Good day ladies and gentlemen. And welcome to The Joint Corp. second quarter 2018 earnings conference call. At this time, all phone participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Kirsten Chapman, LHA Investor Relations. Ma'am, please go ahead.

Thank you operator. Good afternoon everyone. This is Kirsten Chapman of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our second quarter 2018 operating metrics and growth strategy. Controller, 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 ir.thejoint.com/events. Today, after the close of market, The Joint Corp. issued its financial results for the quarter ended June 30, 2018. If you do not already have a copy of this press release, it can also be found in the Investor Relations section of the company's website. As provided on slide two, please be advised, 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 important factors relating to our business that could also 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 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 risk 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 any of 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 as well as management believes they provide a more transparent view of the company's underlying operating performance and operating trends. A reconciliation of net loss to EBITDA and adjusted EBITDA is presented in the press release. The company defines adjusted EBITDA as before acquisition related expenses, bargain purchase gain, loss on disposition or impairment and stock-based compensation expenses. The company defines adjusted EBITDA as net income or loss before net interest tax expenses, depreciation and amortization expenses. Please note that the restatement required in accordance with ASC 606 which change the way franchisers recognize revenue led us some minor changes in the numbers reported in 2017. In order to have a more meaningful comparison, we use the restated figures. Turning to slide three, it's my pleasure to introduce CEO, Peter Holt. Please go ahead, Peter.

Thank you Kirsten and thank you all for joining us. It's a pleasure to speak with you today. For another quarter, our accelerating growth was driven by greater number of clinics as well as increasing number of new patients and existing patients using us more often. And with that, I would like to review the second quarter 2018 compared to the same period last year. Gross system-wide sales grew 29%. System-wide comp sales or same-store retail sales of clinics that have been open for at least 13 full months increased 25%. Revenue grew 26%. The bottom line continued to improve towards sustainable profitability as GAAP net loss of $43,000 improved $1 million and adjusted EBITDA profit of nearly $700,000 improved by $1.1 million. Further, cash and cash equivalents increased to $4.6 million at June 30, 2018, compared to $4.2 million in December 31, 2017. And in April, we acquired our first corporate owned clinic since meeting our milestone of achieving positive adjusted EBITDA. More about that in a minute. Before we get into the details, I would like to welcome our newer investors and provide some background on our company. The Joint's mission is to alleviate pain and help move our patients towards a healthier lifestyle, the sweet spot of the growing health and wellness industry. The Joint's purpose is to improve the quality of life for patients we serve by providing quality and affordable chiropractic care. Our doctors focus on patient care on pain relief and ongoing wellness to promote a healthy lifestyle. We do this in a convenient retail setting that uses no appointment, walk-in only, no insurance, membership-based services. Turning to slide four regarding our portfolio. During the second quarter, we opened eight franchise clinics bringing the total number of franchise opened to 15 clinics by quarter…

Thank you Peter. We have provided detail on our financial performance for the second quarter 2018 compared to the second quarter 2017. Please note that our segment data will be available on our 10-Q which we expect to file on Friday, August 10. Turning to slide nine. As Peter mentioned, we continued to deliver strong growth in our metrics. I will compare second-quarter 2018 to second quarter 2017. Gross sales for all clinics open for any amount of time grew 29% to $39.4 million. System-wide comp sales for all clinics open 13 months or more increased 25%. And more significantly, system-wide comp sales for mature clinics, those open 48 months or more, increased 16%, further pushing the boundaries of our business model. At June 30, our corporate clinic segment consisted of 48 clinics, 16 clinics are greenfields built from the ground up and 32 of buybacks purchased from existing franchisees. Gross sales for the buybacks which we have now owned for an average of 33 months have increased on average 73% from the month prior to acquisition through Q2 demonstrating our capacity to successfully manage these clinics. Turning to slide 10. Revenue for the second quarter of 2018 grew 26% to $7.6 million from $6 million in the same period last year. Of the $1.6 million increase, corporate clinics contributed 48% and franchise operations 52%. The revenue improvements in both our corporate clinic and franchise segments are driven by the increasing comp sales that our clinics continue to experience as they mature. Increased sales in our corporate clinic portfolio is attributed to the marketing and operational improvements we have implemented. Franchise operations segment revenue growth was due to the higher sales from both existing clinics and from adding 29 clinics since the end of second quarter of 2017. Cost of…

Thanks Jake. Turning to slide 11. Our growth indicators for 2018 remain strong. As noted earlier, in 2018 we have sold 34 franchise licenses through June, compared to 37 for all of 2017. Our regional developers are very active in the field, delivering 82% of the license sales through June 30 of this year. Also, we reengaged in our deliberate and measured corporate clinic growth strategy. With that, we are reaffirming our 2018 guidance. Totally clinic openings are expected to be in the range of 40 to 52, including 40 to 50 new franchise clinics, up to two corporate owned or managed greenfield clinics and up to three buyback clinics which are existing clinics acquired from franchisees and will not change the total clinic count. We continue to expect revenue to be between $31 million and $32 million compared to $25 million in 2017 and we expect positive adjusted EBITDA to range between 2.5 million and $3.5 million, improving from a loss of $274,000 in 2017. This reaffirmed guidance reflects our decision to implement the third-party software solution. Now turn to slide 12. The Joint has a significant growth opportunity. Already, chiropractic care has reached 17% of the $90 billion spent on back pain alone and that's only 2% of the $650 billion-plus spent in pain in the United States annually. Trends among millennial, aging baby boomers and a nation struggling to overcome the opioid epidemic indicate that more and more patients will turn to chiropractic in the coming years. And our data supports this trend. In 2017, 22% of our new patients system-wide were new to chiropractic. We believe The Joint's concierge, no appointment, no insurance model provides greater accessibility, simplicity and other advantages that are increasingly resonating with today's patients. Direct primary care or concierge care is growing…

[Operator Instructions]. Our first question comes from the line of David Bain with ROTH Capital. Your line is now open.

Great. Thank you. First, congratulations, particularly on the EBITDA result. My first question is on just ownership levels. Just given where unit return any growth metrics are where we are consistently seeing them come out at the new breakeven timeline, the cost of acquisitions you have made versus your trading multiple and what I think is a clear inflection to positive recurring EBITDA, is there not more urgency towards unleashing a higher ownership goal at this point? And I understand and I think investors definitely appreciate the discipline you have implemented, but is there a green light metric we are waiting for to become more aggressive on that front?

Dave, it's great to talk with you. And when you say ownership goal, I am assuming that you are talking about corporate ownership, correct?

Correct.

Because obviously we are very aggressively focused on expanding the footprint and specifically we know that the best, the greatest part of that growth will come from our franchise portfolio. And the answer is, yes, that we are absolutely committed to the development of our corporate portfolio that we have not really given guidance for 2019 about what that looks like. We are in the discussion about what that would mean and the capital requirements associated with that. But right now, we are sticking to our guidance of zero to five corporate clinics in 2018 and really trying to make a very good decision about the strategic long term value of this organization.

Okay. Fair enough. And then just to follow-up on the lease LOIs you signed. Is that in a strategic cluster or is that more targeted by location? And then any color as to what jurisdiction that could be in?

Well, like we said, when any clinics that we looking at for 2018, it has to be where we currently have outside the four wall support. And of course, that would mean in the three states that we are operating. And that would be California, Arizona and New Mexico. And so the LOIs are in locations that are really clustered where we already have a portfolio of corporate clinics so we can leverage that overhead and then take advantage of the clustering of that markets we are already in. And so the LOIs we are looking at are in really those three states.

Okay. Great. And then just final one, just so I understand, on the regional developer acquisition rights. Does that mean that the economics remain the same in terms of the revenue stream to the parties for the existing units but now the market opens for you to pursue directly? Is that the adjustment? I was just hoping to kind of get some clarity on that?

Sure. What that means is that, obviously the regional developer, we share and we split the franchise fee with the regional developer. We share 3% of the 7% royalty that we collect. We acquire those rights back. And so now we would directly serve that market and that means the numbers for the franchisee don't change. They will still pay the same franchise fee. They still pay the same 7% royalty. The differences is that we will not be splitting that 3% royalty with that regional developer and instead we will be directly supporting, in this case, the Las Vegas market.

And I am sorry, one last one, Peter. Are there any financial metrics from that you can share on the acquisition of rights?

No. We don't have any metrics on it. We reached a fair price between the two parties and I will tell you, David, in my experience in franchising, it's very normal over time that the franchisor once you see the regional developers out there, they develop it and the market matures that it's not unnatural for you to come back and acquire those rights back and to directory serve it.

Okay. Very cool. Congratulations again.

Thank you very much.

Our next question comes from the line of Mike Malouf with Craig-Hallum. Your line is now open.

Hi guys. This is Eric Des Lauriers, on for Mike. Thanks for taking my questions.

Sure Eric. How are you doing?

I am good. How are you?

Very good.

I was wondering if I could dig in a little bit more on the regional developers and the overall process of going from licenses sold to franchise opened. It seems like you guys have had a really good acceleration over the past couple of years in terms of getting more licenses sold. And I am just wondering how we should expect that to matriculate into franchises opened?

It's a great question. And as you know, it's a two part process to get a clinic open. And the first part is to sell the license. And then the second part is to find the right location, negotiate the lease, get the clinic built and then open up. And historically, that timeline from the time that you have signed that license to the time of the clinic is open ranges, let's say, between six and 12 months. Now you may have a situation where somebody has signed for the opening of three clinics and typically they won't open three clinics at once. It's kind of a progression. So they may open the first clinic by the first nine months, the second clinic, six months later and the third clinic, six months after that. And that the biggest time used in that six to nine months or six to 12 months is really in site selection. And so if you are looking at it, we talk about it, okay, for 34 sales through June 30 of this year and we are talking about a lifecycle of six to nine months before that clinic opens, so we know all of the clinics that we are selling in the last couple months going forward will be opening up in 2019 and beyond.

Okay. That makes sense. I appreciate the color there. And then I wanted to talk a little bit about your third-party technology platform that you guys are investing in now. It seems like a great use of capital and I think you guys, along the technology upgrade theme, I think you guys had also talked about your desire to upgrade your app to include such things as a live busyness metric or just be able to see how the --

It's a mobile check-in really.

Yes. And just then to be able to see how busy the clinic is at a given time. And I was just wondering if you had any updates on there, if you are still looking to do that by yourselves or if that could also be something that you reach out to a third party for?

At this point, I think what we have realized is, given the size of our network, given the opportunities of the third-party providers that are out there that it makes a lot more sense to be focused on the acquiring and adapting these platforms to our use as opposed to us trying to build and manage it ourselves. And I have said this before that we are not an IT company, that we are a chiropractic care company that's using a retail format and franchising. And so I think that when we look at these enhancements and certainly one of them is the mobile check-in or digitalizing our intake forms and then just the growing plethora of different opportunities that you can create, whether it's a patient portal that's tracking your whole relationship with us, that we see using that third-party platform and adapting to our needs really puts us in a position to be much more effective in bringing in these new enhancements that would be a lot more complicated for us to build and maintain on our own.

That makes sense. And do you guys have any update or timeline on when you expect these IT upgrades to be completed?

Well, I think first of all, it's an ongoing process. As you can imagine with IT, you are continually upgrading and enhancing. That process never stops. That we are in the final negotiations where we have gone through quite a bit of research in trying to determine what would be in fact, the best provider for this platform. And that we are still in the process of finalizing that agreement. And once that agreement is finalized, that really we can talk more detail and timeline of its implementation. But from our perspective, there is an urgency to get this in place and up and running and supporting our network as quickly as possible.

That's good to hear. Thanks for taking my questions.

Pleasure. Take care.

[Operator Instructions]. Our next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is now open.

Hi guys. This is Frank Takkinen, on for Brooks O'Neil. Thanks for taking my question.

Hi Frank. Pleasure.

My first question is kind of about your customer base and I was curious about how you guys feel about the younger demographic? And how you see then starting to move into this chiropractic area? And if you possibly have any data about the different age groups that you guys catered to right now?

We do. It's a great question. And just quite frankly, my experience of working here is that we have one of the broadest demographics that I have ever had the pleasure to work with in this kind of a small box retail environment, that if you look at just our overall patient base is that there is no question that millennials make the largest segment of that group, followed by the baby boomers. And if you looked at the history of chiropractic is genre of baby boomer and we grew up with this ethos or this mythology that chiropractic care is quackery. And that you are really seeing a fundamental change in that particularly in the medical community where before many years ago that they were very anti-chiropractic, today you have some of the largest associations for the medical community that are endorsing chiropractic to address lower back pain before you try the knife or opioids, try a spinal manipulation. And this is just really a complete turnaround where traditional medicine is in fact endorsing chiropractic as a methodology of pain. We are getting out of pain. If you look at our customers, our target base is that we skew slightly female, that our ideal ranges between 25 and 55 years old. The average household income is somewhere between $50,000 and $100,000. That we skew, we are predominantly in suburbs where we over-index in Hispanic. We over-index on education. We over-index on aerobic exercise, as you can imagine. And that it is really broad and deep demographic that supports our concept. And I think particularly as look at the millennials and younger, they simply do not have this prejudice about chiropractic that was much more traditional in my generation. And in fact, they are seeking out more natural, holistic ways to get out of pain and I think a natural driver to our business to increase growth of our business.

Great. That helps a lot. And then something you guys have talked about on previous calls and I apologize if you talked about a little bit on this one, but can you update me on what you guy's sense is about the pricing outlook?

That we did a price increase in 2016 and that we do not have any plans at the moment to introduce a price increase across the country. Our pricing structure is basically for membership. We have three categories based on rally the demographics of where we are. So it's either $59, $69 and $79 and that you pay that monthly and with that $79 or $69 fee you get four adjustments for that month. We also have an initial fee. So if you are coming in for the first time, it's $29 for that consultation, examination and adjustment. And then if you don't want be a member, then we also have kind of a package program where you can buy a six-pack or a 10-pack that just a walk-in rate for us is $39. And that we are constantly looking at what's the most expected pricing structure that we would hopefully for the use of our patient. So that is definitely something that we review on a periodic basis and can potentially open up different pricing program based on the usage of our patients who have been doing some testing on that. But there's not across the board price increases planned.

Great. Thanks. That's all for me. And congrats on the continued progress.

Thank you very much.

[Operator Instructions]. I am showing no further questions in queue at this time. I would like to turn the call back for closing remarks.

Thank you very much Liz. Thank you all for your interest. I am going to leave you with a patient testimonial. From the outside, Liz Ramos looks like a typical 25-year old, but inside she is in near constant pain. Three years ago she was diagnosed with Lyme disease which causes her to suffer daily from migraines, back pain and other joint aches. In the beginning of her medical journey, Liz was placed on a plethora of prescription medications. She was unable to eat or sleep and lost 30 pounds. As her symptoms worsened, Liz became more discouraged. I decided to take in my health in my own hand, she said. I found The Joint and now it plays a role in my entire treatment plan. Before she visited The Joint, she felt constant throbbing and shooting pain throughout her lower back. She often did not feel well enough to keep all medical appointments that she had for various treatments. She is grateful The Joint offers walk-in adjustments. Fortunately, after the first adjustment, her symptoms lessened. She said, on a scale of 1 to 10, her pain dropped from a level eight to level two. Liz is likely to feel these symptoms of Lyme disease throughout her life, but she is thankful that The Joint and the chiropractic care, they help her with much-needed relief exactly when she needs it. Thank you and stay well-adjusted.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may all disconnect. Everyone, have a great day.