The Joint Corp. (NASDAQ: JYNT) — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company develops, operates, manages and franchises cash-pay chiropractic clinics. Its audited financial statements received an unqualified opinion; the auditor did not opine on internal-control effectiveness.
Business context and operating performance
The system had 399 clinics at year-end: 352 franchised and 47 company-owned or managed, across 30 states. It opened 41 franchised clinics during 2017 and reached 400 system-wide clinics in January 2018. A further 104 franchise licenses were sold but not yet developed, and eight letters of intent had been signed. System-wide sales were $126.8 million, with nearly five million patient visits; these are system metrics, not the company’s consolidated revenue.
The model is appointment-free, cash-based and does not accept insurance or provide Medicare-covered services. The company collects a 7% royalty and a 2% marketing fee on franchised-clinic gross sales. Management reported 21.0% system-wide comparable same-store sales growth for 2017. Average patient price per adjustment was about $26, versus an estimated $77 industry average.
Financial results and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $25.16 million | $20.52 million | +22.6% |
| Operating loss | $3.17 million | $15.01 million | Loss narrowed $11.83 million |
| Net loss | $3.28 million | $15.17 million | Loss narrowed $11.90 million |
| Loss per share, basic and diluted | $0.25 | $1.20 | Improved |
| Adjusted EBITDA (non-GAAP) | $(0.09) million | $(7.71) million | Improved |
| Cash from operating activities | $0.16 million | $(10.85) million | Improved |
Revenue growth reflected higher company-clinic revenue and franchise royalties. Company-clinic revenue was $11.13 million, up 30.1%, despite the portfolio shrinking from 61 to 47 clinics. Royalty revenue rose 29.3% to $7.72 million as franchised clinics increased from 309 to 352. Franchise-fee revenue fell 36.9% to $1.44 million, mainly reflecting fewer openings and termination timing.
Cost of revenue was $3.31 million. Selling, general and administrative expense was $24.61 million, down 15.3% from $29.07 million. The company’s loss from operations remained substantial; its reported results should be distinguished from non-GAAP Adjusted EBITDA.
Year-end cash and cash equivalents were $4.22 million, versus $3.01 million. Current assets were $6.66 million and current liabilities $4.97 million. Total liabilities were $12.01 million, including $1.10 million of notes payable; stockholders’ equity was $4.90 million. Operating cash flow was positive but modest. The company had drawn $1.0 million of a $5.0 million revolving facility bearing 10% interest, secured by company-clinic assets, with a $200,000 minimum aggregate interest payment over the facility term. Contractual obligations included $11.23 million of operating lease payments and $1.10 million of notes payable.
Material changes, outlook and unusual items
- The company sold six Chicago clinic assets to a franchisee-affiliated entity for nominal consideration, sold Chicago regional developer rights for $300,000, and closed the remaining five Chicago clinics and three clinics in upstate New York. It ended the year with 14 fewer company-owned or managed clinics than in 2016.
- Loss on disposition or impairment declined to $0.42 million from $3.52 million in 2016. The prior-year charge primarily reflected clinic portfolio impairments and related write-offs; 2017 charges mainly included lease-exit costs.
- Management said it would preserve cash, continue franchise expansion and pursue selective clinic acquisitions or development at a measured pace. It expected to resume company-owned or managed clinic expansion in 2018, focusing on geographic clusters. No quantified earnings or revenue guidance was provided.
- The company entered ten regional developer agreements in 2017 and received approximately $2.1 million, which was deferred and will generally be recognized as clinics open. Three of 18 regional developers had missed minimum opening requirements; 66 of 104 active undeveloped licenses had not met contractual development timelines.
- The Tax Cuts and Jobs Act prompted a provisional $3.9 million deferred-tax remeasurement expense, principally from reducing the federal corporate rate and remeasuring deferred tax assets. The filing also reports $35,880 of total income-tax expense for 2017; the effects of tax reform and valuation allowances make the tax presentation important to review in the notes.
- Adoption of revenue-recognition Topic 606 in 2018 was expected to change the timing of franchise and regional developer fee recognition. Management estimated a cumulative retained-earnings adjustment of approximately $0.2 million at December 31, 2017 under its full-retrospective transition approach.
Key risks include continued losses and the need to achieve sustainable profitability; successful site selection, clinic openings and franchisee performance; recruiting chiropractors; long-term lease obligations; cybersecurity and patient-data protection; and legal or regulatory challenges to management arrangements under state corporate-practice-of-chiropractic rules. The NLRB’s February 2018 procedural reversal reinstated the broader 2015 joint-employer standard, increasing potential franchise-related employment exposure. The company was also upgrading management information systems and had unresolved landlord negotiations relating to three closed or unopened clinics. Management reported effective disclosure controls and effective internal control over financial reporting as of year-end.
Investor verification points
- Confirm the sources and sustainability of positive operating cash flow, the path to profitability, and the reconciliation of Adjusted EBITDA to GAAP results.
- Review the $3.9 million provisional tax-reform adjustment alongside reported tax expense, deferred tax assets and the valuation allowance.
- Track franchise openings, overdue development commitments, regional developer performance and same-store sales trends.
- Assess the economics and lease exposure of the 47 company-owned or managed clinics, including the status and cost of the remaining landlord negotiations.
- Review the revolving facility’s interest terms and collateral, near-term liquidity, and the effect of lease commitments and upcoming lease-accounting requirements.
- Monitor Topic 606 adoption and legal or regulatory developments affecting corporate practice, management-service agreements and joint-employer liability.