Business Context and Reporting Period
The Joint Corp. operates, manages, supports, and franchises chiropractic clinics and sells regional development rights. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015, compared with the same periods in 2014.
At quarter-end, 262 clinics were operating: 239 franchised and 23 company-owned or managed, versus 215 franchised clinics and no company clinics a year earlier. The company is shifting toward operating and managing clinics directly while continuing franchise growth.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $3.43 million, up 97.9% | $5.93 million, up 82.9% |
| Gross profit / margin | $2.63 million / 76.9% | $4.60 million / 77.5% |
| Operating loss / margin | $(1.85) million / (53.9)% | $(3.76) million / (63.4)% |
| Net loss | $(1.86) million, versus $(0.13) million | $(3.76) million, versus $(0.26) million |
| Basic and diluted loss per share | $(0.19), versus $(0.03) | $(0.39), versus $(0.05) |
| Operating cash flow | $(2.54) million for six months, versus $0.27 million provided |
At June 30, cash was $12.58 million, restricted cash $0.28 million, and current assets and liabilities were $14.54 million and $5.32 million, respectively. Notes payable totaled $619,400, including $479,400 current. Total liabilities were $11.88 million. Future operating lease payments totaled $3.91 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected more operating clinics and growth at existing clinics, newly acquired company clinics, and an increase in the monthly marketing fee from 1% to 2%. Quarter revenue also included $580,000 recognized on termination of 20 defaulting franchise licenses; related previously deferred costs were $236,750.
- For the six-month period, the company acquired 21 developed and 31 undeveloped franchises and reacquired regional developer rights. It operated 19 acquired developed clinics and closed two; undeveloped franchises were terminated, with possible relocation.
- Expenses rose substantially: six-month selling and marketing expense increased to $1.76 million, depreciation and amortization to $0.40 million, and general and administrative expense to $6.20 million. Management cited marketing, added corporate staffing, professional fees, public-company costs, and occupancy costs.
- Net cash fell $8.22 million in the first half, primarily reflecting operating cash use and $5.65 million of investing outflows, including franchise acquisitions and regional-rights reacquisitions. Cash was $20.80 million at year-end 2014.
- Six-month franchise openings were 23, versus 41 in 2014; quarter openings were 10, versus 23.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to repurchase or develop up to 42 clinics or franchises for company operation or management, and open up to 55 new franchised clinics, during 2015. These are plans, not financial guidance.
- Management identified risks including site availability and lease terms, hiring and retaining chiropractors, clinic profitability, franchise sales and acquisitions, competition, regulation, and the company’s limited operating experience with company clinics.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2015, citing control weaknesses. Remediation efforts included additional accounting personnel and a new general ledger system.
- On July 7, 2015, 13 terminated franchisees initiated arbitration alleging, among other matters, wrongful termination and seeking to restrict company clinics near franchise clinics. The company disputed the claims and said it would defend them.
- Purchase-price allocations for 2015 acquisitions remained preliminary. A January clinic asset acquisition had no consideration paid; a potential bargain-purchase gain had not been valued or recorded.
- The company recorded no income tax benefit in 2015 and maintained a valuation allowance against deferred tax assets. It reported approximately $125,000 of uncertain-tax-position liabilities.
Important Facts for Investors to Verify
- Whether the company can integrate and profitably operate acquired clinics while pursuing its stated company-clinic growth plans.
- How much revenue and earnings growth is recurring versus attributable to acquisitions, franchise terminations, and other recognition events.
- Cash burn, acquisition spending, lease commitments, and the company’s ability to fund growth from available liquidity.
- Progress in remediating ineffective disclosure controls and any effect of preliminary acquisition valuations or the franchisee arbitration.