The Joint Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter results are not separately presented in the supplied text.
Business context
The Joint develops and supports branded chiropractic clinics through franchising, regional developers, and company-owned or managed locations. Its cash-pay model does not accept insurance or provide Medicare-covered services. At year-end, the system had 370 operating clinics: 309 franchised and 61 company-owned or managed, plus 115 sold licenses not yet developed. System-wide sales were $98.6 million on 4.1 million patient visits; these are system figures, not the company’s reported revenue.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $20.52 million | $13.84 million |
| Cost of revenue | $2.94 million | $2.82 million |
| Gross profit / margin | $17.58 million / 85.7% | $11.02 million / 79.6% |
| Operating loss / margin | $15.02 million / 73.2% loss | $9.32 million / 67.3% loss |
| Net loss | $15.17 million | $8.80 million |
| Basic and diluted loss per share | $1.20 | $0.88 |
| Adjusted EBITDA (non-GAAP) | $(7.71) million | $(6.79) million |
Revenue rose 48.3%. Company-clinic revenue and management fees increased 134.9% to $8.58 million; royalty fees increased 32.3% to $5.97 million. System-wide comparable same-store sales growth was 27.5%. Cost growth and losses outpaced revenue growth: selling, general and administrative expense rose to $29.09 million from $20.33 million. The company reported a $3.52 million loss on disposition or impairment in 2016, versus none in 2015.
Net cash used in operating activities was $10.85 million, compared with $6.80 million in 2015. Investing activities used $2.70 million, versus $10.01 million; financing activities used $0.24 million, versus providing $12.81 million, largely reflecting the prior-year stock offering. Cash and cash equivalents fell to $3.01 million from $16.79 million. Year-end total liabilities were $10.13 million and stockholders’ equity was $6.93 million. Current assets of $5.70 million were below current liabilities of $5.86 million. Notes payable were $331,500, all current. Contractual operating lease payments totaled $19.05 million.
Material changes and unusual items
- The company acquired six developed franchises and one undeveloped franchise during 2016; it operated the six developed locations. The company-clinic portfolio grew to 61 from 47, while franchised clinics increased to 309 from 265.
- Company-clinic operations recorded a $9.74 million operating loss, compared with a $3.77 million loss in 2015. Franchise operations generated $4.64 million of operating income, up from $4.23 million.
- In December 2016, the company decided to exit 14 Chicago- and New York-area clinics. The related $3.52 million charge included property and equipment impairment, an uncollectible working-capital advance write-off, goodwill and intangible impairments, and lease-exit costs. In January 2017, six Chicago clinics were sold for nominal consideration and the remaining five Chicago clinics and three upstate New York clinics were closed.
- The company terminated 17 defaulted franchise licenses in 2016 and recognized approximately $0.5 million of previously deferred revenue, with approximately $0.2 million of related costs.
- Management reported that the material weakness in internal control over financial reporting identified for 2014 and 2015 was remediated during 2016. Management concluded controls were effective at year-end; the auditor did not provide an opinion on internal control.
Outlook, risks, and contingencies
The company said it did not plan to open or acquire additional company-owned or managed clinics in 2017, prioritizing cash preservation, franchise growth, and improving the existing clinic portfolio. After the exits and other actions, management estimated 2017 cash needs at approximately $2.0 million and said it expected to reach cash-flow breakeven in 2017. No formal revenue or earnings guidance is provided. Management concluded it could continue as a going concern for at least one year from the date the financial statements were available to be issued.
On January 3, 2017, the company entered a revolving credit facility of up to $5.0 million and drew $1.0 million. The facility bears 10% annual interest, includes a $200,000 minimum aggregate interest payment over its term and quarterly payments of at least $25,000, and runs to December 2019 unless terminated earlier. In January, the company also sold Chicago regional developer rights for $300,000; the buyer committed to develop at least 30 clinics over ten years.
Key risks include recurring operating losses and cash consumption; dependence on franchisee and regional developer execution; clinic-level economics and lease commitments; competition and the discretionary nature of maintenance care; ability to recruit chiropractors; and legal or regulatory challenges to management arrangements under corporate-practice-of-chiropractic and joint-employer rules. The filing also highlights healthcare privacy and cybersecurity, labor costs, and the potential effects of new lease accounting on reported liabilities and earnings. A franchisee arbitration matter was settled in December 2016 and dismissed with prejudice; the company said ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the 2017 cash-use estimate and cash-flow breakeven target were achieved, and how much liquidity remained after the $1.0 million credit draw and its financing costs.
- Whether franchise royalty growth, comparable sales, and development of the 115 sold-but-unopened licenses continued, including regional developers’ ability to meet development commitments.
- Whether the clinic exits reduced operating losses and cash burn as intended, and whether further lease-exit costs or impairments arose.
- The scale and economics of the company-owned or managed clinic portfolio relative to the profitable franchise operations.
- Exposure to corporate-practice-of-chiropractic, joint-employer, privacy, and cybersecurity developments, as well as the company’s substantial operating lease commitments.