The Joint Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. The Joint franchises, develops, operates and manages chiropractic clinics in the United States. The filing was signed May 12, 2017.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $5.67 million | $4.27 million |
| Operating loss | $1.59 million | $3.48 million |
| Net loss | $1.65 million | $3.53 million |
| Basic and diluted loss per share | $0.13 | $0.28 |
| Cash used in operating activities | $1.26 million | $5.76 million |
- Revenue increased 33%. Company-clinic revenue and management fees rose 52% to $2.52 million; royalty revenue increased 25% to $1.71 million. Advertising fund revenue increased to $598,000. Franchise fees fell 13% to $450,000, and regional developer fees fell 48% to $77,000.
- Operating loss narrowed by $1.89 million. General and administrative expense declined 20% to $4.56 million, while selling and marketing expense rose 30% to $959,000. The reported operating loss included a $418,000 loss on disposition or impairment.
- Franchise operations generated $1.35 million of segment operating income, versus $989,000 a year earlier. Corporate clinics recorded a $599,000 segment operating loss, improved from $1.69 million.
- Cash and cash equivalents were $2.68 million at quarter-end, down from $3.01 million at December 31, 2016. Restricted cash was $313,000. Total assets were $16.47 million; total liabilities were $10.98 million; stockholders’ equity was $5.49 million.
- Debt included $1.0 million drawn on a revolving facility and $168,000 of current notes payable. The facility permits up to $5 million in borrowings, bears interest at 10%, and has a $200,000 minimum aggregate interest obligation over its term; quarterly interest payments must be at least $25,000.
Changes, outlook and notable items
- The clinic network reached 373 locations: 326 franchised and 47 company-owned or managed. Net franchised clinics increased by 17 during the quarter; 14 company-owned or managed clinics were closed or sold. The total network grew from 370 at December 31, 2016 and 331 a year earlier.
- Management said it would not actively pursue additional company-owned or managed clinics in 2017, prioritizing cash preservation, existing-clinic performance and franchise growth. It estimated 2017 net cash usage at approximately $2 million and said its actions were intended to move toward cash-flow breakeven in 2017; this is management’s expectation, not a formal earnings forecast.
- The company sold regional developer territories for Chicago, Philadelphia and Washington State for approximately $700,000 in total. Fees are deferred and recognized as clinics open; combined development schedules require at least 70 clinics over ten years. A subsequent Florida agreement signed April 29 provided for a $320,000 initial fee, partly funded by a note, and a minimum of 32 clinics over ten years.
- In connection with clinic closures, the company recognized an additional lease exit liability of approximately $739,000, net of estimated sublease income. The filing also describes the sale of six Chicago clinic assets for nominal consideration, conversion to franchised operations, and closure of remaining Chicago-area and Upstate New York clinics.
- Management cited risks including finding suitable clinic sites and favorable leases, attracting patients, staffing with qualified chiropractors, franchise sales and clinic profitability, competition, regulation of chiropractic and management arrangements, and potential reputational harm. Quarterly results may fluctuate with clinic openings, market conditions and consumer demand.
- The company reported no material change in risk factors from its 2016 Form 10-K. It is evaluating the impact of new accounting standards, including revenue recognition and leases; the lease standard is expected to increase reported assets and liabilities and may reduce reported net income. Management judged disclosure controls effective as of March 31, 2017. Litigation may arise in the ordinary course; the filing gives no specific material case details.
Investor verification priorities
- Track cash burn against management’s approximately $2 million estimate for 2017 and assess whether operations approach cash-flow breakeven.
- Verify that improved company-clinic results persist after closing or selling 14 locations, and review continuing lease obligations and exit costs.
- Monitor franchise openings, same-clinic sales, franchisee development schedules and collection of royalties and management fees.
- Assess the cost and availability of the credit facility, including its 10% rate and minimum interest commitment, alongside the company’s remaining liquidity.
- Review the timing and accounting for deferred regional developer fees, and the effect of revenue-recognition and lease accounting changes.