The Joint Corp. — Q1 2018 Form 10-Q
Business and period: The Joint Corp. franchises, develops, owns, operates and manages chiropractic clinics. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017, as adjusted for the retrospective adoption of ASC 606.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $7.10 million | $5.51 million | +28.9% |
| Operating loss | $439,000 | $1.71 million | Improved $1.27 million |
| Net loss | $387,000 | $1.77 million | Improved $1.38 million |
| Loss per share, basic and diluted | $0.03 | $0.14 | Improved |
| Net cash used in operating activities | $33,000 | $1.28 million | Improved $1.25 million |
- Revenue mix: Company-clinic revenue and management fees were $3.26 million (+30.5%); royalties $2.27 million (+33.3%); franchise fees $348,000 (+17.9%); advertising fund revenue $659,000 (+10.1%); software fees $307,000 (+15.2%); regional developer fees $135,000 (+110.5%).
- Margins: Gross margin was approximately 86.3%, versus 87.4% in Q1 2017. Operating margin was approximately (6.2%) versus (31.0%); net margin approximately (5.5%) versus (32.1%).
- Cash and liquidity: Cash and cash equivalents were $4.03 million at March 31, down from $4.22 million at year-end; cash plus restricted cash was $4.17 million. Current assets were $6.65 million and current liabilities $5.67 million (about 1.17x current ratio).
- Debt: Notes payable totaled $1.10 million, including $1.00 million drawn under a $5.00 million revolving facility. The facility bears 10% interest and matures in December 2019. The filing reports $25,000 of interest paid in Q1.
- Cash flows: Investing activities used $142,000, including $184,000 of property and equipment purchases, partly offset by $41,000 collected on notes receivable. Financing provided $23,000, primarily from option exercises. Cash and restricted cash decreased $152,000.
Material changes and operating developments
- System-wide gross sales grew 32% and same-store retail sales increased 26%, according to management. The network reached 406 operating clinics: 359 franchised and 47 company-owned or managed, compared with 373 total clinics a year earlier.
- Franchise operations reported $1.82 million of segment operating income, up from $1.23 million. Corporate clinics recorded $111,000 of segment operating income, versus a $1.02 million loss. Unallocated corporate costs remained substantial at $2.37 million, up from $1.92 million.
- Cost of revenue rose 40.2%, primarily from increased regional developer royalties. General and administrative expense rose 11.2%, mainly due to payroll costs; selling and marketing expense increased 15.0%. Depreciation and amortization declined 33.0%, partly reflecting the prior-year sale or closure of 14 clinics. No disposition or impairment loss was recorded in Q1 2018, compared with $418,000 in Q1 2017.
- ASC 606 was adopted using the full retrospective method. It defers franchise and regional developer fees over agreement terms; previously reported Q1 2017 revenue was reduced by $167,000 and net loss increased by $118,000. The adoption also materially increased reported deferred franchise revenue and accumulated deficit at year-end 2017.
- After quarter-end, the company agreed to repurchase one operating franchise and terminate a second franchise agreement for $100,000; it intends to operate the remaining clinic as a company-managed clinic.
Outlook, risks and other matters
- No quantified financial guidance was provided. Management said it intends to accelerate franchise sales, develop regional developer territories and selectively expand company clinics in clustered locations, while preserving cash and proceeding with acquisitions and development at a measured pace. Management reported a third consecutive quarter of positive Adjusted EBITDA but did not provide the amount.
- The company continued to report a net loss and used operating cash in the quarter. Management cited risks including securing suitable clinic sites and leases, clinic profitability and staffing, franchise sales and growth, competition, regulation of chiropractic and management arrangements, and reputation. Results may fluctuate with clinic openings, consumer conditions and competition.
- Operating lease commitments totaled $13.49 million. The company expected the 2019 adoption of the new lease standard to materially increase balance-sheet assets and liabilities; it did not expect a material impact on the income statement or cash flows.
- The company disclosed routine-course litigation, with no further detail in this filing. It reported no material uncertain tax positions and no goodwill or long-lived asset impairments in the quarter. Tax effects of the 2017 Tax Act remained provisional and subject to adjustment.
- Management concluded disclosure controls were effective at a reasonable assurance level as of March 31, 2018. The filing states that the company is a smaller reporting company and therefore does not provide a separate updated risk-factors section.
Investor verification points
- Verify the drivers and sustainability of reported 32% system-wide sales growth and 26% same-store growth, including clinic-level trends and measurement definitions.
- Assess whether company-clinic and franchise segment improvements can offset corporate overhead and support sustained profitability and positive operating cash flow.
- Review available borrowing capacity, facility terms and maturity, and the company’s ability to meet operating lease commitments while preserving liquidity.
- Track the effects of ASC 606 on future franchise and regional developer revenue, deferred balances and comparability with prior periods.
- Confirm the completion and financial impact of the post-quarter franchise transaction, and monitor clinic expansion, staffing and regulatory risks.