The Joint Corp.

Hello and welcome to the Joint Corps Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kirsten Chapman of LHA Investor Relations. Please go ahead.

Thank you, MJ. Good afternoon, everyone. This is Kirsten Chapman of LHA Investor Relations. Joining us on the call today are President and CEO Peter Holt and CFO Jake Singleton. Please note we are using a slide presentation that can be found at ir.thejoint.com. Today, after the close of market, the joint issued its operating metrics for the quarter ended June 30th, 2023. 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 two, please be advised that 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 current predictions, expectations, estimates, and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from statements we make today. Factors that could contribute to these differences include but are not limited to our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics, Due in part to the nationwide labor shortage, an increase in operating expenses due to measures we may need to take to address such shortage, inflation exasperated by COVID-19 and the current war in Ukraine, which has increased our cost and which could otherwise negatively impact our business, the potential for further disruption to our operations and predictable impact on our business of the COVID-19 outbreak and outbreaks of other contagious diseases, 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, short-selling strategies, and negative opinions posted on the Internet, which could drive down the market price of our common stock and result in class action lawsuits. Our failure to remediate any future material weaknesses in our internal control over financial reporting, which could negatively impact our ability to accurately report our financial results, prevent fraud, or maintain investor confidence, and other factors described in our filings with the SEC, including the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 10th. to 2023 and subsequently filed current and quarterly reports. As a result, we caution you against placing undue reliance on these forward-looking statements and encourage you to review our filings with the SEC for a 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. Due to ongoing quarterly review procedures being performed in conjunction with the joint's independent public accounting firm, management has postponed the issuance of its second quarter financial results as of June 30, 2023. The matter in question is related to our regional developer arrangements that would have a non-cash impact to the company's financial statements. Management also includes commonly discussed performance metrics. System-wide sales includes revenue, at all clinics, whether operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company, management believes the information is important in understanding the company's financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health in franchise base. Comp sales include the revenues from both company-owned or managed clinics and franchise clinics that in each case have been open at least 13 full months and 48 full months and excludes any clinics that have been closed. Turning to slide three, it's my pleasure to turn the call over to Peter Holt. Please go ahead, Peter.

Thank you, Kirsten, and I welcome everybody to the call. For Q2 2023, during an environment of continued economic uncertainty, we posted growth in system-wide sales, supported by our ongoing franchise license sales, clinic openings, and new patient acquisitions. That said, we strive to do more and to do better. As such, we're implementing strategies to increase our long-term opportunities. I'll review these in detail in a moment. First, for those investors who are new to the company, the joint is revolutionizing access to chiropractic care by providing affordable, concierge-style, membership-based services in convenient retail settings. Turning to slide four, let's review our operating metrics for the second quarter of 2023 compared to the second quarter of 22. System-wide sales grew to 120.1 million, increasing 13%. Comp sales for clinics that have been open for at least 13 full months increased by 5%. And at the end of June 30th, 2023, our unrestricted cash was 13.6 million compared to $9.7 million at December 31, 2022. Turning to slide five, I'll discuss our clinic metrics. During Q2, we opened 26 clinics, 23 franchised and three greenfields, one of which is in Southern California, another in Santa Fe, and the third in Fort Dixon, New Jersey, in conjunction with our Army and Air Force Exchange Service. This compares to Q2 2022, in which we opened 34 clinics, 31 franchised, and three greenfields. We also acquired three previously franchised clinics in Northern California, which was made possible by the acquisition of the regional developer rights to that territory in April of 22, as compared to the acquisition of four previously franchised clinics in Q2 22. In Q2 23, we closed two corporate clinics, one which will be relocated, and four franchise clinics, compared to closing one franchise clinic in Q2 2022. At less than 1%, our closure rate remains one of the lowest in the franchise community. In summary, in June 30, 2023, we had 890 clinics in operation, consisting of 556 clinics, franchise clinics, and 134 company-owned or managed clinics. The portfolio mix remained at 85% franchise clinics and 15% company-owned or managed clinics. At the quarter end, we had a solid pipeline for future franchise clinic openings, with 214 franchise licenses in active development. Subsequent to quarter and through the end of August 9th, we opened one Greenfield clinic and nine franchise clinics. And we are delighted to announce that we opened our 900th clinic in Texas earlier this week. Turning to slide six, in Q2 2023, we opened 21 franchise licenses, up from 17 in Q1 2023, compared to 24 franchise licenses sold in Q2 2022. This past quarter, 76% of our new licenses were purchased by existing franchisees. Their reinvestment reflects their understanding and the confidence in the joint, even in this environment, which we believe indicates the strength of our business model and demonstrates the health of our franchise system. In June, we acquired the territory rights to Wisconsin, reducing our regional developer count to 17. Our aggregate 10-year minimum development schedule for new RD territories established since 2017 is 590 clinics. Turning to slide seven, let's review our marketing efforts. Our new patient acquisition is our highest priority, and in Q2, we've implemented new tools, programs, and several tests, and I'll review a few for you now. We launched our first phase of our marketing automation initiative on May 31st with a different email series designed to support lead generation, new patient onboarding, and patient retention. Each email campaign is tailored to the unique needs and perceptions of the prospective and current patients based on their chiropractic journey. Using our new marketing technology, we are automating the sending of the right message at the right time in that patient journey. We have multiple initiatives underway, including employee incentive plans, new lead management programs, and new regional landing pages. Additionally, we're assessing appointments for first-time patients to improve the experience and ensure smooth patient flow in the clinics. We also continue to expand our digital marketing efforts. For example, we started a test with TikTok in four markets. The initial results were positive, with lead costs 15% lower than when compared to meta. Subsequently, we increased the test to include four additional markets on expanding the targeted radius and updating the creative for better optimization. We continue two new promotions in our mix, In April, we launched a digital referral program to drive new patient counts during the most effective validation marketing. In June, we introduced the buy five, get one free wellness sale, which was very successful and allowed any patient that made an advanced wellness plan purchase of five months to receive the six months free, demonstrating our patient's value and an affordable commitment to their treatment plan. Lastly, we're updating our patient journey research. These findings will inform message optimization and customer experience from their initial search for a chiropractor to becoming and remaining a patient. As noted on prior calls, chiropractic care is a natural fit with sports and military, and we enjoyed opportunities to support veterans and the local sport teams. The Department of Manpower and Reserve Affairs conducted a trial found increased isometric strength and endurance among members of the military who received chiropractic adjustments and noted chiropractic care improves key fitness characteristics among active duty service members with lower back pain. In June, we began a collaboration with our Canine for Warriors, a nonprofit organization that pairs highly trained service dogs with military veterans suffering from service-connected traumas. Military training, deployment, and the service can take a serious toll on the body's physical and mental state, and the Canine for Warriors program mirrors the joint's philosophy that everyone can benefit from a natural approach to pain relief. We're sponsoring an impactful conversation surrounding a shared philosophy that supports a drug-free approach to wellness, as well as the training and pairing of a service dog for a veteran in need. Through our year-round military appreciation program, we also honor active and retired members of the military, as well as their immediate families nationwide with discounted initial visits and monthly wellness plans. Also, Chiropractic Economics has several articles citing the study that demonstrate chiropractic boosts sports performance and assists with rehab. In July, we were excited to announce that the joint chiropractic was named the official chiropractor for the Tampa Bay Buccaneers, our first NFL partnership, and our second major league sports sponsorship. The Tampa and Orlando marketing co-op groups, which cover almost 40 clinics, partnered with a team to highlight the benefit of routine chiropractic care for the loyal fan base in the surrounding community. Before I turn the call to Jake, I'd like to note that I'm excited that next week we will welcome our new chief marketing officer. With vast experience, franchise experience, she's an expert in digital marketing and building customer loyalty. We're excited to have her join the team as we implement our programs, including additional brand building efforts with a focus on increasing new patient acquisition.

And with that, Jake, I'll turn it over to you.

Thanks, Peter. And we'll turn to slide eight. As mentioned earlier, due to ongoing quarterly review procedures being performed in conjunction with the joint's independent public accounting firm, management has postponed the issuance of its second quarter financial results as of June 30th, 2023. The matter in question is related to our regional developer arrangements and would have a non-cash impact to the company's financial statements. I'll review our clinic comps for Q2 23 compared to Q2 22. System-wide sales for all clinics open for any amount of time increased to $120.1 million, up 13%. System-wide comp sales for all clinics open 13 months or more increased 5%. System-wide comp sales for mature clinics open 48 months or more decreased 1%. This comp reflects fewer than anticipated new patients at some of the more mature clinics. I can state that at June 30, 2023, our unrestricted cash was $13.6 million compared to $9.7 million at December 31, 2022. For the six months ended June 30, 2023, cash flow from operations was $8.4 million, including the receipt of the employee retention credits of $4.8 million in the first quarter. For the six-month period, we invested $4.7 million in acquiring previously franchised clinics and the rights to an RD territory, as well as ongoing Greenfield Clinics in upgrading existing clinics. Also, we continue to have access to additional cash through our line of credit with JPMorgan Chase. To date, we've drawn $2 million and have an additional $18 million available. Due to the ongoing quarterly review procedures, I can't provide financial guidance at this time. However, I can reaffirm our guidance for clinic openings is on track for 2023. For franchise clinics, we continue to expect openings to range between 100 and 120, compared to 121 in 2022. And for Greenfield clinics, we continue to expect to open a range of 8 to 12 compared to 16 in 2022. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to slide 19, with the success of Joint's national growth with over 900 clinics, we're entering new territory. With a portfolio of 135 corporate clinics, we've reached the natural stage where we'll continually evaluate unit performance and respond as market and retail environments change. This entails considering selling certain clinics to franchisees, closing clinics, and or relocating others due to the performance, loss of an anchor store or the strip center, or changes in the local retail market. This analysis and execution has been thoughtfully and methodically, and especially since we have a talented team's lease obligations and other factors to consider. With that said, it's important to note that we're exiting certain clinics would be accretive and enable us to devote our key resources to more productive areas. Also, as discussed on previous quarter-end conference calls, we're slowing down our greenfield strategy. We began to fulfill our outstanding lease obligations, and then we'll pause to assess strategic markets based on economics and demographics. Further, as Jake mentioned, we're also focusing on general and administrative cost-cutting initiatives. Finally, we're implementing tactics to drive new patient acquisition. Let me start by saying our total new patient conversion is still strong at approximately 50%, and up from around 45% pre-COVID. Also, our attrition remains low, around 11% per month compared to the 12% to 13% in recent years. As such, we're focused on increasing new patient leads. As noted in my marketing review earlier, we're also building our national brand through digital, automated, and traditional marketing. While we're managing this unusual economic environment, it is critical to understand the underlying market fundamentals remain strong for our business, and the drivers of our long-term growth are compelling. Pain, opioid, and obesity epidemics continue to plague our nation. Americans, particularly younger ones, which is our patient base, are searching for natural, more holistic ways to treat pain and are spending about $19.5 billion a year on chiropractic care. Our clinics offer doctors of chiropractic a sustainable path to practice what they love and leverage our system-wide resources like staffing, productivity tools, and more importantly, marketing. The whole system also benefits from frequent educational outreach efforts with associations and schools of chiropractic. For example, a few weeks back, I enjoyed participating in the Texas Chiropractic College's 115th homecoming, and next week with my team, we're headed to the world's largest event of chiropractic care, the National Convention organized by the Florida Chiropractic Association. We remain focused on what we control, executing programs to improve clinic performance and to reduce GNA for our long-term profitable growth. The core of what we're doing and the impact of our mission to improve quality of life through routine and affordable chiropractic care is our guiding principle. I'd like to thank our community of doctors, wellness coordinators, franchisees, regional developers, and employees for their passion and dedication. The team is committed to growing the overall chiropractic care market, educating the consumer about the efficacy of chiropractic, capturing a greater share and enhancing performance, all with the goal of fulfilling our mission. And with that, MJ, I'm ready to take the Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.

Thanks.

So I wanted to ask a question about the Aligned Franchisee Association, the AFA, which is now representing more than 50% of the franchise clinics. And just understand a little bit more of the types of engagement that you're having with AFA, kind of what are the major discussion points and points of interest from the AFA, and what you can share about how you're working with them to help build the brand.

Sure, Jeremy, I'll take that question. Obviously, the AFA has formed. In any organization, in a franchise system, from time to time, you will see an independent franchise association form. We also have our National Franchise Advisory Board. This is made up of nine members that are elected to that position, and that is our formal form of communication with our franchise community. Outside of, of course, I will take a call from any franchisee in our network, And so at this point, that we really don't have a formal relationship with the independent association, that we believe that the National Franchise Advisory Board is the most appropriate form of communication and to address the issues and concerns that the independent association has. And so that's really kind of the approach that we're taking to the situation.

Okay, got it. And then... Since it seems like maybe you're limited in what you can discuss on this call, are you planning to have a follow-up call after you issue formal results, and can you discuss the timeline in which you expect to have the matter resolved with the auditors in the more formal or more full release?

Yeah, Jeremy, this is Jake. Yeah, we're disappointed we couldn't release the financial results today due to the ongoing quarterly review procedures. You know, there was a late question that came up around our regional developer arrangements. You know, we know that that's going to have a non-cash impact, but we have some further documentation and procedures to get through to align on that. You know, we know we have a 10Q filing deadline on Monday, and we are dedicating all resources to adhere to that But yes, we would have an additional press release to release that information.

But are you going to have an additional conference call?

We haven't made that determination at this time.

Okay. And is it fair to assume, though, that you would kind of definitively be wrapped up with reporting Q2 by the end of the month?

Yeah, that is the goal. You know, we're down to a narrow range of ongoing issues. So, you know, like I said, we are dedicating all resources to address the issue and get our financial information out there as quickly as possible.

Okay, got it. Thanks. Good luck.

Thank you. The next question comes from Jeff Van Sinderen with B. Reilly. Please go ahead.

Yes, hi. Not to beat a dead horse here, but just maybe if there's anything else you can shed light on related to the issue with your auditors, related to your RDs, maybe what part of the financials might be impacted, sort of what is the heart of the issue there. And you said you're planning to file the 10-Q by Monday. Is that right? Or I'm a little confused. And then you said get the results out by the end of the month. No, I don't.

No, we know we have a timely filing deadline for Monday, and we are doing everything we can to adhere to that timeline. We do have unresolved issues that we have to work through, and so we know the urgency of the information, and we're dedicating the resources to get out there. But yes, I am shooting to hit that filing deadline on Monday. That's absolutely true. The heart of the issue is around our regional developer arrangements. These were transactions that we've entered into in the past and a reacquisition that we executed in the quarter that we've also done in the past. We use similar accounting treatments that we've used in the past under previous audits, and there's a new question that has arisen that we have to work through and get the documentation together to align with our outside accounting firm.

Okay, so it sounds like, correct me if I'm wrong here, but it sounds like it's really more revolving around the reacquisition. In other words, if you had not reacquired in the quarter, this issue probably would not come up. Am I correct on that?

That's correct. Yeah. Sometimes when you have a new set of eyes, you get a new set of questions, and that's what we had this time. And, you know, we've got to make sure we have the appropriate documentation in place so that all parties can agree to release the financial information.

Okay, got it. Yeah, absolutely. Just to emphasize, it's a non-cash issue. Definitely just to make sure that we're, you know, complying with, you know, gap revenue terms. Yeah, that's correct.

I mean, the flow of funds will be the same. It'll really just be the gap accounting, you know, that sits behind that.

Okay, got it. And then if you could maybe speak more about your plans for the mature corporate clinics. I think you highlighted that in the press release, just kind of what the performance has been there and what the threshold is to close some of them. I realize you guys have a very low closure rate. Maybe how many you expect to close? I know it's a tough question now because you're probably evaluating that. And then also just kind of as a follow-up to that question, maybe touch a little bit more on the expense reductions you're looking into.

Yeah, great questions. Can we categorize that more of a strategic review? And so I don't have a strategic number or a target that we're shooting for. We're looking at that and how we're allocating resources and realizing we can be more efficient there.

And to also just be clear, Jeff, that these aren't always closures, that some of them can be sold to a franchise, you know, in terms of just looking at our geographical spread. So there's a lot of factors there that we're really looking at so that some could be sold off, others will be sold, others can be relocated.

Mm-hmm, mm-hmm. But the net effect should be.

Yeah, I don't have a fixed number for you today, Jeff. We're going through that process. We've identified a number of clinics already that are on kind of our action item list, if you will. So I do expect the mix of corporate and franchise to shift in accordance with that. Again, we're going to be methodical with it, as we mentioned in the transcripts. realizing that there's a lot of factors that we have to consider. And I'll reiterate Peter's point that, you know, this is not, you know, an immediate closure exercise. You know, this is potentially repranchising a portion of that. So what we do know is that we still have a vast majority of our corporate portfolio are profitable units. We have a good number of units that are still, you know, young units. Obviously, we've gone through a pretty significant investing cycle in that space. and the fundamentals of the business are still strong. So we're not abandoning the corporate approach by any means. This is kind of a strategic optimization exercise looking for those efficiencies in the portfolio and also realizing that we have issues to address and we're going to allocate our resources appropriately. As far as your G&A question, that's again, a strategic review. As we kind of pull back the scale of a portfolio, there's some natural flow through and trimming that can happen there. And then also making sure that, you know, with the level of development and where we're going to exert our effort, that we're finding the efficiencies in our G&A structure. And so I think, you know, in periods where we're looking to accelerate the profitability of the company, I think it's only prudent to go back and look at your cost structures and make sure that they're their right size for your organization. And that's the exercise that we're going to take on.

Okay. And then just as a follow-up to that, if I could, can you tell us the difference in the comps between the corporate-owned clinics and the franchise clinics?

Yeah, we don't split that out. I think it was less than a 1% difference for the second quarter. So again, like we've said historically, You know, we traditionally don't see a large spread between the two, just given the model and some of its simplicity. So, you know, there's not a material delta there in the second quarter or really in the first quarter. But, you know, obviously when we have the full economics captured on our P&L, you know, we just have a more outsized impact or overall consolidated position just given the, you know, the economics and the flow through of the corporate unit versus the franchises.

Right, but that sort of speaks to if there's only a 1% difference and your overall comp is 5%, that suggests that the corporate-owned clinics are still performing well and comping positive.

Yeah, like I said, the fundamentals and the vast majority of our portfolio is still maturing. We still have profitable units that are out there. I don't want it to come across that we're doing something drastic here. This is absolutely a strategic review that we're performing because the fundamentals of the business are still strong.

Right, and the net impact should be accretion, so that's also very positive. To the bottom line. To the bottom line, correct. Appreciate that. Thanks for taking my questions. I'll take the rest offline. Thanks, Jeff.

Thank you. As a reminder, to ask a question, you may press star then 1 on your telephone keypad. The next question comes from Thomas McGovern with Maxim Group. Please go ahead.

Hey, guys. How you doing? So, just I know you guys mentioned it briefly on the call, but I just wanted to make sure I got the numbers down. Could you guys just real quick review some of those KPIs you provide us with, specifically the conversion, attrition, and retention rates?

Sure. If you look at our system, there's really three fundamental KPIs we really focus on. One is our notations, that we really track that very closely, and that's, of course, the endowment. very important source of the revenue for our clinics. The second one is conversion. And so when that new patient comes in, do they convert by buying a package or a membership? And what I was saying is that our total conversion, so whether it's a new patient or existing patient that converts, that right now that's running both for franchise and corporate right around 50%. And if I compare that in a pre-COVID environment, that we were running probably somewhere around 44%, 45% pre-COVID with that number. And then when we look at attrition, I said that it's running roughly around 11% per month. Actually, corporate clinics are running a little better than that. I think under 10%. And that compares to, let's say, 12% to 13% in recent years. So you're seeing, again, an improvement overall in the attrition rate. The one area that we're really focused on, as I mentioned in the call, is improving our new patient account. And that's where the real focus is today and going forward.

Great. Thanks for that, Collin. That sounds like things are trending in the right direction there. And then my next question, could you provide a little bit more color on your digital marketing campaign? I know you guys went over it in the slide, but just kind of where you're at with that and then maybe touch a little bit more on the issues you guys kind of solved with Meta.

Sure. And if you look at just our whole new patient strategy, basically we have three sources for new patients. One is referral. And what that is is an existing patient has a great experience with a doctor, and they refer their friends and family to that doctor. And right now about 30% of our new patients are coming directly from referral. The second and increasingly more important is our digital marketing activity. And there's just a whole range of services that are supported by that, both organic and paid search. And so that right now we've been able to measure that of our new patients, that 63% of them at least at some point had touched us digitally. And we have a whole series of different programs and it evolves over time that we're using. And so, for example, we've entered a new program or a new platform with TikTok. And I talked about how we started that in four markets. We've expanded to four more markets and we're seeing some really positive results with that. Meta or what was Facebook is also an important source of new patients for us. And what we have found is that we've increased some of that meta spend and that has, in fact, increased the number of leads that have come from that activity. So that's an area we're also focused. If we go back a little bit, we were spending a lot of time on YouTube, and we'll probably pull back a little bit on that. Because what you're finding in the 21st century is marketing changes so quickly, and the data that you have to drive your marketing becomes only more and more relevant. So one of the things that we've been finishing up is really updating our research on that whole idea patient journey. What if it's a potential patient coming in? What's the path they go? What are the messages they need in order to be able to be driven into the clinic? And so there's a lot of work that's been done with that, and then that research will then guide our marketing activities going forward. The third source for new patients for us would be what I'm going to just call that guerrilla marketing activity. That's typical of all small box retail, because what you've got to do is educate that consumer that lives, travels, and lose travels and works within that five to 15 minute radius around that box that you're there when they need your product or service. And so right now, let's say about 25, 30% of our new patient count is coming from that sign through or the coupon drop or the outreach to the gym or the school or the hospital or whatever's around that specific clinic.

And so that's kind of the overall source of our new patients.

Gotcha. I appreciate that, Collin. And then real quick before I hop back in the queue, you mentioned again also in the call about some of your staff retention and briefly mentioned that you guys have a new initiative to increase staff retention. Can you guys just provide a little bit more color on where you're at this quarter versus last quarter and how you guys anticipate that to trend throughout the year? Thank you.

I think the way I would categorize that is the labor market is still tight. For us, when you have two roles within your clinics, you have your doctor and your wellness coordinator, each are vitally important to the success of the clinic. What we absolutely know is quality doctors is the lifeblood of what we do here. I think we will always have a strategic initiative focused on the retention of our employees, certainly our field employees. As you go through these economic times, we just have to be critically focused on that, and especially as we have the ambitious growth goals that we have, not only do you need to maintain the workforce that you have today, but also prepare yourself for future growth. I think that's where all the successes and the initiatives that we've had with the schools and associations is really starting to pay off. Peter mentioned a couple of those that we have attended or will be attending today. which is just only improving our position within the chiropractic space. It'll just help that retention and attraction of those doctors going forward.

Awesome. Thank you guys for taking my questions. I'll hop back in queue.

Thank you. The next question comes from George Kelly with Roth MKM. Please go ahead.

Hey, everybody. Thanks for taking my questions. Apologies if these have been asked. I wasn't on the beginning part of your call. But first on the strategic review process on the owned portfolio, I was curious, could this very well, I mean, is the entire portfolio kind of up for review and could this lead to a sale of most of the units there? And then the second question on the same topic, is what is the four-wall EBITDA of that portfolio?

Yeah, no, the strategic review is just that. This is not a wholesale review of the portfolio. These are specific targeted clinics that are either in unique geographic areas. We've seen market dynamics change within the specific markets that they're operating in. or they're underperforming. That could be part of that subset. We only have a handful of unprofitable clinics, and certainly those are ones that you critically pay attention to, but this is not an indication that we're exiting a corporate strategy. This will be a smaller strategic review and really trying to optimize the portfolio that we have. If you look at the overall profitability of the units, those As a whole, we're still seeing profitability into the 20%. And then we have the outside, the four-wall bleed that brings it down above that. So we'll be excited to release those full financial results and get you an update by segment so you can see how those are trending. We have seen sequential improvement quarter over quarter in the profitability of the units. So, again, this is not a wholesale exit. This is a strategic review of a subset of clinics. Because really, we understand the importance of profitability in this environment, and we know that that is affected by the performance of our corporate portfolio. It's affected by the outside, the four-ball GNA we have, and the associated unallocated GNA that we have in this system. And that's why we're going to take a strategic look at all of those to try to drive profitability into this organization moving forward.

Yeah, it's a refinement, not a change in policy.

Okay, then I guess I'm a bit surprised. It's gotten a lot of attention in the part of the call that I have listened to it in your press release. I mean, isn't that a normal course of business? What's unique here about the review? I would think that you're always doing status checks on your locations. So maybe I'm off there, but I guess what this seems like.

No, no, George, the point you're making is correct. I mean, as an organization, we should be doing this every day, and we do do that. And I think, again, part of this is just, I will say that we've more than doubled the size of our portfolio over a relatively short period of time. And so much of that focus really was on the increasing of the portfolio as opposed to maybe a little more attention on kind of the existing portfolio and what we need to do with that. And so it's really just recognizing as the portfolio grows in size and importance to the company that we've got to be much more focused on. That's really what we're saying.

Okay, okay, and then second question is on guidance. Did you provide any kind of update on your full year guidance?

No, I can't give the financial metrics at this time. We certainly will update that, but we did do the openings guidance and reaffirmed the range for both franchise openings and the corporate greenfields.

Okay, great, and then last question for me is back to the cost savings and strategic review and everything. Is the cost savings initiatives that you're sort of targeting also outside of your own portfolio and set a different way? You know, I look at your G&A, the unallocated corporate overhead, and there's been a lot of increase in that line in the last two or three years. And I'm curious if you're kind of looking at some of that and there could be savings there as well. And that's all I had. Thank you.

Yes, that is part of the review and stepping back and looking at the overall infrastructure and G&A run rate in that unallocated bucket and doing what we can to optimize and reduce that run rate on a go-forward basis. We're striving for leverage and profitability, and so we're going to do what we need to do to get there.

Okay. I'm sorry, I guess I have one more. When do you expect to conclude this process? Is this something we could start to sort of see play through by year end?

Yeah, we have started now and we'll continue to go through that exercise. As of right now, we're absolutely in the throes of strategic planning for 2024 and beyond. We'll quickly align on our budgeting strategies for a go-forward basis. So these are absolutely active discussions that we're having right now that will Some of them we're able to put in place now, and then we'll look at what we can further find efficiency in as we move forward. So I would say both, and I would say there's not a definitive timeline other than this is going to be an ongoing strategic focus for us. Okay, thanks.

Thank you. As a reminder, to ask a question, you may press star then one on your telephone keypad. Seeing no further questions, I would now like to turn the call back over to Peter Holt for closing remarks.

Thank you, MJ. Before I close, I'd like to note that we'll be in New York City on September 14th, presenting and conducting meetings at the Lake Street Capital Markets Big 7 Conference and the B. Riley Securities Consumer Conference. Our patient story today comes from Melanie, a Marine Corps veteran. During her service, Melanie would participate in training and ops that lasted up to 30 hours, often while carrying a significant amount of gear. She suffered lower back, upper back, and neck injuries, which left her with debilitating chronic pain. Seeking pain relief in 2017, Melanie joined the joint and got into a full alignment, which made a difference in her daily life and enabled her to work out again. She credits the joint chiropractic care with giving back to her both her physical body and the opportunity to do healthy things like hiking with her dog and supporting her mental well-being. When asked to describe the joint in one word, Melanie stated, life-changing, because that's how it helped her. Then realizing the two words, she said chiropractic is necessary. Thank you and stay well adjusted.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.

Thank you. Thank you. Thank you. So,

Hello and welcome to the Joint Corps Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kirsten Chapman of LHA Investor Relations. Please go ahead.

Thank you, MJ. Good afternoon, everyone. This is Kirsten Chapman of LHA Investor Relations. Joining us on the call today are President and CEO Peter Holt and CFO Jake Singleton. Please note we are using a slide presentation that can be found at ir.thejoint.com. Today, after the close of market, the joint issued its operating metrics for the quarter ended June 30, 2023. 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 two, please be advised that 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 current predictions, expectations, estimates, and assumptions, and are also subject to risks and uncertainties that may cause actual results to differ materially from statements we make today. Factors that could contribute to these differences include, but are not limited to, our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics, Due in part to the nationwide labor shortage, an increase in operating expenses due to measures we may need to take to address such shortage, inflation exasperated by COVID-19 and the current war in Ukraine, which has increased our cost and which could otherwise negatively impact our business, the potential for further disruption to our operations and predictable impact on our business of the COVID-19 outbreak and outbreaks of other contagious diseases, 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, short-selling strategies, and negative opinions posted on the Internet, which could drive down the market price of our common stock and result in class action lawsuits. Our failure to remediate any future material weaknesses in our internal control over financial reporting, which could negatively impact our ability to accurately report our financial results, prevent fraud, or maintain investor confidence, and other factors described in our filings with the SEC, including the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 10th, to 2023 and subsequently filed current and quarterly reports. As a result, we caution you against placing undue reliance on these forward-looking statements and encourage you to review our filings with the SEC for a 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. Due to ongoing quarterly review procedures being performed in conjunction with the joint's independent public accounting firm, management has postponed the issuance of its second quarter financial results as of June 30, 2023. The matter in question is related to our regional developer arrangements that would have a non-cash impact to the company's financial statements. Management also includes commonly discussed performance metrics. System-wide sales includes revenue, at all clinics, whether operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company, management believes the information is important in understanding the company's financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health in franchise base. Comp sales include the revenues from both company-owned or managed clinics and franchise clinics that in each case have been open at least 13 full months and 48 full months and excludes any clinics that have been closed. Turning to slide three, it's my pleasure to turn the call over to Peter Holt. Please go ahead, Peter.

Thank you, Kirsten, and I welcome everybody to the call. For Q2 2023, during an environment of continued economic uncertainty, we posted growth in system-wide sales, supported by our ongoing franchise license sales, clinic openings, and new patient acquisitions. That said, we strive to do more and to do better. As such, we're implementing strategies to increase our long-term opportunities. I'll review these in detail in a moment. First, for those investors who are new to the company, the joint is revolutionizing access to chiropractic care by providing affordable, concierge-style, membership-based services in convenient retail settings. Turning to slide four, let's review our operating metrics for the second quarter of 2023 compared to the second quarter of 22. System-wide sales grew to 120.1 million, increasing 13%. Comp sales for clinics that have been open for at least 13 full months increased by 5%. And at the end of June 30th, 2023, our unrestricted cash was 13.6 million compared to $9.7 million at December 31, 2022. Turning to slide five, I'll discuss our clinic metrics. During Q2, we opened 26 clinics, 23 franchised and three greenfields, one of which is in Southern California, another in Santa Fe, and the third in Fort Dixon, New Jersey, in conjunction with our Army and Air Force Exchange Service. This compares to Q2 2022, in which we opened 34 clinics, 31 franchised, and three greenfields. We also acquired three previously franchised clinics in Northern California, which was made possible by the acquisition of the regional developer rights to that territory in April of 22, as compared to the acquisition of four previously franchised clinics in Q2 22. In Q2 23, we closed two corporate clinics, one which will be relocated, and four franchise clinics, compared to closing one franchise clinic in Q2 2022. At less than 1%, our closure rate remains one of the lowest in the franchise community. In summary, in June 30, 2023, we had 890 clinics in operation, consisting of 556 clinics, franchise clinics, and 134 company-owned or managed clinics. The portfolio mix remained at 85% franchise clinics and 15% company-owned or managed clinics. At the quarter end, we had a solid pipeline for future franchise clinic openings with 214 franchise licenses in active development. Subsequent to quarter, and through the end of August 9th, we opened one Greenfield clinic and nine franchise clinics. And we are delighted to announce that we opened our 900th clinic in Texas earlier this week. Turning to slide six, in Q2 2023, we opened 21 franchise licenses, up from 17 in Q1 2023, compared to 24 franchise licenses sold in Q2 2022. This past quarter, 76% of our new licenses were purchased by existing franchisees. Their reinvestment reflects their understanding and the confidence in the joint, even in this environment, which we believe indicates the strength of our business model and demonstrates the health of our franchise system. In June, we acquired the territory rights to Wisconsin, reducing our regional developer count to 17. Our aggregate 10-year minimum development schedule for new RD territories established since 2017 is 590 clinics. Turning to slide seven, let's review our marketing efforts. Our new patient acquisition is our highest priority, and in Q2, we've implemented new tools, programs, and several tests, and I'll review a few for you now. We launched our first phase of our marketing automation initiative on May 31st with a different email series designed to support lead generation, new patient onboarding, and patient retention. Each email campaign is tailored to the unique needs and perceptions of the perspective and current patients based on their chiropractic journey. Using our new marketing technology, we are automating the sending of the right message at the right time in that patient journey. We have multiple initiatives underway, including employee incentive plans, new lead management programs, and new regional landing pages. Additionally, we're assessing appointments for first-time patients to improve the experience and ensure smooth patient flow in the clinics. We also continue to expand our digital marketing efforts. For example, we started a test with TikTok in four markets. The initial results were positive, with lead costs 15% lower than when compared to meta. Subsequently, we increased the test to include four additional markets on expanding the targeted radius and updating the creative for better optimization. We continue two new promotions in our mix, In April, we launched a digital referral program to drive new patient counts during the most effective validation marketing. In June, we introduced the Buy Five, Get One Free wellness sale, which was very successful and allowed any patient that made an advanced wellness plan purchase of five months to receive the six-month free, demonstrating our patient's value and an affordable commitment to their treatment plan. Lastly, we're updating our patient journey research. These findings will inform message optimization and customer experience from their initial search for a chiropractor to becoming and remaining a patient. As noted on prior calls, chiropractic care is a natural fit with sports and military, and we enjoyed opportunities to support veterans and the local sport teams. The Department of Manpower and Reserve Affairs conducted a trial found increased isometric strength and endurance among members of the military who received chiropractic adjustments and noted chiropractic care improves key fitness characteristics among active duty service members with lower back pain. In June, we began a collaboration with our Canine for Warriors, a nonprofit organization that pairs highly trained service dogs with military veterans suffering from service-connected traumas. Military training, deployment, and the service can take a serious toll on the body's physical and mental state, and the Canine for Warriors program mirrors the joint's philosophy that everyone can benefit from a natural approach to pain relief. We're sponsoring an impactful conversation surrounding a shared philosophy that supports a drug-free approach to wellness, as well as the training and pairing of a service dog for a veteran in need. Through our year-round military appreciation program, we also honor active and retired members of the military, as well as their immediate families nationwide with discounted initial visits and monthly wellness plans. Chiropractic Economist has several articles citing the study that demonstrate chiropractic boosts sports performance and assists with rehab. In July, we were excited to announce that the joint chiropractic was named the official chiropractor for the Tampa Bay Buccaneers, our first NFL partnership and our second major league sports sponsorship. The Tampa and Orlando marketing co-op groups, which cover almost 40 clinics, partnered with a team to highlight the benefit of routine chiropractic care for the loyal fan base in the surrounding community. Before I turn the call to Jake, I'd like to note that I'm excited that next week we will welcome our new chief marketing officer. With vast experience, franchise experience, she's an expert in digital marketing and building customer loyalty. We're excited to have her join the team as we implement our programs, including additional brand building efforts with a focus on increasing new patient acquisition.

And with that, Jake, I'll turn it over to you.

Thanks, Peter. And we'll turn to slide eight. As mentioned earlier, due to ongoing quarterly review procedures being performed in conjunction with the Joint's independent public accounting firm, management has postponed the issuance of its second quarter financial results as of June 30th, 2023. The matter in question is related to our regional developer arrangements and would have a non-cash impact to the company's financial statements. I'll review our clinic comps for Q2 23 compared to Q2 22. System-wide sales for all clinics open for any amount of time increased to $120.1 million, up 13%. System-wide comp sales for all clinics open 13 months or more increased 5%. System-wide comp sales for mature clinics open 48 months or more decreased 1%. This comp reflects fewer than anticipated new patients at some of the more mature clinics. I can state that at June 30, 2023, our unrestricted cash was $13.6 million compared to $9.7 million at December 31, 2022. For the six months ended June 30, 2023, cash flow from operations was $8.4 million, including the receipt of the employee retention credits of $4.8 million in the first quarter. For the six-month period, we invested $4.7 million in acquiring previously franchised clinics and the rights to an RD territory, as well as ongoing Greenfield Clinics in upgrading existing clinics. Also, we continue to have access to additional cash through our line of credit with JPMorgan Chase. To date, we've drawn $2 million and have an additional $18 million available. Due to the ongoing quarterly review procedures, I can't provide financial guidance at this time. However, I can reaffirm our guidance for clinic openings is on track for 2023. For franchise clinics, we continue to expect openings to range between 100 and 120, compared to 121 in 2022. And for greenfield clinics, we continue to expect to open a range of 8 to 12 compared to 16 in 2022. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to slide 19, with the success of Joint's national growth with over 900 clinics, we're entering new territory. With a portfolio of 135 corporate clinics, we've reached the natural stage where we'll continually evaluate unit performance and respond as market and retail environments change. This entails considering selling certain clinics to franchisees, closing clinics, and or relocating others due to the performance, loss of an anchor store or the strip center, or changes in the local retail market. This analysis and execution has been thoughtfully and methodically, and especially since we have a talented team, lease obligations, and other factors to consider. With that said, it's important to note that we're exiting certain clinics would be accretive and enable us to devote our key resources to more productive areas. Also, as discussed on previous quarter-end conference calls, we're slowing down our greenfield strategy. We began to fulfill our outstanding lease obligations, and then we'll pause to assess strategic markets based on economics and demographics. Further, as Jake mentioned, we're also focusing on general and administrative cost-cutting initiatives. Finally, we're implementing tactics to drive new patient acquisition. Let me start by saying our total new patient conversion is still strong at approximately 50%, and up from around 45% pre-COVID. Also, our attrition remains low, around 11% per month compared to the 12% to 13% in recent years. As such, we're focused on increasing new patient leads. As noted in my marketing review earlier, we're also building our national brand through digital, automated, and traditional marketing. While we're managing this unusual economic environment, it is critical to understand the underlying market fundamentals remain strong for our business, and the drivers of our long-term growth are compelling. Pain, opioid, and obesity epidemics continue to plague our nation. Americans, particularly younger ones, which is our patient base, are searching for natural, more holistic ways to treat pain and are spending about $19.5 billion a year on chiropractic care. Our clinics offer doctors of chiropractic a sustainable path to practice what they love and leverage our system-wide resources like staffing, productivity tools, and more importantly, marketing. The whole system also benefits from frequent educational outreach efforts with associations and schools of chiropractic. For example, a few weeks back, I enjoyed participating in the Texas Chiropractic College's 115th homecoming, and next week with my team, we're headed to the world's largest event of chiropractic care, the National Convention organized by the Florida Chiropractic Association. We remain focused on what we control, executing programs to improve clinic performance and to reduce GNA for our long-term profitable growth. The core of what we're doing and the impact of our mission to improve quality of life through routine and affordable chiropractic care is our guiding principle. I'd like to thank our community of doctors, wellness coordinators, franchisees, regional developers, and employees for their passion and dedication. The team is committed to growing the overall chiropractic care market, educating the consumer about the efficacy of chiropractic, capturing a greater share and enhancing performance, all with the goal of fulfilling our mission. And with that, MJ, I'm ready to take the Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.

Thanks.

So I wanted to ask a question about the Aligned Franchisee Association, the AFA, which is now representing more than 50% of the franchise clinics. And just understand a little bit more of the types of engagement that you're having with AFA, kind of what are the major discussion points and points of interest from the AFA, and what you can share about how you're working with them to help build the brand.

Sure, Jeremy, I'll take that question. Obviously, the AFA has formed. In any organization, in a franchise system, from time to time, you will see an independent franchise association form. We also have our National Franchise Advisory Board. This is made up of nine members that are elected to that position, and that is our formal form of communication with our franchise community. Outside of, of course, I will take a call from any franchisee in our network, And so at this point, that we really don't have a formal relationship with the independent association, that we believe that the National Franchise Advisory Board is the most appropriate form of communication and to address the issues and concerns that the association, the independent association has. And so that's really kind of the approach that we're taking to the situation.

Okay. Got it. And then Since it seems like maybe you're limited in what you can discuss on this call, are you planning to have like a follow-up call after you issue kind of formal results? And can you discuss the timeline in which you expect to have the matter resolved with the auditors in the more formal or more full release?

Yeah, Jeremy, this is Jake. Yeah, we're disappointed we couldn't release the financial results today due to the ongoing quarterly review procedures. You know, there was a late question that came up around our regional developer arrangements. You know, we know that that's going to have a non-cash impact, but we have some further documentation and procedures to get through to align on that. You know, we know we have a 10Q filing deadline on Monday, and we are dedicating all resources to adhere to that But yes, we would have an additional press release to release that information.

But are you going to have an additional conference call?

We haven't made that determination at this time.

Okay. And is it fair to assume, though, that you would kind of definitively be wrapped up with reporting Q2 by the end of the month?

Yeah, that is the goal. You know, we're down to a narrow range of ongoing issues. So, you know, like I said, we are dedicating all resources to address the issue and get our financial information out there as quickly as possible.

Okay, got it. Thanks. Good luck.

Thank you. The next question comes from Jeff Van Sinderen with B. Reilly. Please go ahead.

Yes, hi. Not to beat a dead horse here, but just maybe if there's anything else you can shed light on related to the issue with your auditors, related to your RDs, maybe what part of the financials might be impacted, sort of what is the heart of the issue there. And you said you're planning to file the 10-Q by Monday. Is that right? Or I'm a little confused. And then you said get the results out by the end of the month. No, I don't.

No, we know we have a filing deadline, a timely filing deadline for Monday, and we are doing everything we can to adhere to that timeline. We do have unresolved issues that we have to work through, and so we know the urgency of the information, and we're dedicating the resources to get out there. But yes, I am shooting to hit that filing deadline on Monday. That's absolutely true. The heart of the issue is around our regional developer arrangements. These were transactions that we've entered into in the past and a reacquisition that we executed in the quarter that we've also done in the past. We use similar accounting treatments that we've used in the past under previous audits, and there's a new question that has arisen that we have to work through and get the documentation together to align with our outside accounting firm.

Okay, so it sounds like Correct me if I'm wrong here, but it sounds like it's really more revolving around the reacquisition. In other words, if you had not reacquired in the quarter, this issue probably would not come up. Am I correct on that?

That's correct. Yeah. Sometimes when you have a new set of eyes, you get a new set of questions, and that's what we had this time. We've got to make sure we have the appropriate documentation in place so that all parties can agree to release the financial information.

Okay, got it. Yeah, absolutely. Just to emphasize, it's a non-cash issue. Definitely just to make sure that we're, you know, compliant with, you know, gap revenue terms. Yeah, that's correct.

I mean, the flow of funds will be the same. It'll really just be the gap accounting, you know, that sits behind that.

Okay, got it. And then if you could maybe speak more about your plans for the mature corporate clinics. I think you highlighted that in the press release, just kind of what the performance has been there and what the threshold is to close some of them. I realize you guys have a very low closure rate. Maybe how many you expect to close? I know it's a tough question now because you're probably evaluating that. And then also just kind of as a follow-up to that question, maybe touch a little bit more on the expense reductions you're looking into.

Yeah, great questions. Can we categorize that more of a strategic review? And so I don't have a strategic number or a target that we're shooting for. We're looking at that and how we're allocating resources and realizing we can be more efficient there.

And to also just be clear, Jeff, that these aren't always closures, that some of them can be sold to a franchise, you know, in terms of just looking at our geographical spread. So there's a lot of factors there that we're really looking at so that some could be sold off, others will be sold, others can be relocated.

Mm-hmm, mm-hmm. But the net effect should be.

Yeah, I don't have a fixed number for you today, Jeff. You know, we're going through that process. We've identified a number of clinics already that are on kind of our action item list, if you will. So I do expect, you know, the mix of corporate and franchise to shift in accordance with that. You know, again, we're going to be methodical with it, as we mentioned in the transcripts. realizing that there's a lot of factors that we have to consider. And I'll reiterate Peter's point that this is not an immediate closure exercise. This is potentially repranchising a portion of that. So what we do know is that we still have the vast majority of our corporate portfolio are profitable units. We have a good number of units that are still young units. Obviously, we've gone through a pretty significant investing cycle in that space. and the fundamentals of the business are still strong. So we're not abandoning the corporate approach by any means. This is kind of a strategic optimization exercise, looking for those efficiencies in the portfolio, and also realizing that we have issues to address, and we're going to allocate our resources appropriately. As far as your G&A question, that's again, a strategic review. As we kind of pull back the scale of a portfolio, there's some natural flow through and trimming that can happen there. And then also making sure that, you know, with the level of development and where we're going to exert our effort, that we're finding the efficiencies in our G&A structure. And so I think, you know, in periods where we're looking to accelerate the profitability of the company, I think it's only prudent to go back and look at your cost structures and make sure that they're they're right size for your organization. And that's the exercise that we're going to take on.

Okay. And then just as a follow up to that, if I could be, can you tell us the difference in the cops between the corporate owned clinics and the franchise clinics?

Yeah, we don't split that out. I think it was less than 1% difference for the second quarter. So again, like we've said, historically, You know, we traditionally don't see a large spread between the two, just given the model and some of its simplicity. So, you know, there's not a material delta there in the second quarter or really in the first quarter. But, you know, obviously when we have the full economics captured on our P&L, you know, we just have a more outsized impact or overall consolidated position just given the, you know, the economics and the flow through of the corporate universe as a franchise.

Right, but that sort of speaks to if there's only a 1% difference and your overall comp is 5%, that suggests that the corporate-owned clinics are still performing well and comping positive.

Yeah, like I said, the fundamentals and the vast majority of our portfolio is still maturing. We still have profitable units that are out there. I don't want it to come across that we're doing something drastic here. This is absolutely a strategic review that we're performing because the fundamentals of the business are still strong.

Right, and the net impact should be accretion, so that's also very positive. To the bottom line. To the bottom line, correct. Appreciate that. Thanks for taking my questions. I'll take the rest offline. Thanks, Jeff.

Thank you. As a reminder, to ask a question, you may press star then 1 on your telephone keypad. The next question comes from Thomas McGovern with Maxim Group. Please go ahead.

Hey, guys. How you doing? So, just I know you guys mentioned it briefly on the call, but I just wanted to make sure I got the numbers down. Could you guys just real quick review some of those KPIs you provide us with, specifically the conversion, attrition, and retention rates?

Sure. If you look at our system, there's really three fundamental KPIs we really focus on. One is our notation, that we really track that very closely, and that's, of course, the endowment. very important source of the revenue for our clinics. The second one is conversion. And so when that new patient comes in, do they convert by buying a package or a membership? And what I was saying is that our total conversion, so whether it's a new patient or existing patient that converts, that right now that's running both for franchise and corporate right around 50%. And if I compare that in a pre-COVID environment, that we were running probably somewhere around 44%, 45% pre-COVID with that number. And then when we look at attrition, I said that it's running roughly around 11% per month. Actually, corporate clinics are running a little better than that. I think under 10%. And that compares to, let's say, 12% to 13% in recent years. So you're seeing, again, an improvement overall in the attrition rate. The one area that we're really focused on, as I mentioned in the call, is improving our new patient account. And that's where the real focus is today and going forward.

Great. Thanks for that, Colin. That sounds like things are trending in the right direction there. And then my next question, could you provide a little bit more color on your digital marketing campaign? I know you guys went over it in the slide, but just kind of where you're at with that and then maybe touch a little bit more on the issues you guys kind of solved with Meta.

Sure. And if you look at just our whole new patient strategy, basically we have three sources for new patients. One is referral. And what that is is an existing patient has a great experience with a doctor, and they refer their friends and family to that doctor. And right now about 30% of our new patients are coming directly from referral. The second and increasingly more important is our digital marketing activity. And there's just a whole range of services that are supported by that, both organic and paid search. And so that right now we've been able to measure that of our new patients, that 63% of them at least at some point had touched us digitally. And we have a whole series of different programs, and it evolves over time that we're using. And so, for example, we've entered a new program or a new platform with TikTok. And I talked about how we started that in four markets. We've expanded to four more markets, and we're seeing some really positive results with that. Meta, or what was Facebook, is also an important source of new patients for us. And what we have found is that we've increased some of that meta spend And that has, in fact, increased the number of leads that have come from that activity. So that's an area we're also focused. If we go back a little bit, we were spending a lot of time on YouTube, and we'll probably pull back a little bit on that. And because what you're finding in the 21st century is marketing changes so quickly. And the data that you have to drive your marketing becomes only more and more relevant. So one of the things that we've been finishing up is really updating our research on that whole patient journey. You know, what if there's one potential patient coming in, what's the path they go, what are the messages they need in order to be able to be driven into the clinic? And so there's a lot of work that's been done with that, and then that research will then guide our marketing activities going forward. You know, the third source for new patients for us would be what I'm going to just call that guerrilla marketing activity. You know, that's typical of all small box retail, because what you've got to do is educate that consumer that lives, travels, and lose travels and works within that five to 15 minute radius around that box, that you're there when they need your product or service. And so right now, let's say about 25, 30% of our new patient count is coming from that sign through or the coupon drop or the outreach to the gym or the school or the hospital or whatever's around that specific clinic.

And so that's kind of the overall source of our new patients.

Gotcha. I appreciate that, Collin. And then real quick before I hop back in the queue, you mentioned again also in the call about some of your staff retention and briefly mentioned that you guys have a new initiative to increase staff retention. Can you guys just provide a little bit more color on where you're at this quarter versus last quarter and how you guys anticipate that to trend throughout the year? Thank you.

I think the way I would categorize that is the labor market is still tight. For us, when you have two roles within your clinics, you have your doctor and your wellness coordinator, each are vitally important to the success of the clinic. What we absolutely know is quality doctors is the lifeblood of what we do here. I think we will always have a strategic initiative focused on the retention of our employees, certainly our field employees. As you go through these economic times, we just have to be critically focused on that, and especially as we have the ambitious growth goals that we have, not only do you need to maintain the workforce that you have today, but also prepare yourself for future growth. I think that's where all the successes and the initiatives that we've had with the schools and associations is really starting to pay off. Peter mentioned a couple of those that we have attended or will be attending today. which is just only improving our position within the chiropractic space that'll just help that retention and attraction of those doctors going forward.

Awesome. Thank you guys for taking my questions. I'll hop back in queue.

Thank you.

The next question comes from George Kelly with Roth MKM. Please go ahead.

Hey, everybody. Thanks for taking my questions. Apologies if these have been asked. I wasn't on the beginning part of your call. But first on the strategic review process on the owned portfolio, I was curious, could this very well, I mean, is the entire portfolio kind of up for review and could this lead to a sale of most of the units there? And then the second question on the same topic, is what is the four-wall EBITDA of that portfolio?

Yeah, no, the strategic review is just that. This is not a wholesale review of the portfolio. These are specific targeted clinics that are either in unique geographic areas. We've seen market dynamics change within the specific markets that they're operating in. or they're underperforming. That could be part of that subset. We only have a handful of unprofitable clinics, and certainly those are ones that you critically pay attention to, but this is not an indication that we're exiting a corporate strategy. This will be a smaller strategic review and really trying to optimize the portfolio that we have. If you look at the overall profitability of the units, those As a whole, we're still seeing profitability into the 20%. And then we have the outside, the four-wall bleed that brings it down above that. So we'll be excited to release those full financial results and get you an update by segment so you can see how those are trending. We have seen sequential improvement quarter over quarter in the profitability of the units. So, again, this is not a wholesale exit. This is a strategic review of a subset of clinics. because really we understand the importance of profitability in this environment, and we know that that is affected by the performance of our corporate portfolio. It's affected by the outside, the four-ball G&A we have, and the associated unallocated G&A that we have in this system. And that's why we're going to take a strategic look at all of those to try to drive profitability into this organization moving forward.

Yeah, it's a refinement, not a change in policy.

Okay, then I guess I'm a bit surprised. It's gotten a lot of attention in the part of the call that I have listened to it in your press release. I mean, isn't that a normal course of business? What's unique here about the review? I would think that you're always doing status checks on your locations. So maybe I'm off there, but I guess what this seems like.

No, no, George, the point you're making is correct. I mean, as an organization, we should be doing this every day, and we do do that. And I think, again, part of this is just, you know, I will say that we've more than doubled the size of our portfolio over a relatively short period of time. And so much of that focus really was on the increasing of the portfolio as opposed to maybe a little more attention on kind of the existing portfolio and what we need to do with that. And so it's really just recognizing as the portfolio grows in size and importance to the company that we've got to be much more focused on. That's really what we're saying.

Okay, okay, and then second question is on guidance. Did you provide any kind of update on your full year guidance?

No, I can't give the financial metrics at this time. We certainly will update that, but we did do the openings guidance and reaffirmed the range for both franchise openings and the corporate greenfields.

Okay, great, and then last question for me is back to the cost savings and strategic review and everything. Is the cost savings initiatives that you're sort of targeting also outside of your own portfolio and set a different way? You know, I look at your G&A, the unallocated corporate overhead, and there's been a lot of increase in that line in the last two or three years. And I'm curious if you're kind of looking at some of that and there could be savings there as well. And that's all I had. Thank you.

Yes, that is part of the review and stepping back and looking at the overall infrastructure and GNA run rate in that unallocated bucket and doing what we can to optimize and reduce that run rate on a go-forward basis. We're striving for leverage and profitability, and so we're going to do what we need to do to get there.

Okay. I'm sorry, I guess I have one more. When do you expect to conclude this process? Is this something we could start to sort of see play through by year end?

Yeah, we have started now and we'll continue to go through that exercise. As of right now, we're absolutely in the throes of strategic planning for 2024 and beyond. We'll quickly align on our budgeting strategies for a go-forward basis. So these are absolutely active discussions that we're having right now that will Some of them we're able to put in place now, and then we'll look at what we can further find efficiency in as we move forward. So I would say both, and I would say there's not a definitive timeline other than this is going to be an ongoing strategic focus for us.

Okay, thanks.

Thank you. As a reminder, to ask a question, you may press star then one on your telephone keypad. Seeing no further questions, I would now like to turn the call back over to Peter Holt for closing remarks.

Thank you, MJ. Before I close, I'd like to note that we'll be in New York City on September 14th, presenting and conducting meetings at the Lake Street Capital Markets Big 7 Conference and the B. Riley Securities Consumer Conference. Our patient story today comes from Melanie, a Marine Corps veteran. During her service, Melanie would participate in training and ops that lasted up to 30 hours, often while carrying a significant amount of gear. She suffered lower back, upper back, and neck injuries, which left her with debilitating chronic pain. Seeking pain relief in 2017, Melanie joined a joint and got into a full alignment, which made a difference in her daily life and enabled her to work out again. She credits the joint chiropractic care with giving back to her both her physical body and the opportunity to do healthy things like hiking with her dog and supporting her mental well-being. When asked to describe the joint in one word, Melanie stated, life-changing, because that's how it helped her. Then realizing the two words, she said chiropractic is necessary. Thank you and stay well adjusted.

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