The Joint Corp. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2017. The Joint franchises and supports chiropractic clinics and also owns or manages clinics. At quarter-end, its network comprised 342 franchised and 47 company-owned or managed clinics, 389 total, versus 354 total a year earlier.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $6.55 million | $5.50 million | $18.23 million | $14.74 million |
| Operating loss | $0.38 million | $2.62 million | $2.95 million | $9.29 million |
| Net loss | $0.40 million | $2.63 million | $3.06 million | $9.41 million |
| Loss per diluted share | $0.03 | $0.21 | $0.23 | $0.74 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(1.42) million | $(10.34) million |
- Revenue increased 18.9% in Q3 and 23.7% year to date. Q3 company-clinic revenue rose 25.1%, royalties 27.1%, and advertising-fund revenue 30.1%; franchise-fee revenue fell 61.9%, largely due to timing and fewer openings.
- Q3 gross margin, calculated as revenue less reported cost of revenues, was approximately 87.5%, versus 86.9% a year earlier. The Q3 operating loss was approximately 5.8% of revenue.
- Improved results reflected revenue growth and lower expenses. Q3 general and administrative expense declined 17.9%, while depreciation and amortization declined 32.6%. The franchise operations segment generated $1.67 million of operating income in Q3; corporate clinics recorded a $0.20 million operating loss.
- Cash and cash equivalents were $2.63 million at September 30, down from $3.01 million at year-end; restricted cash was a further $0.16 million. Current assets were $5.42 million and current liabilities $4.11 million.
- Net cash used in operating activities was $1.42 million for the first nine months, substantially below the $10.34 million used in the comparable 2016 period. Investing activities used $0.15 million; financing activities provided $1.19 million.
- Notes payable totaled $1.10 million, including $1.00 million drawn under a $5 million revolving facility. The facility bears 10% interest, is secured by company-clinic assets, and includes a $200,000 minimum aggregate interest payment over its term. The filing reports $10.74 million in future minimum operating lease payments.
Material changes, outlook and risks
- The company added a net 33 franchised clinics in the first nine months and closed or sold 14 company-owned or managed clinics. Management said the closures were intended to reduce cash usage and move toward cash-flow breakeven.
- Management said it would not proactively add company-owned or managed clinics during 2017 and estimated 2017 net cash usage at approximately $2.0 million. This is an estimate, not a formal earnings forecast. Regional developer territory sales provided cash inflows; related fees are generally recognized as clinics open.
- The company recorded approximately $418,000 of lease-exit expense in the first nine months related to ceasing use of eight clinic locations. The lease-exit liability was approximately $448,000 at September 30.
- Management reported delays and added costs while migrating its proprietary management information system to a redundant cloud environment. Failure to stabilize the system could cause further costs or operating interruptions for the company and franchisees.
- The company expects the revenue standard effective in 2018 to change accounting for initial franchise and regional developer fees, potentially recognizing them over agreement terms rather than primarily as clinics open. The impact had not yet been quantified. The upcoming lease standard is expected to significantly increase reported assets and liabilities; its impact had not been quantified.
- Other stated risks include site selection and lease economics, clinic profitability and staffing, franchise sales, competition, regulatory challenges to the business model, and reputational risks. Management said disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether cash usage tracks management’s approximately $2.0 million full-year 2017 estimate, and how much liquidity remains available under the revolving facility.
- The facility’s minimum interest obligation, collateral terms, and ongoing ability to meet lease and other commitments.
- Whether franchise openings, clinic sales and same-store growth support revenue while company-clinic losses and cash use continue to decline.
- The status and operational effects of the cloud-system migration and any further related costs.
- The eventual quantified effects and transition approach for the new revenue and lease accounting standards.
- The timing and performance obligations associated with deferred regional developer fees and sold territories.