Good day, and welcome to The Joint Corp. Third Quarter 2023 Financial Results Conference Call. [Operator Instructions]. Please note this 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, Harmony, and thank you, everyone, for joining us this afternoon. This is Kirsten Chapman of LHA Investor Relations. Joining us on the call today are President and CEO, Peter Holt; and CFO, Jake Singleton. Please note that we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the close of the market, The Joint issued its operating metrics and financial results for the quarter ended September 30, 2023. If you do not have a copy of this press release, it can be found in the Investor Relations section of the company's website. As provided on Slide 2, please be advised that today's discussion includes forward-looking statements within the meaning of the safe harbor provisions in the Private Securities Litigation Reform Act of 1995. All statements other than the statements of historical facts may be considered forward-looking statements. Although the company believes the expectations and assumptions reflected in these forward-looking statements are reasonable, it can make no assurances that such expectations or assumptions will prove to have been correct. Actual results may differ materially from those expressed or implied in forward-looking statements due to risks, various risks and uncertainties. As a result, we caution you against placing any undue reliance on these forward-looking statements. For a discussion of these risks and uncertainties that could cause actual results to differ from those expressed or implied in the forward-looking statements, please review the risk factors detailed in the company's reports on the Forms 10-K and 10-Q as well as other reports that the company files from time to time with the SEC. Finally, any forward-looking statements included in this conference call are made only as of the date of this call, and we do not undertake any obligation to revise our results or publicly release any updates to these forward-looking statements in light of new information or future results. Management also includes commonly discussed performance metrics. System-wide sales includes revenue at all clinics, whether operated by the company or by franchisees, while franchise 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 franchise base. System-wide comp sales used in -- from both the company and company-owned, managed and franchise clinics are those, in each case, have been open for at least 13 months and exclude any clinics that have been closed. The company also uses adjusted EBITDA and provides a reconciliation to GAAP in its press release and presentation. Turning to Slide 3. It's my pleasure to turn the call over to Peter Holt. Please go ahead, sir.

Thank you, Kirsten, and I welcome everybody to the call. During Q3 2023, we continue to execute our mission to improve quality of life through routine and affordable chiropractic care. The strength of our franchise concept remains strong as we continue to revolutionize access to chiropractic care by providing affordable, concierge-style, membership-based services in convenient retail settings. However, ongoing economic uncertainty and continued cost pressures have impacted our corporate clinic portfolio performance. After evaluating options for improvement, the Board has authorized management to initiate a plan to refranchise or sell the majority of our company-owned or managed clinics. Management intends to retain a portion of highly performing corporate clinics. This refined strategy will leverage our greatest strength, our capacity to build the franchise to drive long-term growth, both for our franchisees and The Joint as a public company. We intend to use the clinic sales proceeds to support marketing and patient acquisition and to reinvest in our company through a possible acquisition of regional developer territories and potential stock repurchases. The reduction of corporate clinic portfolio will also facilitate our unallocated cost reduction efforts. Jake and I will elaborate more on these initiatives and our progress in a moment. Turning to Slide 4. I'll review our operating financial highlights for the third quarter of 2023. System-wide sales grew to $119.3 million, increasing 8% compared to Q3 2022. Comp sales for clinics that have been opened for at least 13 full months were flat at 0%. Revenue increased 11%, compared to Q3 2022. Adjusted EBITDA was $2.9 million for Q3 2023. At September 30, 2023, our unrestricted cash grew to $16 million, compared to $9.7 million on December 31, 2022. Turning to Slide 5, I'll discuss our clinic metrics. During Q3 2023, we opened 26 clinics, 24 franchised and two greenfields.…

Thanks, Peter. Turning to Slide 8. I'll review our clinic comps for Q3 2023 compared to Q3 2022. System-wide sales for all clinics opened for any amount of time increased to $119.3 million, up 8%. The System-wide comp sales for all clinics opened 13 months were flat at 0%. System-wide comp sales for mature clinics opened 48 months or more decreased 5%. This comp reflects fewer than anticipated new patients at some of our more mature clinics. Revenue was $29.5 million, up $3 million or 11%. Revenue from franchise operations increased 9%, contributing $11.6 million. Company-owned or managed clinic revenue increased 13%, contributing $17.9 million. The increases represent continued year-over-year growth in both the franchise base and the corporate portfolio. Cost of revenues was $2.6 million, up 11% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $4.3 million, up 22% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise and corporate base, an increase in local marketing expenditures by the company-owned or managed clinics and the timing of our national marketing fund spend. Depreciation and amortization expenses increased $569,000, up 32% compared to the prior year period, primarily due to the increase in the number of greenfield developments and acquired clinics. G&A expenses were $20.2 million, compared to $17.8 million. The change reflects the cost to support the increased clinic count. However, the year-over-year rate of increase slowed, it was 14% for Q3 '23 over Q3 '22, down from 39% from Q3 '22, compared to Q3 '21. Also, we have continued certain cost control initiatives such as hiring freezes, travel reductions, and the elimination of non-core projects. Loss on disposition or impairment was $905,000 compared to $264,000 in the…

Thanks, Jake. We're excited to execute our new strategic focus. By converting the majority of our corporate portfolio to franchise clinics, we're taking clear action to strengthen the health of our franchise network to increase our cash flow to reinvest in the business and to innovate additional products and services on the clinical level, and to improve clinic level performance across the company. We believe these changes will enhance the value and performance of the company, whether from the perspective of a franchisee or a stockholder for the following reasons. Number one, the market opportunity continues to be large. According to IBIS, people in the U.S. spent $19.5 billion a year on chiropractic care, and our franchisees have barely scratched the surface, capturing only 2% market that -- to date. Two, the market is expanding. The drivers for chiropractic care, pain, Opioid, and obesity epidemic continue to persist. According to Kenley Insight, the industry five-year compounded annual growth rate is greater than 5%, and the joint gross sales have consistently outperformed that, delivering 12-year CAGR of 62%. Three, The Joint continues to expand the market. For example, in 2022, of the 845,000 people who opened the door to The Joint for the very first time that year, 35% had never seen a chiropractor before. Four, we have a clear first-to-market advantage. With over 900 clinics, we have greater presence in all other franchise chiropractic systems combined. Our national brand presence creates economies of scale, which sets the flywheel in motion that drives even greater brand recognition. Five, our digital footprint leads the Internet. Today, The Joint is the largest online publisher for information about chiropractic in the industry, and we intend to leverage it even more to drive increased patient acquisition. Finally, our concept leads franchises and chiropractic care businesses, making The Joint a top choice for entrepreneurs. Our success is frequently recognized with accolades from Franchise Times, Franchise Business Review, Entrepreneur Magazine, FRANdata, and more. And with that, I'd like to thank our community of doctors, of chiropractic wellness coordinators, franchisees, regional developers and employees for their passion and dedication to The Joint. We could not be achieving the success that we are without their dedicated efforts. And with that, Harmony, I'm ready to open up for Q&A.

[Operator Instructions]. Your first question comes from Jeff Van Sinderen from B. Riley, FBR. Please go ahead.

This is Richard Magnusen in for Jeff Van Sinderen. Thank you, for taking a call. To start off, you gave us some detail regarding sort of about different cohorts and the comps. But what further detail can you give us about the trends among the different cohorts? And specifically, what are you seeing with the latest cohorts that might stand out?

Yes. Richard, I don't think we'll give any further disaggregated information. I think what we can say is, obviously, flat comps for the quarter is not where we want to be. We've seen some positive momentum as we start -- as we start Q4. But the issues, especially as it's relating to our mature clinic portfolio continue to be centered around our new patient headwinds. And that's why we've dedicated a lot of our efforts in support of Lori and the initiatives that Peter spoke about on the call.

Okay. And then what metrics are you seeing in retention and new member adds?

Sure. What we're seeing is, of course, you know the key three metrics that we focus on is new patient counts, attrition -- or excuse me, conversion, so they join as a member, and then attrition. And that we historically have been doing great with our conversion numbers. And so, as we talked about before, a pre-COVID number, our total conversion was running 44% to 45%. So far this year, it's running over 50% system-wide. When we look at our attrition rate, again, pre-COVID, that was probably running around 11% -- around 13%. And today, that's system-wide running around 11%, with the corporate portfolio, even less than that. So, the one metric that's really been hit is that new patient count. And so, if you look at that new patient count from our highs in 2021 to 2022, it's down by 14%. And then if we look in '23 year-to-date, we're probably another 4% down quarter-to-quarter, if we just compare quarter '23 to quarter '22. So, we are seeing it kind of bottom out, anticipating that we're moving to the other side of that new patient count. But that's the key metric that we really want to focus on. The other thing that I mentioned is that we definitely recognize that we can take a much more nuanced approach to our existing patient base to make sure they stay with us longer. And when they do drop, to being sure that we're getting them back in earlier because we know that on average, those patients who leave us, 25% of them will come back within the next six months. So that's an important element that we're really going to focus on.

Okay. And then my last question is that, as the new CMO focuses on leveraging patient data, are you layering on new capabilities with your software system at the clinics? And then aside from the new marketing demands on the software, have you achieved most of what we believe you can or what the software can provide in its current form?

Well, I'm going to answer that last question. And no, I don't think that we're anywhere near touched on the real capacity of our new IT platform to help drive clinic performance. As we've talked about on some of the earlier calls that it's been slower than we anticipated, getting some of these bugs cleaned out and the challenges that's created. But I think that we've made enormous inroads this year. And we really are now starting to focus on what -- how do we leverage that resource or that asset. And so that we're focusing on the creation of a patient portal, a mobile check-in, all the elements of being able to do that automated marketing to your patient base so that you can make sure they're receiving the right message at the right time and where they are in their patient journey. So, I think we really have a lot of room to grow to continue to really leverage that asset of the -- of our IT platform.

And the first follow-up question again?

Yes, as the CMO focuses on levering to patient data, are you having to layer on new capabilities to that software to accommodate that demand?

Yes. The short answer is yes. There is a program that we're using, an inner bullet that does our automated marketing, and we've done that now with -- on an e-mail basis. We're moving it to text. And that she -- we have actually done quite a bit of research on the patient journey as -- earlier in this year, that Lori is able to really leverage and use that as a model or guide as she refines our new patient marketing strategy going forward.

Your next question comes from JP Wollam from ROTH MKM. Please go ahead.

If we could maybe just start, in terms of maybe really dialing in on some of the problems we've had with the new member growth. One, is there anything you can point to that, maybe said this is a problem for the industry rather than maybe a problem related to new member acquisition at The Joint? Just something to make sure that we know it's not losing customers to other chiro brands, but rather maybe something going on with consumer health. And then as part of that, just anything to point out in terms of consumer spending? And maybe trade down to more 2 times a month visit and less membership or less four-wall plus kind of visiting customers? Anything to point out on your spending in health? Thank you.

Sure. That's a great question. And the way I would answer that is, if you look at our ideal patient, is that the ideal family income is running between 50,000 and 105,000. And so, when we look at -- if you think about last year, what were we talking about, oh my gosh, the pending recession, the recession. Of course, we know that we're not in a recession, but you still have 49% of the American people who are saying that they are in a recession. And so, I think if you look at our patient base, and you look at what's going on for them as it relates to inflation, as it relates to higher interest rates, as it relates to higher mortgages or rents, is that they have, in fact, been impacted by some of these economic issues. And I think that, that is very much the core of our patient base. One of the key attributes of The Joint is absolutely affordability. And so, I think that while we are not in a recession, let's be very clear about that, but I think that our patient base is more impacted because that growth that we've been experiencing in the economy has not been evenly spread across the economy. So, I think that's a part of it. We're not really seeing any kind of indication that our new patient count is being drawn away by competitors. Quite frankly, where I sit here, with the 919 clinics open, I'm surprised by how little competition that we really have. Yes, there are some very small direct competitors that are absolutely mimicking our modeling -- our model. But they're kind of localized in certain markets. And so, I don't think it's been a competitive issue that's impacted our new patient counts.

Understood. Very helpful. And then maybe if we could just talk about the corporate-owned portfolio for a minute. I understand the not wanting to kind of put a timeline or cadence on it, but is there anything -- just as we really start the process, any kind of number you have circled back in terms of size of the corporate portfolio you'd hold on to? And then just the other part of that is, can you expand on how the sale negotiations are going? Is its existing franchisees that are looking to take on an additional unit or what kind of buyers are out there?

Sure. To answer the first part of that question is that, we made it very clear that we will be selling off the majority of our corporate portfolio. At the end of the quarter, we had 136 clinics. In September, we started -- we made an announcement that we were going to look at kind of our bottom 10%, and that we would address either by closing those clinics, franchising those clinics or relocating, and that we're well in that process. And so, as I said, we've sold two, we have two that are about to sell that we've closed two units. And so, what I would say is that, so far, in terms of who the buyers have been of that segment that we talked about in September has been existing franchisees. And when we go forward and think about who would be the typical buyer of this majority of clinics that we are going to be selling, again, we would absolutely expect it to be existing franchisees. They've already expressed interest to us that they're interested in expanding their market area or into other markets just because they believe so much in the business. That doesn't mean that we wouldn't also be open to selling to qualified new franchisees new to The Joint. But again, the key is you want to make sure that you are selling your franchise to quality businessmen and women who really know and effectively can run clinics. So that's going to be the criteria for us. As we said, this is not a fire sale. This isn't okay. We have to have these off our books by x date. These are valuable assets that we believe that given the market conditions that we're in, some of the challenges on the margins with increased patient-incurred labor is that this is an effective strategy for this organization.

Your next question comes from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead.

Thanks for taking my question. So first, just in terms of the multiples. Just -- sorry, if you've covered this already. But in terms of the kind of value that you are looking to achieve, is it a multiple of the 4-wall cash flow that's being generated? Or is it a multiple of the revenue of the clinic? How are you determining what the appropriate valuations are, especially given that financing is tougher to come by and more expensive for potential franchisees that might be looking to acquire?

Sure, Jeremy, great question. We've really gone on a clinic-by-clinic basis across a range of valuation methodologies. So, looking at the performance on a clinic-by-clinic basis, running individual DCF models, looking at a range of different valuation, multiple techniques, whether it's sales, earnings, cash flow, et cetera, and it's certainly given us an idea and some negotiating ranges on a per clinic basis. There is a range of performance across the portfolio. So, we do have high-performing clinics that will command higher sales proceeds in-demand areas that might tick up from a multiple’s perspective. And then that ranges all the way to a small subset of underperformers. And then we've got young clinics that are still ramping. So, each of those has a unique way to view valuation. And for competitive reasons, we probably won't put out metrics on what those multiple targets are or anything of that nature. But we have done a very detailed analysis to give us a basis for what they think they're worth. And then we'll continue those negotiations with the related prospective buyers.

And so, in terms of the prospective buyer, can you give us a sense for -- are you looking for, like mid-tier franchisee types? Are you looking for clinicians maybe that already have competing chiropractic clinics? What type of -- kind of -- what's your type that you're looking for?

It's a great question. And I would say that it's probably all of the above. If you look at the network today, is roughly 35% of our franchise communities, the doctor chiropractic is, in fact, the franchisee. And then the majority of them, obviously, are businessmen and women who are hiring the doctor. And so, I think that absolutely, there's opportunities for doctors to be able to buy a clinic or clinics. And again, they -- especially if they're in the business, they understand the business and can be effective in running it, that's very -- those are all positive attributes that would help us in that process to continue to make sure those clinics perform. I think that what I've learned over the years in franchising is you know better than your operators. And so that you're looking for quality business people who know how to run a business. Yes, this is The Joint and it's always better, if they come directly from The Joint experience because then you don't have that same learning curve. But you've got some very successful franchisees in other concepts that have also shown that they can run The Joint very effectively. So, we're going to be looking very much at the quality to be able to run a business as a criteria for the sale.

Got it. And then just coming back to this process, and it can be challenging to go through a refranchising effort. And really, to be matching the lost revenue versus the embedded corporate costs, in particular. Can you give us a sense for what's a reasonable time frame if the majority, in terms of the number of companies-operated clinics, like 136 at the end of the quarter? Is it feasible to do 25% of those in one year? Or is that just too aggressive in terms of the timing? Is there a range you might be able to provide us with in terms of what you think can happen in year one, year two?

Yes. I can appreciate the desire to want to hone that in. I think it's important to reiterate that these are clinics of value, right? This is not a fire sale. We're not going to be rushed through this process. So, it's really hard to put a defined timeline on that, Jeremy. So, we probably won't state anything publicly as it relates to that. We've got...

Until we get further into the process.

Absolutely.

Jeremy, as we get further into this, we'll be much more able to talk about kind of timelines and time frames. But at this stage is that it's a little harder to give you, okay, it's going to take x amount of time, or x percentage will be sold by a certain time frame. It's a priority. It's important to us that this is absolutely an adjustment in our strategic focus, where we're focusing on the franchisees and selling off as the majority of our corporate portfolio. But it's -- but again, these are important assets that we are -- we will be putting in the hands of great franchisees who can continue to run them effectively.

Your next question comes from Aaron Lockman from Lake Street Capital Markets. Please go ahead.

This is Aaron on the line for Brooks. Are you able to hear me okay?

Yes, no problem at all, Aaron.

So just recognizing that the majority of your revenue and earnings come from the corporate side. How do you think moving to a primarily franchise concept, excuse me, will affect your public investors? Just in a general sense, trying to trying to get a bit more color on your thoughts there.

Sure. I think that -- what I would say is that when we went down this path of -- when public to create a portfolio of corporate units, okay, we obviously accelerate that growth as we went into '21 and '22. And I think, as I reflect on kind of where we are and some of the challenges we face, both externally in terms of some of these market economic trends that have impacted our business. And at the same time, we've seen some increase in the cost, particularly labor. And so, I think that environment has changed enough that it makes sense for us to rethink that strategy of that corporate portfolio. You certainly see franchise systems from time to time, go back and forth on whether they want to have a lot of corporate units or they want to pull back on the corporate units. And I think that we actually looking at that environment. If I reflect on where we are in terms of the price of our stock, is that I don't think that we're getting credit for the management of our corporate portfolio. And so, this is another reason to consider as we're going down this path.

And I think it's important to remember that we're selling the majority, but we are going to maintain a portion of corporate portfolios. And we'll be targeting those high-performing clinics that are in tight kind of concentric geographic areas that will allow us to really scale back that corporate overhead. So, with the strategy, we should be able to maintain a significant chunk of the earnings potential from a smaller number of units and then allow us to continue that hybrid strategy.

Got you. Very helpful. And then just a quick follow-up. You mentioned a little bit in your prepared remarks, but have you identified tangible, and I guess, practical ways to improve the new patient starts in this current environment? Just trying to get a better sense of what that would look like and your thoughts there.

Yes. No, we have. We've been doing a lot of work. We've been using different forums. So, for example, we're doing a lot with Meta these days. We are also with TikTok, is what I meant to say. We are increasing our spend on Meta. We're doing a whole audit of our marketing spend to understand the efficacy of that and where those resources are best spent. That's one of the projects that Lori is first taking on. From that, we'll also do an RFP of really looking at that whole local store or that whole digital marketing spends. If you look at our new patient count right now, roughly 35% or 30% comes from referral. So that's just a patient having a great experience with a doctor and telling their friends. We have been able to track, for example, last year that 63% of our new patients touched us at some point digitally. And it's always hard to answer true patient attribution or new patient attribution. But we know that's only increasingly important. And so, we know, we need to be more and more effective on that spend and making sure that we're able to close that gap of generating those leads, whether it's through paid or organic search, and then making sure that we are closing them and bring them into the clinic. And so, there's some new programs we're putting in place, a call center, for example, that we're experimenting with a program where a new patient is being offered an appointment to be able to create a sense of urgency or willingness to cross over into the clinic. So, there's a number of activities. More to come on that, but we feel that we are definitely moving in the right direction to address the new patient count.

Your next question comes from Anthony Vendetti from Maxim Group. Please go ahead.

Sure. Thank you. Just looking at some of the trends, can you point to either some regions or general KPIs that you're seeing? Any positive trends that you're seeing? And then specifically on the comps, what would you attribute the relative flatness there? Is that more macro? Or -- I'm just trying to figure out what you're seeing and what you're attributing some of the trends to.

Sure. I think some of the positive trends we absolutely continue to see, and as I've mentioned on those three-key metrics, our conversion rate absolutely stay strong. It's always like I said, it was pre-COVID is running around a total conversion of between 44%, 45%. Today, it's over 50%. During the COVID, it was up to 60%, but I think that was reflective of kind of the time we're in. And if you were leaving your house to get an adjustment, you're in pretty serious pain. And so, I think that's reflective of that higher conversion rate. So even post-COVID, if we can talk about that, we are seeing a really continuing strong conversion rate. And that's very positive for the business, 84% of our sales comes from our subscription from our wellness plan. So that's an important element of this business. We're also seeing that attrition improves. Again, I talked about attrition was 13% pre-COVID. Today, it's probably running closer to 11%. A corporate portfolio is less than that. And so obviously, our patients are staying longer. The real KPI that's been impacted is that new patient count. And I think there's a number of things that are impacting that, that we've talked a little bit about. There's no question it ties to our comps. The new patient count -- the new patient hub is down, that does impact our comps for the quarter or for the year. And I think some of that, the reasons that's down is as we've talked about, is these macroeconomic issues based on who is our patient profile. We know that there's an element there. And if you look at some of the younger generations, and we have a very young patient base, they have been more impacted by some of the deep amount of uncertainty than, let's say, baby boomers, for example. And I think that there is -- perhaps, in a couple of our markets, where we're more mature, is that the new patient count, we have a lot of clicks around it, that new patient count is being absorbed by that greater number of clinics. So, it's getting spread between a greater number of clinics, which is also impacting the individual clinic new patient count.

Okay. And then on the franchise side, and then I'll hop back in the queue. With just the higher interest rates, are some of the current franchise owners that are looking to expand or new ones, are they a little bit more hesitant? Are they waiting for rate to come down? Or it's not really having much of an impact?

No, it has had an impact. And it's not -- and I talk with other franchisors, they all agree, that there's no question, there's a lot of research out there as well is that it is impacting new franchise sales. And part of that is absolutely increasing interest rates, part of that is uncertainty about the economy, part of that is inflation. And so, I do think that there is impact, and it's reflected in our franchise sales. If you go back to '21, for example, we had 156 sales that year. Last year, we had -- last year, we had 75. Year-to-date, we're here at 50. And so, we're a little below where we were last year, but I think that's a direct relationship or a direct impact on some of these macroeconomic issues that are influencing whether somebody is going to make that leap to buy a franchise, whether it's The Joint or anybody else. As we talked about, if you look at the franchisees sold in 2023, is that 58% of them were existing franchisees. And as a franchise system, there's no better validation than somebody who's already in the business, who understands it and says, "You know what, even its conditions, I want more." If you are new to The Joint, maybe not new to franchising, and you don't have that same certainty of how this operates, it makes sense for me to see -- because historically, we had been running around a 50-50 split, 50% of our new patients --our new franchisees were new to The Joint, and the other 50% were existing franchisees. And so, it makes sense to me in this environment to see that percentage of sales being driven by our existing franchisees given that uncertainty that's out there.

Thank you, that concludes our question-and-answer session. I would now like to turn the conference back to Mr. Peter Holt.

Thank you, Harmony. Before I close, I'd like to note that we'll be at the Roth Deer Valley Conference in December. And today, about 30% of our franchisees are doctors of chiropractic. And I'd like to tell you a story about one of our doctors in our systems. When Dr. P. [ph] moved to Las Vegas, he was looking for a chiropractic practice that afford him the ability to maintain a few business ventures in its prior location. The Joint provided that flexibility, no pun intended. And Dr. P. said, and I quote, "I quickly fell in love with the brand and everything The Joint represents." Two years later, he realized his hometown and yet another state didn't have any The Joint clinics. Dr. P. reported, I saw this as an ideal opportunity to embrace the challenge of marrying my passion for the brand, my experience as a chiropractor, and my entrepreneurial spirit. It almost felt like it was an opportunity that was meant to be, so we took the leap, and he hasn't looked back since. Thank you and stay well-adjusted.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.