The Joint Corp. — Q3 2015 Form 10-Q
Business context and period. The company franchises, owns, operates, and manages chiropractic clinics and sells regional development rights. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Its growth strategy is shifting toward company-owned or managed clinics while continuing franchise expansion.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.14 million | $1.82 million | $10.07 million | $5.06 million |
| Operating loss | $(2.05) million | $(0.31) million | $(5.81) million | $(0.69) million |
| Net loss | $(1.66) million | $(0.20) million | $(5.42) million | $(0.46) million |
| Basic and diluted loss per share | $(0.17) | $(0.04) | $(0.55) | $(0.10) |
- Revenue rose 127.8% in Q3 and 99.0% year to date. Growth reflected more clinics, newly consolidated company clinics, higher advertising fees, and regional developer revenue. Company-clinic revenue was $1.20 million in Q3 and $2.37 million year to date, with no comparable 2014 revenue.
- Cost of revenue was $0.75 million in Q3 and $2.08 million year to date. Gross profit, calculated as revenue less reported cost of revenue, was $3.39 million (82.0% margin) in Q3 and $7.99 million (79.3%) year to date; corresponding 2014 margins were 64.0% and 65.6%. These measures do not reflect selling, marketing, or administrative costs.
- Operating losses widened as selling and marketing, depreciation and amortization, and general and administrative expenses increased. Year-to-date G&A was $10.53 million versus $3.15 million, including higher staffing, occupancy, professional fees, insurance, and acquisition costs.
- Q3 and year-to-date results included a $384,214 bargain-purchase gain. Revenue also included previously deferred amounts recognized after franchise or regional developer terminations. In the first nine months, $870,000 of franchise revenue and $254,250 of excess deferred regional developer fees were recognized in connection with terminations or reacquired rights.
Liquidity, cash flow, and obligations
- At September 30, cash and cash equivalents were $9.52 million, down from $20.80 million at December 31, 2014. Current assets were $11.59 million and current liabilities $5.88 million; working capital was approximately $5.70 million and the current ratio approximately 1.97, versus 5.59 at year-end.
- For the nine months, operating cash use was $4.01 million, investing cash use $7.16 million, and financing cash use $0.11 million. Investing outflows included $4.65 million for franchise acquisitions, $1.08 million for regional developer rights, and $1.46 million for property and equipment. Cash declined by $11.27 million.
- Notes payable totaled $634,350 ($466,850 current and $167,500 long-term). Contractual operating lease payments totaled $17.49 million, including $8.44 million thereafter. No credit facility or other borrowing availability is identified in the provided filing text.
Material changes, outlook, and risks
- The company had 277 clinics at quarter-end: 248 franchised and 29 company-owned or managed, compared with 230 franchised and no company-owned or managed clinics a year earlier. It acquired 23 developed franchises during the first nine months; 21 were being operated as company-owned or managed clinics and two were closed.
- Management expected to repurchase or develop up to 42 clinics for company operation or management and open up to 55 new franchised clinics during 2015. These are targets, not assurances; management cited site availability, lease terms, funding, and qualified chiropractor recruitment as constraints.
- The company reported that disclosure controls and procedures were not effective at quarter-end. It was addressing control weaknesses through additional accounting personnel and implementation of a new general ledger system; management cautioned that weaknesses or errors could remain.
- Thirteen terminated franchisees initiated arbitration alleging, among other things, wrongful termination and seeking an injunction against company clinics within 25 miles of franchise clinics. The company disputed the claims and said it intended to defend them vigorously.
- Acquisition purchase-price allocations remained preliminary and subject to adjustment. Management noted that changed estimates could affect goodwill, intangible assets, or future amortization. Other stated risks include execution of the clinic-growth strategy, clinic profitability, competition, staffing, regulation of the business model, and the company’s limited experience operating clinics directly.
- The company had a valuation allowance against all deferred tax assets; its effective tax rate was reported as 0% for the 2015 periods. It also disclosed approximately $142,000 of liabilities for uncertain tax positions, including penalties and interest.
Investor verification priorities
- Determine how much revenue and earnings growth is recurring versus attributable to acquisitions, fee changes, franchise terminations, and the bargain-purchase gain.
- Assess cash consumption and funding needs against the clinic expansion plan, lease commitments, and remaining cash balance.
- Review operating performance and profitability of the 29 company-owned or managed clinics, which contributed revenue but also increased staffing, occupancy, and other costs.
- Track progress in remediating ineffective disclosure controls and any subsequent updates on the franchisee arbitration.
- Verify completion of acquisition valuations and monitor potential goodwill or intangible-asset impairment and future amortization expense.