JOINT Corp. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016; filed August 12, 2016. Financial statements are unaudited. The Joint develops, operates, manages and franchises chiropractic clinics.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $4.97 million | $3.43 million | $9.24 million | $5.93 million |
| Operating loss | $(3.19) million | $(1.85) million | $(6.68) million | $(3.76) million |
| Net loss | $(3.26) million | $(1.86) million | $(6.79) million | $(3.76) million |
| Loss per share, basic and diluted | $(0.26) | $(0.19) | $(0.54) | $(0.39) |
- Revenue rose 45% in Q2 and 56% in the first half. Company-clinic revenue and management fees grew with the larger company-owned or managed clinic base; royalty revenue also increased. Franchise fees fell, partly because fewer terminations generated recognized revenue.
- Gross margin, calculated as revenue less reported cost of revenue, was approximately 85% in Q2 2016 versus 77% a year earlier, and 84% for the first half versus 77%. Despite revenue growth, operating losses widened as selling and marketing, depreciation and amortization, payroll and occupancy costs increased.
- Franchise Operations generated operating income of $1.0 million in Q2 and $2.1 million for the first half. Corporate Clinics reported operating losses of $1.7 million and $3.3 million, respectively; unallocated corporate costs further increased consolidated losses.
- Cash and cash equivalents were $6.12 million at June 30, down from $16.79 million at December 31, 2015. Current assets were $9.52 million and current liabilities $5.38 million. The filing reports no meaningful profitability-based liquidity measure.
- First-half operating cash use was $8.06 million, compared with $2.54 million in 2015. Investing cash use was $2.47 million, including $1.34 million for property and equipment, $0.81 million for clinic acquisitions and $0.33 million for regional rights. Financing cash use was $0.15 million.
- Notes payable totaled $550,400, all current, with maturities through 2017; no long-term notes payable were reported. Future minimum operating lease payments totaled $22.49 million.
Changes, outlook and notable matters
- At June 30, the system had 341 clinics: 280 franchised and 61 company-owned or managed, compared with 262 total clinics a year earlier. The company-operated/managed count increased from 23 to 61. There were 134 clinic licenses sold but not yet developed, down from 230.
- The company reacquired six developed franchises and one undeveloped franchise during the first half; it operates the developed clinics and terminated the undeveloped license. It also reacquired regional development rights in two territories.
- Management said it would not add company-owned or managed clinics for the remainder of 2016, citing cash preservation and a focus on improving existing clinics and franchise development. Management stated that available cash was sufficient for its strategy for the foreseeable future; no numerical earnings or revenue guidance was provided.
- Franchise-license terminations generated $281,309 of recognized revenue and $97,150 of related costs during the first half. Q2 stock-based compensation included an approximately $412,000 increase from accelerated vesting and option-exercise-period modifications following former executives’ departures.
- Management identified site availability and lease terms, clinic profitability, chiropractor recruitment, franchise sales, competition, regulation of the business model, and execution of acquisitions and growth as risks. Minimum lease commitments and operating cash burn are significant liquidity considerations.
- Disclosure controls and procedures were reported ineffective at quarter-end. The company was addressing internal-control weaknesses with added financial-reporting resources, improved segregation of duties and outside consultants; it expected further remediation efforts in Q3.
- A franchisee arbitration remained pending. Five claimants with 16 former licenses sought, among other relief, rescission of franchise investment-related fees and alleged losses; an evidentiary hearing was scheduled to begin December 5, 2016. The company said it was vigorously defending the matter. The filing does not quantify a potential loss.
Investor verification priorities
- Assess cash burn against $6.12 million of cash, the company’s stated liquidity outlook and planned spending; distinguish restricted cash from available cash.
- Track whether the 61 company-owned or managed clinics improve operating results and whether management follows through on its pause in additional clinic openings.
- Review clinic-level economics, occupancy and marketing costs, and franchise openings, closures and the 134 undeveloped licenses.
- Monitor remediation of ineffective disclosure controls and any subsequent disclosures about the arbitration, including potential exposure.
- Evaluate the $22.49 million of future lease payments and the effect of adopting the new lease-accounting standard, which the company said could materially increase reported assets and liabilities.