The Joint Corp. — Form 10-Q Summary
Business and period: Unaudited results for the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. The Joint franchises chiropractic clinics, sells regional developer rights, and provides franchise support. All 230 clinics were franchisee-operated at quarter-end; the company had no company-owned clinics.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.82 million | $1.47 million | $5.06 million | $4.31 million |
| Gross margin | 67.7% | 67.0% | 67.0% | 65.3% |
| Operating income (loss) | $(311,000) | $194,000 | $(690,000) | $298,000 |
| Net income (loss) | $(202,000) | $43,000 | $(464,000) | $156,000 |
| Operating cash flow | Not presented separately | Not presented separately | $(114,000) | $521,000 |
- Q3 revenue increased 23.3%; nine-month revenue increased 17.6%. Royalty fees rose 99.3% in Q3 and 120.8% year to date, reflecting a larger clinic base and higher sales. Franchise and regional developer fees declined as fewer clinics opened than in the prior-year periods.
- Operating results moved from profit to loss as selling, marketing, and general and administrative expenses grew. Nine-month G&A rose 72.9%, primarily from added senior management and staff costs, professional fees, and recruitment expense.
- At September 30, cash was $2.37 million, restricted cash $218,000, and total assets $9.78 million. Current liabilities were $3.99 million; total liabilities were $11.42 million, including $9.46 million of deferred revenue. No borrowings or other conventional debt are reported on the balance sheet. Stockholders’ deficit was $1.64 million.
- Nine-month investing cash outflow was $517,000, mainly property and equipment purchases of $538,000. Financing cash outflow of $512,000 consisted of deferred IPO costs. Cash declined $1.14 million from year-end 2013.
Outlook, developments, and risks
- Management expected approximately 80 new clinic openings over the following 12 months; a typical opening takes 9–12 months after signing a franchise agreement. The filing gives no financial earnings or revenue guidance.
- After quarter-end, the company completed its IPO: 3.0 million shares at $6.50 per share, with approximately $17.29 million net proceeds, followed by an over-allotment of 450,000 shares yielding approximately $2.71 million net. Management said a significant portion would support company-owned clinic development, potentially through new locations or acquisitions; allocation remained discretionary.
- Management identified growth execution risks, including securing suitable locations and leases, recruiting chiropractors and staff, franchise sales and clinic profitability, competition, regulation, and higher public-company costs. Litigation was described as ordinary-course and not expected to have a material adverse effect.
- Disclosure controls and procedures were reported ineffective due to weaknesses in segregation of duties and accounting for complex transactions. Remediation was planned through additional hiring and a new general ledger system in late 2014 and early 2015.
- Uncertain tax-position liabilities were approximately $204,000 at September 30. Two franchisees accounted for 31% of accounts receivable; the company recorded a $70,081 allowance for doubtful accounts. It fully reserved a $21,750 related-party note receivable.
Investor facts to verify
- Whether IPO proceeds are deployed as planned and whether company-owned clinics can be opened profitably.
- Clinic openings, closures, and development pipeline versus the 80-opening expectation; also the effects of slower franchise and regional developer fee revenue.
- Cash burn, deferred-revenue recognition, and funding needs as operating expenses and expansion investment rise.
- Progress remediating ineffective controls, and the status of uncertain tax positions and franchisee receivable concentration.
- Post-IPO share count, potential dilution from preferred shares, options, restricted stock, and underwriter warrants. The filing reports 9,723,933 common shares outstanding as of December 10, 2014.