Prepared remarks
Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to The Joint Corporation Second Quarter 2026 Financial Results Conference Call. I will now turn the call over to Richard Land with Alliance Advisors Investor Relations. Please go ahead.
Thank you, Rebecca, and good afternoon, everyone. Joining us on the call today are President and CEO, Sanjiv Razdan; and CFO, Scott Bowman. Please note we are using a slide presentation that can be found on The Joint's Investor Relations website. This afternoon, The Joint Corp issued a press release for the second quarter ended June 30, 2026. If you do not already have a copy, it can also be found on the company's website. Please be advised that today's discussion, including any financial and related guidance to be provided, consists of forward-looking statements as defined by securities laws. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. Some important factors that could cause such differences are discussed in the risk factor section of The Joint Corp's filing with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements are made, and the company assumes no obligation to update them except to the extent required by applicable securities laws. Management uses non-GAAP financial measures such as EBITDA, adjusted EBITDA, free cash flow, and system-wide sales. A description of these measures is included in the press release issued earlier this afternoon, and reconciliations to the most directly comparable GAAP measures are included in the appendix to the presentation and press release, both of which are available in the investors tab of our website. With that, I'll now turn the call over to Sanjiv Razdan. Sanjiv, please go ahead.
Thank you, Richard. Good afternoon, everyone. The second quarter was a period of continued execution of our Joint 2.0 initiative, with our results reflecting the progress we are making toward a stronger, more profitable financial profile as a capital-light, pure-play franchisor. This was underscored by a $560,000 year-over-year improvement in consolidated net income and a $1.4 million increase in adjusted EBITDA from continuing operations, reflecting the improved operating leverage of the current business. Meanwhile, we delivered 152% year-over-year growth in cash flow from operating activities, resulting in a $1.6 million increase in free cash flow. These improvements were driven by continued progress on our refranchising initiative, disciplined capital allocation, and significant improvement in our patient retention levels. First, on refranchising, our three previously announced clinic sale bundles are progressing well, with buyers already operating the clinics under management service agreements, while lease assignments are completed and remaining ownership transfers are being finalized. Taken together, these transactions mean The Joint effectively operates today as a capital-light, pure-play franchisor. Second, on patient retention, we posted our best quarterly retention rate in over five years, a direct result of the new flexible and expanded plan options introduced earlier this year. These initiatives are working as intended, reducing attrition while making our offerings more attractive to patients. And third, on capital allocation, we remained disciplined during the quarter, repurchasing approximately $677,000 of shares while also investing in the business and completing three regional developer territory buybacks in the quarter, bringing the year-to-date total to four. Together, these actions reflect our conviction in the long-term value of this business and our commitment to disciplined, balanced capital deployment. Combined with our progress on optimizing the clinic portfolio, they're driving higher profitability and stronger free cash flow. Turning to Slide 5, I'll touch on some of our Q2 financial highlights, which reflect the combined benefit of this execution. Revenue grew 14% year-over-year to $15.2 million. Adjusted EBITDA from continuing operations was $1.5 million compared to $88,000 in Q2 2025, an increase of $1.4 million, underscoring the operating leverage we are generating as we shift to a more royalty and fee-based franchise revenue. Consolidated net income increased to $653,000 compared to $93,000 in Q2 2025. And cash flow from operating activities grew 152% year-over-year to $2.2 million, driving a $1.6 million increase in free cash flow to $1.9 million. Turning to Slide 6, now I'd like to provide a little bit more background on the status of our refranchising efforts. Since entering into the sale agreement covering the Southern California clinic bundle, ownership has been transferred for 32 clinics to date, and the remaining 13 clinics are being operated by the buyer under management service agreements while lease assignments are finalized. For the Northern California bundle, a signed asset purchase agreement is in place for four clinics. And finally, for the Southeast bundle, ownership has been transferred for six clinics to date, with the remaining 15 clinics also operating under management service agreements pending lease reassignments. Once ownership transfers are finalized across these clinic bundles, we will have only three remaining company-owned or managed clinics, effectively positioning the company to realize the full benefits of our pure-play, capital-light franchisor model. Turning to Slide 7, while our refranchising efforts are nearly behind us, we have more capacity to concentrate on driving growth through franchise system support, new patient acquisition, and long-term network development. We see a significant opportunity to further strengthen new patient acquisition and to win back lapsed patients. This, along with patient retention, remains our primary near-term focus, and we're leaning into targeted marketing and optimized membership offerings to capture demand more effectively. We've done extensive research recently on our consumer base, and that work is sharpening our focus on the patient and user experience. For example, as a result of these consumer insights, we are piloting a proprietary set of clinical care protocols which, among other things, will provide quantifiable mobility scores to our patients. Our 2025 class of 29 clinic openings continue to outperform prior year cohorts, and the new clinics so far this year are performing even better. In addition, we are working to bring on well-capitalized franchisees with strong multi-site operating experience to support our portfolio optimization efforts as well as to drive net new clinic growth. Also, as we directly engage franchisees previously supported by regional developers, we are finding opportunities to elevate both the quality of operations and the pace of clinic development. As mentioned on our last call, our longer-term journey will prioritize growth through new channels, expansion into underpenetrated U.S. markets, and potential entry into our first international markets. This longer-term strategy is expected to address shifting consumer trends, including growing interest in longevity, health span, mindfulness, sleep quality, posture, and non-invasive whole-body care. Chiropractic care and The Joint's unique model is exceptionally well positioned against this backdrop. Moving to Slide 8, now turning to our marketing efforts and how we are driving top-line momentum. Our messaging continues to center on chiropractic care for pain relief, helping patients improve their mobility and get back to doing the things they love. And we're increasingly emphasizing the quality of the patient experience alongside this. This message tends to attract patients who stay with us longer. We have seen sequential improvement in active member growth each month this year. We are also increasing focus on our MVPs, or most valuable patients, by exploring ways to personalize their experience, bringing additional value to membership, and ultimately driving LTV, or long-term value. Another focus is on winning back lapsed patients who are familiar with The Joint and have benefited from our membership model in the past. On the digital side, our ongoing SEO and AI visibility optimization work is driving higher organic traffic and lead quality. Our AI visibility score has held steady in the high 70s, keeping us ahead of competitors on key search topics. Meanwhile, we are seeing continued positive trends in traffic and high-intent actions on our local clinic microsites. During Q2, we expanded our offering of more flexible plans to drive conversion and longer-term retention. Lastly, in July, we rolled out our $5 and $10 pricing increases to additional clinics, bringing the total number of clinics that have opted to take pricing to over 500. Feedback to date continues to indicate no meaningful patient pushback, and we are using this data to ensure pricing changes support revenue optimization without impacting patient acquisition or retention. Turning to Slide 9, I'll speak to how these initiatives are translating into comps and retention. Comparable sales were negative 2.8% in the second quarter, an improvement compared to the first quarter. As I mentioned, our flexible membership options drove our best patient retention rate in over five years this quarter and pricing optimization efforts also continued. Together with improving active member trends, these factors are driving consistent recovery in comp trends. We expect comparable sales trends to improve throughout the balance of this year. Growing our active member base remains a central driver of comp sales improvement, and we will continue to drive growth through stronger lead generation, improved retention, and winning back lapsed patients. With that, I'll turn it over to Scott, our CFO.
Thanks, Sanjiv. First, I'll review some key operating metrics. System-wide sales in the second quarter were $128 million, a decline of 3.7% compared to the same period last year. Comp sales were negative 2.8%, a 140 basis point improvement from the first quarter, consistent with the strengthening trends Sanjiv discussed earlier. Meanwhile, adjusted EBITDA from consolidated operations was $3.2 million, in line with the same period last year. Turning to Slide 12, I'll review results from continuing operations for the second quarter unless otherwise specified. Revenue grew 14% to $15.2 million, reflecting the shift to our pure-play franchisor revenue model. Cost of revenues was $2.5 million, down 11% compared to the same period last year, primarily reflecting lower regional developer royalty costs as we continue to reacquire RD territories. Selling and marketing expenses were $4.9 million, an increase of 40% compared to the same period last year, driven by a shift in local marketing to national marketing, which has funded incremental investments in patient acquisition and brand initiatives. Meanwhile, G&A expenses decreased 2% to $7.6 million compared to $7.7 million in the same period last year. Included in G&A expenses is approximately $500,000 that relates to expenses incurred for RD buybacks and expenses that will not be recurring post-refranchising. Net loss from continuing operations was $251,000 compared to a loss of $990,000 in the same period last year. While consolidated net income was $653,000 compared to $93,000 in the prior year period. And lastly, adjusted EBITDA from continuing operations was $1.5 million compared to $88,000 in the same period last year, a clear reflection of the operating leverage we are generating in our new franchisor model. Now, onto the balance sheet and capital allocation. Unrestricted cash at the end of the second quarter was $22.2 million compared to $23.6 million at the end of 2025. We maintain our $20 million line of credit with JPMorgan Chase, which remains fully undrawn and is available through August 2029. During the quarter, we repurchased approximately 82,000 shares for consideration of $677,000 at an average price of $8.23 per share. We now have $3.8 million remaining under the $12 million authorization approved in November 2025. As Sanjiv mentioned, we also completed three RD territory buybacks during the quarter, further optimizing our portfolio economics. As with prior buybacks, we are already seeing stronger performance in these markets post-transaction. Through the buybacks of the four RD territories we have completed year-to-date, we expect to realize approximately $630,000 in reduced RD royalties on an annualized basis, partially offset by internal costs to manage these territories. On to Slide 14, let's discuss our clinic count. Total clinic count was 941 at the end of the second quarter. During the quarter, we opened five clinics, closed seven clinics, and refranchised 29 clinics, reflecting our previously discussed strategy to optimize the portfolio for quality and performance. Meanwhile, our new clinics in 2026 have continued to outperform similar to 2025 and are reaching their breakeven point even earlier at under six months. As Sanjiv noted, our refranchising efforts are now substantially complete with the sale of our three previously announced clinic bundles progressing well. On Slide 15, with refranchising largely complete, I would like to touch on our pure-play franchisor financial model. Under this new operating model, The Joint is now reshaped with a capital-light operating model with lower G&A expense and higher profitability margins. We expect to achieve this model starting in the back half of 2026 once the transfer of ownership of the remaining clinics is fully complete. I would like to remind everyone that these are not our long-term targets. They are the starting point once the full benefit of refranchising is realized, and we intend to build on these improvements in 2027 and beyond. As a reminder, our expected starting points for this new model are as follows: gross margin between 83% and 85% of revenues, G&A expense between 40% and 42% of revenues, CapEx of approximately 3% of revenues, and free cash flow conversion, which we define as free cash flow divided by adjusted EBITDA, between 60% and 70%. These starting points would result in an estimated adjusted EBITDA margin of 19% to 21% and net income margin of 13% to 15%. On to Slide 16, we are reiterating our full year 2026 financial guidance as originally provided in March 2026. Our operating model improvements are progressing as expected, and with improving comp sale trends observed in recent months, we continue to expect system-wide sales of from $519 million to $552 million, comp sales in the range of negative 3% to positive 3%, consolidated adjusted EBITDA in the range of $12.5 million to $13.5 million. We expect comp sales to improve in the second half of the year, with the fourth quarter expected to be higher than the third quarter. We have more visibility on new franchise clinic openings for the year, which we now expect to be in the range of 22 to 26. This compares to prior guidance of 30 to 35 new clinics. New clinic openings will continue to be offset by closures as we reshape the portfolio around stronger operators and healthier sites, meaning that on a net basis, our clinic count at the end of the 2026 year will be lower than 2025. Our clinic portfolio optimization is giving us a stronger, more durable foundation for future growth, and we continue to see potential for more than 1,800 franchise clinics in the U.S. alone. Finally, on Slide 17, I'll briefly speak to our capital allocation. As highlighted by our activities in the second quarter, we remain committed to disciplined capital allocation that prioritizes investments in growth initiatives, share repurchases, and repurchases of RD territories. With that, I'll turn it back over to Sanjiv.
Thanks, Scott. Q2 was a quarter defined by continued execution. Our disciplined capital allocation, our best patient retention in over five years, and the nearing completion of our refranchising initiatives are together building towards the stronger capital-light financial profile we will deliver. We are securing a strong foundation to launch The Joint 3.0 with a growing national brand, more active members, stronger patient retention and lifetime value, and an innovation pipeline to improve the patient experience. Meanwhile, our capital allocation including share repurchases, RD buybacks, and disciplined investment in growth initiatives reflects our conviction in the long-term value of this business and our commitment to delivering returns for stockholders. And finally, we are also building a business that is well aligned with aging demographics and consumer expectations for where healthcare and wellness are heading. This growing consumer demand for longevity, health span, and noninvasive whole body care creates a unique opportunity for The Joint to address this demand at scale. With that, operator, we are ready for Q&A.
Questions and answers
Your first question comes from the line of Nicholas Sherwood with Maxim Group. Your line is open.
My first question is, one of the things that you've spoken about in the past is making sure that you're optimizing your digital marketing strategy for AI search engine optimization. And there's been a lot of commentary about click rates on Google declining in some cases. How are you operating in this new AI search environment and making sure that you're getting customers to click through to your website?
First of all, I want to acknowledge, Nicholas, that the AI search environment is changing extremely rapidly and is vitally important for us. The way that we stay ahead of this is in three ways. Number one, we have the benefit of about 260 local franchisees and operators who are giving us feedback right at the local level on how our search is showing up in their trade zones, and that allows us to stay on top of things. Second, we have a digital marketing team that stays on top of algorithm changes across the marketplace, not just with Google, which continues to remain dominant, but also on other platforms where consumers are searching via AI-enabled search. We have dedicated resources that are constantly monitoring algorithm changes that drive those searches. The third thing is that we have objective measurement systems in place. We look at performance through a couple of different measurement systems to make sure that we're not just reliant on internal metrics. As a result of those three approaches, we get enough insight to take corrective action if needed to stay on top of changes. When we started this journey late last year, our AI visibility score was in the low 70s, 71 to be precise. For the last several months, it has been in the high 70s, which is a competitive number when compared to others who are considered strong in the category.
Understood. I appreciate the detail. And then my second question is, looking at getting lapsed patients to return, are these patients lapsing because they find themselves cured and no longer need care, maybe because they shifted to something like traditional physical therapy, or is it a cost issue? What's the mix between those reasons for lapsed patients, and how do you approach getting them back into your clinics?
Great question. We find that the reasons for patients lapsing are invariably one of three: number one, they are no longer in pain; number two, they may not have the same amount of time to come back for regular adjustments as when they were in pain or discomfort; number three, relative to the first two, they no longer wish to invest the same level of money in getting regular adjustments. So for us, pain, time, and money are the three biggest drivers of lapsing. What we've learned from consumer research is that, unlike some other brands where lapsed patients may have some degree of dissatisfaction, our lapsed patients often have fond memories of getting pain relief and are willing to reconsider us. That's an encouraging insight. Given this, we are actively targeting digital and local marketing efforts toward winning back lapsed patients. In fact, our August promotion is specifically targeted at that group. We're hopeful that this approach will work and will allow us to reacquire more patients into the active member funnel at a lower cost of acquisition over time.
I'll just add a comment on that as well. We've rolled out more flexible options, which is a big win for these patients. Typically, these patients will lapse from a wellness plan—four visits a month for a certain price depending on location. With the Align One plan, you pay $35 for one visit per month, and then you can pay an additional $25 if you need additional visits. That has been a big win because it gives these patients another option other than the standard wellness plan. As a result, our conversion rate for lapsed patients has increased by several hundred basis points. We actually have two of these flexible options now, and that's been an unlock for us in the last few months.
Your next question comes from the line of George Kelly with ROTH Capital Partners.
I have a few for you. First, could you provide more detail on your comp performance—trends throughout the quarter and any comment on July would be helpful. Second, on pricing, can you give a breakdown of how much pricing benefited 2Q and your expectations, given more clinics have rolled out the new pricing for the back half of the year?
Sure. As far as comps go, we did see slightly better comps toward the end of the quarter and coming into the third quarter, so we're encouraged. If you look at the back half of the year, we've indicated that we think comps will be better. Related to your pricing question, we had some pricing initiatives earlier in the year and then another rollout at the end of June. Isolated just to the wellness plan, pricing looks like it's helping in the low single-digit range. We have a lot of other initiatives, including new offerings, that also contribute. As we look into the second half, with more clinics adopting the new pricing, we expect the pricing benefit to be at the high end of that low single-digit range, based on our estimates right now.
George, just to remind everyone, when we take pricing, we have been taking pricing only for new patients. In a membership model, it takes time for that pricing impact to catch up as the bulk of patients migrate to the most current pricing model.
Okay, that's helpful. Can you comment on July comp performance?
Yes, July comps are a bit better than how we closed out Q2. So not dramatically different, but sequentially a little better than the end of Q2.
And the other topic is the pro forma profitability slide. You noted this is really a starting point and that there's opportunity for continual margin improvement. Could you provide more color on where you see additional opportunity? Is it mostly scale and leveraging cost structure, or are there direct cost-out opportunities? And how should we think about 2027 and 2028 relative to the 19% to 21% EBITDA margin targets once refranchising is done?
Good question, George. We're not ready to guide to 2027 and 2028, but I'll give a little color. The model in the earnings deck is intended to be a starting point showing what we would expect once refranchising is complete. It is not a forward projection for a year or two from now. The expectation is that this is a baseline, and as we continue to increase sales, this platform will give us the opportunity to leverage additional sales to expand profitability margins. We have structured G&A so that it can withstand revenue increases, which gives us confidence that we can leverage the model as sales grow. From a refranchising standpoint, there are some discrete expenses related to the transition that we do not expect to recur—about $0.5 million in the quarter related to RD buybacks and other one-time refranchising costs. Once refranchising is complete and those costs are behind us, achieving the G&A targets in the deck will be clearer. There are also areas where we expect to continue optimizing overall cost structure post-refranchising, and that will become more apparent once ownership transfers are complete and the go-forward model is finalized. So while we don't have a multi-year numerical projection for 2027 and 2028, we believe the framework provides a clear path to leverage growth into higher margins over time.
Just to clarify, the approximately $0.5 million we mentioned was associated with RD buybacks and other one-time expenses related to refranchising. That amount is currently included in our SG&A, and we do not expect it to recur.
Understood. Last question on refranchising: what are the remaining proceeds on those clinics that have not yet transferred ownership and when do you expect the process to be complete?
We're still working through the process to complete the remaining transfers, and it is somewhat lengthy because we need to work with landlords to execute lease assignments to transfer ownership. In the meantime, the clinics are operating under management service agreements. As far as the remaining proceeds to collect, it will be a little under $500,000 when all is said and done.
I will now turn the call back over to Sanjiv Razdan for closing remarks.
Thank you all for joining us today. Have a great day. And remember, at The Joint, we always have your back.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.