Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Joint Corporation Second Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Moriah Shilton. Thank you. Ma’am, please begin.

Thank you, operator. Good afternoon, everyone. This is Moriah Shilton of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our second quarter and provide an update of the business. CFO, Jake Singleton, will detail our financial results. Then Peter will close with a summary and open the call for questions. Please note, we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the close of the market, The Joint Corp. issued its financial results for the quarter ended June 30, 2020. If you do not already have a copy of this press release, it can be found in the Investor Relations section of the company’s website. As provided on Slide 2, please be advised, today’s discussion includes forward-looking statements, including statements concerning our strategy, future operations, future financial position and plans and objectives of management. Throughout today’s discussion, we will present some important factors relating to our business that could affect these forward-looking statements. The forward-looking statements are made based on our current predictions, expectations, estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today. Factors that could contribute to these differences include, but are not limited to, the continuing impact of the COVID-19 outbreak on the economy and our operations, including temporary clinic closures, shortened business hours and reduced patient demand, our failure to develop or acquire company-owned or managed clinics as rapidly as we intend, our failure to profitably operate company-owned or managed clinics and the other factors described in Risk Factors in our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2019, as updated for any material changes described in any subsequently filed quarterly…

Thank you, Moriah, and I welcome everybody to the call. I’d like to start by thanking all of our doctors and staff, who in the middle of this pandemic are providing essential health care services to our patients who truly see chiropractic care as essential to their health care need. And by utilizing chiropractic care to help reduce their pain, we’re able to alleviate some of the pressures on our country’s overtaxed emergency rooms and hospitals. It’s hard to imagine it’s only five months ago that our lives were overturned by COVID-19. As I reflect on the performance of The Joint, I’m humbled and gratified by the resiliency of our business model. As we witnessed so many other retail concepts urgently reinventing themselves to survive, the strategic vision and the operating model of The Joint continues to perform, as illustrated by the fact that 99% of our clinics are open, the strength of our overall financial performance, our continued growth in both franchise and greenfield clinic openings as well as our ongoing franchise license sales. And while no one can predict the course of COVID-19 with certainty, we remain confident in our ability to adapt, to serve and to grow in this unique environment. While Americans spend over $15 billion a year on chiropractic care, The Joint continues to revolutionize access with convenient retail settings, concierge-style membership-based services, attractive pricing and hours and without the need for insurance or appointments. Our growth strategy is to open new clinics, which builds our brand, grows familiarity with chiropractic care and attracts new patients. Already, we’re the largest and most recognizable provider of chiropractic care in the country. We utilize a franchise model as well as company-owned and managed clinics to expand in a capital-light fashion. As noted on our last call, at…

Thank you, Peter. Turning to Slide 10. As we review the performance of 2020 compared to 2019, keep in mind that the COVID-19 impacts included the effects of reduced new patient traffic in the early part of the quarter, frozen memberships and discounts associated with the marketing promotions that Peter reviewed. Notably, our performance improved throughout the quarter and the trend continues. Comparing the second quarter 2020 to the second quarter 2019. Even taking into account the discounts related to our two promotions, system-wide sales for all clinics open for any amount of time increased 2% to $53.5 million. System-wide comp sales for all clinics open 13 months or more decreased 6%. System-wide comp sales for mature clinics open 48 months or more decreased 10%. Revenue was $12.6 million, up $1.4 million or 13%. Company-owned or managed clinics contributed revenue of $6.9 million, increasing 19% from the same period a year ago. Franchise operations contributed $5.7 million, up 6% compared to the same period last year. Increased revenue for both categories is due to the greater number of clinics and continued organic growth, offset by the impacts of COVID-19. Cost of revenues was $1.4 million, up 5% over the same period last year. The increase was in line with total increase in franchise sales and reflective of higher regional developer royalties and commissions. Selling and marketing expenses were $1.8 million for both periods, reflecting the timing of our advertising fund spend. General and administrative expenses were $8.5 million compared to $7.2 million, primarily due to an increase in payroll and related expenses to support revenue growth and increased clinic count. We continue to operate our corporate clinics and headquarters without any furloughs or layoffs while working to increase sanitary measures to ensure patient and employee safety. Also, as previously discussed,…

Thanks, Jake. Turning to Slide 12. As noted, our resilient model is driving growth and our long-term opportunities continue to expand. As a nation, we’re looking for more natural holistic ways to get out of pain. The U.S. chiropractic market is already $15 billion, and 50% of the Americans still don’t even know what the word chiropractic means or how it can help them. As we increase awareness, our new patient base continues to grow. Now with many working from homes slouched on their couch or using non-ergonomic chairs, more people than ever are experiencing pain. The Joint will be there to help them out. And with our newest tagline that says, we truly have got your back, baby. In closing, I’d like to once again express my deepest gratitude to all of The Joint chiropractic teams who have continued to selflessly serve during this pandemic. Their dedication to our mission is awespiring. To our franchise community, our RDs, our corporate team and The Joint colleagues around the country, I thank you. You’re truly making a difference in all the lives that you touch. Howard, I’m ready to begin the Q&A.

[Operator Instructions] Our first question or comment comes from the line of Jeff Van Sinderen from B. Riley. Your line is open.

This is Richard Magnusen in for Jeff Van Sinderen. First, congratulations on performing so well in spite of the COVID impact. Can you give us some insight into what your current expectations of 3Q revenue are compared to your pre-COVID expectations?

Richard, thanks for the kind words. We appreciate it. And Jake?

Yes. As you know from the remarks, we’re not reiterating or providing any forward-looking guidance. In the release and in the comments, we did refer to the momentum that we’re seeing in July back to double-digit comps of 10%, license sales and openings picking back up. So I think we’ll refer to those comments in terms of any forward-looking projections.

Okay. And you communicated with the patient base frequently during the early stages of COVID, and it seems to have paid off. Can you provide us any metric or feedback from patients on how successful these efforts were at making patients feel safe and how it may have strengthened your relationship – their relationship with Joint? And then also, how much higher was the conversion rate of new patients during the campaign in June that offered the free initial visits to the new clients?

Sure. And there’s no question, as the pandemic broke out, and we’re all wondering what to do, how to respond, what does this mean to our patient base, what does this mean to our franchisees. On every level, we leaned into a greater level of communication with our franchisees. We had all kinds of different calls that we set up, town hall calls, webinars, helping them get their PPP loans. And we had the same reach out to our patients. And our patients were reaching out to us. They were going online. They were expressing their concerns. They were asking about what is our protocols or procedures. And so that we did, in fact, both through text, with email to our patient bases, expressed to them what some of the changes that we’re doing, making sure they understood that we remained open. There are so many businesses that were closing; it’s always not clear whether you were open or not. And at one point, as we talked about in earlier calls, about 10% of our network was, in fact, closed for a period. Today, 99% is open. And that, in terms of the conversion rate, is our historical conversion rate has been running, let’s say, in later 40s as a system, and that since COVID is that aside from just the promotion, we have seen consistently a higher conversion rate, well over 50% on average across the network in light of this COVID environment. And when we looked at it for the promotion itself, it was even a little bit higher than that 50% mark. So we were bringing more people into the clinic and then converting them at a rate that we have not seen before historically as a company.

Wow, that’s pretty strong. And then my follow-up question, considering where you are in this prolonged pandemic environment and considering what has worked for you recently, can you provide any more details or direction on your marketing message to new patients and existing patients going forward?

Well, the main message to our patients going forward is that we’re there, we’re open, we’re there to serve you, that we’ll continue to make sure they understand the increasingly important protocols of cleanliness and sanitization. That we’ve obviously, as I outlined in my conversation there, that there’s a number of changes we’ve made in the way in which that we treat our patients and where the – how much – how many we’ll allow in the clinic any given time, the number of seats in those reception area, removing or limiting the number of people in the open bay. And so we’ll continue to share that message with our patient base. The other thing is that we believe this is a real opportunity for chiropractic. 60% of the American people right now are teleworking. And they’re not in their ergonomically sound chairs. They’re slouched over the couch. Their spines are a mess. And so we believe that we’re in a space that we can bring them in, give them – show them the benefit of chiropractic care, and it’s affordable, and it’s accessible, and it’s convenient at a time when there’s so many things that are going crazy in this environment, that we believe that, that’s a really important message that we’ll continue to share as we go forward through the rest of the year.

Very good. Thank you.

Thank you very much, Richard.

Thank you. Our next question or comment comes from the line of Frank Takkinen from Lake Street Capital. Your line is open.

Hey guys, congrats on all the strong progress and the continued resiliency of demand in the quarter. I got a couple for you today. First, I kind of want to focus in more on the conversion rate we were just previously speaking about. What else do you think was behind that 50% conversion rate aside from the promotional activity? Is there something occurring in the competitive environment where maybe some of your less funded mom-and-pop shops weren’t able to stay open, and you’re seeing conversions from some of those people? Or what else is driving that high conversion rate in the quarter?

Hi Frank, thanks for the kind words, and that’s such a great question. And what I really truly believe is that one of the reasons we’ve, through this pandemic, experienced such a high conversion rate, and not just because of the promotion, in fact, actually, to be very frank, there was a concern that if we were offering free visits in the month of June, historically, you bring in a patient that’s more of a tire kicker, not really serious, okay, they get their free adjustment, but are they really going to stay with us as a patient? Is it worthwhile for our doctors to be busy with these patients that ultimately won’t stay on as a member? And what we found is, obviously, the opposite. So we were converting at a rate that we really were surprised by. And I really believe that more than anything else, that’s because of those patients who are going out into chiropractic care today, are in probably more pain and more serious about it because of the pandemic because you may be concerned about going to get your coffee, or going to a fast food restaurant or some of the other places, a bar, which is, I think, one of the worst places you can go with in light of COVID, but if you’re going to a chiropractic care clinic for the first time, it’s because you’re in pretty significant pain. And so I think that in some way, there was self-selecting in that those patients who really ventured out and came into our clinics for the first time and not really knowing what to expect, were the ones that really needed us and then that’s reflected in the conversion rate that we saw throughout this pandemic in particularly the promotion.

Got it. That’s very helpful. On the second question, I was hoping we could talk about the comp sales a little bit. It was encouraging to see that jump back into the double digits as quickly as it did in July. How are you guys thinking about comp sales for the rest of the year? And do you feel that we may have a linear outlook from the lows that we probably experienced in April, May time frame?

Yes, Frank, great question. If you think trajectory, as we mentioned, obviously, we had the deepest impacts in the early part of the quarter, and we’ve seen those trends improve. I think the same reason we’re not reiterating guidance. I think there’s still uncertainty that remains out there. But really, as we look at the momentum that we picked up in the latter half of the second quarter and into July, we’re optimistic that those trends will continue. But I think uncertainty remains, which is why we’re not providing that longer-term guidance at this time.

The one thing I’d add to that, though, Frank, is that if you look at our network is that – and if we go back into the early part of this pandemic, is that the parts of the country that were most impacted were Northern California, were the New York corridor and places where we had the least amount of clinics. And as we come into this new hotspots or surges or whatever you want to call it, is that you’re looking at clinics in Southern California, Arizona, Texas, Florida, all in which areas where we obviously have a significant portion of our clinics. In fact, probably about half of our clinics are in those four states alone. And as we’re analyzing, we gave the number for July, and we typically never break down our comp sales by region, but when we looked at the July numbers and the overall rate for any clinic open more than 13 months, as we said, was over 10%. And we analyzed just those four states, and it was, I think, 9.4% for those four states that were in the heart of this impact. And so while we’re still not clear because no one can really give us certainty on the course of this pandemic, we’re heartened by the trends that we’ve seen as we move through this pandemic.

Got it. All right, I’ll hop back in queue. Thanks so much for taking the questions.

Thanks a lot.

Thank you. Our next question or comment comes from the line of Brian Finley from ROTH Capital. Your line is open.

This is Brian Finley. I work with Dave Bain. We are hoping if you could discuss if COVID has accelerated any plan to accelerate the diversification of your mix of greenfields or acquisitions from a geographic standpoint. Also, as we hopefully exit COVID, your business has proven extremely resilient, adding to overall confidence in our view. Does that change your calculus to be even more aggressive with greenfields or acquisitions as we think about next year? Or is the 2021 plan pretty much the same as pre-COVID?

Yes, Brian, thanks. Those are great questions. I’ll start with the second one first in that, I think, overall, the trends and the resiliency of the model have given us confidence. We mentioned a couple of times in the comments that we are returning to growth. Another thing that Peter mentioned is that as we look at the model in our strategic direction is that we really didn’t have to pivot off of that. So our growth strategy in terms of the franchise and corporate mix is still the same as it was. The underlying model and the economics make sense for us to continue to grow our corporate portfolio and balance that against the continued franchise growth. So I think through the pandemic, we’ve just seen the resiliency, which provides us more confidence to get back into that growth and increase our development. We reiterated the goal to reach 1,000 by the end of 2023. And with the slight pause here in the second quarter, the slowdown, we’re going to have to get back on that to reach that goal, but it’s very much attainable for us. So I think the resiliency has provided us continued confidence to move forward. As it relates to the geographies, the core concept is still the same, right? We would always look to cluster where we have existing corporate clinics, so we can leverage that overhead. But the model is sound. As we look at regions, as Peter mentioned, or different states throughout the country, the model – the consumers wanting chiropractic care is proving to be something that we see viable across the entire country. So we will continue to deploy the regional developer model and complement that with our corporate clinic development.

Great, thank you.

Thank you. Our next question and comment comes from the line of Anthony Vendetti from Maxim Group.

Thanks. Good afternoon, and good evening. Sorry, I missed part of the call, but I heard the part, and I just want to make sure I have this right. So about half your clinics, Peter, are in Florida, Texas, Arizona, California. And for those clinics, did you say patient visits or patient volume was up 9.4%? And was that for the quarter, if that’s the correct percentage, or is that for the month of July?

Yes. What I was saying is those were comp sales for those four states, and that – and I guess what – Jake was just correcting me that our system-wide comp sales for any clinic open for 13 months in the month of July, we said it’s 10%. It’s actually 10.2%. And that in our analysis, and this is just looking at comps, not visits but just comp sales, in our analysis, we took four states, California, Arizona, Texas and Florida, which represents roughly 50% of our network, what we’ve seen in the country, some of the biggest impact in these resurgence or hotspots of COVID. And we looked at the comp rates in July now for those four states separate. And what – I said the number was 9.4%, but Jake just corrected me and said that actually, the number was 10.1%.

Wow. So it’s even with the surge or outbreak.

Correct, exactly.

It’s pretty close to what you’re seeing for all your other clinics.

Correct. It’s 10.1% versus the 10.2% across the whole country.

Right. Okay. That’s impressive. Okay, and…

And also, I think, Anthony, I think that’s really reflective of kind of the whole message that we – one of the messages that we’ve been talking about today is the resiliency of the model, that health care – the chiropractic care is essential to health care, but not just because I say it, because our patients need it. Our patients are coming in. The patients are coming in from the promotions. They’re coming off freezes. They truly see this as essential for them. And of course, that gives us comfort with this model going forward.

Sure. I don’t know if this was mentioned before, but just on – in terms of COVID-19 for whether it’s your franchise owners, the corporate-owned clinics or the chiropractors that you employ, what has been the level of positivity? Or what’s been the level of positive tests? How many of your employees and then how many of the franchise owners’ employees, particularly at the chiropractic level, have contracted COVID-19?

It’s a great question. As a straightforward number, I don’t have that. I can certainly know how many have got it within our corporate office and within our – with our own corporate network. What I would say is that we definitely have seen it. We’ve seen a few cases in our corporate office. Our corporate office is relatively closed. We’re in Phase 1, we call it. So there’s only – normally, we’d have 50 people in the office here and that we are only allowing 10% – 10 people in the office any given time, and we have a series of procedures that we put in place to protect the staff. On our corporate level, again, not a significant number, but yes, that we have had doctors and wellness coordinators who have tested positive. We’ve had patients who’ve called in, and said to us, I just got tested positive. We sought all the local health procedure or the local health authorities on how you proceed when you have these positive cases. And so it’s happening out there, but not to any measurable degree is the way I would say that. And I think on the franchise side, I have a little less visibility into that since these obviously are independently owned and operated businesses, but I think that their experience has been reflected similar to the corporate.

Okay. So even though there’s been some cases, what you’re saying is that it hasn’t had a material impact on your business thus far, correct?

No. And I mean, that’s a very fair statement. I mean with the number of employees or staff or doctors or franchisees who’ve been positive to COVID-19, it has not materially in any way impacted the business.

Okay, great. Thanks a lot. I’ll hop back in the queue.

Thanks, Anthony.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Ryan Kimbrel from Craig-Hallum. Your line is open.

Hey guys, congrats on the quarter. I understand the environment is wildly different right now. But can you talk about the 13 clinics you opened in the quarter and how the current ramp rates of those new clinics compare to your more typical ramp rates?

Sure, Ryan. Thanks for the question. I’ll point to the comment that we made within Peter’s section with kind of the post-COVID example. We opened a clinic in Texas that opened in June. And in June and July, the cumulative sales were $75,000, which is an all-time system record for us. So while that is obviously the record in the outlier, the clinics are starting strong. So again, the resiliency of the model, I think, is the message that patients still need this chiropractic care, and the affordable and convenient way that we’re providing it is resonating. So we are seeing kind of this post-COVID environment with strong starts.

Okay, great. And then maybe if you guys could provide some color on the success of the free trial program in June. And then as a second part, I guess, we’re seeing sort of a second wave of sorts across the country in terms of COVID cases. I guess, if you could provide some color on what you’re hearing from customers and sort of the differences between customer behavior during the initial onset of COVID in March and compared to sort of what you’re seeing today, that would be great.

Sure. I’m going to start with your second question, kind of the customer behavior, as it started in March and how it is today. And what – and we talked a little bit about this on the earlier quarter call is that what was interesting is that our attrition rate, and that’s the rate in which our members drop – remain steady or dropped during the COVID, the initial part of the COVID pandemic through to today. And so we’ve seen a consistency in that attrition rate. And I would have expected, quite frankly, that we would have seen an increase. Now we did see an increase in freezes, but it was not translated into attrition or drop. So I think people canceling their membership. And that while we may see a little bit more of that as we go forward, but the messages then is that they – we have not, in fact, seen an increase in attrition to date. We have also, as I already talked on the call, seen during this period, in particular during the June month promotion, an increase in the conversion rate. And again, I think that’s reflective of those patients who are actually opening that door for the first time, are really in need of our services and that they’re converting at a rate historically that we have not seen before, which is, again, very positive. The one area that we had seen a particular drop in one of the key metrics that we measure, especially if we go back to Q1, was, in fact, our new patient counts, which also makes sense to me because if you’re a new patient, you’ve never been to the chiropractor or you’ve never been to The Joint, and that you’re in the middle of a pandemic,…

Great, thanks for taking the questions, and congrats again.

Thank you.

I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Holt for any final comments.

Thank you, Howard, and thank you all for your time today. Please note that we plan to participate virtually in the Lake Street Best Ideas Growth Conference and LD 500 later on this quarter. Typically, I’d like to end the call with a patient story. And today, the patient is from Portland, and I’m quoting, "Right before COVID, I flew a lot for work, and it triggered an old back injury. When shelter-in-place started, and I was working from home, I was in a lot of pain. However, I was worried that where could I go to get treatment. My friends recommended The Joint. With their sanitary protocols and masks, I felt comfortable getting adjustments. I’ve continued treatment, and my pain is significantly improved. With my pain nearly gone, I’ve been able to work at home – work in my home office, exercise and garden." So thank you and stay well adjusted.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Stay safe.