The Joint Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. The Joint franchises and supports chiropractic clinics and operates or manages clinics itself. Comparisons below are with Q1 2021 unless otherwise noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $22.44 million | $17.55 million | +27.9% |
| Operating income (loss) | ($0.18 million) | $1.97 million | Down $2.15 million |
| Net income (loss) | ($0.21 million) | $2.31 million | Down $2.52 million |
| Diluted EPS | ($0.01) | $0.16 | — |
| Adjusted EBITDA | $1.78 million | $3.46 million | Down 48.5% |
| Cash from operating activities | $0.45 million | $2.27 million | Down $1.82 million |
Revenue growth reflected expansion of both the franchise network and company-owned or managed clinics. Company-clinic revenue increased 33.2% to $12.61 million; royalties rose 26.0% to $6.01 million; advertising fund revenue rose 24.4% to $1.71 million. Franchise fees declined 7.8% to $0.64 million.
Operating expenses outpaced revenue. General and administrative expense rose 52.5% to $15.38 million, chiefly from $3.4 million higher payroll and related expenses, alongside higher overhead, professional fees, and software costs. G&A was 69% of revenue versus 57% a year earlier. Selling and marketing expense increased 32.1%, and depreciation and amortization increased 39.3%. Consolidated operating margin was approximately -0.8%, compared with 11.2% in Q1 2021. Management attributed the company-clinic segment’s operating loss partly to wage increases and costs of portfolio expansion; franchise operations remained profitable, with segment operating income of $4.40 million versus $3.85 million.
Financial position and liquidity
- Cash and cash equivalents were $18.25 million at March 31, 2022, down from $19.53 million at year-end; restricted cash was $0.59 million. Cash, cash equivalents and restricted cash combined were $18.85 million.
- Operating cash flow was $0.45 million. Investing activities used $1.54 million, including $1.29 million for property and equipment and $0.25 million to reacquire New Jersey development rights. Financing activities provided $0.03 million. Combined cash and restricted cash decreased $1.07 million.
- Debt under the credit agreement was $2.0 million. On February 28, 2022, the company amended its facility: the revolver increased to $20 million, with up to $5 million available for letters of credit and a further $30 million uncommitted amount; the $5.5 million development line was terminated. The revolver matures February 28, 2027. The reported borrowing rate at quarter-end was 2.25%; the company said it complied with covenants.
- Operating lease liabilities totaled $22.06 million; finance lease liabilities totaled $0.12 million. Total liabilities were $55.33 million and stockholders’ equity was $29.73 million.
- Management said cash, anticipated operating cash flows, and available financing were expected to fund operating and investment needs for at least 12 months. However, its liquidity discussion refers to $18 million of capacity under a “development line,” although the filing says that line was terminated in the February amendment. The current revolver terms and available capacity should be confirmed.
Growth, outlook, and management commentary
- At quarter-end, the system had 736 clinics: 636 franchised and 100 company-owned or managed, versus 592 total clinics a year earlier. There were 239 licenses sold but not yet developed and 39 executed letters of intent for future licenses.
- Comparable sales increased 15% for clinics open at least 13 full months and 11% for mature clinics open at least 48 months. System-wide sales grew 27%. These are operating measures, not company revenue.
- For full-year 2022, management expected revenue of $98–$102 million, Adjusted EBITDA of $12–$14 million, 110–130 franchised clinic openings, and a 30–40 increase in company-owned or managed clinics. It cited a goal of 1,000 clinics by the end of 2023. The filing provides no detailed quarterly guidance.
- Management expected elevated cost inflation, particularly labor costs, to persist through 2022, with pricing actions expected to offset some pressure. It also cited uncertainty from COVID-19, the Ukraine war, potential reduced discretionary spending, labor shortages, and access to financing.
- On April 1, 2022, after quarter-end, the company agreed to repurchase California development rights for $2.4 million; after netting $0.36 million of deferred revenue, $2.04 million was recorded as reacquired development rights. In March, it repurchased New Jersey development rights for $0.25 million, net of $0.10 million deferred revenue.
Risks, controls, and contingencies
- Management concluded disclosure controls were not effective as of March 31, 2022 because of material weaknesses in internal control over financial reporting. Areas included risk assessment and scoping, segregation of duties, complex accounting, revenue recognition, and leases. Remediation was underway; management expected completion during fiscal 2022, subject to testing.
- The filing identifies inflation and labor costs as risks to profitability and notes that weaker demand could affect compliance with credit covenants. The company reported covenant compliance at quarter-end and anticipated continued compliance through 2022.
- The company is subject to litigation in the ordinary course. A claim settled in February 2022 for $0.75 million, with a $0.25 million insurance recovery; the $0.50 million net impact was included in 2021 results.
- No long-lived asset impairment was recorded in Q1 2022; Q1 2021 included approximately $0.1 million of noncash impairment. No new regional developer agreements were entered into during Q1 2022.
Key facts investors should verify
- Confirm actual undrawn availability, borrowing conditions, and covenant headroom under the amended revolver; reconcile the MD&A reference to the terminated development line.
- Track whether clinic-level growth converts into improved company-clinic profitability and operating cash flow, given the Q1 loss and sharp increase in expenses.
- Assess progress against the 2022 revenue, Adjusted EBITDA, and clinic-opening outlook, including the costs and performance of new company clinics.
- Monitor remediation and independent testing of the disclosed material weaknesses, and whether controls are deemed effective in subsequent filings.
- Evaluate labor inflation, pricing effectiveness, patient demand, and discretionary spending risks, as well as costs and expected returns from the California rights reacquisition and clinic expansion.