JOINT Corp. (NASDAQ: JYNT) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; 2018 comparatives were restated to consolidate variable-interest professional corporations (VIEs). The company franchises, supports, manages and operates chiropractic clinics.
Financial performance
| Metric | Q3 2019 | Q3 2018, adjusted | Nine months 2019 | Nine months 2018, adjusted |
|---|---|---|---|---|
| Revenue | $12.73 million | $9.24 million | $34.58 million | $26.69 million |
| Operating income (loss) | $0.64 million | ($0.25 million) | $2.07 million | ($0.40 million) |
| Net income (loss) | $0.62 million | ($0.21 million) | $2.03 million | ($0.29 million) |
| Diluted EPS | $0.04 | ($0.02) | $0.14 | ($0.02) |
- Revenue increased 37.7% in Q3 and 29.5% year to date. Company-owned or managed clinic revenue rose 40.7% and 27.3%, respectively; franchise royalties rose 33.2% and 33.7%.
- Operating margin was approximately 5.0% in Q3 and 6.0% year to date, versus negative 2.7% and 1.5% in the comparable 2018 periods. Net margin was approximately 4.8% and 5.9%, versus negative 2.2% and 1.1%.
- Operating cash flow was $4.71 million for nine months, up from $1.89 million. Investing used $5.96 million, principally for clinic acquisitions, equipment and regional developer rights; financing provided $0.39 million. Cash and restricted cash declined to $8.00 million from $8.85 million at year-end 2018.
- At September 30, cash and cash equivalents were $7.83 million; current assets were $11.29 million and current liabilities $13.37 million. Shareholders’ equity was $3.80 million.
- The company had drawn $1.00 million of its $5.00 million revolving facility. The facility carried a 10% rate and was scheduled to terminate in December 2019; the company reported covenant compliance. Operating lease liabilities totaled $13.99 million and finance lease liabilities $0.06 million.
Material changes and operating trends
- Clinics in operation reached 488: 430 franchised and 58 company-owned or managed, compared with 422 total a year earlier. The company opened 47 franchised clinics and four company greenfields in the first nine months, and acquired seven clinics for approximately $3.1 million.
- Q3 comparable sales for clinics open at least 13 months rose 23%; mature clinics open at least 48 months rose 17%. Nine-month system-wide sales increased 33% to $157.9 million. System-wide sales include franchisee sales and are not company revenue.
- Profitability improved as both operating segments grew, while corporate overhead, marketing and payroll costs also increased. General and administrative expense grew 28.1% in Q3 and 18.6% year to date, but declined as a share of revenue to 65% and 64%, respectively, from 70% in both prior-year periods.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities. Management also began consolidating VIE professional corporations after reassessing control. The 2018 statements were restated; management characterized the prior-period error as immaterial, though consolidation changed reported revenue and expenses and deferred some prepaid clinic-package revenue.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described continued growth and a measured approach to expanding company clinics, targeting clustered locations and selective acquisitions alongside franchise and regional-developer growth. It stated that short-term working-capital needs were expected to be covered by cash and operating cash flows; long-term initiatives could require additional debt or equity financing.
- Management identified risks including finding sites and attracting patients, staffing clinics with qualified chiropractors, competition, acquisitions and franchise sales, and regulatory challenges to the company’s clinic-management model.
- In North Carolina, 13 of 16 chiropractors accepted proposed informal settlements following Board allegations; three were expected to face hearings in late 2019 or early 2020. Arkansas had withdrawn a 2019 bill concerning non-chiropractor ownership or management, but management warned similar proposals or Board action could recur.
- The company reported ordinary-course litigation and said it did not expect resolution to have a material adverse effect. It reported effective disclosure controls. A clinic acquisition for approximately $55,000 occurred in October 2019.
Important facts for investors to verify
- Whether the Q3 comparable-sales gains and system-wide sales growth continue, and how much growth comes from existing clinics versus new openings and acquisitions.
- The profitability and cash contribution of acquired and company-operated clinics, given rising payroll, marketing and amortization costs.
- The status and terms of the revolving credit facility scheduled to terminate in December 2019, and the company’s funding needs for further expansion.
- Developments in North Carolina proceedings and any future state actions affecting the management-services model.
- The effects of VIE consolidation and deferred prepaid-clinic revenue on comparability, and the final purchase-price allocation for 2019 acquisitions.