The Joint Corp. (JYNT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the First Quarter 2018 The Joint Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to host for today, Kirsten Chapman at LHA, Investor Relations. You may begin.

Thank you, [Sonia]. 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 performance and Peter will close with our long-term vision and open the call for questions. Please note we are using the 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 have not already received 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 two, 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 discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we’re 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 beliefs they provide a more transparently 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 expenses, 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 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 number reported in 2007 in order to have a more meaningful comparison we use the restated figures. Turning to slide three; it’s my pleasure to introduce Peter Holt. Please go ahead, Peter.

Thank you, Kirsten. And thank you all for joining us today. We're focus on accelerating growth. The Joint's mission is to alleviate pain and to help move our patients toward a healthier life style, 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. For the first quarter of 2018, we once again delivered strong financial results and achieve our third consecutive quarter of positive adjusted EBITDA. In 2018, we were well-positioned to accelerate growth by implementing three key strategies. One, continue to accelerate our franchise sale. Two, continue to build upon our retail developer strategy, and three, expand our corporate clinic portfolio within clustered locations I'm please to report that we're making progress on all fronts.

Ladies and gentlemen please standup. Your conference call will begin momentary. Thank you for your patience. Again, please standby. You may now begin.

Okay. Sorry about that. It looks like we off the line there, but I think we're back on. And that I'm not sure where I cut off, but I'm going start from the beginning. Again, thanks, Kirsten for Joint, and thank all of you for joining us on today's call. We're focus on accelerating growth. The Joint's mission is to alleviate pain and to help move our patients toward the healthier lifestyle. The sweets 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 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. For the first quarter of 2018, we once again delivered strong financial results and achieve our third consecutive quarter of positive adjusted EBITDA. In 2018, we were well-positioned to accelerate growth by implementing three key strategies. One, continue to accelerate our franchise sale. Two, continue to build upon our regional developers 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 four; I'd like to quickly review some important metrics for Q1, 2018 versus Q1, 2017 demonstrating our continued validation of our business model. Growth system-wide sales grew 32%. System-wide comp sales or same-store retail sales, the clinics that have been open for at least [13 four] 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 continue to drive towards sustainable profitability. Our net loss improved $1.4 million to $387,000 and our adjusted EBITDA improve $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 open seven franchise clinics and close none. Thus at March 31, 218 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 a first step in a new phase of our growth. We're committed to expanding the corporate portfolio in a deliberate manner. We waited until we achieve positive adjusted EBITDA and moved ahead only – and moving ahead only with the opportunities that are demonstratively in the interest of our stock holders and our existing franchisees. Achieving a positive adjusted EBITDA at both the corporate clinics and at 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 clinic as well as for franchisees. And I'm excited to report that the first quarter of 2018 our gross sales have been hit a new high. Further, our franchisees continue to break their own personal records. Our top – our new top clinics in Houston, Texas and generated $117,000 in gross sales in March, the highest of any clinic in any months to-date. While we understand its level performance is in outlier, it does illustrate how effective marketing first rate patient rate service and a focus on operational excellent can impact clinic sales. With portfolio operations in a continual improvement phase we're now focus on opportunistically acquiring existing franchise clinic and evaluating, building new Greenfield clinics that fit in overall expansion strategy. I've been asked why franchisees sell their clinic? 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 very widely. Someone's demonetize investment, other do preparing to retire, experience the health issue, going through divorce or another life 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 cluster clinics that fits our criteria perfectly. We purchase the clinic plus the patient list from a near-by 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 accepted to be the norm, it was a great opportunity for us. Turning to slide five, in addition to improving adjusted EBITDA, our new operational protocols which includes best practices from high performers have helped improved the time to breakeven for new clinics. At the end of the year we've reported the 2017 class of that 41 newly franchise clinic reached an estimated breakeven on average of nine months, down from the historical average of 18 months. And as you can see by the slide this class continues its path of accelerated gross sales, considerably outperforming historical average. We open seven clinics in the first quarter and in the early month of 2018 clinics are exceeding the 2017 clinic ramp. And when franchisees have achieved profitability faster this also reduces the [risk of the money] out of cash. Similar to the increase in efficiency in our clinic operations we're implementing best practices, targeting the time from our franchise sale to franchise opening. We're training regional developers to more effectively manage franchisees as well as that in corporate resource [to a system] site selection which is a biggest use of time in our lifecycle of opening clinics. Additionally, we're working to help our regional developers begin free selecting suitable sites so that once they identify our franchisee they can move more quickly into lease negotiation and thereby reducing the time to clinic opening. We believe these measures will drive openings in a later 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 six, additional growth indicators are also remained strong. During Q1 we sold 16 new franchise licenses and sold the net 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 nine 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 last 2018 and 2019. You may ask, what is driving this increase in license sale? Well, the answer is simply. Our highly engaged in growing regional developer program. Our regional developers are 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 sale regional developers the rights to open up the minimum number of clinics to the define territory. They in turn help us to 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 initial franchise fee and part of ongoing royalties. At March 31,2018 we had 18 regional developers overseen the opening and operation of clinics in approximately one-third of the country. While we don't expect to maintain a same pace of regional developer growth in 2018 as we did in 2017. We're committed to increasing the program as it affords us much leverage while we expand. During the quarter we continue our regional developer ongoing education. First of all, all new regional developers participating in the week long onboarding training program. Additionally, we meet twice a year for ongoing training sections. And in April all of our RDs came to discuss there for two-day conference to share best practices, train an operations, staff support, selling franchises and much more, all to help them succeed in their role and then enable our franchisees to reach their full potential. And out of the 2018 rather than hold the national conference we're taking the program to the field with a series of one day regional meetings to make it easier for franchisees to attend, ask question, receive education, updates and celebrate performance. Turning to slide seven, as part of our dedication to supporting our franchisees, the regional developers and corporate clinics we're committed to ongoing marketing and infrastructure improvement. With that in mind, we're driving ahead with our IT strategy. During Q1 we launch a new sophisticated communication platform, a cloud-based franchise management software that provides a one stop shop for franchisees and corporate employees to access tools, documents and resources and disseminate communications, assign path, join events, engage and contribute feedback. We believe this is an important upgrade in our partnership and collaboration with our franchise community that's streamlines the lines of communication by integrating or replacing multiple pre-existing communication platform. Additionally, we're excited to introduce our new VP of Information Technology, Manjula Sriram to lead our IT department. She brings over 20 years of robust industry experience and a proven track record of effective, strategic and tactical leadership from a variety of world class companies including [Indiscernible] systems, Walgreens, United Airlines and [U.S. Crews]. Currently our IT team is focused on implementing system upgrade to improve the stability, security and scalability of our software platform that we used to run our clinics. Turing to slide eight, 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 are 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 conversation to help fuel sales growth, accelerate new clinic ramp to profitability and to optimize our advertising spend. Innovation continues in 2018 as we pursue performance gains in other digital marketing channels such as paid search, paid social, email and SMS. Additionally, we diversify our branded video content by leveraging our doctor' experience and human interest stories and amazing testimonial from our patients to increase traffic and engagement on all of our social media platforms. Overall we believe that our larger footprint the greater opportunity to leverage marketing in IT to heighten our brand awareness nationally, to grow our business and can have 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 of 2018 compared to the first quarter of 2017. I'll 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 nine, this segment data will be available in our 10-Q, which we will file on Friday, May 11th. As a reminder, for retail concept two of the most important health measures of the business are rate of growth for one, system-wide comp sales and two, gross sales. As Peter mentioned, our operational improvements continue to deliver strong metrics, comparing first quarter 2018 to first quarter 2017 demonstrates the strong growth of our business. Gross sales for all clinics opened 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 31st, our corporate clinic segment consist of 47 clinics, 31 are buybacks, we bought from existing franchisees and now have own for an average of 33 months and 16 clinics are Greenfields that we build from a ground up. Gross sales for the buyback and some months 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 same period last year. Of the $1.6 million increase, corporate clinic contributed 48% and franchise operations 52%. The revenue improvements in both our corporate clinic and franchise operations segments are driven by the increase in comp sales that our clinic 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 higher sales from both existing clinics and from adding 33 clinics since the end of the first quarter of 2017. Cost of revenues 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 franchised 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 reflect higher marketing expenses allocated to our company owned or managed clinic. 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 increase payroll partially offset by lowered depreciation and amortization expenses. Consolidated loss from operations improved to $439,000 improving from $1.7 million in the first quarter of 2017. Net loss in the first of 2018 was $387,000 or $0.03 per share. First quarter of 2017 net loss was 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 million compared to adjusted EBITDA loss of $597,000 million in the same quarter last year. Of the $753,000 million 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 $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 of 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, I'll review our outlook for 2018. The growth indicators for 2018 remain strong. As Peter noted, in 2018 we have sold 27 franchise licenses through April compared to 37 for all 2017, which was up 68% compared to 2016. Second, we now have 18 regional developers active in the deal. More than double than the beginning of 2017 they are our agents of accelerated growth. Finally, since we achieve that goal of positive adjusted EBITDA performance from our corporate clinics portfolio we are reengaging 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 franchised 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 revenues 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 to $3.5 million, improving from a loss $214,000 in 2017. Thanks everyone for your time and I'll now turn the call back over to Peter.

Thanks, John. Now turning to slide 12, we've served dynamic yet fragmented market that operates a significant growth opportunity. I would iterate annual pain cost United Sates more than $650 billion, with $90 billion on back pain alone including $15 billion spend on chiropractic care. The 2017 Gallup-Palmer College of Chiropractic Annual Report reveal some significant finding. Nearly two-thirds of the adults in United States have had neck or back pain significant enough that they have start help on healthcare profession. Although who did so in last 12 month, more than half have an ongoing problem with neck and back pain for more than five years. And most importantly, 78% of adults in the U.S. preferred drug free pain management. So fundamentally more people need better ways to manage their pain, however of those surveyed half did not know the philosophy that guide chiropractic care and the main reason they don't go to chiropractic is they lack information about chiropractic profession. Further, a study published by SPINE Journal in 2018 by the [Indiscernible] Foundation of Chiropractic Progress conclude and I quote "spinal manipulation is the most likely to reduce chronic low back pain and improve function when compared to other approached" keep finding of those surveys new life in manipulation and mobilization as compared to other approaches such as physical therapy include 57% experience a reduction in chronic low back pain, 78% a reduction in disability and 39% significantly reduce pain and disability. So the opportunity before us is clear. We need to continue our reach out and educate the public about chiropractic in general and specifically about the Join which create affordable high quality that can be 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 and assist them and when appropriate to communicate the patient care plan and encourage better usage. Based on our detailed analysis of the current user base we believe in United States that we have the opportunity to open up at least 1700 clinics. However the chiropractic becomes more common place, we expect that number to increase. This is important that study show that a 1000 franchise units tends to be the tripping point because national recognition that can further drive accelerated growth. Turning to Slide 13. Overall, hybrid model for franchise and company owned and managed clinic enables us to expand in a capitalized fashion. This is essential and helping us to build brand awareness and name recognition establish a predictive revenue stream and increase scale. In 2018, we plan to accelerate franchise sales and build on a regional development strategy and increase our corporate clinic segment to strategically and measured deliberate steps. Turning to Slide 14, we continue to execute a long term vision which is to be the premiere provider of chiropractic care and health and wellness plan, accelerate a footprint to the expansion of our corporate and franchise clinic be the career path towards for chiropractors build world-class organizational culture, fast robust regional developer community and maintain a world class IT platform. Before I open up for Q&A, I'd like to thank our entire franchise community and all of our employee. Our progress would not be possible without their commitment and our hard work. Sonia, I'm ready to begin the Q&A.

Thank you. [Operator Instructions] Our first question comes from Brooks O'Neil of Lake Street Capital Markets. Your line is now open.

Hello, can you hear me okay?

We can, Brooks. How are you doing?

I'm doing great, thank you. 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 sort of what those differences are and why you think they occur?

Well Brooks, I would say that in a average franchises that I've seen, there is a corporate unit portfolio. Historically you see franchisees are performed, franchised were managed units by around 20%. And that's sure in a more than a unit out there. And there's a lot of reasons for that. One of them is just because of that, that’s an interest. When you're talking about a system, you have the franchisees that are just that much more aggressive and successful really making sure that they're running that unit as profitably as possible. And one of the things I'd say that for me then really minding and interesting on at the Joint, is when you look at for example the comps, corporate clinics versus franchise clinics, they're relatively the same. And so, what I've seen is that in this system is that there is truly not a lot of differences particularly over the last two years is we've been taking in some of these best practices from our franchisees and utilizing them not only for corporate clinics but spreading that out with the rest of our franchisees. I can't tell you that there is really a significant difference in performance when I examine the performance of our corporate connect portfolio compared to the overall franchise portfolio.

That's great. The comp store performance is truly outstanding and impressive. 1) Could you just talk about what you think is driving that? 2) Can you talk about how sustainable you think it is, obviously nobody can predict the future but I'm curious of your perspective, and then 3) maybe just talk a little bit about what you see as sort of the available capacity or potential in your clinics to continue to drive strong same unit growth?

I mean all great questions. And certainly, I mean, I have never worked for a company that has had such consistent same stores 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. Sometimes you'll see it here increasing the price of them on 2016, we did have a price increase or a portion of those same store sales improvements were price driven. And into 2017 and '18, this truly was more patients using our product or using our services more often and new patients coming in for the first time. On average, right now we're on 22% of all of our new patients are new to chiropractic. So, it isn’t just somebody who's been in chiropractic care and ran out of insurance or just had to change, we're bringing new people than 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 that we are around 12% of the American people access chiropractic care. And I think that they really understand and you saw met them the course that was you're 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. Now, I think by taking a concept into a retail setting where people shop, where they buy their haircut or get a haircut, buy a frozen yoghurt and get exposure to the brand at the joint, it really opens up the opportunity for people who had never had access to chiropractic care before. So, we're seeing the market itself expand. I think that's a portion of why we're 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, whether I -- one way to try to get a handle on that is to look at, okay, you're 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 the unit that's been open for at least 48 months or four years. And for Q1, they were increasing 17%. That's amazing. And so that it shows that again and I said it's before as we do not know what 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 a business model, just a system of the Joint is that we still to this day have enormous amount of underutilized capacity. So that typical doctor and 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 that too about $35,000 in sales just what the four time equivalent to that doctor and that the wellness coordinator working together. And so then as that increases, you can add another doctor which is kind of a incremental way to increase its other system and so what that shows you is that we still to this day have huge amount of capacity that we haven’t been using. Are studying that, because the doctor is there for the full time that we're open and he's not just sitting there every three minutes doing adjustments. So, there's a room for the clinics to continue to grow and all the same store sales.

I think that's fantastic. One other thing I'd love for you to talk just a little bit about that, 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 you think you've hit the wall on that?

Well, if we look at our 2018 cohort, is it's clear that we have not hit the wall.

Alright.

We've talked about the 2017 performance and going from that roughly 18 months to breakeven and that on average that 41 clinics that opened in 2017 had an average nine month in 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 when 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 which you want to see that time to breakeven for franchisee to be on average somewhere between six and nine months. And so, as we look at 2018 and beyond, that certainly is our goal is to take over that an 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're seeing some small competitors. I was looking at a site a while ago in Dallas and it was if you go to their site, they're franchising, it's retail and you'll get a picture that the units and the only thing missing on there is the Joint made logo out there. 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 kind of 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 that's called the HealthSource. It is franchised and it's been more than, it's not a retail comp but more what they're doing is really kind of rebranding and independent and providing shared services. They're continuing to stay focused on an insurance based model and that it's really nothing comparable to this retail concept that we're driving. I think this is what surely, exciting for me is that that we truly have that first mover advantage in this specific industry that will be difficult for anybody to catch up. Because there is nothing out there to acquire and then convert in a rapid manner. It's really it's going to building unit-by-unit if you want to compete with this business model.

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

Thank you very much, Brooks.

Thank you. [Operator Instructions] Our next question comes from Mike Malouf of Craig-Hallum Capital Group. Your line is now open.

Great. And thanks for taking my questions.

Hey Mike, how are you doing?

I'm doing great. Great. Hey Peter, if you look at the regional developers, can you give us a sense of how they are implementing and 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 opening to that. Like so, just give a sense of that.

Oh surely. And I think that is a really it's you could imagine and it makes a lot of sense. Now, what's really interesting of those, regional developers that we sold in 2017 a bit 10 of them, nine of them came directly out of our own business. These were existing franchisees or existing regional developers who want to expand on their investment. So, that gets in a little bit of a heads up. Really trying to understand our business model itself. And because that part of what you do when you're becoming a regional developer is to learn the model, typically you're going to require them to open at least one what I call pilot unit clinic in the territory. And then you're going to help them use that as a base as to sell franchises in that territory. Now, they don’t even have to sell the franchises, we have in some cases in our beak and open it up right all of the clinics in that territory themselves. We have in one of our deals for example is a couple of them are looking that, 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're going to be able to open and 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 clustering, you get more effective, they run units, it builds on itself. And one of the examples I like to talk about and we'll take it away from the Joint model for a moment. If you look at another company that worked for a long, for a fair amount of time which's called Mail Boxes Etc. the UPS store today. And that they too work 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 that first 10 years, from they started in 1980 and it took them 10 years to get the first 1000 units open for that mid, for the system. It took them three years to open the second. The second 1000 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 why you kind of see that hockey sticks. So, you're not going to see kind of every leg that beautiful 45 degree angled of growth and I think and a regional developer model, it's much more the hockey stick where you have those first cup of years, what's kind of getting settled, you're getting your experience, you're really establishing yourself in the market place. 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 have two questions on that. One is as you sort of look at it the 1700 unit, I'm wondering if you can kind of update us on what you think is the optimum mix between franchises and corporate owned. And then sort of secondly play it on that, at least to hear in the near term, you have one closed clinic first one that you've done since you've been there and certainly for the company for a while. Giving the sense that you said about 10% turn over every year and so that I would sort of assume that there's 30 to 40 there kind of available to buy and probably some pent up demand. I'm just wondering if you could give us a sense of how the opportunity to purchase sets right now and after you bought one back. Have you sort of stirred the pod a little bit and got in some more people coming at you? Thanks.

Sure. That and to take you’re the second answer or the second part of your question first, is that it's true and almost any franchise system I've been a part of that you really do have roughly 10% of the system that is up for so any given time. And I think finally here I think that’s no different. I don’t know if there's really a pent up demand on that because it's not that the only buyer 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 and including ourselves that as a franchisor we have 1) the right approved any new buyer. So, you just kind of turn your franchise over to somebody else, so we have to prove them, they have to go to their background check, they have to make sure they meet our criteria. And 2) we always have the right of first refusal. And so, that there is if there's any clinic that ultimately comes up for sale, they've they complete the transaction and before they, well before they complete that transaction, they have to, 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 said on other call that we're focusing on any clinics or acquisitions in the three markets we currently have corporate clinics. That's California, New Mexico and Arizona. And we'll stick to that strategy. So, that is kind of 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 if corporate versus franchise? And that, it's a great question. I get it asked all the time and I have a kind of a broad answer. Because it is, it does evolve overtime and I've seen it happen time and again with other franchise systems. And what I felt to this sweet offer, 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 now, right now of course we have 12% of our system is corporately owned or managed, and that what could change that percentage is really the question of capita. If you look at just the overall investment between to build that and time to break even, I'm just going to use some real ran numbers that say it's a quarter million dollar investment. And so, if I have as planned to open up four units and for Greenfields in 2018, I better have a $1 million ready for that. If I want to open up 40, I better have $10 million. Now, I want to be very clear I'm not opening 40 units in 2018. But to answer your question about how does that percentage of ownership change, is that 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. That I can also go out with my own development using the profit of the company to continue and slow and measure pace of corporate winnings. If you want to change that, you'd have to look at another option there.

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

Thank you. Our next question comes from Peter Rabover of Artko Capital. Your line is now open.

Hey guys, can you hear me?

Yes, hear you. Hi Peter, how are you doing?

Good, how are you? Hey, I just wanted to make sure so you guys had a pretty good quarter what I was expecting maybe and it looks like you've had pretty 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 thing that make that 55% go up or down?

Yes. So, when you look at as we've kind of talked a little bit on the call, the excess capacity that we have in the system. Both are corporate clinics and I would say the franchise segment has additional capacity as far as being able to grow growth sales without having to add additional operational operating expenses into the model. So, from an overall growth sales, generation to the flow through to the bottom line. I do expect that you as growth sales continue to increase, that you'll see the flow through 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, I mean obviously a great clip, right? -- 40% to 50% that you're expecting to grow. And you're growing at the high double-digit same store sales. So, what would be the thing that make those numbers go from 30% to 40% to 50%? Have you guys, is it just more regional developers coming through or are those things in your control or out of your control?

Well, without getting too complex with that. The store openings have a very minimal impact now on revenue as far as what as regional developer, developer with an accounting 606 guideline. From that perspective, I don’t think openings have much influence. Really what has an influence now is really growth sales and license sales. As we do continue to accelerate license sales in R&D territory, the specific franchise to be line in revenue would still be accrued -- I'm sorry, recognized the same but there would be a higher offsetting regional developer, royalty a franchise fee that would be offsetting that transaction. So, as you see a higher mix of R&D territory clinic openings that does have an influence. However, when you see the continued growth in our corporate clinic portfolio, the waiting versus the royalty we collect versus the 100% topline we're doing our corporates' that the wading kind of all the shadow there, I guess overpower is what flows to the bottom line. So, in essence I don’t really see a material impact in the growth of R&D to what flows through to our bottom line.

Great. Thank you, thank you so much on that. And then, I guess here the last question I had again I'm impressed by the results, your 48 plus month clinics, the ones that are around Virginia, 17% 18% same store sales, where are those comps coming from? Are they volume, are they price, what?

Well, they certainly are not coming from price because we haven’t h ad a price change certainly in Q1. And so, that they are absolutely are coming from volume. And so, as new patients coming in the door, if we look at some of our new patient counts, we're seeing them considerably improve or increase. And they're also coming from our existing patients who are using us more often. And now, those are the two primary drivers of those same store sales for to achieve on those 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+, this one?

I think it's probably around a 50'ish. So, we'd say well that part is about 12% of the network and they've not been more than 48 months; it's as the estimate but that speak well.

Okay, great. And then, I mean have you guys thought about your front price increases or just I guess your fronts 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 pricing structure to help a patient that something we look at different ways to make sure that the patients are most affectively utilizing it. That nothing that we're announcing to the system but it's definitely something that we're looking at to 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 that do you think the customers how long they give the demand or the volume to price them heavily. Have you looked at that?

If you look at, I think one of the drivers of this business from the beginning is just one, the ease of access to it, two, the cost is that we're incredibly affordable. If you got traditional chiropractic care, even if you've had insurances that the typical co-pay on a per adjustment basis is far higher that what would be if you remember the Joint. And so, I think that there is no question that the increase in our patient is related to the convenience and the affordability of our offering. And we do look at it on a as on a system wide basis is what is the most effective pricing structure. So, it was in 2016, that we did in fact raise our prices. What would, most of our sale is from a clinic, 76% of the sales of an average clinic was generated from membership fees. And what that is and we do have kind of regional pricing on a monthly fee between $59 or a $69 or $79. And that patient will pay that monthly fee and has access to four adjustments for that month. And that back in 2015, after its considerable testing program that 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 roll out of them that very much. And what we found is that it was we had very little fall off in terms of our patients.

Is that you can get it because it's just the price parity between what you guys were offering and the I guess the competition, the co-pay kind of act in 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 are people then okay was she prefer me to go to the Joint, is the people who never had access to chiropractic care before, they didn’t know what it was; didn’t know they could afford it. Didn’t know where it was. And so, that I think that certainly that you have patients who may have traditional chiropractic care, ran out of insurance but I think this is 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. Hey, I don’t have any more questions. And thank you so much for your time and I'll talk to you guys next quarter.

Alright. Thank you, very much.

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. And I'd like to leave you with the patient testimonial. 36-year-old Lauren works in sales but no weekends she's a Motocross competitor. Over the years this form have offered motor cycle racing has resulted in a few injuries and most recently the separation of her AC joint that connects the shoulder blade and the collar bone negatively impacting her performance and quality of ride. Luckily, she's 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 patient's wellbeing and we'll continue our pursuit of delivering quality, convenient, and affordable chiropractic care to our patients and value to our shareholders by broadening our footprint to accelerating our franchise sales, expanding our regional developer program and adding corporate and my owned or managed clinics in a strategic and measured with passion. Alright, 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!