JOINT VENTURE MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended
December 31, 2021and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, especially in this Management's Discussion and Analysis or MD&A, contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"), which are subject to the "safe harbor" created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management; and accounting estimates and the impact of new or recently issued accounting pronouncements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "should," "could," "predicts," "potential," "continue," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations as described from time to time in our
SECreports, including those risks outlined under "Risk Factors" which are contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2021and in Part II, Item 1A of this Form 10-Q. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10- Q. Youshould carefully consider these risks and uncertainties and other information contained in the reports we file with or furnish to the SECbefore making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. Some of the important factors contained in Part I, Item 1A of our Form 10-K for the year ended December 31, 2021and in Part II, Item 1A of this Form 10-Q that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following:
• major public health issues, including outbreaks of epidemics or pandemic contagious diseases, may adversely affect our clinics’ revenues and disrupt financial markets, adversely affecting our stock price;
•the impact of the COVID-19 pandemic on the economy and our operations, including the measures taken by governmental authorities to deal with it, may precipitate or exacerbate other risks and/or uncertainties;
• inflation, exacerbated by COVID-19 and the current war in
•we may not be able to successfully implement our growth strategy if we or our franchisees are unable to locate and secure suitable sites for clinic locations, obtain favorable rental terms and to attract patients to our clinics;
•we have limited experience operating company-owned or managed clinics in those geographic areas where we currently have few or no clinics, and we may not be able to duplicate the success of some of our franchisees;
•we may not be able to acquire operating clinics from existing franchisees or expand company-owned or operated clinics on attractive terms;
•we may not be able to identify, recruit and train enough qualified chiropractors and other personnel to staff our clinics, particularly in light of the current workforce shortages nationwide national level, which could limit our ability to implement our growth strategy;
•short selling strategies and negative opinions posted on the Internet may lower the price of our common stock and result in class action lawsuits;
•we may fail to remediate the current or future material weaknesses in our internal controls over financial reporting or may otherwise be unable to maintain an effective system of internal control over financial reporting, which might negatively impact our ability to accurately report our financial results, prevent fraud, or maintain investor confidence;
•we may fail to design and maintain our proprietary and third-party management information systems or implement new systems;
•we may not properly maintain the integrity of our data or strategically implement, upgrade or consolidate existing information systems;
• franchised clinic acquisitions that we make could disrupt our business and harm our financial condition if we cannot continue their operational success or successfully integrate them;
•we may not be able to continue to sell franchises to qualified franchisees, and our franchisees may fail to develop profitable territories and clinics;
• new clinics may not reach the point of profitability, and we may not be able to maintain or improve the revenues and franchise fees of existing franchise clinics;
•the chiropractic industry is highly competitive, with many well-established independent competitors, which could prevent us from increasing our market share or result in reduction in our market share; •state administrative actions and rulings regarding the corporate practice of chiropractic and federal and state laws and regulations regarding joint employer responsibility may jeopardize our business model; •negative publicity or damage to our reputation, which could arise from concerns expressed by opponents of chiropractic and by chiropractors operating under traditional service models, could adversely impact our operations and financial position; •our security systems may be breached, and we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract and retain patients; and
•Legislation, regulations and new medical procedures and techniques could reduce or eliminate our competitive advantages.
Our primary business is to develop, own, operate, support and manage chiropractic clinics through direct ownership, management arrangements, franchises and regional developers across
We seek to be the leading provider of chiropractic care in the markets we serve and to become the most recognized brand in our industry through the rapid and focused expansion of chiropractic clinics in key markets throughout
North Americaand potentially abroad. Key Performance Measures. We receive monthly performance reports from our system and our clinics which include key performance indicators per clinic including gross sales, comparable same-store sales growth, or "Comp Sales," number of new patients, conversion percentage, and membership attrition. In addition, we review monthly reporting related to system-wide sales, clinic openings, clinic license sales, adjusted EBITDA, and various earnings metrics in the aggregate and per clinic. We believe these indicators provide us with useful data with which to measure our performance and to measure our franchisees' and clinics' performance. Comp Sales include the sales from both company-owned or managed clinics and franchised clinics that in each case have been open at least 13 full months and exclude any clinics that have closed. System-wide sales include sales at all clinics, whether operated by us or by franchisees. While franchised sales are not recorded as revenues by us, management believes the information is important in understanding the overall brand's financial performance, because these sales are the basis on which we calculate and record royalty fees and are indicative of the financial health of the franchisee base. Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, and (gain) loss on disposition or impairment. There was no bargain purchase gain for the three months ended March 31, 2022and 2021. Key Clinic Development Trends. As of March 31, 2022, we and our franchisees operated or managed 736 clinics, of which 636 were operated or managed by franchisees and 100 were operated as company-owned or managed clinics. Of the 100 company-owned or managed clinics, 47 were constructed and developed by us, and 53 were acquired from franchisees. Our current strategy is to grow through the sale and development of additional franchises, build upon our regional developer strategy, and continue to expand our corporate clinic portfolio within clustered locations. The number of franchise licenses sold for the year ended December 31, 2021was 156, compared with 121 and 126 licenses for the years ended December 31, 2020and 2019, respectively. We ended the first three months of 2022 with 20 regional developers who were responsible for 77% of the 22 licenses sold during the period. This strong result reflects the power of the regional developer program to accelerate the number of clinics sold, and eventually opened, across the country. In addition, we believe that we can accelerate the development of, and revenue generation from, company-owned or managed clinics through the accelerated development of greenfield units and the further selective acquisition of existing franchised clinics. We will seek to acquire existing franchised clinics that meet our criteria for demographics, site attractiveness, proximity to other clinics and additional suitability factors. During the quarter ended March 31, 2022, we opened four greenfield clinics, and as of March 31, 2022, we executed 10 leases for future greenfield clinic locations for further greenfield expansion. We believe that The Joint has a sound concept, which was further validated through its resiliency during the pandemic and will benefit from the fundamental changes taking place in the manner in which Americans access chiropractic care and their growing interest in seeking effective, affordable natural solutions for general wellness. These trends join with the preference we have seen among chiropractic doctors to reject the insurance-based model to produce a combination that benefits the consumer and the service provider alike. We believe that these forces create an important opportunity to accelerate the growth of our network.
Recent Events and COVID-19 Update
Recent events that may impact our business include unfavorable global economic or political conditions, such as the ongoing COVID-19 pandemic, the Ukraine War, and inflation and other cost increases. We anticipate that fiscal 2022 will continue to be a volatile macroeconomic environment. While we expect the impacts of COVID-19 on our business to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, the severity and duration of the pandemic, the continued availability and effectiveness of vaccines and actions taken by government authorities, including restrictions, laws or regulations, and other third parties in response to the pandemic. The primary inflationary factor affecting our operations is labor costs. In the fourth quarter of 2021 and the first quarter of 2022, company-owned or managed clinics were negatively impacted by wage increases, which increased our general and administrative expenses. Further, should we fail to increase our wages competitively in response to increasing wage rates, the quality of our workforce could decline, causing our patient service to suffer. We expect elevated levels of cost inflation to persist throughout 2022. While we anticipate that these headwinds will be partially mitigated by pricing actions in response to inflation, there can be 25 -------------------------------------------------------------------------------- Table of Contents no assurance that we will be able to continue to do so in the future. A continued increase in labor costs could have an adverse effect on our operating costs, financial condition and results of operations. Also, the Ukraine War and the sanctions imposed on
Russiain response to this conflict have increased global economic and political uncertainty. While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition, or results of operations. These and other uncertainties with respect to these recent events could result in changes to our current expectations. 26
Other significant events and/or recent developments
For the three months ended
• Comp Sales for clinics that have been open for at least 13 full months increased by 15%.
• Add-on sales for mature clinics that have been open for 48 months or more increased by 11%.
• System-wide sales for all clinics open at all times increased by 27%.
April 1, 2022, we entered into an agreement under which we repurchased the right to develop franchises in various counties in California. The total consideration for the transaction was $2,400,000. We carried a deferred revenue balance associated with this transaction of $357,721, representing the unrecognized fee collected upon the execution of the regional developer agreement. We accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price. We recognized the net amount of $2,042,279as reacquired development rights on April 1, 2022, which is amortized over the remaining original contract period of approximately 5.3 years. On March 18, 2022, we entered into an agreement under which we repurchased the right to develop franchises in various counties in New Jersey. The total consideration for the transaction was $250,000. We carried a deferred revenue balance associated with this transaction of $95,197, representing the unrecognized fee collected upon the execution of the regional developer agreement. We accounted for the termination of development rights associated with unsold or undeveloped franchises as a cancellation, and the associated deferred revenue was netted against the aggregate purchase price. We recognized the net amount of $154,803as reacquired development rights on March 18, 2022, which is amortized over the remaining original contract period of approximately 5.5 years. On February 28, 2022, we entered into an amendment to our Credit Facilities (as amended, the "2022 Credit Facility") with the Lender. Under the 2022 Credit Facility, the Revolver increased to $20,000,000(from $2,000,000), the portion of the Revolver available for letters of credit increased to $5,000,000(from $1,000,000), the uncommitted additional amount increased to $30,000,000(from $2,500,000) and the developmental line of credit of $5,500,000was terminated. The Revolver will be used for working capital needs, general corporate purposes and for acquisitions, development and capital improvement uses.
For the three months ended
Outlook for 2022
•We now expect our revenues to be between
$98 millionand $102 million, compared to $80.9 millionin 2021. •We now expect our adjusted EBITDA to be between $12 millionand $14 million, compared to $12.6 millionin 2021. •We expect franchised clinic openings to be between 110 and 130, compared to 110 in 2021. •We expect Company-owned or managed clinics, through a combination of both greenfields and buybacks, to increase by between 30 and 40, compared to 32 in 2021. We believe we are well positioned to achieve our goal to have 1,000 clinics by the end of 2023 due to, among other things, our resilient business model, planned new clinic openings and expansion of company-owned or managed clinics. However, the long-term impact of COVID-19 on our operational and financial performance will depend on certain developments including the duration, spread, severity, and trajectory of the virus and economic conditions. These potential developments are uncertain and cannot be predicted, and as such, the extent to which COVID-19 will impact our business, operations, financial condition and results of operations over the long term is unknown.
Factors affecting our performance
Our operating results may fluctuate significantly as a result of a variety of factors, including the timing of new clinic sales, openings, closures, markets in which they are contained and related expenses, general economic conditions, cost inflation, labor shortages, consumer confidence in the economy, consumer preferences, competitive factors, and disease epidemics and other health-related concerns, such as the current COVID-19 outbreak.
Significant accounting policies and estimates
There have been no changes in our significant accounting policies and estimates during the three months ended
The following discussion and analysis of our financial results encompasses our consolidated results and results of our two business segments:
Corporate Clinicsand Franchise Operations.
Total revenue – three months ended
The revenue components were as follows:
Three Months Ended March 31, Change from Percent Change 2022 2021 Prior Year from Prior Year Revenues: Revenues from company-owned or managed clinics
$ 12,606,999 $ 9,466,083 $ 3,140,91633.2 % Royalty fees 6,008,932 4,769,246 $ 1,239,68626.0 % Franchise fees 640,965 695,427 $ (54,462)(7.8) % Advertising fund revenue 1,710,717 1,374,741 $ 335,97624.4 % IT related income and software fees 956,998 760,537 $ 196,46125.8 % Regional developer fees 201,787 217,956 $ (16,169)(7.4) % Other revenues 312,140 263,975 $ 48,16518.2 % Total revenues $ 22,438,538 $ 17,547,965 $ 4,890,57327.9 %
Total revenue increased by
Revenues from corporately owned and operated clinics increased primarily due to improved comparable store sales growth, as well as the expansion of our portfolio of corporately owned and operated clinics. From
•Royalty fees and advertising fund revenue increased due to an increase in the number of franchised clinics in operation during the current period, along with continued sales growth in existing franchised clinics. As of
March 31, 2022and 2021, there were 636 and 527 franchised clinics in operation, respectively. •Franchise fees decreased due to the impact of accelerated revenue recognition resulting from the terminated franchise license agreements in the prior year period. There were no such comparable events during the first quarter of 2022 .
• Software fee revenue increased due to an increase in our base of franchised clinics and the recognition of related revenue over the term of the franchise agreement, as described above.
• Regional developer fee revenue decreased due to the impact of the regional developer rights buyout in the first quarter of 2022.
•Other revenues primarily consist of merchant income associated with credit card transactions. Change from Percent Change Three Months Ended March 31, 2022 2021 Prior Year from Prior Year Cost of Revenues 2,312,771 1,765,317
$ 547,45431.0 % For the three months ended March 31, 2022, as compared with the three months ended March 31, 2021, the total cost of revenues increased primarily due to an increase in regional developer royalties of $0.4 millionand an increase in website hosting costs of $0.2 million.
Sales and marketing expenses
from percent change
Three Months Ended March 31, 2022 2021 Prior
Year of previous year
Selling and marketing expenses 3,287,488 2,489,279
32.1 % Selling and marketing expenses increased for the three months ended
March 31, 2022, as compared to the three months ended March 31, 2021, driven by: (i) an increase in advertising fund expenditures from a larger franchise base, (ii) an increase in local marketing expenditures by the company-owned or managed clinics, and (iii) the timing of the national marketing fund spend and the new brand campaign.
Depreciation and amortization
Change from Percent Change Three Months Ended March 31, 2022 2021 Prior Year from Prior Year Depreciation and Amortization Expenses 1,629,176 1,169,866
$ 459,31039.3 % 29
Depreciation and amortization expenses increased for the three months ended
March 31, 2022, as compared to the three months ended March 31, 2021, primarily due to the depreciation expenses associated with the expansion of our corporate-owned or managed clinics portfolio in 2021 and 2022 and depreciation expenses associated with the new IT platform used by clinics for operations and for the management of operations, which went live in July 2021.
General and administrative expenses
Change from Percent Change Three Months Ended March 31, 2022 2021 Prior Year from Prior Year General and Administrative Expenses 15,378,623 10,087,060
$ 5,291,56352.5 % General and administrative expenses increased during the three months ended March 31, 2022compared to the three months ended March 31, 2021, primarily due to the increases in the following to support continued clinic count and revenue growth in both operating segments: (i) payroll and related expenses of $3.4 million, (ii) general overhead and administrative expenses of $1.1 million, (iii) professional and advisory fees of $0.6 million, and (iv) software and maintenance expense of $0.2 million. As a percentage of revenue, general and administrative expenses during the three months ended March 31, 2022and 2021 were 69% and 57%, respectively.
(loss) Operating result
from percent change
Three Months Ended March 31, 2022 2021 Prior
Year of previous year
(Loss) Operating income (176,426) 1,971,676
(108.9) % Consolidated Results Consolidated income from operations decreased by
$2.1 millionfor the three months ended March 31, 2022compared to the three months ended March 31, 2021, primarily due to the increased expenses in the corporate clinics and unallocated corporate segments discussed below.
Our corporate clinics segment had loss from operations of
$0.4 millionfor the three months ended March 31, 2022, a decrease of $1.8 millioncompared to income from operations of $1.3 millionfor the prior year period. The decrease was primarily due to: •A $4.9 millionincrease in operating expenses due to the increases in the following: (i) payroll-related expenses of $3.4 milliondue to a higher head count to support the expansion of our corporate clinic portfolio and general wage increases to remain competitive in the current labor market, (ii) depreciation and administration expense associated with the expansion of our corporate-owned or managed clinics portfolio in 2021 and 2022 and new IT platform discussed above of $0.3 million, (iii) selling and marketing expenses due to increased local marketing expenditures by the company-owned or managed clinics of $0.4 million, and (iv) general overhead and administrative expenses to support the expansion of our corporate clinic portfolio of $0.8 million; partially offset by
• An increase in revenue of
Our franchise operations segment had income from operations of
$4.4 millionfor the three months ended March 31, 2022, an increase of $0.6 million, compared to income from operations of $3.8 millionfor the prior year period. This increase was primarily due to:
• An augmentation of
•An increase of
$0.6 millionin cost of revenues primarily due to an increase in regional developer royalties and website hosting costs and an increase of $0.6 millionin operating expenses, primarily due to an increase in selling and marketing 30
expenses resulting from a larger franchise base of
$0.4 million, as well as due to an increase in depreciation and administration expense associated with the new IT platform discussed above of $0.2 million.
Unallocated corporate expenses for the three months ended
Non-GAAP Financial Measures
The table below reconciles net income (loss) to Adjusted EBITDA for the three months ended
Three Months Ended March 31, 2022 2021 Non-GAAP Financial Data: Net (loss) income
$ (205,797) $ 2,314,287Net interest expense 15,859 21,537 Depreciation and amortization expense 1,629,176 1,169,866 Tax expense (benefit) 13,224 (364,148) EBITDA 1,452,462 3,141,542 Stock compensation expense 323,556 246,494 Acquisition related expenses -
Loss on disposition or impairment 6,906 64,767 Adjusted EBITDA
$ 1,782,924 $ 3,458,777Adjusted EBITDA consists of net income before interest, income taxes, depreciation and amortization, acquisition related expenses, stock-based compensation expense, bargain purchase gain, and (gain) loss on disposition or impairment. There was no bargain purchase gain for the three months ended March 31, 2022and 2021. We have provided Adjusted EBITDA because it is a non-GAAP measure of financial performance commonly used for comparing companies in our industry. You should not consider Adjusted EBITDA as a substitute for operating profit as an indicator of our operating performance or as an alternative to cash flows from operating activities as a measure of liquidity. We may calculate Adjusted EBITDA differently from other companies. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other outpatient medical clinics, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same manner.
Cash and capital resources
March 31, 2022, we had unrestricted cash and short-term bank deposits of $18.3 millionand $18 millionof available capacity under the development line of credit. While the ongoing COVID-19 pandemic and the Ukraine War create potential liquidity risks, as discussed further below, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations and amounts available under our development line of credit will be sufficient to fund our anticipated operating and investment needs for at least the next twelve months. While the interruptions, delays and/or cost increases resulting from the ongoing COVID-19 pandemic, political instability or geopolitical tensions, such as the Ukraine War, economic weakness, inflationary pressures or other factors have created uncertainty as to general economic conditions for the remainder of 2022 and beyond, as of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. For the 31 -------------------------------------------------------------------------------- Table of Contents remainder of 2022, we expect to use or redeploy our cash resources to support our business within the context of prevailing market conditions, which, given the ongoing uncertainties described above, could rapidly and materially deteriorate or otherwise change. Our long-term capital requirements, primarily for acquisitions and other corporate initiatives, could be dependent on our ability to access additional funds through the debt and/or equity markets. If the equity and credit markets deteriorate, including as a result of economic weakness, a resurgence of COVID-19, political unrest or war, including the Ukraine War, or any other reason, it may make any necessary equity or debt financing more difficult to obtain in a timely manner and on favorable terms, if at all, and if obtained, it may be more costly or more dilutive. From time to time, we consider and evaluate transactions related to our portfolio and capital structure, including debt financings, equity issuances, purchases and sales of assets, and other transactions. Given the ongoing uncertainties described above, the levels of our cash flows from operations for 2022 may be impacted. There can be no assurance that we will be able to generate sufficient cash flows or obtain the capital necessary to meet our short and long-term capital requirements.
Cash flow analysis
Net cash provided by operating activities decreased by
$1.8 millionto $0.4 millionfor the three months ended March 31, 2022, compared to $2.3 millionfor the three months ended March 31, 2021. The decrease was primarily attributable to an increase in general and administrative expenses over the prior year period, which was partially offset by an increase in revenue over the prior year period. Net cash used in investing activities was $1.5 millionand $2.3 millionfor the three months ended March 31, 2022and 2021, respectively. For the three months ended March 31, 2022, this included purchases of property and equipment of $1.3 millionand reacquisition and termination of regional developer rights for $0.3 million. For the three months ended March 31, 2021, this included purchases of property and equipment of $1.0 millionand reacquisition and termination of regional developer rights for $1.4 million. Net cash used in financing activities for the three months ended March 31, 2022was less than $50 thousand, compared to $2.7 millionfor the three months ended March 31, 2021. For the three months ended March 31, 2021, this included repayment of the PPP loan of $2.7 millionand purchases of treasury stock for $0.6 million, which were partially offset by the proceeds from the exercise of stock options of $0.6 million.
Recent accounting pronouncements
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.
Off-balance sheet arrangements
During the three months ended
March 31, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.
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