The Joint Corp. (NASDAQ: JYNT) — Q2 2023 Form 10-Q
Business context and period. The Joint franchises, operates, and manages chiropractic clinics. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the same 2022 periods, which were restated. At quarter-end, the system had 890 clinics: 756 franchised and 134 company-owned or managed.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022, restated | Six months 2023 | Six months 2022, restated |
|---|---|---|---|---|
| Revenue | $29.31 million | $24.89 million | $57.61 million | $47.12 million |
| Operating income (loss) | $(0.37) million | $(1.33) million | $(1.03) million | $(1.37) million |
| Net income (loss) | $(0.32) million | $(0.87) million | $2.01 million | $(0.87) million |
| Diluted EPS | $(0.02) | $(0.06) | $0.13 | $(0.06) |
| Adjusted EBITDA | $3.23 million | $2.63 million | $5.27 million | $4.42 million |
- Q2 revenue rose 17.8%; six-month revenue rose 22.2%. Company-clinic revenue increased 22.8% in Q2 and 28.9% year to date. Royalty revenue grew 11.9% and 13.0%, respectively.
- Operating losses narrowed versus restated 2022 periods, but the company remained loss-making from operations. Q2 franchise operations generated $4.23 million of segment operating income, while corporate clinics were slightly loss-making; six-month corporate-clinic segment operating loss was $0.40 million.
- Six-month net income includes $3.8 million of Employee Retention Credit (ERC) income, net of consulting fees. The ERC was a significant, non-recurring contributor; excluding it, the filing reports adjusted EBITDA of $5.27 million, up from $4.42 million.
- Operating cash flow was $7.49 million for the six months, versus cash used of $1.18 million in 2022. The increase reflected higher revenue and receipt of the $4.8 million ERC refund, partly offset by increased expenses. Investing used $3.78 million, including $1.05 million for California clinics and $2.73 million for property and equipment.
- June 30 cash and cash equivalents were $13.60 million, plus $0.85 million restricted cash. The company reported $18 million available under its revolving facility. Total assets were $99.21 million and equity was $35.48 million.
- Debt under the credit agreement was $2.0 million; the facility is a $20 million revolver and bore interest at 7.1% at quarter-end. Operating lease liabilities totaled $25.91 million; finance lease liabilities were $0.08 million.
Material changes and unusual items
- The company repurchased three California franchised clinics in May for net purchase consideration of approximately $1.16 million and began operating them as company-managed clinics. It also opened three company clinics during Q2.
- In June, the company agreed to repurchase Wisconsin development rights for $1.0 million. After applying a $0.3 million associated upfront-fee liability, it recorded a net $0.7 million general and administrative expense.
- One California company-managed clinic was classified as held for sale; the company recorded a $60,201 valuation loss. The proposed sale was expected to close in Q3, subject to customary conditions.
- System-wide comparable sales increased 5.0% for clinics open at least 13 months, while comparable sales for mature clinics open at least 48 months declined 1.0%. System-wide sales across all clinics increased 13.3% in Q2.
- 2022 financial statements were restated for errors involving reacquired regional developer rights, regional developer fees, and transfer-pricing/tax accounting for variable interest entities. The company also revised its previously reported Q1 2023 results for immaterial errors.
Outlook, risks, and contingencies
- No specific revenue, earnings, or clinic-opening guidance is provided. Management expects a volatile macroeconomic environment and elevated, though lower than 2022, cost inflation in 2023. It believes cash, operating cash flows, and available credit will meet operating and investment needs for at least 12 months, while warning that economic conditions and financing access could deteriorate.
- Management identifies labor shortages and wage increases, inflation, higher interest rates, reduced discretionary spending, clinic development and staffing, franchisee performance, regulatory constraints, and cybersecurity as risks. The filing notes that cash deposits may exceed FDIC insurance limits.
- Management concluded disclosure controls were not effective as of June 30, 2023. Previously disclosed material weaknesses in accounting controls, including complex tax, revenue, and asset-acquisition accounting, remained. Remediation was ongoing and was not yet considered complete.
- The late filing triggered a credit-agreement default in September 2023. JPMorgan waived the default through September 30, 2023; the company said filing this 10-Q before that date cured it. A separate reporting deadline had also been extended, and the filing states the reporting covenant was in compliance upon filing. The facility is secured by substantially all company assets and includes financial covenants.
- The $4.8 million ERC refund remains subject to IRS audit for five years. The company recorded a related $0.9 million discrete increase in income tax expense. It also disclosed a lease guarantee with $209,496 of remaining undiscounted potential payments; no liability was recorded because payment was not considered probable. Litigation may arise in the ordinary course of business.
Important facts for investors to verify
- Review the restated 2022 statements and Q1 2023 revision, and assess whether the accounting-control weaknesses have been remediated and tested effectively.
- Separate recurring operating performance from the ERC-related income and cash receipt; confirm the company’s eligibility and any audit developments.
- Track clinic-level economics, especially corporate-clinic profitability, mature-clinic sales, wage costs, and the pace and returns of new clinic openings and acquisitions.
- Confirm ongoing compliance with credit-facility reporting and financial covenants, borrowing availability, and the effect of variable interest rates.
- Assess cash concentration at financial institutions, lease commitments, the planned clinic sale, and the Wisconsin development-rights repurchase.