The Joint Corp. (NASDAQ: JYNT) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Comparisons are with Q1 2023 unless otherwise noted.
Business context
The Joint franchises, develops, supports, and operates chiropractic clinics. At quarter-end, its system included 954 clinics: 819 franchised and 135 company-owned or managed, compared with 870 total clinics a year earlier. The company is pursuing a plan to re-franchise or sell most company-owned or managed clinics; clinics identified for re-franchising represent approximately 76% of that portfolio.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $29.72 million | $28.30 million | +5.0% |
| Income (loss) from operations | $1.09 million | ($0.65 million) | Turned positive |
| Net income | $0.95 million | $2.33 million | -59.3% |
| Diluted earnings per share | $0.06 | $0.16 | Down $0.10 |
| Adjusted EBITDA (non-GAAP) | $3.51 million | $2.04 million | +72.3% |
| Net cash provided by operating activities | $2.81 million | $6.02 million | -53.3% |
Revenue growth reflected expansion in both the franchise base and company clinics. Royalty fees rose 10.5%, advertising fund revenue 11.0%, and software fees 14.6%; company-clinic revenue increased 2.4%. Franchise fees fell 13.1%, partly because Q1 2023 included accelerated recognition upon franchise agreement terminations.
Cost of revenues increased 9.8% to $2.72 million. Selling and marketing expense declined 6.6%; general and administrative expense increased 1.1% to $20.26 million. Operating income was 3.7% of revenue, versus an operating loss of 2.3% a year earlier. Net income was 3.2% of revenue, versus 8.2% in Q1 2023.
Operating income improved in part because the company stopped recording depreciation and amortization on clinics designated as held for sale. The company also recorded $0.36 million of net loss on disposition or impairment, including an estimated $0.2 million loss on disposal and approximately $0.1 million impairment of held-and-used assets. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for operating income or operating cash flow.
Cash and cash equivalents were $18.74 million, with an additional $0.92 million of restricted cash, at March 31. The company repaid $2.0 million under its credit agreement in January and had no debt outstanding at quarter-end; it reported $20 million of available line capacity and compliance with covenants. Operating lease liabilities totaled $14.36 million, excluding leases classified as held for sale. Total equity was $26.21 million.
Changes, outlook, and risks
- The prior-year comparison included $3.8 million of Employee Retention Credit income, net of consulting fees, recognized in Q1 2023. Its absence was the primary reason other income fell from $3.82 million to $0.04 million and helps explain why net income declined despite the operating turnaround.
- Operating cash flow decreased by $3.2 million year over year, primarily reflecting the prior-year ERC receipt. Investing activities used $0.34 million, and financing activities used $2.01 million, including the debt repayment.
- System-wide comparable sales increased 3% for clinics open at least 13 months, while comparable sales at mature clinics open 48 months or more decreased 3%. System-wide sales across all clinics increased 9%.
- Management expects a volatile macroeconomic environment in 2024 and cites labor shortages, wage inflation, higher interest rates, and possible pressure on consumer spending. It believes cash, operating cash flows, anticipated proceeds from re-franchising, and available credit will cover operating and investment needs for at least 12 months. The filing gives no specific revenue or earnings guidance.
- Management expects to use or redeploy cash during the remainder of 2024. Potential capital allocation options include brand marketing, IT investment, repurchasing regional developer territories, or stock repurchases; no commitment to a specific option is stated.
- Approximately 50% of the clinics identified for sale within one year were estimated to have fair value of $30.2 million at quarter-end. Sales remain subject to negotiations and execution; held-for-sale assets were $17.73 million and related liabilities were $12.83 million on the balance sheet.
- The $4.8 million ERC refund received in 2023 remains subject to IRS audit for five years. The company also disclosed ordinary-course litigation and a lease guarantee with $171,696 of undiscounted remaining payments; no liability was recorded because payment was not considered probable.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material changes in internal control during the quarter. The filing identifies historical internal-control weaknesses, prior restatements, and a delayed quarterly filing that currently makes the company ineligible to use Form S-3.
Important facts for investors to verify
- Progress, timing, final sale prices, and cash proceeds from the re-franchising program, including whether proceeds align with estimated values.
- Whether underlying clinic and franchise performance remains positive, particularly the decline in mature-clinic comparable sales.
- How much of the operating improvement reflects sustainable performance versus suspended depreciation and amortization for held-for-sale clinics.
- Cash conversion and liquidity trends, including the effect of lease obligations, capital needs, and the availability and covenant terms of the credit line.
- IRS audit developments concerning the ERC and any changes in litigation, lease-guarantee, or other contingency exposure.