The Joint Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparison is with Q1 2019. The Joint franchises, develops, owns, operates, supports and manages chiropractic clinics. At quarter-end, its system had 530 clinics: 469 franchised and 61 company-owned or managed.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $13.64 million | $10.68 million; up 27.8% |
| Operating income | $0.75 million | $0.94 million; down 20.2% |
| Net income | $0.81 million | $0.95 million |
| Diluted EPS | $0.06 | $0.07 |
| Operating cash flow | $1.47 million | $0.46 million |
| Investing cash flow | $(1.22) million | $(1.20) million |
| Financing cash flow | $2.08 million | $0.08 million |
Company-owned or managed clinic revenue increased 29.4% to $7.29 million; franchise royalties rose 22.8% to $3.72 million. Software-fee revenue grew 76.8% to $0.65 million. Management attributed growth to a larger clinic base and sales growth. System-wide sales increased 24%; comparable sales for clinics open at least 13 months grew 15%, and for clinics open at least 48 months grew 10%.
Operating margin was approximately 5.5%, versus 8.8% in Q1 2019; net margin was approximately 6.0%, versus 8.9%. Higher operating expenses, especially corporate and administrative costs, outweighed revenue growth. General and administrative expense rose 32.7% to $8.69 million and increased to 64% of revenue from 61%; selling and marketing expense rose 36.5% to $2.06 million. Depreciation and amortization increased 78.9% to $0.65 million.
At March 31, cash and cash equivalents were $10.71 million, with $0.26 million restricted. Current assets were $14.82 million and current liabilities $12.89 million. Total assets were $46.41 million, total liabilities $39.49 million, and stockholders’ equity $6.92 million. Debt under the new credit agreement was $2.0 million; the company also had substantial lease obligations, including $14.35 million of operating lease liabilities and $0.20 million of finance lease liabilities.
Operating cash flow improved year over year, partly due to higher revenue, a $0.7 million tenant improvement allowance collection and a regional developer agreement sale; payroll-liability reductions partially offset the increase. Capital expenditures were $1.26 million. Cash increased by $2.33 million, including proceeds from the new credit facility.
Material developments, outlook and risks
- COVID-19: Management reported lower-than-expected March revenue and earnings, and substantial second-quarter effects from clinic closures or restrictions, reduced patient traffic, and membership freezes and cancellations. It expected 2020 revenue and net income to decline versus 2019, but said uncertainty prevented a reliable forecast; the company did not expect to provide 2020 guidance until it had better visibility.
- Liquidity measures: The company drew $2.0 million under a $7.5 million senior secured facility on March 18 as a precaution. The facility comprises a $2.0 million revolver and a $5.5 million development line, with the latter restricted to development purposes. It reported compliance with covenants at quarter-end. On April 10, it received a roughly $2.7 million PPP loan, bringing cash to $13.6 million as of April 14. Forgiveness depends on eligible use of proceeds and maintaining or restoring staffing and salaries under program rules.
- Actions and plans: The company was reducing discretionary spending, deferring most planned 2020 capital expenditures, pausing hiring and working with vendors and landlords. It expected available cash, operating cash flow and facilities to cover short-term requirements and stated it believed liquidity could meet requirements for at least 12 months from issuance of the statements. It planned to resume selective clinic acquisitions and development in 2021 or later; long-term funding needs may require access to debt or equity markets.
- Franchise support: The company waived minimum royalties for the rest of 2020, software fees for certain clinics closed at least 16 days in a month, and minimum local advertising expenditures for the remainder of Q2. These measures may reduce franchise-related revenue and could be extended.
- Debt and impairment: The credit facilities are secured by substantially all company assets and include financial covenants; default could accelerate repayment. COVID-19-related deterioration in projected cash flows could also lead to impairment of goodwill or long-lived assets. The company tested goodwill at quarter-end and recorded no goodwill or long-lived-asset impairment in Q1.
- Other contingencies: Washington regulators began investigating complaints involving three chiropractors associated with franchisee-managed clinics, including allegations concerning fee-splitting provisions; the company said the investigations were at an early stage. The company also cited litigation in the normal course of business and said it did not expect its resolution to have a material adverse effect.
- Controls: Management concluded disclosure controls were ineffective at March 31 because of a previously reported material weakness in internal control over financial reporting. Remediation was underway, with completion expected before fiscal year-end 2020, subject to testing.
Important facts for investors to verify
- Subsequent-quarter clinic traffic, membership trends, franchisee sales and the resulting effect on royalties and clinic revenue.
- Whether the PPP loan qualifies for full or partial forgiveness and whether franchisee relief measures are continued or expanded.
- Cash generation, capital spending, use of the development line, debt covenant compliance and the capacity to meet lease and other obligations.
- Progress toward remediating the material weakness and any further developments in the Washington investigations or impairment assessments.