Joint Corp (JYNT) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2018 The Joint Corp. earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I will now turn the conference ever to your host for today, Kirsten Chapman, LHA Investor Relations. You may begin.

Thank you Sonja. Good afternoon everyone. This is Kirsten Chapman of LHA Investor Relations. On the call today President and CEO Peter Holt will review our first-quarter 2018 operating metrics and our growth strategy. CFO John Meloun will detail our financial performance, then 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 and presentations.

Today, after the close of market, the Joint Corp. issued its financial results for the quarter ended March 31, 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.

Now turning to slide 2, please be advised today's discussion includes forward-looking statements including predictions, expectations, estimates and other information that might be considered 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 factors and other risks that may affect your 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 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 EBITDA as net income or loss before net interest tax expense, depreciation and amortization expenses. The Company defines adjusted EBITDA as EBITDA before acquisition-related expenses, bargain purchase gain, loss on disposition or impairment and stock-based compensation expense.

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 2007. In order to have a more meaningful comparison we use the restated figures.

Turning to slide 3, it is my pleasure to introduce Peter Holt. Please go ahead, Peter.

Thank you, Kirsten, and thank you all for joining us today. We are focused on accelerating growth. The Joint's mission is to alleviate pain and to help move our patients toward 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 an 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.

For the first quarter of 2018 we once again delivered strong financial results and achieved our third consecutive quarter of positive adjusted EBITDA. In 2018 we are well positioned to accelerate growth by implementing three key strategies: one, continue to accelerate our franchise sales; to continue to build upon our regional developer strategy; and three, expand our corporate clinic portfolio within clustered locations. I'm pleased to report that we're making progress on all fronts.

Ladies and gentlemen, please stand by. Your conference call will begin momentarily. Again, thank you for your patience. Please stand by.

Sorry about that. It looks like we lost a line there, but I think we are back on. I'm not sure where cut off, but I'm going to start from the beginning and I'm going to again thank Kirsten for joining -- and thank all of you for joining us on today's call.

We're focused on accelerating growth. The Joint's mission is to alleviate pain and to help move our patients toward 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 our patients we serve by providing quality and affordable chiropractic care.

Our doctors focus patient care on pain relief an 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.

For the first quarter of 2018 we once again delivered strong financial results and achieved our third consecutive quarter of positive adjusted EBITDA. In 2018 we are well positioned to accelerate growth by implementing three key strategies: one, continue to accelerate franchise sales; two, continue to build upon our regional developer strategy; and three, expand our corporate clinic portfolio within clustered locations. I'm pleased to report that we're making progress on all fronts.

Turning to slide 4, I'd like to quickly review some important metrics for Q1 2018 versus Q1 2017, demonstrating our continued validation of our business model.

Gross system-wide sales grew 32%. System-wide comp sales, or same-store retail sales of clinics that have been open for at least 13 full months, increased 26%. We continue to post strong same-store sales reflecting increasing acceptance of our business model with more new patients coming in the door and existing patients using us more often.

Our revenue grew 29%. Our bottom-line continued to drive toward sustainable profitability. Our net loss improved $1.4 million to $387,000 and our adjusted EBITDA improved $753,000 to $156,000. Further, cash and cash equivalents were relatively stable at $4 million on March 31, 2018, compared to $4.2 million on December 31, 2017.

Regarding our portfolio, during the first quarter we opened seven franchise clinics and closed none. Thus at March 31, 2018 we had 359 franchise clinics or 88% of our total of 406 clinics. Corporate clinics remained at 47 or 12% of the total. Then in April we re-launched our corporate clinic growth strategy with the acquisition of a franchise clinic, increasing our corporate clinic count to 48.

This acquisition represents the first step in a new phase of our growth. We are committed to expanding the corporate portfolio in a deliberate manner. We waited until we achieved positive adjusted EBITDA and moving ahead only with the opportunities that are demonstrably in the interest of our stockholders and our existing franchisees.

Achieving a positive adjusted EBITDA at both the corporate clinics and the total portfolio levels reflects the results from a great deal of hard work and fundamental improvements. After researching best practices during 2016 and 2017, our operations team implemented new standards for company owned or managed clinics, as well as for our franchisees. And I'm excited to report that the first quarter of 2018 our gross sales have hit a new high.

Further, our franchisees continue to break their own personal records. Our top -- our new top clinic is in Houston, Texas and generated $117,000 in gross sales in March, the highest of any clinic in any month to date. While we understand this level of performance is an outlier, it does illustrate how effective marketing, first-rate patient service and a focus on operational excellence can impact clinic sales.

With portfolio operations in a continual improvement phase we are now focused on opportunistically acquiring existing franchise clinics and evaluating building new greenfield clinics that fit in our overall expansion strategy.

I've been asked why franchisees sell their clinics. In my 30-plus years in building and managing franchise networks, I have found that in any given time 10% of franchisees are considering selling their franchise and the reasons vary widely. Some want to monetize the investment, others are preparing to retire, experience a health issue, going through a divorce or another life of event requiring a change in their lifestyle. We strive to maintain an open and positive relationship with our franchisees so we know when these situations arise.

Of the 32 acquisitions to date we paid on average $220,000. Our recent acquisition in San Diego, California is located among a cluster of clinics that fits our criteria perfectly. We purchased the clinic plus the patient list from a nearby closing unit for $100,000. By consolidating the two, we transformed an underperforming clinic into an immediately profitable operation. While this pricing is not to be expected to be the norm, it was a great opportunity for us.

Turning to slide 5, in addition to improving adjusted EBITDA, our new operational protocol, which includes best practices from high performers, have helped improve the time to breakeven for new clinics. At the end of the year we reported the 2017 class of the 41 newly franchised clinics reached an estimated breakeven on average of nine months, down from the historical average of 18 months. And as you can see by this slide, this class continues its path of accelerated gross sales, considerably outperforming the historical average.

We opened seven clinics in the first quarter and, in the early months of 2018, clinics far exceeding the 2017 clinic ramp. And when franchisees achieve profitability faster, this also reduces the risk of them running out of cash.

Similar to the increase in efficiency in our clinic operations, we are implementing best practices targeting the time from our franchise sales to franchise opening. We are training regional developers to more effectively manage franchisees, as well as adding corporate resources to assist in site selection, which is the biggest use of time in the lifecycle of opening clinics.

Additionally, we're working to help our regional developers begin preselecting suitable sites so that once they identify a franchisee they can move more quickly into lease negotiations and thereby reducing the time to clinic opening. We believe these measures will drive openings in the latter half of 2018 and keep us on track to meet our guidance of 40 to 50 new franchises and up to five new corporate clinics for a net increase of 40 to 52 new clinics for the year.

Turning to slide 6, additional growth indicators are also remaining strong. During Q1 we sold 16 new franchise licenses, and sold an additional 11 licenses in April alone, for a year-to-date total of 27 licenses compared to 37 licenses for all of 2017. As you may recall, it can take between 9 and 15 months to move from a sole license to an open clinic, so our accelerating increase in license sales bodes well for the growth in late 2018 and 2019.

You may ask what is driving this increase in license sales. Well, the answer is simple -- our highly engaged and growing regional developer program. Our regional developers are a key strategy to ramp up growth. In 2018, 89% of the licenses were sold by RD. That compares to 49% in 2017.

As a reminder, we sell these new developers the rights to open up a minimum number of clinics in a defined territory. They in turn help us identify and qualify new -- potential new franchisees in that territory and assist us in providing [field] training clinic openings and ongoing support. And for that assistance we share part of the initial franchise fee and part ongoing royalties.

At March 31, 2018 we had 18 regional developers overseeing the opening and operation of clinics in approximately one-third of the country. While we don't expect to maintain the same pace of result developer growth in 2018 as we did in 2017, we are committed to increasing the program as it affords us much leverage while we expand.

During the quarter, we continued our regional developer ongoing education. First of all, all new regional developers participate in a weeklong on-boarding training program. Additionally, we meet twice a year for ongoing training sessions and in April all of our RDs came to Scottsdale for a two-day conference to share best practices, train on operations, staff support, selling franchises and much more, all to help them succeed in their role and enable our franchisees to reach their full potential.

In August of 2018, rather than hold a national conference, we are taking the program to the field with a series of one-day regional meetings to make it easier for our franchisees to attend, ask questions, receive education updates and celebrate performance.

Turning to slide 7, as a part of our dedication to supporting our franchisees, regional developers and corporate clinics, we are committed to ongoing marketing and infrastructure improvement. With that in mind we are driving ahead with our IT strategy.

During Q1 we launched a new sophisticated communication platform, a cloud-based management software, that provides a one-stop-shop for franchisees and corporate employees to access tools, documents and resources and disseminate communications, assign tasks, join events, engage and contribute feedback.

We believe this is an important upgrade in our partnership and collaboration with our franchise community that streamlines the lines of communication by integrating or replacing multiple pre-existing communication platforms.

Additionally, we are excited to introduce our new VP of Information Technology, Manjula Sriram, to lead our IT department. She brings over 20 years of relevant industry experience and a proven track record of effective strategic and tactical leadership from a variety of world-class companies including Vail/Versay Systems, Walgreens, United Airlines and US Foods. Currently our IT team is focused on implementing system upgrades to improve the stability, security and scalability of our software platform that we use to run our clinics.

Turning to slide 8, another important growth driver for our business is our digital marketing effort. We strive to be the leader in best practices and innovation within health and wellness and small box retail space. In 2017 we completely overhauled our SEO strategy, which included the launch of our new consumer facing website.

While we're pleased with these improved results in 2017, we expect to continue to benefit from these efforts in 2018. In fact, in Q1 they yielded strong gains in web traffic leads and new patient conversion that helped fuel sales growth, accelerate new clinic ramp to profitability, and to optimize our advertising spend.

Innovation continued in 2018 as we pursued performance gains and other digital marketing channels such as paid search, paid social, email and SMS. Additionally, we diversify our branded video content by leveraging our doctors' experience and human interest stories and the amazing testimonials from our patients to increase traffic and engagement on all of our social media platforms.

Overall we believe that a larger footprint, the greater opportunity to leverage marketing and IT to heighten our brand awareness nationally, to grow our business and to enhance shareholder value. And with that I'd like to turn the call over to John to review the financial results.

Thank you, Peter, and hello, everybody. We have provided detail on our financial performance for the first quarter 2018 compared to the first quarter 2017. I will now take a few moments to discuss some of the highlights broken down by the two operating segments, corporate clinics and franchise operations, as well as our unallocated corporate overhead.

Turning to slide 9, this segment data will be available in our 10-Q which we will file on Friday, May 11. As a reminder, for retail concepts, two of the most important health measures of a business are rate of growth for, one, system-wide comp sales and, two, gross sales.

As Peter mentioned, our operational improvement continue to develop strong metrics. Comparing first quarter 2018 to first quarter 2017 demonstrates the strong growth of our business.

Gross sales for all clinics open for any amount of time grew 32% to $37 million. System-wide comp sales for all clinics opened 13 months or more increased 26%. And more significantly, system-wide comp sales for mature clinics opened 48 months or more increased 17%, further pushing the boundaries of our business model.

At March 31 our corporate clinic segment consisted of 47 clinics. 31 clinics are buybacks we bought from existing franchisees and now have owned for an average of 33 months and 16 clinics are greenfields that we built from the ground up. Gross sales for the buyback clinics since the month prior to their acquisition have increased on average 68% through Q1, demonstrating our capacity to successfully manage these clinics.

Turning to slide 10, revenue for the first quarter of 2018 grew 29% to $7.1 million from $5.5 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 operation segments are driven by the increase in 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 operation segment revenue growth was due to higher sales from both existing clinics and from adding 33 clinics since the end of the first quarter 2017.

Cost of revenue in the first quarter of 2018 was $1 million, increasing 40% over the same period last year primarily due to higher regional developer royalties from increased gross sales of franchise clinics in regional developer territories. Gross profit was $6.1 million, increasing 27%.

Selling and marketing expenses were $1.1 million or 15.5% of revenue in the first quarter of 2018 compared to $1 million or 17.4% of revenue in the first quarter of 2017. This 15% increase reflects higher marketing expenses allocated to our Company owned or managed clinics.

General and administrative expenses were $5.1 million, or 71.5%, of revenue compared to $4.6 million, or 82.9%, of revenue in the same period last year. The 11% increase is primarily due to increased payroll partially offset by lower depreciation and amortization expenses.

Consolidated loss from operations improved to $439,000, improving from $1.7 million in the first quarter 2017. Net loss in the first quarter of 2018 was $387,000 or $0.03 per share. First quarter of 2017 net loss, which included a charge of $418,000 related to the disposition and impairment of non-operating leases, was $1.8 million or $0.14 per share.

Total adjusted EBITDA income in the first quarter 2018 was $156,000, improving $753,000 compared to adjusted EBITDA loss of $597,000 in the same quarter last year. Of the $753,000 improvement, corporate clinics contributed 76% or 570,000. Franchise operations contributed 77% or $582,000 and unallocated corporate overhead offset the improvement by 53% or a $399,000 expense. Our corporate clinics segment adjusted EBITDA income was $414,000 and now positive for the third consecutive quarter.

As of March 31, 2018 cash and cash equivalents were $4 million, down from $4.2 million at December 31, 2017. Pursuant to the terms of our credit agreement, during the first quarter 2017 the Company borrowed $1 million as required by the terms of its line of credit. The $1 million remains unused on the balance sheet at quarter end.

Turning to slide 11 our review our outlet for 2018. The growth indicators for 2018 remains strong. As Peter noted, in 2018 we have sold 27 franchise licenses through April compared to 37 for all of 2017, which was up 68% compared to 2016. Second, we now have 18 regional developers active in the field, more than double than the beginning of 2017, they are our agents of accelerated growth.

Finally, since we achieved our goal of positive adjusted EBITDA performance from our corporate clinics portfolio, we are now re-engaging in an opportunistic buyback and/or greenfield strategy. With that we are reaffirming our 2018 guidance.

Total new 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 which will not change the total clinic count.

We 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 $214,000 in 2017.

Thanks, everyone, for your time and I will now turn the call back over to Peter.

Thanks, John. Now turning to slide 12, we serve a dynamic yet fragmented market that operates a significant growth opportunity. I will reiterate, annual pain costs the United States more than $650 billion with $90 billion on back pain alone including $15 billion spent on chiropractic care.

The 2017 Gallup Palmer College of Chiropractic annual report revealed some significant findings. Nearly two-thirds of adults in the United States have had neck or back pain significant enough that they have sought help from a healthcare professional. Of those who did so in the last 12 months, more than half have an ongoing problem with neck or back pain for more than five years. And most importantly, 78% of adults in the US prefer drug-free pain management.

So fundamentally, more people need better ways to manage their pain. However of those surveyed half did not know the philosophies that guide chiropractic care. And 3 in 10 said the main reason they don't go to a chiropractor is they lack information about chiropractic profession.

Further, a study published by Spine Journal in 2018 by the nonprofit Foundation of Chiropractic Progress concludes, and I quote, spinal manipulation is the most likely to reduce chronic low back pain and improve function when compared to other approaches, end of quote.

Key findings of those surveys utilizing manipulation and mobilization as compared to other approaches such as physical therapy include 57% experienced a reduction in chronic low back pain, 78% a reduction in disability, and 79% significantly reduced pain and disability.

So the opportunity before us is clear. We need to continue to reach out and educate the public about chiropractic in general and specifically about The Joint, which creates affordable, high quality, and convenient access to chiropractic care.

As I noted before, we are investing in smarter digital marketing. The goal is to drive awareness of The Joint and increase the number of patients in our system and, when appropriate, to communicate the patient care plan and encourage greater usage.

Based on our detailed analysis of the current user base, we believe in the United States that we have the opportunity to open at least 1,700 clinics. However, as chiropractic becomes more commonplace we expect that number to increase. This is important as studies show that 1,000 franchise units tends to be the tipping point to national recognition that can further drive accelerated growth.

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 build brand awareness and name recognition, establish a predictable revenue stream and increase scale. In 2018, we plan to accelerate franchise sales and build on our regional developer strategy and increase our corporate clinics segment through strategically and measured deliberate steps.

Turning to slide 14, we continue to execute our long-term vision, which is to be the premier provider of chiropractic care in health and wellness plans, accelerate our footprint through the expansion of our corporate and franchise clinics, be the career path of choice for chiropractors, build world class organizational culture, foster robust regional developer community, and maintain a world-class IT platform.

Before I open up for Q&A I would like to thank our entire franchise community and all of our employees. Our progress would not be possible without their commitment and their hard work. Sonja, I'm ready to begin the Q&A.

(Operator Instructions). Brooks O'Neil, Lake Street Capital Markets.

So, I was hoping you might be willing to talk a little bit about whether you see a difference in performance between the franchise stores and the corporate stores. And if so, could you describe what those differences are and why you think they occur?

I would say in an average franchise system that I have seen that has a corporate unit portfolio, historically you see franchisees outperform the franchisor managed units by around 20%, and that's true in almost any unit out there. And there's a lot of reasons for that, but one of them is just because of that vested interest. When you're talking about a system you just have -- the franchisees that are just that much more aggressive and successful really making sure they are running that unit as profitably as possible.

And one of the things I'd say that's for me been really enlightening or interesting at The Joint is when you look at, for example, the comps of corporate clinics versus franchise clinics that are relatively the same.

And so, what I've seen is that -- in this system is that there's truly not a lot of differences, particularly over the last two years, as we've been taking in some of these best practices from our franchisees and utilizing them not only for our corporate clinics, but spreading that out with the rest of our franchisees.

I can't tell you that there's really a significant difference in performance when I examine the performance of our corporate clinic portfolio compared to the overall franchise portfolio.

That's great. The comp strong performance is truly outstanding and impressive. Could you just talk about what you think is driving that, number one? Number two, can you talk about how sustainable you think it is? Obviously nobody can predict the future, but I'm just curious your perspective. And then number three, maybe just talk a little bit about what you see as the available capacity or potential in your clinics to continue to drive strong same unit growth.

All great questions and certainly -- I have never worked for a company that has had such consistent same-store sales performance. It truly is amazing and I think it's a reflection of a number of things.

One thing, as you look in 2017 and into 2018, those comp sales were not driven by a change in price, because sometimes you'll see if you are increasing your price -- so for example, in 2016 we did have a price increase. So a portion of those same-store sales improvements were price driven.

And in 2017 and 2018 this truly was more patients using our product -- using our services more often and the patients coming in for the first time. On average right now around 22% of all of our new patients are new to chiropractic. So it isn't just somebody who's been chiropractic care and ran out of insurance or decided to change; we are bringing new people in that have never been there before.

And I think that that really is the greatest opportunity we have in front of us. If you look at the United States, around 12% of the American people access chiropractic care. And I think if they really understand -- and you saw in some of the quotes that I was referring to is that one in three people really don't even understand what chiropractic care is, which I think is limiting their willingness to try it or try chiropractic care at all.

And I think by taking our concept into a retail setting where people shop, where they buy their haircut or get a haircut, buy a frozen yogurt and get exposure to the branded, The Joint, really opens up the opportunity for people that never had access to chiropractic care before. So we are seeing the market itself expand and I think that's a portion of why we are seeing an increase of same-store sales.

As to the question of how long can this go on is that -- as you can imagine, that's a really hard question for anybody to ask. One way to try to get a handle on that is to look at, okay, your same-store sales at 13 months is 26% for Q1; well, let's look at some of the more mature clinics you have. And in our case that's a unit that has been open for at least 48 months or four years. And for Q1 they were increasing 17%. That's amazing.

And so, it shows us again -- and I've said this before -- is that we do not know where the top of this business model is. And the third part of your question was kind of asking about capacity.

And I would again tell you that in our business model, just the system of The Joint is that we still to this day have an enormous amount of underutilized capacity so that typical doctor -- that typical clinic is going to have on any given day a wellness coordinator in the front and a doctor in the back. And they can probably perform on average around up to about $35,000 in sales just with the full-time equivalent of that doctor and that wellness coordinator working together.

And so, then as that increases you can add another doctor, which is kind of an incremental way to increase the sales of the system. And so, what that shows you is that we still to this day have a huge amount of capacity that we haven't been using -- are sitting there because the doctor is there for the full time that we are open. And he's not just sitting there every three minutes doing an adjustment. So there's still room for the clinics to continue to grow in their own same-store sales.

I think that's fantastic. One other thing I'd love for you to talk just a little bit about -- I think it's incredible and important that you've been able to shorten the time to breakeven of the new clinics. I think that's going to attract more franchisees and it's going to be very powerful for you as you turn to opening more corporate stores. But could you just talk a little bit about what you're doing, what's working and whether you think that can go further or do you think you've hit the wall on that?

Well, if we look at our 2018 cohort, it's clear we have not hit the wall. We talked about the 2017 performance of going from that roughly 18 months to breakeven and on average that 41 clinics that opened in 2017 had an average nine months to reach a breakeven point.

If you look at that graph, which is showing you those clinics continuing to perform into 2018, what's noticeable is how significantly higher they are from the historical ramp that we've experienced in the years previous.

And so, as we look at the 2018 class and its seven clinics, is that we've seen an even faster ramp compared to the 2017 class. And I think that my experience in that small box retail environment that we always are talking about is ideally that you want to see that time to breakeven for a franchisee to be on average somewhere between six and nine months.

And so, as we look at 2018 and beyond, certainly our goal is to take what was on average of nine months in 2017 and push it closer to that six to nine months as a standard for our business.

Perfect, sounds good. I'll just ask one more. I appreciate all the time and insights. Are you seeing any other company out there that's trying to build the kind of small box branded national chain presence in retail chiropractic that you guys are?

Yes, we are seeing some small competitors. I was looking at a site and while ago in Dallas and it was -- if you go to their site, they're franchising, it's retail. And you look at the pictures of their units, the only thing missing on it is The Joint logo or brand and they have two or three units. And so, yes, I would expect that we will spawn all of our own competitors.

If you look at a national franchise chain that's out there that's anywhere close to what we're doing, the closest you'd find to that would be considered -- it's called The Health Source. It is franchised and it's been more than -- it's not a retail concept. More what they're doing is really rebranding independent and providing shared services. They are continuing to stay focused on an insurance-based model and that it's really -- nothing comparable to this retail concept that we are driving.

I think this is what's really exciting for me is that we truly have that first mover advantage in this specific industry that will be difficult for anybody to catch up because there's nothing out there to acquire and convert in a rapid manner. It's going to be building unit by unit if you want to compete with this business model.

Absolutely, great. Peter, thanks a lot. Congratulations. Keep it up.

(Operator Instructions). Mike Malouf, Craig-Hallum Capital Group.

Great and thanks for taking my questions. Peter, if you look at the regional developers, can you give us a sense of how they are implementing -- or how long it takes for them to really start to franchise their area? Because it seems like you've had a big push here in 2017. You'll probably have a nice modest push here in 2018. But there is a lag as far as openings, and I'd like to sort of just get a sense of that.

Absolutely. And I think really, as you can imagine, it makes a lot of sense. Now what's really interesting, of those regional developers that we sold in 2017, of the 10 of them, 9 of them came directly out of our own business. These were existing franchisees or existing regional developers who wanted to expand on their investment.

So that gives them a little bit of a heads up of really trying to understand our business model itself. Because that's part of what you do when you're becoming a regional developer is to learn the model. Typically you are going to require them to open at least one what I'd will call pilot unit clinic in their territory. And then you are going to help them use that as the basis to sell franchises in that territory.

Now they don't even have to sell the franchises. We have -- in some cases an RD can open and operate all the clinics in that territory themselves. One of our RDs for example is -- a couple of them are looking -- are using that as their own strategy. So they aren't seeking franchises and they have the resources to open up those clinics themselves.

And so, you really do see this kind of in the early stages, okay, they are going to be able to open or maybe sell one or two clinics. And then as that kind of builds up and you get more traction in that territory and you get more cluster and you get more effectively run units it builds on itself.

And one of the examples I like to talk a lot about, and we will take it away from the joint model for a moment. If you look at a another company that I worked for a fair amount of time, was called Mailbox Etc., the UPS Store today. And they too were industry innovators, created an industry that didn't really exist before that they used an aggressive regional developer strategy from the beginning of their business.

And that if you looked at them in the first 10 years from -- they started in 1980 and it took them 10 years to get the first thousand units open for the system. It took them three years to open the second. The second thousand set of units and that's a direct reflection of the development of their -- and the capacity of their regional developer model.

And so, that's where you kind of see that hockey stick. So, you're not going to see -- everybody likes that beautiful 45 degree angle of growth. And I think in our regional developer model it's much more of the hockey stick where you have those first couple of years where it's getting settled, you're getting your experience, you are really establishing yourself in the marketplace. And then you're really starting to leverage that experience which allows you to accelerate the growth.

Great. That's very helpful. And then with regards to corporate units, I've got two questions on that. One is as you look out at the 1,700 units, I'm wondering if you can update us on what you think is the optimal mix between franchise and corporate owned?

And then sort of secondly, playing on that list here in the near-term, you've had one closed clinic, the first one that you've done since you've been there and certainly for the Company for a while. I'm getting the sense that you said about 10% turnover every year, and so that would sort of assume that there's 30 to 40 that are available to buy and probably some pent up demand.

I'm just wondering if you can't give us a sense of how the opportunity to purchase sits right now. And after you've bought one back, have you sort of stirred the pot a little bit and gotten some more people coming at you?

Sure, to take the second part of your question first is that -- it's true in almost any franchise system I've been a part of, that you really do have roughly 10% of the system that is up for sale at any given time. And I think that here I think that's no different. I don't know there's really a pent up demand on that because it's not that the only buyer of a franchise clinic would be the franchisor.

Very often you're seeing franchisees that are selling to other franchisees and new investors. And in any franchise system, including ourselves, that as a franchise or we have, number one, the right to approve any new buyer. So you just can't turn your franchise over to somebody else; we have to approve them, they have to go through their background check, they have to make sure they meet our criteria.

And secondly, we always have the right of first refusal. And so, if there is any clinic that ultimately comes up for sale, they complete their transaction and before they -- well, before they complete that transaction, we have the right to assume that transaction.

And so, as we look at this very measured pace in 2018 of corporate clinic growth, we are -- as I've said on other calls, we are focusing on any new clinics or acquisitions in the three markets where we currently have corporate clinics, and that's California, New Mexico and Arizona, and we'll stick to that strategy. So that is the pool of potential acquisitions that we would be focused on in 2018.

The first part of your question is what is the right percentage of ownership of corporate versus franchise. And that -- it's a great question; I get asked that all the time and I have kind of a broad answer, because it does evolve over time. And I've seen that happen time and again with other franchise systems.

And what I've said to the Street often -- consistently is I can envision that somewhere between 10% and 25% and that's going to change over time. And you can say, well why? What's the change on that? Well, right now of course we have 12% of our system is corporately owned or managed and that what could change that percentage is really it's a question of capital.

If you look at just the overall investment between the build out and time to breakeven, and I'm just going to use some real round numbers, let's say it's a $0.25 million investment. And so, if I have -- as planned to open up four units, for greenfields in 2018 I'd better have $1 million ready for that. If I want to open up 40 I'd better have $10 million.

I want to be very clear and not opening 40 units in 2018, but to answer your question about how does that percentage of ownership change, it truly would be a question of deployment of capital. If you look at the business, I don't need additional capital to support and run the franchise side of the business.

I can also go out of my own development using the profit of the Company to continue a slow and measured pace of corporate clinics. If you want to change that you'd have to look at another alternative.

Yes, that's great. Thanks a lot for the color. Appreciate it.

Peter Rabover, Artko Capital.

I just wanted to make sure, so you guys had a pretty good quarter, what I was expecting maybe. And it looked like you had pretty good flow through of about 55% of I guess incremental EBITDA margin. Is this something that you expect to continue going forward? Or is there something that would -- I guess what would be the things that make that 55% go up or down?

So, when you look at -- as we kind of talked a little bit on the call, the excess capacity that we have in the system, both our corporate clinics and I would say the franchise segment have additional capacity as far as being able to grow gross sales without having to add additional operating expenses into the model.

So from an overall gross sales generation to the flow through to the bottom line, I do expect that you, as gross sales continue to increase, that you'll see the flow through to the bottom line. There's not a lot of additional operating expenses, at least in the corporate clinic portfolio, that would need to be added to generate those sales with the excess capacity we have.

Okay. And then what about maybe just your -- I guess your clinic openings and your revenues? Obviously it's a great clip, 40 to 50 that you expect to grow and you are growing at -- well, high double-digit same-store sales. So what would be the things that make those numbers go from 30% to 40% to 50%? Is it just more regional developers coming through or are those things in your control or out of your control?

Without getting too complex, the store openings have a very minimal impact now on revenue as far as whether it's a regional developer, developer with the new accounting 606 guidelines. From that perspective I don't think openings have much influence.

Really what has an influence now is really gross sales and license sales. As we continue to accelerate license sales and R&D territories, the specific franchise fee line and revenue would still be accrued -- I'm sorry -- recognized the same, but there would be a higher offsetting regional developer royalty or franchise fee that would be offsetting that transaction.

So as you see a higher mix of RD territory clinic openings that does have an influence. However, when you see the continued growth in our corporate clinic portfolio the weighting versus the royalty we collect versus the 100% top line we do in our corporate clinics, the weighting kind of overshadows or I guess overpowers what flows to the bottom line. So in essence I don't really see a material impact in the growth of RDs to what flows through to our bottom line.

Great, thank you. Thank you so much on that. And then I guess the very last question I had -- again, I'm impressed by the results. Your 48-plus month clinics, the ones that are averaging 17%-18% same-store sales, where are (technical difficulty) those comps coming from? Are they volume, are they price, what --?

They certainly are not coming from price because we haven't had a price change certainly in Q1. And so, they absolutely are coming from volume. And so, it is new patients coming in the door. If we look at some of our new patient counts, we are seeing them considerably improve or increase. And they're also coming from our existing patients who are using us more often. And those are the two primary drivers of the same-store sales to achieve -- whether it was the system-wide at 26% or for those open more than 48 months at 17%.

And so I guess two follow-ups on that. What percent of your portfolio is 48-plus at this point?

I think it's probably around the 50-ish. So let's say that's probably about 12% of the network has been open more than 48 months. That's an estimate but that's pretty close.

Great. And then have you guys thought about different price increases or just I guess different pricing plans that could drive that price line?

It's certainly something that we're looking at all the time in terms of what is the appropriate racing structure to help our patients. So we look at different ways to make sure that the patients are most effectively utilizing us. Nothing that we are announcing to the system, but definitely something we're looking at making sure that we are pricing ourselves appropriately for the markets we serve.

I guess have you guys -- it sounds like you've done some experiments. Do you think the customers -- how elastic is the demand or the volume to price sensitivity. Have you looked at that?

If you look at -- I think one of the drivers of this business from the beginning is just, number one, the ease of access to us; number two, the cost is that we are incredibly affordable. If you have got traditional chiropractic care, even if you've had insurance, is that the typical co-pay on a per adjustment basis is far higher than what it would be if you were a member of The Joint.

And so, I think there is no question that the increase in our patients is related to the convenience and the affordability of our offering. And we really do look at this on a system-wide basis as what is the most effective pricing structure. So, in 2016 that we did in fact raise our prices.

Most of our sales from a clinic, 76% of the sales of an average clinic is generated from membership fees. And what that is is -- and we do have regional pricing on a monthly fee of between $59 or $69 or $79. And that patient will pay that monthly fee and has access to four adjustments for that month.

And that back in 2016 after a considerable testing program, we recognized that we should increase the prices, which we did across the board. We did a testing group in October and then we did a full rollout in the following March. And what we found is that we had very little falloff in terms of our patients.

Do you think -- is it because of just the price parity between what you guys are offering and I guess the competition, the co-pays and chiropractic competition?

No, I think really what's driving the business is really the accessibility of it. It's in a retail setting, the ease of access -- like I said, 22% of our patients are new to chiropractic. So these aren't people saying, okay, well, it's cheaper for me to go to The Joint. These are people who never had access to chiropractic care before, didn't know what it was, didn't know they could afford it, didn't know where was.

And so, I think that certainly you have patients who may have had traditional chiropractic care, ran out of insurance. But I think it's just the ease of access for us and the quality of the service they get and the convenience of it is absolutely the drivers of our business.

Okay. Well, that's great. I don't have any more questions and thank you so much for your time. And talk to you guys next quarter.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Peter Holt for any closing remarks.

Well, I want to thank you all for your interest. I'd like to leave you with a patient testimonial. 36-year-old Lauren works in sales, but on weekends she's a motocross competitor.

Over the years this form of off-road motorcycle racing has resulted in a few injuries and most recently the separation of her AC joint that connects the shoulder blade and the collarbone, negatively impacting her performance and quality of life. Luckily she has been a member of The Joint for more than a year. And thanks to our chiropractors, Lauren regained full range of motion in her arm and is back on her bike.

Once again we're proud to contribute to our patients' well-being and we'll continue our pursuit to delivering quality, convenient and affordable chiropractic care to our patients and value to our shareholders by broadening our footprint through accelerating our franchise sales, expanding our regional development program and adding corporate and owned or managed clinics in a strategic and measured fashion. I thank you and stay well-adjusted.

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