John Heilshorn – LHA Peter Holt – President and Chief Executive Officer Jake Singleton – Chief Financial Officer.

Brooks O’Neil – Lake Street Capital Mike Malouf – Craig-Hallum.

Good day, ladies and gentlemen, and welcome to The Joint Corp Third Quarter Results Conference Call. Currently at this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

At this time I’d like to turn the call over to your host, John Heilshorn of LHA. Please go ahead..

Thank you, Dylan. This is John Heilshorn. Good afternoon. Again, John Heilshorn of LHA Investor Relations.

On the call today President and CEO, Peter Holt, will review our third quarter 2018 operating metrics and our growth strategy; newly appointed CFO, Jake Singleton, will detail our financial performance, and Peter will close with our long-term vision and open the call for questions.

Please note we are using a slide presentation that can be found at the joint.com Events section of the IR website. Again that is ir.thejoint.com/events. Today after the close of the market The Joint Corp issued its financial results for the quarter ending September 30, 2018.

If you have not already have – if you do not already have a copy of this press release it will be found in the Investor Relations section of the Company’s website.

As provided on Slide 2, please be advised today’s discussion includes forward-looking statements including statements concerning our strategy, future operations, future financial position and plans and objectives of management.

Throughout today’s discussion we will present some important factors relating to our business that could affect these forward-looking statements.

The forward-looking statements are made based on our current predictions, expectations estimates and assumptions and 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 encourage you to review our filings with the Securities and Exchange Commission for a discussion on 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. Management uses EBITDA and adjusted EBITDA which are non-GAAP financial measures.

These are presented because they are important measures used by management to assess financial performance. Management believes that they provide a more transparent view of the Company than underlying operating performance and operating trends. Reconciliation of net loss to EBITDA and adjusted EBITDA is presented in the press release.

The company defines adjusted EBITDA as EBITDA before acquisition-related expenses, bargain purchase gain, loss on disposition or impairment to stock-based compensation expenses. The Company defines EBITDA as net income loss before net interest, tax expense, depreciation and amortization expenses.

Please note that the restatement required in accordance with ASC 606, which changed the way franchisors recognize revenue, led to some minor changes in the numbers reported in 2017. To have a more meaningful comparison we will use the restated figures in this presentation.

The Company expects to file the 10-Q with the Securities and Exchange Commission on Friday, November 9. Turning to slide number 3, it is my pleasure to turn the call to Peter. Good afternoon, Peter..

existing Joint patients; former Joint patients; active chiropractic patients who have never visited The Joint; and people with back pain who have never seen a chiropractor.

Our objective was to better understand the customer journey to chiropractic with a goal of refining our brand architecture and improving the effectiveness of our advertising, promotion and patient experience.

Our research study’s findings showed that everyday activities, such as sitting at a computer or doing yard work, are far bigger drivers to chronic pain than accidents and sport related injuries. But the biggest obstacles in seeking treatment for pain are time and money which delay people from getting the relief they need.

Consideration of chiropractic includes dramatically when consumers hear testimonials from others who have benefited. And at the moment there’s no national brand in the chiropractic industry creating a huge opportunity for The Joint as the category leader.

Our social media footprint, clinic micro sites and other SEO best practices play critical role in the validation process for our new patients. Many chiropractic providers fail to deliver on the most fundamental drivers of that first visit particularly related to affordability inconvenienced, the two key brand differentiators for The Joint.

And finally, the credibility of our patient experience combined with an empathetic approach to care focused on our patients’ personal health and wellness goals are the essential brand equity of The Joint. Turning to Slide 8, our portfolio is approaching a critical mass.

Concurrently third-party IT SaaS platform costs have decreased, while external cyber security risks have increased. As such, during the quarter we finalized our IT evaluation and chose SugarCRM as our new platform. SugarCRM provides a simple user interface, industry-leading customer experience and an intuitive customization platform.

Sugar’s global customer list includes household names like Apple, HTC, IBM, Audi, T-Mobile and many others.

We concluded that buying an existing well tested IT platform and adapting it to our requirements rather than building it internally is a cost-effective solution which will meet our infrastructure needs, reduce risk, improve and overall provide better support to our growing clinic system.

The initial cost of the newest SaaS platform, a substantial portion of which is expected to be capitalized, should approximate the estimated cost of internal development. The previously capitalized in-house IT development of $343,000 was written off in a non-cash charge in the third quarter.

We expect our SugarCRM platform strategy to improve our ability to quickly and consistently provide important feature enhancements, system upgrades and state-of-the-art security across our entire platform as we continue to grow. We just completed the discovery phase with Sugar and we expect to complete the rollout by the end of 2019.

Overall we believe our larger footprint along with our improved marketing IT will continue to heighten our brand awareness nationally to grow our business and enhance shareholder value. And with that I’m delighted to note earlier this week, after an extensive search, the Board of Directors appointed Jake Singleton as our new Chief Financial Officer.

Jake began his career at The Joint as a corporate controller and has been a key member of our management team. Jake has provided thoughtful insights around strategic business initiatives and strengthened our Company professionally and financially. I congratulate Jake on his new promotion and look forward to his continued contributions.

Now I will turn the call over to Jake to review the financial results..

Thank you, Peter. Turning to Slide 9, as Peter mentioned, we continue to deliver strong growth in our metrics. Notably our corporate clinic segment reported positive adjusted EBITDA for the fifth consecutive quarter. For this section I will compare third quarter 2018 to third quarter 2017.

Gross sales for all clinics open for any amount of time grew 31% to $42.2 million. System-wide comp sales for all clinics open 13 months or more increased 26%. System-wide comp sales for mature clinics open 48 months or more increased 18%, further pushing the boundaries of our business model.

Turning to Slide 10, revenue for the third quarter of 2018 grew 23% to $8.1 million. The $1.5 million revenue increase came from both corporate clinics, which contributed 49%, and franchised operations, which contributed 51%.

The revenue improvements in both our corporate clinics and franchise segments are driven by the increasing comp sales that our clinics continue to experience as they mature. In our corporate clinic portfolio innovative marketing and continued focus on operational excellence and consistency drove increased revenue.

In our franchise operations segment, greater sales from existing clinics and from the 32 additional clinics grew revenue from the third quarter of 2017.

Cost of revenues was $1.1 million, increasing 29% over the same period last year, primarily due to the higher regional developer royalties from increased gross sales of franchise clinics in RD territories. Gross profit increased 22% to $7 million.

Selling and marketing expenses were $1.2 million or 15% of revenue in the third quarter of 2018 compared to $1.2 million or 18% of revenue in the third quarter of 2017. The shift represents our ability to leverage marketing over the larger portfolio of clinics.

General and administrative expenses were $5.2 million or 65% of revenue compared to $4.5 million or 68% of revenue in the third quarter of 2017. The increase reflects bonus accruals that resulted from our strong third quarter and continued progress towards our bonus targets.

As Peter discussed, management entered into a license agreement with a SaaS IT platform that will replace our proprietary IT platform and provide long-term sustainable benefits. As a result, during the third quarter of 2018 the Company recorded a loss on impairment of $343,000 related to previously capitalized in-house development.

This write-off is however lower than the $500,000 originally anticipated. We posted a GAAP net loss of $152,000 or a loss of $0.01 per share, which improved $280,000 when compared to the net loss of $432,000 or a loss of $0.03 per share for the third quarter of 2017.

Total adjusted EBITDA in the third quarter of 2018 was positive for the fifth consecutive quarter at $665,000, improving $386,000 compared to adjusted EBITDA of $279,000 in the same quarter last year. Franchise adjusted EBITDA income increased $2.1 million; corporate clinics adjusted EBITDA income increased $717,000.

Corporate expense adjusted EBITDA loss was $2.2 million. Turning to the balance sheet, as of September 30, 2018, cash and cash equivalents were $5.6 million, up from $4.2 million at December 31, 2017, increasing primarily from cash flow from operations.

Pursuant to the terms of our credit agreement, during the first quarter of 2017 the Company borrowed $1 million as required by the terms of its line of credit. It remains unused on the balance sheet at quarter end.

Turning to Slide 11, and on to our 2018 guidance, based on our performance to date we continue to expect revenue to be between $31 million and $32 million compared to $25 million in 2017. We continue to expect positive adjusted EBITDA to range between $2.5 million and $3.5 million, improving from a loss of $274,000 in 2017.

Regarding franchise clinic openings, we continue to expect 40 to 50 in 2018. Regarding our corporate clinic openings, we acquired one clinic from a franchisee earlier this year which is neutral to the total clinic count, and we do not expect to open or acquire any more in 2018.

As a result we now expect our total new clinic openings to range between 40 and 50. Overall the strong third-quarter results and our year-to-date $1.9 million of cash flow from operations have strengthened our balance sheet and positioned us well for growth. I will turn the call back over to you, Peter..

Thank you, Jake. Turning to Slide 12, I’d like to take a minute to talk about our market opportunity. Last month the 2018 Gallup-Palmer College of Chiropractic Annual Report Managing Neck & Back Pain in America was released. According to the report about two-thirds of the U.S.

adults have had neck or back pain significant enough that they’ve sought help from a healthcare professional during some point in their lifetime. In fact 25% did so in the last 12 months.

Further, when given a choice eight out of 10 adults surveyed said they preferred to try other ways to address physical pain before they take prescription medication, demonstrating an openness to non-drug remedies. Our own data shows 22% of our new patients in 2017 were new to chiropractic.

Additional sources sight that in this country alone approximately $90 billion is spent annually on back pain and of that chiropractic accounted for about $16 billion. One of the most salient points when talking about market opportunity is how highly fragmented the chiropractic industry is.

There are over 39,000 independent practitioners operating in the United States today. Therefore our increasing footprint and our ability to leverage our marketing and infrastructure creates significant opportunities to lead to the transformation of the chiropractic industry.

Based on our detailed analysis of our current user base we believe there’s an opportunity to open up at least 1,700 clinics in the United States. However, as chiropractic becomes more commonplace, we expect this number to increase.

We believe our concierge model that provides greater accessibility, simplicity and affordability resonates with our target market. Turning to slide 13, overall our hybrid model of franchised and company owned or managed clinics enables us to expand in a capital light fashion.

This is essential in helping us to build brand awareness and name recognition, establish a predictable revenue stream and increase scale.

To increase the size of our footprint through expansion of our corporate and franchise clinics we plan to expand our patient base to be the career path of choice for chiropractors to foster a robust regional developer community and enhance individual clinic performance and service.

Now before I open up to Q&A I’d like to mention that during the next several weeks we plan to be at the Craig-Hallum Alpha Select conference in New York City and the annual ROTH Deer Valley corporate access event and we look forward to seeing some of you there.

And finally and most importantly, I’d like to thank our franchise community, our RDs, and our employees for their major contributions to the health and growth of this Company. This progress would not be possible without their commitment and hard work. Dylan, I’m ready to start the Q&A..

Thank you, sir. [Operator Instructions] Our first question comes from Brooks O’Neil from Lake Street Capital. Please go ahead..

Good afternoon, guys, and thanks for taking my questions..

Hey, Brooks.

How are you doing?.

I’m great, Peter. Thank you very much.

Is it fair to guess that, because of the increase in the number of regional developers and the number of franchise licenses you have signed, that we might see an acceleration of franchise unit growth in 2019?.

The short answer is yes. And really, Brooks, where you can see that – and this is just the whole concept of franchising is it really is a two-step process. You have a franchisee that signs the agreement and, as we talked about, it’s at six to nine months to get that clinic open for that first clinic.

And so, when we’re talking about in 2016 we had 22 licenses sold, in 2017 we had 37 licenses sold, in 2018 just for the first three quarters we had 60 licenses sold. And those sold licenses will in fact continue to track into opening clinics because that’s obviously where our pipeline comes from.

So as you watch those sales you can see, quite frankly, the acceleration of the openings that you’d expect in 2019 and beyond..

And because you mentioned that you have roughly 50% penetration of the MSAs in the country, is it fair to guess that you’re going to continue to seek to add regional developers to the mix over time?.

Yes, our plan is to continue to add additional RDs to our mix. We see that as an important accelerator of really getting as many units out there, which is of course how we are building the brand and educating our consumers that this is a service that they, number one, learn about and then use..

So obviously the one company acquired or open store is a little bit less than you had originally suggested might be possible. And I know you’ve been telling me all year long that you did not plan to exceed your guidance.

So I’ve been expecting this, but would it be fair to guess that you’re going to try to ramp up the number of company-owned units you either open de novo or acquire during 2019?.

The short answer is yes. And you know our strategy continues – our strategy is both for franchise and corporate growth. And you also know this year we are very measured and strategic about how we did it.

But based on the continued performance of our corporate clinic portfolio, and while we haven’t set our 2019 guidance and we haven’t finalized the budget, it’s our intention that we are going to accelerate that pace.

It will be in our fourth-quarter – our Q4 call that we’ll share our full-year 2019 guidance which will include the number of corporate clinics we anticipate opening that year..

All right, that’s good. I appreciate that. And then just one last question. You guys have done an incredible job of reducing your time to breakeven. And I know it’s already down to you said less than six months, which is pretty close to seems like as low as you can go.

But do you think there’s any more room for you to improve that number further?.

The way I would look at it, Brooks, is just my experience over the years of building and managing franchise systems in that small box retail environment, you really have to have that range as a system. You always can have a single performer that breaks even in two months, and we’ve had it.

We had a clinic here in Arizona and their first month sales were $30,000, that was unprecedented for us. Can I use that as a model to go forward? Of course not. And really what we are doing here is building systems that is moving the whole group of units up to a certain percentage of performance. And so, I would be happy anywhere in that range.

What I know, as you are building and managing a small box retail environment, you need that breakeven to be between six and nine months and that’s where we’re going to stay focused. Now, does that mean we won’t stop and continue to look at our grand opening process and how we can improve it and how we can be more effective? Of course we will.

But we are in some really solid range of performance as it relates to breakeven mode with what we are currently doing..

That’s great and I’ll just ask one last one and I appreciate your patience with me. So, I note the improvement in the balance sheet and the cash generation. I’m guessing you are feeling pretty good about your ability to continue to drive growth with the capital you have available both on the balance sheet and with your line of credit.

Is that a fair way to think about things right now?.

I think that is. I think what’s really clear is that we have the ability to continue our growth with the capital on hand with what we’re doing now. And particularly on the franchise side, again as we’ve talked about to continue to support my franchise growth that I don’t need of additional capital to do that.

Do I have the infrastructure in place? I’ve got my RDs in place, it’s capital light. Yes, we’ll add additional people out in the field, there are a couple here in the office. But that is strong sustainable growth going forward. On the corporate side of our growth is that as we’ve talked about, the cost of a new unit let’s just say roughly is $250,000.

So if I want to open up four new units I need $1 million. If I want to open up 40 I need $10 million.

And there’s additional overhead that’s going to have to be put in place to support that development because we’ve learned from past experiences, it’s not just getting the clinic open, it’s ensuring we have the right oversight and the systems in place to make sure that as they are opening up in the field that they are in fact profitable.

And so, we are working closely with the board and looking at all the strategic options we have to determine what is the best way to create shareholder value..

That’s perfect. You seem to be doing a great job and I applaud you. Thanks a lot for taking my questions..

Thank you, very much..

Thank you. Our next question comes from Mike Malouf from Craig-Hallum. Please go ahead..

Great, thanks for taking my questions.

How are you doing there?.

Hey, Mike, how are you doing?.

Great. If I could just explore a little bit more in that corporate side, can you talk a little bit about the infrastructure that is needed to support an accelerated corporate rollout, I guess both on the greenfield side and the acquisition side? And I would assume that those are maybe two different talents.

So, do you have like two different teams on how to approach that? And I’m just trying to get some insight into what kind of build out you’ve done and what you’d need to do to accelerate that..

Sure. You are right that there’s a different management requirement of a greenfield versus an existing unit and we found that in the first set of clinics we acquired. So a couple years ago we acquired in a relatively short period of time 61 clinics. Or we built about 61 clinics. So half of them were greenfield, half of them were buybacks.

And quite frankly the buybacks, once we acquired them, continue to perform because they really do require less of that oversight – that management oversight because they are more mature, they have an existing patient base, the system is working. Yes, are there tools and techniques that we can put in place to make them even more profitable? Of course.

But it is in fact a different oversight.

Now when it relates to greenfield some of that infrastructure that I was talking about is that as we are going forward that in opening up new greenfields, what that means is I need to have people in the field looking at real estate, I need to be going through the whole process of building infrastructure internally to support the actual design and construction of that clinic.

I need to have more support on the ground to make sure they hit those same breakeven targets that we’ve had with our existing franchise network. So to add a couple of greenfields to our network, there’s not a huge amount of infrastructure that I need to build to support that.

But certainly as we are growing that at a more accelerated pace, there’s absolutely two levels of support, one internally as we just talked about to go through the site selection and build out process, but also in the support.

So one of the lessons that we learned when we were going back and restructuring the support of our existing clinics is that we took – reduced the one level we had of district managers led a very wide level of oversight. And we reduced that down to eight to 10 units.

And then we created two new positions, one was what we would call an area sales manager and the other was a clinical director who is a doctor of chiropractic. And those two people are providing the outside the formal support of our existing clinics.

And this is one of the reasons we believe we see this accelerated improvement in the performance of our corporate portfolio, because of the role that this kind of structure is supporting or impacting.

And so if I look at that – doing the math what kind of infrastructure, well, I know I need an ASM and a clinic director for every eight to 10 clinics that I’m going to add to that portfolio.

So does that give you a sense of what we are talking about?.

Yes, yes, no, that’s really helpful. And then second of all, I guess I’d love to get a sense – I know you’ve instituted a lot of best practices over the last 12 to 18 months. And I remember you’re telling me anecdotally that it took a while to convince everybody to come on board and implement some of these practices.

And I’m just wondering if you could tell us sort of as we stand now, out of the 400 and some odd stores that you have, how many are instituting, do you think, on sort of a full best practices and how much more work do you have to do to convince some of the owners to come on board?.

Well, I think that we really have made great inroads in the last several years of really working with our franchise community and together implementing programs that they are seeing that works for them.

And this is my experience is that if you’re creating programs that actually work and they’re seeing it work in other units, then that’s a really powerful influencer that maybe that more skeptical franchisee is going to say, well, I want to wait and see what it looks like after somebody else has done it to adopt it themselves.

So you always have your first adopters and then as they see that performance, and this is really one of the values of a franchise system is it really is that system of accelerated learning. And so you see more and more of the slower adoptees to take on these new programs.

And I can kind of go across the board and we are measuring in terms of we create a whole series of online training programs for our wellness coordinators and for our DCs, and we monitor how many of those DCs and wellness coordinators have gone through that program and are working with our RDs to ensure that we are setting targets to make sure to get to that 100%.

Are we there? No. Are there other elements like that that we are putting in place? Absolutely. And so we are certainly in no means done with this and quite frankly, in a franchise system that you never are. If you really understand the role of the franchisor, I can’t eliminate the bottom.

My role as a franchisor is not to eliminate the bottom, because there’s always going to be a bottom to your system; my role as a franchisor is to raise the bar of what that lowest performance is. And you do that through this process of implementing and utilizing these best practices that truly come from the field..

Got it. That’s great. Thanks for the color. I appreciate it..

[Operator Instructions]. I show no further questions in the queue at this time. I would like to turn the call back over to Peter Holt, President and CEO of The Joint Corp. Please go ahead with closing remarks..

Thank you all for your interest. We’ve been adding patient testimonials to our Joint Corp YouTube channel. And today, I’d like to leave you with a summary of a recent poignant case. James Stewart was living in Utah as a Syme’s amputee, which means his foot was cut off below the ankle.

He describes how walking causes his hip to jump up, impacting his gait, throwing out his back and leading to overall pain. After seven years of struggle, he found The Joint chiropractic, which provided him relief.

Jim says through The Joint he discovered a new active life in which he runs and climbs mountains without fear, knowing that he can go to The Joint to relieve his pain. Thank you and stay well-adjusted..

Thank you, ladies and gentlemen, for attending today’s conference. This concludes the program. You may all disconnect. Good day..