JOINT Corp. — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; unaudited. The Joint develops, franchises, operates and manages chiropractic clinics. At quarter-end it had 277 franchised clinics and 54 company-owned or managed clinics, 331 total, versus 241, 12 and 253, respectively, a year earlier.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $4.27 million | $2.51 million |
| Cost of revenue | $0.74 million | $0.55 million |
| Operating loss | $3.49 million | $1.92 million |
| Net loss | $3.53 million | $1.90 million |
| Basic and diluted loss per share | $0.28 | $0.20 |
| Cash used in operating activities | $5.76 million | $1.34 million |
- Revenue grew 70.1%. Company-clinic revenue and management fees rose 328.1% to $1.66 million, reflecting the larger company-operated and managed clinic base. Royalty fees rose 34.8% to $1.37 million; franchise fees rose 47.9% to $0.51 million.
- Gross profit was approximately $3.53 million, or 82.6% of revenue. Net loss was approximately 82.6% of revenue. These calculated margins are affected by the company’s mix of franchising and clinic operations.
- Operating expenses increased, notably general and administrative expenses, up 104.3% to $5.70 million, and depreciation and amortization, up 369.5% to $0.58 million. Management attributed the increase mainly to payroll and occupancy costs associated with clinic expansion. Selling and marketing expense declined 23.6% to $0.74 million, largely due to timing of marketing-fund spending.
- Franchise Operations reported $1.07 million of segment operating income, versus $0.68 million. Corporate Clinics reported a $1.68 million segment operating loss, versus approximately breakeven. Unallocated corporate costs were $2.87 million, versus $2.59 million.
- Cash and cash equivalents were $10.37 million at March 31, down from $16.79 million at year-end. Current assets were $13.63 million and current liabilities $6.17 million (current ratio approximately 2.2). Total liabilities were $11.32 million; notes payable were $0.46 million, all current, with no long-term notes payable reported.
- Net cash used in investing activities was $0.55 million, including $0.28 million of property and equipment purchases and $0.28 million to reacquire regional development rights. Financing used $0.12 million, mainly for note repayments.
Changes, outlook and risks
- Management’s strategy emphasizes opening company-owned or managed clinics, reacquiring selected franchises and continuing franchise growth. Seven company-owned or managed clinics opened during the quarter. Management stated cash was sufficient to pursue its development strategy for the foreseeable future; the filing gives no quantified revenue, earnings or cash-flow guidance.
- Management said growth in revenue reflected 42 more company-owned or managed clinics than in Q1 2015, as well as expansion and performance of the franchise base. The larger clinic base also drove higher payroll, occupancy and depreciation costs, while operating cash use increased with operating losses and working-capital needs.
- During the quarter, three franchise licenses were terminated for defaults; the company recognized $87,000 of previously deferred revenue and $45,900 of related costs. It paid $275,000 to reacquire regional development rights. Subsequent to quarter-end, it agreed to repurchase three operating franchises for $430,000 and three more for $595,000, funded partly with cash and partly with promissory notes.
- Operating lease commitments totaled $20.14 million, including $2.16 million for the remainder of 2016. Rent expense was $0.75 million, versus $0.12 million a year earlier. The company noted that adoption of the new lease standard is expected to materially increase recognized assets and liabilities and could reduce reported net income.
- Disclosure controls and procedures were reported ineffective at quarter-end. Management was working to remediate control weaknesses through added financial-reporting resources, improved segregation of duties and outside consultants; it cautioned that deficiencies could still result in financial-statement errors.
- A franchisee arbitration alleges, among other things, wrongful termination and seeks to restrict company clinics near franchise locations. The company disputes the claims and intends to defend itself; it also asserts counterclaims. One claimant voluntarily dismissed its claims in April 2016, leaving five claimants, according to the filing.
- Other risks highlighted include the ability to secure clinic sites and leases, staff clinics with qualified chiropractors, make profitable acquisitions and openings, compete effectively, and address regulatory issues related to the corporate practice of chiropractic and joint-employer responsibility.
Important facts for investors to verify
- Whether company-owned and managed clinics can improve profitability enough to offset their higher payroll, occupancy and depreciation costs.
- The pace and economics of clinic openings, franchise growth and subsequent franchise repurchases, including their cash and debt funding.
- Cash burn, working-capital requirements and liquidity relative to management’s stated development plans.
- Progress and evidence of remediation of the disclosed ineffective controls.
- Developments and potential effects of the franchisee arbitration, lease commitments and applicable regulatory issues.