JOINT Corp. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results include The Joint Corp. and its wholly owned subsidiary. The company develops, operates, supports, and franchises chiropractic clinics.
Financial performance and liquidity
| Metric | Q3 2016 | Nine months 2016 |
|---|---|---|
| Revenue | $5.50 million | $14.74 million |
| Operating loss | $2.61 million | $9.29 million |
| Net loss | $2.63 million | $9.41 million |
| Basic and diluted loss per share | $0.21 | $0.74 |
| Operating cash flow | Not provided for the quarter | $(10.34) million |
- Q3 revenue rose 33.0% year over year; nine-month revenue rose 46.4%. Growth reflected an expanded company-clinic base and franchise growth.
- Operating loss widened 27.5% in Q3 and 59.9% for the nine-month period. Company-clinic operating losses increased, while franchise operations remained profitable: $1.2 million in Q3 and $3.3 million year to date.
- Cash and cash equivalents were $3.39 million at September 30, down from $16.79 million at December 31, 2015. Current assets were $7.41 million and current liabilities $5.35 million. The company used $10.34 million in operating cash during the first nine months.
- Notes payable totaled $331,500, all current; no long-term notes payable were reported. Operating lease commitments totaled $21.62 million.
- Management did not present a clear numerical gross-margin measure. Calculated operating margins were approximately -47.5% for Q3 and -63.0% for the nine-month period.
Changes versus prior comparable periods
- Q3 revenue increased from $4.14 million to $5.50 million; nine-month revenue increased from $10.07 million to $14.74 million.
- Revenue from company-owned or managed clinics increased substantially, and royalty fees rose 33.9% in Q3 and 32.9% year to date. Regional developer fees fell 76.7% in Q3 and 37.9% year to date.
- Q3 general and administrative expense increased 20.1% to $5.43 million; nine-month expense increased 51.0% to $16.75 million. Selling and marketing expense and depreciation and amortization also increased, reflecting clinic expansion and investment.
- At quarter-end, 354 clinics were operating: 293 franchised and 61 company-owned or managed, versus 277 total clinics a year earlier.
Outlook, risks, and unusual items
- Management said it would not add company-owned or managed clinics for the remainder of 2016, citing cash preservation and a focus on improving sales and operations at its existing 61 clinics. It was considering non-dilutive financing options. No numerical financial guidance was provided.
- Management reported that Chicago-area clinics were underperforming expectations and that strategic alternatives were being explored.
- The company reacquired six developed and one undeveloped franchise during the first nine months. It also terminated franchise licenses; related deferred revenue recognized was $477,109 year to date.
- Operating cash use increased from $4.01 million in the first nine months of 2015 to $10.34 million in 2016, which management attributed primarily to operating losses and working-capital needs from company clinics and added staff.
- Disclosure controls and procedures were deemed ineffective at September 30, 2016. Management described remediation efforts but acknowledged deficiencies could still lead to financial-statement errors.
- Five former franchisees continued an arbitration proceeding involving 12 licenses. Claimants sought rescission and alleged losses, and disclosed they may also seek lost profits, punitive damages, and attorneys’ fees. The company said a loss was not probable or estimable as of September 30 and was vigorously defending the matter.
- Management cited risks including clinic-site availability, profitability and staffing, competition, regulation of the business model, franchise growth, and internal-control weaknesses.
Important facts for investors to verify
- Cash runway, expected operating cash needs, and the status and terms of potential financing.
- Whether company clinics, particularly Chicago-area locations, improve operating performance and whether strategic alternatives are pursued.
- Progress in remediating material weaknesses and the effectiveness of disclosure controls in subsequent filings.
- Developments in the franchisee arbitration, including potential exposure and hearing outcome.
- Clinic-level economics and the extent to which revenue growth reflects sustainable comparable-clinic performance versus acquisitions and expansion.