The Joint Corp. — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. The Joint develops, operates, manages and franchises chiropractic clinics. At quarter-end, its network had 870 operating clinics: 740 franchised and 130 company-owned or managed.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $28.45 million | $22.44 million |
| Operating loss | $0.68 million | $0.18 million |
| Net income (loss) | $2.30 million | ($0.21 million) |
| Operating cash flow | $6.02 million | $0.45 million |
| Adjusted EBITDA (non-GAAP) | $2.04 million | $1.78 million |
| Cash and cash equivalents at quarter-end | $14.77 million | $18.25 million |
- Revenue rose 26.8%. Company-owned or managed clinic revenue increased 35.9% to $17.13 million; franchise operations revenue increased to $11.32 million.
- Cost of revenue was $2.62 million, yielding a calculated gross margin of approximately 90.8%, versus 89.7% in Q1 2022. The operating margin was approximately negative 2.4%, versus negative 0.8%.
- General and administrative expense increased 29.6% to $19.94 million, driven mainly by payroll and related costs, overhead, and utilities and facilities. Depreciation and amortization increased 43.8% to $2.34 million.
- Net income included $3.9 million of employee retention credits (ERC), net of consulting fees, recorded in other income. Excluding this unusual item, reported earnings do not reflect the same level of underlying operating profitability; the filing’s Adjusted EBITDA was $2.04 million.
- Operating cash flow improved to $6.02 million, with the ERC and revenue growth among the contributors. Investing cash outflow was $1.20 million, primarily property and equipment purchases; financing cash inflow was $0.13 million.
- At March 31, cash and cash equivalents were $14.77 million, plus $0.73 million of restricted cash. Credit Agreement debt was $2.00 million; $18 million of revolver capacity remained available. The revolver rate was 6.4%, and the company reported compliance with its covenants. Operating lease liabilities totaled $25.83 million.
- Basic and diluted earnings per share were $0.16 and $0.15, respectively, compared with a $0.01 loss per share in Q1 2022.
Material changes and operating trends
- Comparable sales for clinics open at least 13 full months increased 8%; mature-clinic comparable sales (open 48 months or more) increased 1%. System-wide sales increased 17%.
- Franchised clinics grew from 636 to 740 year over year; company-owned or managed clinics increased from 100 to 130. The company opened four corporate clinics during the quarter. It reported 14 franchise licenses sold in the quarter, with regional developers responsible for 71%.
- Despite revenue growth, the consolidated operating loss widened as clinic and corporate expenses increased. Franchise Operations generated $4.64 million of segment operating income; Corporate Clinics recorded a $0.55 million segment operating loss.
Outlook, risks and unusual items
- No specific revenue, earnings or clinic-opening guidance is provided. Management expects a volatile macroeconomic environment and elevated cost inflation to continue in 2023, particularly for labor. Pricing actions may partly offset cost increases, but their effectiveness is uncertain.
- Management believes cash, expected operating cash flows and available credit will be sufficient for anticipated operating and investment needs for at least 12 months. It cautions that weaker markets could make future financing more difficult, costly or dilutive.
- The $4.8 million ERC refund, including interest, was received in March; $3.9 million net of consulting fees was recorded as other income. The credit remains subject to IRS audit for five years. The filing says the ERC-related tax treatment increased Q1 income tax expense by $922,881, net of the consulting-expense deduction.
- Key disclosed risks include labor shortages and wage inflation, reduced discretionary spending, clinic-site availability and profitability, franchisee development and performance, competition, regulation of chiropractic and franchising, cybersecurity, and potential weaknesses in internal controls. The company also holds bank deposits above FDIC-insured limits; it reported no deposits at the failed Silicon Valley Bank.
- The filing reports litigation and claims in the ordinary course of business, with insurance covering certain matters; it provides no clear quantified exposure.
Important facts for investors to verify
- How much of reported earnings and operating cash flow is attributable to the one-time ERC, and whether the IRS could challenge eligibility or repayment.
- Whether clinic-level sales growth and new clinic openings can outpace rising payroll, marketing, occupancy and depreciation costs.
- Whether the 1% comparable-sales growth at mature clinics persists, alongside the broader 8% comparable-sales result.
- Liquidity and financing assumptions, including cash balances above FDIC limits, variable-rate debt, covenant compliance and lease commitments.
- Whether franchise license sales convert into opened clinics and sustainable royalty growth; 178 licenses were sold but not yet developed at quarter-end.