million and financing cash provided was $0.852 million, including the $1.0 million revolver borrowing. Deferred revenue totaled approximately $6.237 million at quarter-end. The company also reported a roughly $0.9 million lease-exit liability and $11.019 million in future minimum lease payments.
Material changes versus prior comparable periods
- First-half revenue growth reflected higher company-clinic revenue and management fees, up 37.6%, and royalty fees, up 27.3%. Royalty growth was supported by 336 franchised clinics versus 280 a year earlier.
- Consolidated operating loss improved by $2.2 million in Q2 and $4.1 million in the first half. Lower general and administrative costs and improved results in both operating segments contributed; the company cited reduced payroll and facility costs, including effects of clinic closures.
- Franchise operations reported operating income of $1.456 million in Q2 and $2.807 million for the first half. Company clinics reported operating losses of $0.438 million and $1.037 million, respectively; unallocated corporate costs remained significant.
- First-half operating cash use fell to $0.735 million from $8.055 million in 2016, principally reflecting lower operating losses and working-capital needs. The company closed or sold 14 company clinics, including locations in Chicago and Upstate New York.
- First-half results included a $0.418 million loss on disposition or impairment. The company also recorded an additional $0.739 million lease-exit liability in Q1 related to clinic closures. The prior-year comparison included substantial costs and clinic acquisitions not repeated in 2017.
Outlook, management commentary and risks
Management said it would not proactively add company-owned or managed clinics during 2017, prioritizing cash preservation, clinic performance and franchise expansion. It estimated 2017 net cash usage at approximately $2.0 million, citing clinic closures and regional developer territory sales; this is management’s estimate, not formal earnings guidance. Management’s stated objective is to accelerate progress toward cash-flow breakeven.
In the first half, five regional development agreements generated approximately $1.3 million, deferred for recognition as clinics open. Territory sales in Chicago, Philadelphia, Washington State, Central Florida and Ohio included development obligations for new clinics over the next decade.
Key risks identified include the ability to secure clinic sites and favorable leases, attract patients, sell franchises, recruit chiropractors and make new clinics profitable; competition; acquisition risks; and regulatory developments concerning chiropractic practice and joint-employer responsibility. The filing reported no material changes to the risk factors in the 2016 Form 10-K and described litigation as occurring in the normal course of business.
The company was evaluating revenue-recognition rules effective in 2018 and expected initial franchise and regional developer fee recognition to change, but could not yet estimate the financial impact. It also expected the new lease standard to materially increase reported assets and liabilities, with possible effects on expenses and reported net income. Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether clinic growth, same-store sales and franchise royalty increases continue, and whether company-clinic losses keep narrowing.
- Whether actual 2017 cash use tracks management’s approximately $2.0 million estimate, and how much revolver capacity is drawn and what financing costs accrue.
- Whether regional developers meet clinic-opening commitments and how deferred fees and related revenue are recognized.
- The cash and earnings effects of lease exits, remaining lease commitments, and adoption of the revenue and lease accounting standards.
- Whether the company can reach cash-flow breakeven while funding operations, given recurring losses and the distinction between restricted and available cash.