Peter Vozzo – Investor Relations Peter Holt – Chief Executive Officer John Meloun – Chief Financial Officer.

Mike Malouf – Craig-Hallum Capital.

Good day, ladies and gentlemen, and welcome to The Joint Corp. Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to Peter Vozzo, Investor Relations. Sir, you may begin..

Thank you, Shannan. Good afternoon, everyone. Today after the close of the market The Joint Corp. released its financial results for quarter ended June 30, 2017. Before we begin, if you do not already have a copy of the press release announcing these financial results, it can be found in the Investor Relations section of our website at www.thejoint.com.

Please be advised that today’s discussion includes forward-looking statements, including predictions, expectations, estimates, and other information that might be considered forward-looking. Throughout today’s discussion, we will present some important factors relating to our business which could affect these forward-looking statements.

The forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today.

As a result, we caution you against placing undue reliance on these forward-looking statements and would encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock.

Finally, we are not obligating ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events. With that, I will turn the call over to Peter Holt, Chief Executive Officer..

Thank you, Peter, and thanks everyone for joining us on today’s call to discuss our 2017 second quarter results. Joining me to present is John Meloun, our Chief Financial Officer. I will provide the financial and operational highlights for the quarter and John will discuss our financial results in more detail.

For the benefit of those of you who are listening to our quarterly call for the first time, our purpose of The Joint is to improve the quality of life for the patients we serve.

We do that through our network of over 400 retail clinics utilizing over 800 fully licensed chiropractic doctors who performed more than 4 million chiropractic adjustments last year. Our doctors provide patient care focused on pain relief and ongoing wellness to promote a healthy lifestyle.

As a retail concept, two of the most important measures of health of the business is system-wide comp sales and overall revenue growth. Comp sales are simply compared to retail sales to the same clinic or clinics, for the same period one year earlier to measure whether sales are expanding or contracting.

Comp sales include only sales from clinics that have been opened for at least 13 full months and excludes any clinics that have been closed.

To get a context of broad industry trends according to eMarketer, a research firm specializing in retail trend, the 65 retailers that they tracked had a combined comp sales of a negative 0.9% in the fiscal first quarter of 2017. During that same period, our system-wide comp sales were up 19%.

And in a second quarter of 2017 our system-wide comp sales continued to be up 19% compared to the same period last year. This reflects the growing market acceptance of chiropractic services while bucking the trend of falling comp sales that have impacted the general retail market in the United States.

As I mentioned, over 4.1 million adjustments occurred in our Joint clinic last year. And even more importantly 21% of our patients are new to chiropractor care. The industry fundamentals are strong driven in part by the general trend towards health and wellness and a non-invasive approach to pain management especially among the millennial.

The consumer attitudes of this large demographic, while we estimate it to be about a third of our current patient base, can be defined by their more holistic approach towards health and wellness, and a willingness to embrace health alternatives there were left accepted by previous generations.

Millennials as a group are known to be dedicated to wellness and devoting time and money to exercising in active lifestyle. According to the U.S. Census data, the millennials are the largest living generation in U.S. history.

And as they reach their prime working and spending years, their impact on the economy and on our business only continues to grow in significance.

At the corporate level, our revenue growth of 21% or $6 million for the second quarter 2017 compared to the quarter of last year, reflects the net addition of 42 clinics over the last 12 months and the double-digit growth in comp sales that we have experienced.

During the second quarter, we continue to make progress on our goals toward accelerated growth. First, we sold two new regional developer territories covering Ohio and Central Florida, which included Tampa, Orlando and Jacksonville.

For clarification, we sell to a regional developer the rights to open a minimum number of clinics in a defined territory. They in turn help us to identify and qualify potential new franchisees in that territory, and insist us in the providing of field training, clinical opening and ongoing support.

And for this assistance, we share part of the initial franchise fee collected in the ongoing royalties. In my career I’ve often worked with regional developers and when effectively managed they provide an opportunity for accelerated growth of the business.

This most recent regional developer expansion post three new developer – regional developer territories in the first quarter of this year covering Chicago, Philadelphia and the state of Washington.

The combined development schedules for the new Central Florida and Ohio territories together with the new regional development territories announced in the first quarter of this year, required the opening and operating of a minimum of 149 clinics over the next 10 years.

The Central Florida regional developer team is a partnership of current joint franchisees with proven success in a combined of 11 clinics in the Atlanta market. Members of this team are also experienced franchisees of other retail concepts.

This group has started out fast out of the gate, and have already sold five franchise licenses in the Jacksonville area.

The new regional developer for the state of Ohio had been in franchising for 10 years including the successful joint franchisees since 2012 with two clinics in Columbus, and it is a multi-unit operator for another franchise concept.

As we continue to improve our franchise system, our upcoming national conference in October in Scottsdale is perhaps where the most important event that we can hold.

This is a time when our franchise community come together to learn about the latest trends in our business, celebrate last year’s accomplishments and most importantly share best practices. This is an essential meeting that helps us improve the overall performance of our entire system.

Core to our continuing growth is opening and operating franchise clinics. During the second quarter we added 11 new franchise clinics and closed one franchise clinic. This brought the total number of clinics to 383 as of June 30, 2017, up from 341 on June 30, 2016.

Of the 11 clinics that we opened in the second quarter, 10 were opened by existing franchisees and markets in which we already served adding to our strategy of cluster development.

We forecast that we’ll be adding a total 50 to 60 new franchise clinics in 2017, and based upon our current core customer profile on usage, we’ve identified the opportunity to expand to more than 1,700 clinics across this country over time. Another important element of our growth strategy is opening and operating company-owned or managed clinics.

During the second quarter, our company-owned or managed clinics continue to demonstrate improved performance. As of June 30 2017, we had 47 company-owned or managed clinics, which represented 12% of our clinic portfolio, as compared to 61 or 18% of the clinic portfolio in the same point the previous year.

31 of the 47 clinics were bought from existing franchisees which we refer to as buyback. And 16 of the clinics were built from the ground up which we refer to as Greenfields.

Our company-owned or managed clinic buybacks as a portfolio remains cash positive at the clinic level and while during the second quarter our Greenfields continued to make progress towards profitability and is in line with our expectations.

We remain focused on continuing to improve the operating performance of our corporate clinics, and to that end we’ve taken steps in the second quarter to add operational support for these clinics and redefine its support staff roles and responsibilities.

The additional support staff will have direct oversight of the corporate clinics and we’ve reduced this scope of responsibility from our field staff from where we’ve seen approximately 20 clinics per person to around 8 to 10 each. And finally, a new training program for corporate clinic staff has been developed and implanted.

Our corporate clinic performance continues to improve. And now with the new team in place, we expect these investments will help us bolster long-term sales growth and operational performance of our company-owned or managed clinics. In our second quarter, adjusted EBITDA on the corporate clinical level improved 97% compared to the same period 2016.

Adjusted EBITDA for the second quarter of 2017 was a loss of negative $0.3 million and improvement compared to the loss of $2 million in the same period last year. And it’s our sixth consecutive quarterly improvement in adjusted EBITDA.

I’d also like to point out, that our cash balance at the end of the second quarter was $3 million a sequential quarterly improvement from $2.7 million at the end of the first quarter of 2017.

This increase is primarily due to increases in regional developer strategy or sales and new franchise sales plus our ongoing focus on managing the working capital. For the remainder of 2017, we’re focused on achieving profitability of our corporate clinic segment, expanding our franchise network and continuing to control cost to operate our business.

While earlier this year, when we sold the regional developer rights to Chicago in six of our corporate clinics in that area, we believe that we will be close to positive adjusted EBITDA by the first half of 2017.

And while we continue to experience consecutive quarterly improvement in adjusted EBITDA, as I just mentioned this quarter we’ve invested to increase the operational oversight of our remaining corporate clinics, which has in a short-term impact on our timing to adjusted EBITDA probability.

We remain focused on achieving adjusted EBITDA breakeven as quickly as possible. And finally, as we announce in our press release today newly elected board member Matt Rubel was appointed Lead Director of the Joint Corp. Matt brings extensive C-suite and public company board experience to the Joint Corp.

He most recently served as a Chief Executive Officer, President and Board Member of Varsity Brands and from 2005 to 2011 he served as Chief Executive Officer and President of Collective Brands. Matt succeeds Ron DaVella as Lead Director who will remain on the board and remain chairperson of the Company’s audit committee.

With nearly 400 clinics today the road before us is clear. To fully capitalize on this opportunity we’ll focus on the rapid expansion to our franchising efforts, amplified by the network that are strategically located company-owned or managed clinic.

With that, I’d like to turn the call over to John Meloun to discuss the 2017 second quarter results and a general outlook for the full year of 2017..

Thanks Peter. We have provided detail on our financial performance for the quarter ended June 30, 2017 in the press release issued earlier today. I will now take a few moments and discuss some of the highlights broken down by the two operating segments corporate clinics and franchise operations as well as our unallocated corporate overhead.

This segment data will be available in our 10-Q, which will be filed tomorrow August 11. Revenues increased 21% in the second quarter of 2017 or approximately $1 million to $6 million compared to the same period last year. This increase will split evenly between the corporate clinic segment and from our franchise operations.

Revenue growth in the corporate clinic segment is attributed to an increasing sales in our existing clinic portfolio and from the six clinics that were acquired since the end of the first quarter of 2016.

Franchise segment revenue increased due to higher sales from both existing clinics and from a net 56 clinics added since the end of the second quarter of 2016. The improvements in both our corporate clinic segment and franchise segment revenues are driven by the comp sales that our clinics continue to experience as they mature.

As Peter mentioned, system-wide comp sales in the second quarter of 2017 increased by 19% over the same period last year. With the performance of our most mature clinics those have operated for 48 months or more continue their strong comp clinic sales growth increasing by 12% over the prior year.

Further reflecting the growth of our business system-wide comp sales for all clinics were $30.5 million in the second quarter of 2017 an increase of $6.7 million or 28.4% from the same quarter of 2016. Our company-owned or managed clinic buybacks as a portfolio continue to be adjusted EBITDA positive at the clinic level.

Gross sales of these clinics since the month prior to when they were acquired increased on average by 50% through June 2017. In addition, during the quarter our Greenfield clinics continue to make progress towards profitability.

The Greenfields that were opened for the full second quarter of 2016 experienced a 61% increase in the second quarter of 2017 sales compared to the second quarter of 2016. While this is a significant increase it also is a reflection of the smaller base of patients our clinics experience in the first year which increases over time.

Cost of revenues of $0.8 million in the second quarter of 2017 increased 6% compared to the second quarter of last year due primarily to higher regional developer royalties from increased sales of franchises.

Selling and marketing expenses decreased by 10% or $0.1 million to $1.1 million compared to $1.2 million in the same period last year primarily due to 14 corporate clinics in the second quarter excuse me, primary due to 14 fewer corporate clinics in the second quarter of 2017 compared to the same period last year.

General and administrative expenses decreased 17% or $1 million to $4.7 million in the second quarter of 2017 compared to $5.6 million in the second quarter of 2016 due to lower payroll and occupancy costs from 14 fewer corporate clinics in the second quarter of 2017 compared to the year earlier period.

In addition the second quarter of 2016 was negatively impacted by a $0.3 million charge related to halting Greenfield clinic development.

Total depreciation and amortization expenses decreased for the second quarter of 2017 compared to the prior year quarter due to the aforementioned 14 fewer clinics in 2017 second quarter compared to the same quarter last year.

Consolidated loss from operations improved by 69% or $2.2 million in the quarter from a $3.2 million loss in the second quarter of 2016 to $1 million loss in the second quarter of 2017.

Loss from operations in our corporate clinic segment improved by $1.2 million and improved in our franchise operations by $0.4 million in both cases as compared to the second quarter of 2016. We continue to leverage corporate overhead and expand the business with nominal increases in cost.

Unallocated corporate overhead, which we define as all expenses that are not directly tied to our corporate clinic or franchise segment was down $0.6 million to $2 million compared to $2.6 million in the same period the prior year. Unallocated corporate overhead was 33% of revenue compared to 51% in the same period the prior year.

Adjusted EBITDA loss in the second quarter of 2017 was $0.3 million an improvement over our $2 million loss in the same quarter last year. $1.1 million of the improvement was generated in the corporate clinic segment due to the growth in sales.

Our franchise operation, which made up $0.4 million in adjusted EBITDA improvement continues to grow in profitability from increasing sales as well. Our unallocated corporate overhead made up the remaining $0.1 million in adjusted EBITDA improvement, which as I just mentioned is attributed to reduction in expenses.

Net loss in the second quarter of 2017 was a negative $1 million or – excuse me, $0.08 per share as compared to a net loss of $3.3 million or $0.26 per share in the second quarter of 2016.

Approximately 13.1 million weighted average common shares were outstanding in the second quarter of 2017 as compared to 12.7 million shares in the same period the prior year. At June 30, 2017 cash and cash equivalents were $3 million equal to the $3 million as of December 31, 2016.

I do note that the $1 million minimum required draw per the terms of our line of credit was taken in the first quarter of this year. This draw remains unused and as part of our cash and cash equivalents on the company’s balance sheet as of June 30, 2017.

As Peter mentioned, our cash balance at the end of the second quarter was up by $0.3 million compared to cash balance at March 31, 2017 this is primarily due to the increase in regional developer sales and new franchise license sales plus the ongoing focus on managing our working capital. Now turning to 2017 guidance.

We continue to expect total revenues in the range of $22 million to $24 million, adjusted EBITDA loss in the range of a negative $1.5 million to a negative $0.5 million. In addition in 2017, we expect net new franchise clinic openings in the range of 50 to 60.

Finally, we believe we can achieve all our 2017 financial goals with the current cash available. And with that, I’d like to turn it back to Peter..

Thanks, John. We remain on track to achieve our 2017 financial and operational goal, and our second quarter 2017 results shows a continuation of our overall positive growth and operating strategy. This progress would not be possible without the commitment and hard work of our franchise community and our employees.

And I want to thank each and every one of them for their efforts, as we continue to improve the quality of life of our patients by providing affordable and routine chiropractic care. And with those comments, I’d like to open the floor to questions..

Thank you. [Operator Instructions] Our first question is from Mike Malouf with Craig-Hallum Capital. You may begin..

Great. Thanks guys for taking my questions..

Hi, Mike..

Can you – and you might have gone over this, and I made missed it.

But could you kind of little bit more about franchise fees was down, sequentially down year-over-year, that’s kind of wonder, how volatile is that number and what you expected sort of play out of the next few quarters?.

Yes. So Mike, franchise fees are really a function of the number of openings, we have in the period. Number of franchise openings – so really it’s more of a timing of 50 to 60 that we guided two in the year, when they’re actually opened. In the second quarter, we had 11 clinic openings.

We do expect a larger number of openings in Q3 and Q4 to kind of balance out the 50 to 60 we guided to..

How many did you have in the Q1?.

There was 12 in Q1..

Right, that 12….

In Q1, we had 12 new openings and then we sold six of the 11 clinics in Chicago. So there was a total of 18 franchises into Q1 but six of them were Corporate clinics, where turned over to our D group there. And then we had 11 clinics that opened in – our Q2 2017..

And Mike another function of the franchise – chiropractic franchise fees, the current license cost is $39,000 or $39,900 for an opening per for a license sale, in prior to that reason, so licenses at $29,000. So the mix of all older license openings versus new license openings does have an impact on that..

Okay.

So there might have been a tougher mix in the second quarter?.

Yes. I mean that does have an impact, yes..

Got it. Okay, that’s helpful. I was just doing the math and coming up at the right number, good. And then when you take a look at the 1,700 clinics that you’ve targeted out there.

Can you give us a sense of where you think that percentage would end up being between franchised units and corporate down units?.

Yes, Mike. That’s a great question. I actually get asset quite often from investors and talking to people interested in the company. And that right now with the 47 clinics against the 383 open that’s about 12% of it, that are corporately owned. And as I look forward, while there’s not a specific number that we’ve all agreed upon.

But I would expect that to range over time depending on time and capital between 10% and 25% of the overall portfolio..

Okay, great. Thanks. That’s a pretty wide target to look at. And then….

But also Mike you guys can change over time. I mean just watching other franchise systems and you can see their strategy changes sometimes, they’re going to be really focused on more corporate clinics as opposed to franchising and you can see some major franchise order or so.

I haven’t seen it works, as usually just this fixed number that you keep that, because it just the number of factors that are going to influence that..

Right, right.

When you guys take a look at the back half of the year, you would expect to be up year-over-year in revenues in the back half, correct?.

Absolutely..

So why do you keep – what scenario because a lot of companies will look at ranges of guidance as potential ranges, ranges that – things were a little slow, will be at the low end and the things could do little bit better, will be at the high-end and then may be a good target as in the middle.

If you used last year’s numbers, you almost come up to the middle of that range. I’m just trying to understand the philosophy around the guidance, specifically on the top end, around the top line because it doesn’t seem like $22 million to $23 million that ranges sort of even in the possibility..

Yes. I mean the guidance that we’ve provided for revenue is currently where we see the business having, being a small company there’s fluctuation that we could experience.

But right now, the performance for Q1 and Q2 of what we see, for Q3 and Q4 guidance that we feel as representative of the business and if we get to the point where the guidance need to be adjusted, we will do it at the time, but at this point in time, the $22 million, $24 million is what we saw is an accurate depiction where we’re heading..

Right. But you just said that, you thought – you would certainly be up year-over-year in the back half.

So what would be accurate about you coming in within the $22.5 million? So what would be accurate about you coming in within the $22 million to $23 million range?.

Well. One of the things, we’re trying to do here as well is to make sure that our guidance is accurate as possible. And as John said, we will change it, when we believe that it should be. But we also coming into this, certainly the new management is that some of the guidance that was previously provided was – wasn’t quite as accurate.

And so that we’re trying to be very powerful about the expectations that we’re setting and still be truly reflective of our view of the business..

Got it. Okay. Just trying to understand that. That’s all I got. Thank you..

Thank you. [Operator Instructions] And I’m currently showing no further questions at this time, I’d like turn the call back over to Peter Holt for closing remarks..

I want to thank everyone for participating on today’s call and for your questions. And we look forward to keeping you up-to-date on all our progress. And have a great day..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day..