Good afternoon, and welcome to the preliminary Q2 2023 Financial Review for The Joint Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Kirsten Chapman of LHA Investor Relations. Please go ahead..

Thank you, Rocco. Thank you, everyone, for joining us this afternoon. This is Kirsten Chapman of LHA Investor Relations and Alliance Advisors Company. Joining us on the call today are President and CEO, Peter Holt and CFO, Jake Singleton.

Today, after the close of market, The Joint issued its preliminary financial statements for the quarter ended June 30, 2023. If you do not already have a copy of this press release, it can be found in the Investor Relations section of the company’s website.

Please be advised that today’s discussion includes forward-looking statements, including statements concerning our strategy, future operations, future financial propositions, 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 current predictions and expectations and estimates and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today.

Factors that could contribute to these differences include, but are not limited to, our preliminary results different from final results, possible negative effects of the restatement of our financial statements for 2021 and 2022 on our financial position, results of operations and cash flows, increases in our borrowing costs under our current credit facility, given that our borrowings are under the credit facility at bear interest rates tied to certain rising benchmark interest rates, state laws limiting the use of our business model, including prohibitions on advanced payments for chiropractic services, which recently caused us to elect not to offer franchises in South Dakota and Wyoming.

Increased costs to comply with the new SEC reporting rule enhancing and standardizing disclosure regarding cybersecurity incidents and cybersecurity risk management.

Our inability to identify and recruit enough qualified car tractors and other personnel to staff our clinics due to, in part, the nationwide labor shortage, an increase in operating expenses due to measures we may need to take to address such shortage.

Inflation exasperated by COVID-19 in the current war in Ukraine, which has increased our costs, which could otherwise negatively impact our business, the potential for further disruption to our operations and the unpredictable impact on our business of COVID-19 outbreak in the outbreaks of other contagious diseases, our failure to develop or acquire company-owned or managed clinics as rapidly or not as we intended, our failure to profitably operate company-owned or managed clinics, short-selling strategies and negative opinions posted on the Internet, which could drive down the market price of our common stocking result in a class action lawsuit.

Our failure to remediate any material weaknesses in our internal control over financial reporting, which could negatively impact our ability to accurately report our financial results, prevent fraud or maintain investor confidence and other factors described in our filings with the SEC, including the section entitled Risk Factors in our annual report on Form 10-K for the year end December 31, 2022, filed with the SEC and subsequently filed current and quarterly reports.

As a result, we caution you to – we caution you against placing undue reliance on these forward-looking statements and encourage you to review our filings with the SEC for a discussion of these factors and other factors 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. Today’s call will also include a discussion of system-wide sales and comp sales, which are commonly discussed performance metrics.

System-wide sales includes revenues at all clinics where they’re operated by the company or by the franchisees.

While franchised sales are not recorded as revenues by the company, management believes the information is important in understanding the company’s financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health of the franchisee base.

Comp sales include the revenues from both company-owned or managed clinics and franchised clinics that are in each case have been open at least 13 full months or 48 full months and exclude any clinics that have been closed.

While the company believes the preliminary results reported herein to be accurate, there can be no assurances that the final reported results following the completion of the company’s previously announced restatement and quarterly review by the company’s independent auditors will not vary from those that are stated herein.

Now it is my pleasure to turn the call over to Peter Holt. Peter, please go ahead..

Thank you, Kirsten. Welcome, everybody, to the call. Thank you for your patience as we implement our new accounting methods relating to the reacquisition of regional developer right and transfer pricing adjustments for the professional corporation entity. Today, we’re delivering our preliminary Q2 ‘23 financial statements.

We’ve already reported the Q2 2023 operating metrics in August, we’ll keep our comments brief here. In Q2 2023, our ongoing franchise sales, clinic openings and new patient acquisitions grew system-wide sales 13%, preliminary revenue, 18% and preliminary adjusted EBITDA 23%.

Yet our performance is not meeting the standards we set for the joint, and we’re taking actions. We discussed these strategies in August, and I’m going to provide greater detail now. To strengthen our new patient acquisition, we’re executing more automated digital and traditional marketing campaign.

Last month, we welcomed our new Chief Marketing Officer, Lori Abou Habib, with her 20 years marketing experience and 6 years serving as Senior VP and CMO for SONIC Drive-In Franchise Brand. Lori brings a wealth of expertise and experience in The Joint.

She is tasked with leading our marketing and strategic planning to advance enterprise initiatives and grow performance of clinics, franchise prospects and consumer awareness.

Already, she and the team are leveraging our new research on the patient journey with increased data to guide our marketing strategies, which we’ll discuss in more detail in November. To reduce our general administrative expense, we’ve begun cost control initiatives such as hiring freezes, travel reductions and elimination of non-core projects.

And to improve our corporate clinic profitability, we’re evaluating and divesting a portion of our corporate portfolio. Though our greenfield development and acquisition of previously franchised clinics, our owned or managed portfolio has grown to 135 clinics.

As of June 30, the average age of our corporate portfolio was 16 months in operation and over 1/2 of our corporate clinics are over 48 months. Clinics are experiencing market changes such as the loss of an anchor store in the strip center or changes in the local retail market. These and other factors have impacted some clinics performance.

As a first step, we’ve identified a little more than 10% of our portfolio that we’re considering relocating, selling to franchisees or closing.

As we have talented teams, lease obligations and other factors to consider, our analysis and execution will be done very thoughtfully and methodically and we’ll continue our evaluation with shareholder value creation in mind. Ultimately, we’ll make accretive transactions that enable us to redeploy key resources in more efficient areas.

Regarding our greenfield strategy, we expect to complete development of those leases in process. Looking forward, we’ll pause greenfield development to assess strategic markets based on economic and demographics. And with that, Jake, I’ll turn it over to you..

Thank you, Peter. As noted, we’re nearing the completion of our restatement, which was a series of noncash entries to reflect accounting changes associated with the reacquisition and revenue recognition around regional developer rights and transfer pricing adjustments for the professional corporation entities.

I will now review the preliminary financial results for Q2 2023 compared to Q2 2022. System-wide sales for all clinics opened for any amount of time increased to $120.1 million, up 13%. System-wide comp sales for all clinics opened 13 months or more increased 5%, and system-wide comp sales for mature clinics opened 48 months or more decreased 1%.

This comp reflects fewer than anticipated new patients at some of these more mature clinics. Preliminary revenue was $29.3 million, up $4.4 million or 18%. The Company-owned or managed clinic preliminary revenue increased 23%, contributing $17.8 million. Preliminary revenue from franchise operations grew 11%, contributing $11.5 million.

The increases represent continued growth in both the corporate portfolio and franchise base. Preliminary cost of revenues was $2.6 million, up 15% over the same period last year, reflecting the associated higher regional developer royalties and commissions from a larger franchise base.

Preliminary sales and marketing expenses were $4.7 million, up 23% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise base, an increase in local marketing expenditures by the company-owned or managed clinics and the timing of associated marketing spend.

Preliminary depreciation and amortization expenses were $2.3 million compared to $1.5 million, up 44% compared to the prior year period. primarily due to the increase in the number of greenfield developments in acquired clinics.

Preliminary G&A expenses were $19.9 million compared to $18.6 million, up 7%, reflecting the cost to support the increased clinic count, revenue growth and higher payroll to remain competitive in the tight labor market. Preliminary loss from operations was $375,000 compared to $1.3 million in Q2 ‘22.

Preliminary loss before income tax expense was $481,000 compared to $1.3 million in the second quarter of 2022. Preliminary adjusted EBITDA was $3.2 million compared to $2.6 million for the same period last year. Franchise clinic preliminary adjusted EBITDA increased to $5.1 million.

Company-owned or managed clinic preliminary adjusted EBITDA increased to $2.2 million, reflecting the maturation of clinics in our greenfield portfolio as well as our concerted effort to optimize labor. Corporate expense is a component of preliminary adjusted EBITDA was $4.1 million.

For the 6 months of 2023 compared to the same period in 2022, preliminary revenue increased 22% to $57.6 million, and preliminary adjusted EBITDA grew 19% to $5.3 million. As previously reported, our June 30, 2023, unrestricted cash was $13.6 million compared to $9.7 million at December 31, 2022.

For the 6 months ended June 30, 2023, cash flow from operations was $7.5 million, including the receipt of the employee retention credits of $4.8 million in Q1. For the six-month period, we invested $3.8 million to acquire previously franchised clinics as well as open greenfield clinics and upgrading existing clinics.

Also, we continue to have access to additional cash through our line of credit with JPMorgan Chase. To date, we have drawn $2 million and have an additional $18 million available. We’ve amended our preliminary guidance for 2023 for several reasons.

First, we incorporated the impact of the accounting related to the recognition of regional developer fee revenues. Next, we no longer expect to close on a multiunit franchise clinic acquisition that was included in our former guidance. Third, we’re evaluating divestitures of approximately 10% of our corporate portfolio.

These transactions will eliminate 100% of the associated revenues as well as the associated adjusted EBITDA losses, which should be accretive to the bottom line. Finally, with the current environment of ongoing economic uncertainty, we are experiencing some negative comps in clinics, which is unprecedented for The Joint.

While these economic factors are likely temporary and demand for pain management continues to increase, we’ve recalibrated how we forecast clinic performance and utilize more conservative assumptions. Therefore, we’re adjusting our revenue expectations to be between $115 million and $118 million compared to $101.9 million in 2022.

We do expect continuing pressure on our system-wide comps for the remainder of the year. In response to reduced revenue expectations, we’re focusing critically on G&A and initiating a series of cost control initiatives to reduce our ongoing expense run rate.

Accordingly, we’ve also revised our adjusted EBITDA to be between $11 million and $12.5 million compared to $11.5 million in 2022. That said, our guidance for clinic openings is on track for 2023. For franchise clinics, we continue to expect openings to range from 100 to 120 compared to 121 in 2022.

For greenfield clinics, we continue to expect openings to range from 8 to 12 compared to 16 in 2022. And with that, I’ll turn the call back over to you, Peter..

Thanks, Jake. I’d like to reiterate that the delay on the release of our Q2 financial performance and required restatement was specifically related to technical accounting and completely noncash issues.

Finally, it’s important to emphasize that pain remains epidemic of this country and our core patients are looking for more natural holistic ways to manage their pain. Americans are spending $19.5 billion annual in chiropractic care, and there are many more Americans who don’t even know how we can help them.

As such, we’re dedicated to educating consumers on the effectiveness of chiropractic care, which in turn, will expand our market presence and improve our client performance. And with that, I’ll open it up to questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Jeff Van Sinderen with B. Riley FBR. Please go ahead..

Oh, hello. This is Richard Magnusen for Jeff Van Sinderen, and thank you for taking our call. And a couple of questions. The first one, you just mentioned that you restated the guidance for the top line and for EBITDA.

I was wondering if you could break out roughly how much of that was due to the financial statements? And how much was due to the other factors that you mentioned, but did not break out separately?.

Sure, yes. If you do the midpoint, Richard, it’s a $9 million reduction. You’ve probably got $500,000 related to the RD reacquisition, change in accounting. You’ve got a multiunit deal that didn’t come through that could range anywhere from $500,000 to $1 million probably.

And then you’ve got the potential divestitures that we’re factoring in is potentially closing. That one is a little hard to estimate just given the timing uncertainty and then the balance being just the recalibration and some of the economic headwinds that we’re facing..

Okay. And then regarding the greenfields that you’re closing, I think you said that you closed – overall, a little bit more than 10% will be affected in total. Some of those will be closed.

Do you – can you give us maybe a better estimation of what percentage might actually close if you have an idea?.

Yes. The ultimate goal would be mostly to refranchise. It’s not that every single one of those is underperforming. There’s a variety of reasons that are leading to the evaluation, but those are opportunities that we first look to refranchise and from there. So I would think the actual closures would probably be similar to our historical closure rate.

And we just don’t have a significant track record of closures in the system, which is less than 1%. So again, I think that’s something that would be further down the pecking order from a priority perspective..

And then finally, I think you said that for the first time, some of your units actually comp negative, is that correct? Because I couldn’t hear that very well. I just want to be clear on that..

No. Just as a system, the only other quarter that we’ve had a negative comp was in the Q2 COVID quarter back in 2020. So to post a negative 1% comp for our greater than 48-month clinic is unprecedented for our system. And that’s really the point we were trying to make..

Okay. But you gave that information during your previous August call, too, right, I believe that....

That’s correct. That’s correct..

All right. Well, thank you. I’ll get back in the queue..

Thanks, Richard..

Thank you. And our next question today comes from George Kelly at ROTH MKM. Please go ahead..

Hi, everyone. Thanks for taking my questions. First one is the topic you were just covering about your expectations for comp growth in the back half. Just curious if you can be more specific on how far it could fall from that 1% negative comp growth you just posted. And then second question on the same topic.

How can you reaccelerate? What are you doing to try to get that positive again? And I understand marketing optimization is probably a big part of that.

But are there any other levers you’re considering like adding products to your stores or maybe tweaking pricing again or anything else that’s under consideration?.

Yes, Jordan. I’ll take the first part of the question there, and then I’ll turn it over to you, Peter, if that’s all right..

Yes, that would be great..

As far as the second half comps, we don’t guide on comps. As mentioned in the transcript, George, we do expect you can see continued headwind as it relates to the comp in the second half of the year. And obviously, we’re doing a number of activities to specifically address that. So with that, I’ll turn it over to you, Peter..

Yes. And George, the number of activities that we’re doing that we can influence outcome. Yes, there’s the factors outside that we don’t control. We talked about it before, some of this economic uncertainty.

But absolutely, if you look at the 3 core metrics that drive the business, we have our new patient count, we have our conversion rates, and we have our attrition. And we’ve talked in the past calls is that the attrition and the conversion are strong or improving.

It’s that new patient count where we’re really seeing the softness, which has influenced, I think, the comps. And so I think with Lori coming on board and really looking at our entire marketing program, specifically on the digital side, gives us an opportunity to revamp and really evaluate and make sure that we are using that spend most effectively.

And so we’ve been working very hard on putting our automated marketing program in place. We launched that first in May. We’re moving to – that was on all by e-mail. It’s now moving to SMS text, I think, this month. So there’s a whole series of activities on that marketing side that we can do to improve that new patient count.

We have other 2 sources for new patients and one is referral. And the other is our what I’ll call that gorilla local marketing activity. And in the pandemic, I think a lot of our clinics got used to doing more on that digital spend and putting less attention on the referral and on that growing marketing.

And so one of the things that we’re really focused on is what we call back to basics. We’re really looking at making sure that our doctors are providing that world-class service and then asking for the referral in the process. Right now about 30% of our new patients are coming directly from that referral activity. Then listen, this is small box retail.

You’ve heard me talk about that a lot. And so what we know is we’ve got to educate the consumers who work, travel and live in that 5- to 15-minute radius around that box and educate them that you’re there when they need that product or service.

So we’ve got to make sure we’re doing that coupon drop that we’re doing that science there doing the outreach to the schools, the gyms, all the activities that are just so traditional in that space that has to be done to educate that consumer that you’re there.

So that’s really where we are primarily focused on trying to make sure that we’re addressing that softer comps than we’ve seen historically..

Okay. And then next question is on the owned business. I think you said in the press release that the 10% is a first step – and so I’m curious, that sounds like sort of, I guess, stronger language than you offered a month ago.

So I’m curious what else could follow? And the second part of the question is how much 4-wall EBITDA is coming out of that portfolio of owned locations? I’m somewhere in the mid-teens million. Just curious if that sounds reasonable.

And what kind of multiple in refranchising would you expect to realize in these sales that you’re considering?.

Well, I’ll answer the first question and turn the second over to Jake. And you’re right, we did reference it being a first step. And that I think what we’re implying is that we’re looking at overall that portfolio. We have not made any kind of decision. We are definitely looking at that roughly about 10%.

We’ll continue to look at that to ensure that we are focused on shareholder value..

Absolutely.

And then I think I caught the last part about the multiple, but was there something in the middle there, George, that I am missing?.

Yes. I just try to back into your 4-wall EBITDA in that business. I’m getting somewhere in the mid-teens million. I don’t know if that sounds reasonable.

And then I’m just trying to think as you’re refranchising these units, what kind of multiple can you get in that process as you’re seeing them?.

Sure. Yes. And I think if you look at the contribution in the quarter from that segment, we did about $2.2 million of adjusted EBITDA. If you get into the deck, we did have sequential improvement in terms of the margin in that segment. I think we went from 10.5% to 11% to 12%, 12.5%, something like that.

So we are seeing sequential improvement in the EBITDA margin in that segment, which we hope continues, certainly, as the younger units mature. So that’s kind of your existing run rate. The things that will factor that in are the pace in which we execute on the divestitures and really addressing some of the negative comps of our corporate portfolio.

We’ve got over half of our portfolio that’s greater than 48 months in age. So that’s a pretty aged portfolio. And again, those are the clinics that are having a little bit tougher time right now in our system in terms of that 1% comp of the greater than 48%.

So those are things that will factor the long-term guide, and we really don’t break out by segment, the specific elements of guidance. as it relates to the multiple, that varies, really, the potential cash generation is more so from the potential strength of the units, as we mentioned. Again, some of these units are underperforming.

But as I look at that subset of clinics, of my greater than 24 months late, so I probably got 44 units that are less than 24 months old. If you look at those are greater than 24 months. I think there’s only 6 that have negative year-to-date adjusted EBITDA that’s material.

So we’re not talking about a large portion being underperformers and then we’ll have to embark on individual negotiations on a clinic-by-clinic basis..

Okay. And then last question for me is on G&A on the cost savings initiative.

Just curious if you could help quantify? Is it more about holding your G&A flat? Or is there a target that you’d be comfortable? You’ve had, I guess, a month since the last call, I’m just wondering if there’s a target number that we should think about for potentially next year as far as year-over-year cost savings..

Yes, we probably won’t give a target right now, George. We’re still working through all the pieces of that, but that will be twofold, right? One will be the G&A associated with some of those clinic divestitures, there as being – looking at that corporate unallocated G&A in both of those buckets are on the table for full evaluation.

So we’ll have more to speak on as it relates to that piece, but we probably won’t give a target today..

Okay. I guess one last one, too.

Do you expect to get a queue out soon?.

That is the absolute goal. Obviously, [this is] labeled as preliminary today. We are working very hard to get that out as soon as possible as our independent audit partners supporting us in that. So we hope that’s very soon. Yes..

Okay. Thank you..

Thank you. [Operator Instructions] Our next question comes from Anthony Vendetti with Maxim Group. Please go ahead..

Thanks. Yes. So I just wanted to focus on the – on the 10% that you’re looking to call of the corporate owned, so that’s 13 to 14, I guess, clinics approximately. Sort of what’s the timing? What’s going into the evaluation process? Maybe just give us a little more color around that..

Go ahead, Jake..

Yes, a multifaceted approach. Again, the small subset of those are underperformance that we’re looking to divest and hopefully have accretive contributions to the overall bottom line. The other are just strategic reviews, whether it be some of the clinic specific issues.

We mentioned some of the areas have lost an anchor or certain factors in those particular trade areas have made us reevaluate a site and others are just determinations based on overall cost savings initiatives and things of that nature. So a pretty....

And truly in leveraging. I’m sorry, Jake, but also leveraging outside the 4-wall support. I mean that’s one of our drivers there..

Okay. Okay. And the timing is the evaluation process, the rest of 2023 – or have they been identified and then it’s just a matter of when you would sell them, close them down? What – is that a 6-month process? I’m just trying to understand the....

Sure. And Anthony, they have been identified. The process has begun. And then obviously, once you go down that path, you want to do that as quickly as possible. They all have the timing of their own. So we’re doing it, as we said, methodically, carefully. There’s a lot of factors involved. So this isn’t just like a fire sale and run away.

It’s strategically reviewing and addressing these handful of clinics..

Okay. So the – so to sum it up, they’ve all been identified and some – obviously, there’s an urgency to it, but each has their own timing depending on factors that you’ll evaluate each one on an individual basis in terms of what’s best for that at that particular time..

Okay, correct..

Thank you. I’ll hop back in the queue..

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Peter for any closing remarks..

Thank you, Rocco, and thank you all for joining us today. Tomorrow, I’ll be at the Lake Street Big 7 Conference, and Jake will be at the B. Riley Securities Consumer Conference. If you can attend, or would like to have a call, please contact Kirsten Chapman of LHA Investor Relations, and thank you and stay well adjusted..

Thank you. Ladies and gentlemen, this concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day..