Business Context and Reporting Period
The Joint Corp. franchises chiropractic clinics, sells regional development rights, and supports clinics. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The company was shifting toward acquiring and operating or managing clinics while continuing franchise growth. It reported 253 clinics in operation at quarter-end, including 12 company clinics.
Financial Results and Liquidity
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Total revenue | $2.508 million | $1.513 million; up 65.8% |
| Cost of revenue | $545,000; 21.7% of revenue | $531,000; 35.1% of revenue |
| Operating expenses | $3.878 million | $1.140 million |
| Operating loss | $1.915 million; 76.4% of revenue | $157,000 loss |
| Net loss | $1.904 million | $128,000 loss |
| Basic and diluted loss per share | $0.20 | $0.03 |
| Operating cash flow | $1.343 million used | $50,000 provided |
| Cash and cash equivalents | $17.083 million at March 31 | $20.797 million at December 31, 2014 |
| Notes payable | $255,000 | None at December 31, 2014 |
Cash used in investing activities was $2.371 million, principally for franchise acquisitions ($1.830 million) and regional developer rights ($545,000). Cash declined by $3.714 million during the quarter; there were no financing cash flows. Current assets were $19.486 million and current liabilities $4.764 million at March 31. Total liabilities were $12.671 million. The filing reports no income tax provision for Q1 2015, citing a net operating loss and valuation allowance.
Material Changes and Unusual Items
- Revenue growth reflected higher royalty fees, the addition of company-clinic revenue, and increased advertising fund revenue. Royalty fees rose 66.9%; company-clinic revenue was $387,000. Franchise fees fell 25% as 13 clinics opened versus 18 a year earlier.
- Selling and marketing expense increased to $967,000 from $120,000. This included a $298,000 provision for advertising-agency work and spending associated with a focused marketing strategy.
- General and administrative expense increased to $2.788 million from $980,000, driven mainly by approximately $956,000 in additional employment costs, $476,000 in professional fees, and $143,000 in acquisition-related costs.
- The company acquired or reacquired clinic franchises and regional developer rights. Acquisitions contributed $406,706 of revenue and a $153,547 net loss in the quarter, according to the filing. Purchase-price allocations were preliminary for certain transactions. A default-related clinic acquisition had no consideration recorded; a possible bargain purchase gain had not been estimated or recognized.
- Regional developer-rights terminations affected revenue recognition. In particular, the New Jersey transaction resulted in recognition of excess deferred fees after the company determined it had no remaining performance obligations.
- Advertising fund contributions increased from 1% to 2% of franchisees’ gross sales in January 2015. Advertising fund revenue is accompanied by related expense as funds are spent.
Outlook, Risks, and Controls
Management expected to repurchase or develop up to 50 franchises or clinics for company operation or management over the 12 months beginning January 1, 2015, and expected approximately 60–65 new franchised clinic openings over that period. These are operating targets; the filing gives no earnings or revenue guidance. Management said company-clinic development would be its principal focus and that IPO proceeds would fund growth, including clinic development and acquisitions.
Management cautioned that growth depends on finding suitable sites and lease terms, recruiting chiropractors and staff, attracting patients, acquiring clinics on acceptable terms, and successfully operating company clinics. The filing also cites competition, regulatory and industry risks, execution risks, and the costs of being a public company. Results may fluctuate with clinic openings, expenses, economic conditions, and competition.
Disclosure controls and procedures were deemed ineffective at quarter-end. Management identified material weaknesses involving segregation of duties and accounting for and reporting complex transactions, and said remediation—including additional personnel and a new general ledger system—was planned for mid-2015. The filing states there were no material changes to the risk factors disclosed in the 2014 Form 10-K. Litigation in the ordinary course was not expected by management to have a material adverse effect. Operating lease commitments totaled $2.222 million; notes payable maturities totaled $255,000.
Important Facts for Investors to Verify
- Reconcile clinic counts: the filing reports 253 clinics in operation in its clinic table and overview, but cites 247 clinics in the explanation of royalty-fee growth.
- Assess whether company-clinic acquisitions can generate sustainable returns, given the acquired clinics’ reported contribution and the quarter’s increased operating loss and cash use.
- Track cash consumption, acquisition spending, seller-note repayments, and the use of IPO proceeds against management’s clinic-growth plans.
- Monitor remediation of the disclosed material weaknesses and the effect of acquisition accounting and preliminary purchase-price allocations.
- Review the timing and profitability of planned clinic openings and franchise growth; the filing notes that openings generally take 9–12 months after franchise agreements are signed.