JOINT Corp. (The Joint Corp.) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. 2017 comparative figures were retrospectively adjusted for adoption of ASC 606.
Business context
The Joint develops, franchises, owns, operates and manages cash-pay chiropractic clinics. It does not accept insurance or provide Medicare-covered services. At year-end, its network had 442 operating clinics in 32 states: 394 franchised and 48 company-owned or managed. It also reported 136 sold but undeveloped clinic licenses and 19 letters of intent.
Financial performance and liquidity
| Metric | 2018 | 2017, adjusted | Change |
|---|---|---|---|
| Revenue | $31.79 million | $24.92 million | +27.6% |
| Operating income (loss) | $0.21 million | $(3.33) million | +$3.54 million |
| Net income (loss) | $0.25 million | $(3.43) million | +$3.69 million |
| Diluted earnings (loss) per share | $0.02 | $(0.26) | Improved |
| Adjusted EBITDA | $2.99 million | $(0.28) million | +$3.26 million |
| Cash from operating activities | $5.45 million | $(0.07) million | +$5.53 million |
Gross profit was approximately $27.48 million, or 86.4% of revenue. Operating margin was approximately 0.6% and net margin approximately 0.8%. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, stock compensation, impairment/disposition losses and acquisition-related items.
Revenue grew across company clinics and franchise operations: company-clinic revenue and management fees rose 31.9% to $14.67 million; royalty fees rose 31.3% to $10.14 million. The company reported system-wide sales growth of 30% and comparable sales growth of approximately 25% (25.2% in the business discussion). New patient count increased 25% to more than 434,000. Franchise licenses sold rose to 99 from 37.
Cash and cash equivalents were $8.72 million at year-end, versus $4.22 million. Current assets were $11.71 million and current liabilities $8.74 million, implying working capital of about $2.97 million. Total liabilities were $21.17 million and stockholders’ equity $2.36 million. Notes payable totaled $1.10 million, including a $1.00 million draw under a $5.00 million credit facility; the facility bears 10% interest and was scheduled to terminate in December 2019. The filing lists $13.78 million of undiscounted operating lease commitments. Management said available cash and expected operating cash flows and financing sources were expected to cover short-term working-capital needs; long-term capital needs for acquisitions and growth could depend on access to debt or equity markets.
Material changes, outlook and notable items
- The company moved from a consolidated operating loss and net loss in 2017 to modest GAAP operating and net income in 2018. Franchise operations earned $8.08 million in segment operating income; corporate clinics reported $1.54 million, compared with a $1.70 million loss in 2017. Unallocated corporate costs remained substantial at $9.42 million.
- Management cited higher clinic sales, a larger franchise base and improved operating leverage. General and administrative expenses rose 12.1%, including higher payroll and professional costs; cost of revenue increased 33.7%, partly due to regional developer royalties and commissions.
- The company recorded $593,960 of disposition or impairment losses, including approximately $343,000 related to capitalized software after deciding to use a third-party software-as-a-service CRM platform. It also recognized a $58,006 bargain-purchase gain.
- Management planned to continue franchise development and resume measured growth of company-owned or managed clinics, targeting geographic clusters. By March 1, 2019, two new company-operated greenfield clinics had opened, with two leases executed and nine additional letters of intent. The filing provides no formal numeric earnings or revenue guidance.
- Adoption of ASC 606 changed the timing of franchise and regional developer fee recognition and reduced reported 2017 equity; investors should compare the adjusted figures presented here. The 2018 results also include tax effects of prior-year U.S. tax reform; the company reported federal and state net operating loss carryforwards of approximately $23.1 million and $28.5 million, respectively.
- Regulatory and legal uncertainties include corporate-practice-of-chiropractic restrictions and potential joint-employer liability. Arkansas proposed legislation and Oregon rule changes could affect the operating model; in North Carolina, notices alleging violations were delivered to approximately 15 chiropractors working at franchisee-managed clinics, with a preliminary hearing held in February 2019. Management said the outcome of ordinary-course litigation was not expected to have a material adverse effect.
- The company expected adoption of the new lease standard in 2019 to add approximately $10–11 million of right-of-use assets and lease liabilities. Management reported effective disclosure controls and effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether 2018 profitability and positive operating cash flow are sustainable, including the effects of working-capital movements and deferred franchise revenue.
- Clinic-level economics and the conversion of the 136 undeveloped licenses and 19 letters of intent into opened, profitable clinics.
- Progress, costs and cash requirements for the resumed company-owned clinic expansion and acquisitions.
- Status and potential impact of state chiropractic-practice inquiries, including North Carolina, and developments in joint-employer rules.
- Debt repayment and refinancing plans, lease obligations, and the balance-sheet impact of lease-standard adoption.
- ASC 606 comparability and the nature and recurrence of impairment, bargain-purchase and tax-related items.