The Joint Corp. (NASDAQ: JYNT) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter report. Financial comparisons are with fiscal 2014.
Business context and operating performance
The Joint develops, franchises, owns, operates and manages cash-pay chiropractic clinics. At year-end, its network had 312 operating clinics in 27 states: 265 franchised and 47 company-owned or managed. The system recorded 3.2 million patient visits and $70.1 million in system-wide sales during 2015; these are system metrics, not company revenue. The company reported 34.1% system-wide comparable same-store sales growth.
Management is shifting toward company-owned or managed clinics while continuing franchising. It acquired 24 developed and 35 undeveloped franchise licenses during 2015; 22 acquired clinics were operated and two closed. It opened 21 internally developed clinics, including 17 in the fourth quarter. A further 168 sold franchise licenses had not yet been developed.
Financial results
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Revenue | $13.84 million | $7.12 million | Up 94.4% |
| Cost of revenue | $2.82 million | $2.35 million | Up 20.2% |
| Gross margin | About 79.6% | About 67.0% | Calculated from reported revenue and cost of revenue |
| Operating loss | $9.32 million | $1.63 million | Operating margin about -67.3% in 2015 |
| Net loss | $8.80 million | $3.03 million | Loss per share: $0.88 vs. $0.56 |
| Adjusted EBITDA | $(6.79) million | $(1.38) million | Non-GAAP measure; not a substitute for GAAP results or operating cash flow |
| Cash from operations | $(6.80) million | $(0.44) million | Cash used increased substantially |
| Cash from investing | $(10.01) million | $(2.06) million | Included acquisitions, regional rights and clinic investment |
| Cash from financing | $12.81 million | $19.78 million | 2015 included follow-on equity proceeds |
Revenue growth included royalty fees of $4.52 million, up 41.4%, and $3.65 million of company-clinic revenue and management fees, which had not been reported in 2014. Franchise openings fell to 54 from 73. Revenue also included $957,000 recognized from terminated franchise licenses and approximately $283,000 from terminated regional developer rights. The company recorded a $261,000 bargain-purchase gain.
Selling, general and administrative expenses totaled $20.33 million, versus $6.40 million in 2014. Management attributed the increase principally to clinic and corporate hiring, public-company and professional costs, marketing, and occupancy costs associated with acquired and newly opened clinics. Net margin was approximately -63.6% in 2015, calculated from reported revenue and net loss.
Liquidity, debt and capital
Cash and cash equivalents were $16.79 million at year-end, down from $20.80 million. The company raised approximately $13.0 million net in its November–December 2015 follow-on offering. Total liabilities were $12.68 million and stockholders’ equity was $20.68 million. Notes payable totaled approximately $581,850, with $451,850 due in 2016 and $130,000 in 2017. Contractual operating-lease payments totaled approximately $19.96 million, including $2.73 million due in 2016. The company reported no off-balance-sheet arrangements of the specified type.
Outlook, risks and unusual items
- Outlook: No quantified earnings or revenue guidance is provided. Management plans to prioritize development and acquisition of company-owned or managed clinics, selectively reacquire regional developer rights, continue franchise sales, and pursue cost and margin efficiencies. It also planned price increases in 2016 following tests in selected markets.
- Profitability and execution: The company has a history of losses and negative operating cash flow. New clinics require investment and may take time to build revenue; management’s company-operated model is relatively unproven. Site availability, lease costs, staffing, patient demand and potential cannibalization could impede growth.
- Regulatory exposure: Corporate-practice-of-chiropractic rules and management-service arrangements are significant uncertainties. The filing describes inquiries or concerns in Arkansas, Kansas and Oregon, and a California administrative proceeding involving a doctor at a clinic the company manages. The company was not a party to the California proceeding. Expanded joint-employer interpretations could also expose franchisors to franchisee labor claims.
- Litigation: Six current or former franchisees initiated arbitration alleging, among other matters, wrongful termination and seeking to restrict company clinics near franchise locations. The company disputes the claims and intends to defend them.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were not effective at December 31, 2015, citing deficient segregation of duties and account compilation, reconciliation and review processes. Remediation was underway; the independent auditor did not provide an opinion on control effectiveness.
- Other notable items: Acquisition accounting included preliminary allocations for a late-December transaction and could be adjusted. The company fully reserved its 2015 deferred tax assets. A new lease accounting standard was expected to put substantial operating-lease assets and liabilities on the balance sheet; the impact had not been quantified.
Important facts for investors to verify
- Whether clinic-level growth translates into improved company profitability and operating cash flow, particularly as company-operated locations expand.
- Progress in remediating the disclosed material weaknesses and whether future filings report effective controls.
- Developments in state regulatory scrutiny of management agreements and corporate practice, and any implications for clinic operations or branding.
- Resolution and potential financial or operational consequences of the franchisee arbitration.
- Actual opening, performance and funding requirements for the 168 undeveloped licenses and planned company clinics, alongside lease commitments.
- The quality and comparability of non-GAAP Adjusted EBITDA and system-wide sales data versus GAAP company results.