The Joint Corp. (JYNT) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to The Joint Corp Fourth Quarter 2019 Financial Results Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Julie Cimino, LHA Investor Relations. Please go ahead, ma’am.

Thank you, Catherine. Good afternoon, everyone. this is Julie Cimino of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our fourth quarter and year-end 2019 operating metrics and our growth strategy; CFO, Jake Singleton, will detail our financial performance to provide 2020 guidance; and then Peter will close with our long-term vision and open the call for questions. Please note we’re using a slide presentation that can be found on the Investor Relations section of the website. Today, after the close of the market, The Joint Corp issued its financial results for the quarter-end – year-end December 31, 2019. If you do not already have a copy of this press release, it can be found in the Investor Relations section of the company’s website. As provided on Slide 2, please be advised today’s discussions include forward-looking statements, including statements concerning our strategy, future operations, future financial position and plans and objectives of management. Throughout today’s discussion, we will present some important factors relating to our business that could affect these forward-looking statements. The forward-looking statements are made based on our current predictions, expectations, estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we are making today. Factors that could contribute to these differences include, but are 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 uncertainties associated with the coronavirus including its possible effects on patient demand and the other factors described in Risk Factors in our Annual Report on Form 10-K as filed with the SEC with the year ended December 31, 2018, as updated for any material changes described in any subsequently filed quarterly reports on form 10-K, 10-Q and in our Annual Report on form 10-K for the year ended December 31, 2019, which we expect to file with the SEC on or around March 6, 2020, as they may be revised or updated on our – in our subsequent filings. 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 are not obligating ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events. Management uses EBITDA and adjusted EBITDA, which are non-GAAP financial measures. These are presented, because their important measures used by management to assess financial performance. Management believes they provide a more transparent view of the company’s underlying operating performance and operating trends then GAAP measures above. Reconciliation of net income, EBITDA, and adjusted EBITDA is presented in the press release. The company defines EBITDA as net income or loss before net interest, tax expense, depreciation and amortization expenses. The company defines adjusted EBITDA as EBITDA before acquisition-related expenses, bargain purchase gain, net gain or loss on disposition or impairment and stock-based compensation expenses. Turning to Slide 3, it is my pleasure to turn the call over to Peter Holt. Please go ahead.

Thank you, Julie and thank you all for joining us. As projected in 2019, we accelerated our business momentum and continue to deliver strong sustainable growth and profitability. We leveraged our regional developers to drive franchise sales and clinic openings, and we expanded our corporate clinic portfolio within clustered locations. We also continued to increase productivity initiatives resulting an improved clinic performance and profitability. As a result, we met or exceeded our plan, achieved positive adjusted EBITDA for the second full year since being public, and built our strongest foundation for growth to-date. The 2019 full-year results clearly demonstrate our impressive performance. We increased franchise license sales to 126, up 26% from 2018. We grew our year-end clinic count to 513 at December 31, 2019, up 16% compared to December 31, 2018. 585,000 patients opened the door to the joint for the very first time, up 34% compared to 2018, and the total number of unique patients treated in a 12-month period approached a million. We performed 7.7 million adjustments during the year of 28% compared to 2018. Jake will discuss her financial results in detail. I’ll note that the 2019, our system-wide sales increased 33% as compared to last year. Our comp sales for clinics that were open for at least 13 full months grew 25% compared to 2018 and bring our four-year stacked comp sales to a remarkable 99%. As we continue to welcome new investors to our call, I’d like to provide a little background on our company. The driving force behind The Joint is not that we’re reinventing chiropractic care, which has been around since the 19th century, but more fundamentally, we’re revolutionizing access to chiropractic care. We do this in a convenient retail study providing concierge style, membership-based services with no appointments, no assurance, attractive pricing and convenient hours of operation including the evenings and weekends. The Joint’s purpose is to alleviate pain and to help move our patients towards a healthier lifestyle; it’s a sweet spot of a growing health and wellness industry. Our doctors focus on patient care, on pain relief and ongoing wellness, so to help our patients live the best version of themselves. Patients are attracted to The Joint due to our accessibility, credibility and empathy, the three key pillars that support our brand as identified by our extensive market research. Turning to Slide 4, let’s review our portfolio. During the fourth quarter, we opened 25 new clinics, one of the most active quarters for clinic openings in our history. This reflects the power of our regional developer network and our accelerating momentum. We began the year with 442 clinics and opened an additional 76. We closed five clinics last year, continuing an unusually low closure rate of less than 1%. We ended the year with 513 clinics maintaining our clinic mix of 88% franchised with 453 clinics and 12% company-owned or managed with 60 clinics. At December 31, 2019, we were in 34 states. Regarding the corporate portfolio, during the year, we bought back eight clinics from franchisees and opened five greenfields for a total of 13 additional clinics. As reported previously, in March of 2019, we took the opportunity to improve the profitability by merging two closely located clinics and therefore, the year end, we had a net increase of 12 to the corporate portfolio. Our acquisitions from franchisees are opportunistic, including purchasing clinics at attractive valuations and applying our expertise and bringing them to better operating standards and acquiring well-run clinics that have provided us new access to markets and to add to our corporate portfolio. Our greenfield development is strategic. We expand existing clusters and leverage our brand presence and operating infrastructure. In 2019, we spent $3.9 million in our corporate portfolio expansion, all of which was funded through cash from operations. In 2020, we’ll continue our corporate portfolio expansion. We expect to add 16 to 20 company-owned or managed clinics and 80 to 90 franchise clinics. As has been our trend for several years, we expect these new openings will be weighted toward the second half of the year. Also, we’re pleased to announce our first greenfield opening in 2020, located in Inglewood, California. This clinic increases our cluster in the Los Angeles region and brings our corporate portfolio to 61 clinics as of today. Turning to Slide 5, in 2019, our regional developer or RD program continues to be pivotal and driving accelerated growth. As mentioned earlier, the franchise license sales grew from 99 in 2018 to 126 in 2019. Responsible for 89% of these sales, our 21 RDs support 78% of our franchisees and cover 53% of the metropolitan statistical areas of the United States. Notably, our RD’s efforts combined with the success of The Joint French concept or changing the profile of our franchisees. First, we’re attracting more sophisticated franchisees, including some from private equity and institutional backgrounds. Further, we’re increasing the number of multi-unit holders, which creates efficiencies and marketing, hiring, staffing, and more. Beginning in 2017, we’ve sold 15 new RD territories, each having a minimum development schedule. In aggregate, they total a minimum of 432 new franchise clinics over the 10-year agreements. This large foundation of franchise clinic commitment bodes well for the continued clinic expansion and sales growth into 2020 and beyond. In January, we hosted another very successful three-day RD training conference in Scottsdale with 100% attendance. We celebrated our 2019 performance and reviewed key 2020 initiatives to improve site selection and lease signing protocols to shorten the time from franchise sale to grand opening among other key topics. Turning to Slide 6. We continue to prioritize the improving operational execution. The fourth quarter is historically our strongest quarter for both growth sales and clinical opening, and once again, that’s held true. In the beginning of December, in conjunction with our Black Friday sale, we posted system-wide sales of $1 million in one day for the very first time. and then we repeated the accomplishment in January associated with our year-end membership promotion. Moving forward, these promotions will continue to be an important part of our annual marketing plan. Reviewing operations, we continue to prove that clinics that start strong tend to stay strong. Those clinics that start slow, have a longer trajectory to achieve breakeven and experience a slower overall sales ramp. Our enhanced grand opening programs yielded 15 clinics achieving the Go Elite status in 2019. Go Elite show up for the grand opening elite means that the clinic achieved at least 400 new patients and $30,000 in sales within the first two months of operation. This is a very high bar compared to our historical performance, and I’m proud to say that four of the five corporate greenfields opened in 2019 attain this coveted distinction. Meanwhile, we continue to relentlessly test and to prioritize both our grand opening program and operational tools and protocols to improve operating margins at the clinic level. As we review our breakeven chart, please note this dynamic has new clinics from the cohort added each month. The monthly sales results will change until the entire cohort reaches a full 24 months of operation. In January, 2019 four legacy franchisees open clinics in four different regions using older opening guidelines rather than following our new grand opening protocols. As a result, these four clinics have underperformed compared to the overall 2019 cohort negatively affecting the lead of the trend line. More importantly, the entire 2019 cohort outperformed our historical rep by 60% to 160% throughout the first 11 months of their operations. To illustrate the impact, we’ve shown in 2019 cohort net of the four underperforming clinics opened in January. You can see that our 2019 clinics using the grand opening protocols outperformed or were in line with the same very high performance standards set in 2018. Turning to Slide 7. franchising is ultimately, a brand building exercise. The Joint has already the largest and most recognized provider of chiropractic care in the country. Yet according to the Gallup-Palmer study, over 50% of Americans don’t understand what chiropractic is or how it can benefit them. That’s why we’re increasing our investment in growing awareness of our brand and quite frankly, the entire chiropractic profession, as we continue to increase store fronts and build on marketing muscle will play an ever more important role in educating the wider marketplace of consumers seeking health – seeking pain relief and building demand for chiropractic care. A case in point, last October, we launched our new brand campaign called You’re Back, Baby, which focuses on how chiropractic care at the joint can help alleviate pain from everyday activities such as office work or keeping up with the family. It also features several of our actual patients, who share their personal testimonials of how chiropractic care has helped at The joint has helped them get back to their desired lifestyles. This wide-ranging campaign launched across multiple advertising channels and web platforms is resonating with consumers, who want to learn more about chiropractic. and this is only the beginning. We have stories to share with the marketplace about the value The Joint provides and how chiropractic care is a natural solution that millions of Americans are turning to for pain relief in greater quality of life. Turning to slide 8 to further strengthen our brand and build the consumer awareness around the clinic. We required each clinic to spend a minimum of $25 to $3,000 per month – $2,500 to $3,000 per month in local advertising. in 2019, we estimated The joint’s off balance sheet spend is between $15 million and $18 million. Note that this is on top of the 2% each clinic contributes toward the national marketing spend, which is $4.4 million in 2019. further, we leverage our increased penetration in many local markets by forming advertising cooperatives or co-ops. These co-ops enable our franchisees to better organize and pull their local resources toward more desirable marketing opportunities that would ordinarily be out of reach for the individual operator. Many of our co-ops are using this leverage to execute sophisticated media buys, including television, radio, outdoor and even sports sponsorships. As of today, we have more than 30 of these co-ops operating across the country and they remain an essential component of our brand building strategy. Turning to slide 9. Those investors closely following The joint, know that we’re in the process of rolling out a new IT system named AXIS and know how important is the undertaking is to our network. First, we evaluated buy versus build options and in September 2018, we chose a SugarCRM to replace our homegrown IT platform. SugarCRM is a platform employed by millions of users with ongoing capabilities to ensure a sustainable system with frequent updates to cybersecurity and other critical features. As we finish up the development work, we’re now moving into a period of extensive testing and final adjustments, which will culminate in user training. It’s been demonstrated time and again, extensive testing and training on all the users is critical to a successful rollout. We anticipate rolling knock this out mid-year. However, we will not be tied to an artificial timeline. if determined appropriate, we’ll extend the rollout date as necessary for the business. We’re confident access once implemented will provide a higher standard point of sale, improved financial and business intelligence, marketing automation and enhance the feedback – patient feedback systems. Before I turn the call over to Jake, our CFO to review our financial results, I’ll reiterate, we are focused on continuing to deliver strong business performance and believe that we’re well positioned to build upon the growth momentum. And with that Jake, I’ll turn it over to you.

Thanks, Peter. Turning to slide 10, as Peter mentioned, we continue to deliver strong growth across all our metrics. To begin, I will compare fourth quarter 2019 to fourth quarter 2018. gross sales for all clinics opened for any amount of time grew 34% to $62.5 million. System-wide comp sales for all clinics opened 13 months or more increased 26%. System-wide comp sales for mature clinics opened 48 months or more increased 19%. Turning to Slide 11. revenue for the fourth quarter of 2019 grew to $13.9 million, up $3.9 million or 39%. Company-owned or managed clinics contributed revenue of $7.6 million, increasing 45% from the same period a year ago. Franchised operations contributed $6.3 million, up 33% compared to the same period last year. Our increased revenue for both categories is due to the greater number of clinics continued organic growth and two successful fourth quarter promotions. Cost of revenues was $1.6 million growing 36% over the same period last year due to higher regional developer royalties in commissions. This increase reflects the success of the RD strategy. selling and marketing expenses were $1.8 million or 13% of revenue in the fourth quarter of 2019, compared to $1.2 million or 12% of revenue in the fourth quarter of 2018. in addition to operating more corporate clinics, we invested in advertising to fuel our brand refresh in October. General and administrative expenses were $8.5 million or 61% of revenue compared to $6.6 million or 66% of revenue in the fourth quarter of 2018. We posted net income of $1.3 million or $0.09 per diluted share, which improved $855,000 when compared to a net income of $437,000 or $0.03 per diluted share for the fourth quarter of 2018. total adjusted EBITDA for the fourth quarter of 2019 was positive for the 10th consecutive quarter at $2.1 million improving $1 million compared to adjusted EBITDA of $1.1 million in the same quarter last year. Franchise adjusted EBITDA income increased 42% to $3.1 million. Company-owned or managed clinics adjusted EBITDA income increased 77% compared to last year, increasing $1.7 million. Corporate expense adjusted EBITDA loss increased 29% to $2.6 million. Turning to slide 12. I will now compare the year ended 2019 to 2018. gross sales for all clinics opened for any amount of time grew 33% to $220.3 million. System-wide comp sales for all clinics opened 13 months or more increased 25% and significantly, system-wide comp sales for mature clinics opened 48 months or more, which was a base of 290 clinics, increased 19%, which is remarkable in today’s retail environment. revenue increased by 32% to $48.5 million. Net income improved by $3.2 million to $3.3 million and adjusted EBITDA more than doubled to $6.2 million. Regarding the balance sheet as of December 31, 2019, unrestricted cash was $8.5 million, compared to $8.7 million at December 31, 2018. the balance is relatively stable, demonstrating our strong cash flow from operations and franchise license sales with these inflows offset by our investment in new corporate clinics, our IT system development and the repayment of debt. Subsequent to year-end, we entered into an agreement for a line of credit with JPMorgan chase bank, designed to provide increased liquidity in a non-diluted fashion. The senior secured credit facility is $7.5 million including a $5.5 million developmental line of credit and a $2 million revolving line of credit, which has an uncommitted accordion feature of $2.5 million. In addition to increasing cash availability without diluting our stock, the facility reflects the strengthening of our financial position and our improving balance sheet. Further, we have the opportunity to broaden our relationship with a top-tier bank. as it relates to internal controls, we expect to report a material weakness in our form 10-K for 2019 related to our IT general controls. please note there have been no misstatements identified in our financial statements. We have already implemented a number of additional protocols and procedures to strengthen our IT controls and we fully expect to remediate the material weakness. Turning to slide 13. our 2020 guidance reflects our accelerated momentum. We expect revenue of $61 million to $63 million, compared to $48.5 million in 2019. Adjusted EBITDA of $8.5 million to $9.5 million compared to $6.2 million in 2019 and franchised clinic openings to range from 80 to 90, up from 71 in 2019 and company-owned or managed clinic expansion through a combination of greenfields and franchised clinic buybacks to range from 16 to 20, up from 13 in 2019. that said, when we add a significant number of clinics to the corporate portfolio, we will require additional resources to ensure we maintain our high operational standards. We expect the corporate expansion to be weighted more heavily towards greenfield development. As a reminder, when we open more greenfields, they will negatively impact our short-term profitability until they break even. Overall, our strong 2019 results, $7.5 million of cash flow from operations and our new line of credit that strengthened our balance sheet in a non-dilutive way and positioned us well for growth. I will now turn the call back over to you, Peter.

Thanks, Jake. Turning to slide 14, I’d like to take a minute to talk about our expanding market opportunity. I’ve said it before and I’ll say it again, there are many macro factors that are driving the mainstream adoption of chiropractic care. Doctors and patients alike are looking for drug fee therapies to address the opioid epidemic, the obesity epidemic and quite frankly, the pain epidemic that plagued this nation. further, the younger generations are more open to natural holistic forms of pain relief, increasing the use of chiropractic care. Turning to Slide 15. As The joint is revolutionizing access to chiropractic care, we’re making it more available to people than ever before. As a healthcare franchise concept, we’re able to collect and track all of the demographic and psychographic information from our customer base. at the close of 2019 using this collected patient data, we analyzed the exact qualities of our users and compared them to the existing demographics across the country. We identified more than 1,800 points of distribution that meet the criteria for The joint clinic, up from our former account of 1,700 demonstrating the expansion of our market in just a few years. to capture this opportunity, we’ll continue to execute our successful growth model for franchise and corporate growth. We’ll also test additional new markets, rural and urban and non-traditional locations like airports and store-in-store concepts. among retail concept – retail franchise concepts, the thousand units is considered a tipping point for national brand awareness, which is why we’ve had such a focus on new unit growth. Based on our success, we fully expect to reach our target to open our 1000th clinic by the end of 2023. turning to slide 16. overall, our hybrid model, a franchising company-owned or managed clinic enables us to expand in a capital light fashion. This is essential in helping us to build the brand awareness and name recognition, establish predictive – a predictable revenue stream, increase scale, and improve shareholder value. In closing, I’d like to recognize The Joint chiropractic teams for their collective engagement to our franchise community, our RD, our corporate team, and The Joint colleagues across the country, I thank you. Our significant progress in making chiropractic care more accessible for patients and the strengths of our company would not be possible without your commitment to our brand. the leadership team and I are grateful for all of your hard work. Finally, we plan to be at the 32nd Annual ROTH Conference on March 15 to March 17 in Dana Point, California. Catherine, I’m ready to begin the Q&A.

Thank you. [Operator Instructions] And our first question comes from David Bain with ROTH Capital. Your line is open.

Great. Thanks so much and congrats again on the results and great KPIs. First, can you just confirm with regard to the coronavirus if you’ve seen any sort of downtick in renewals, frequency of visits, comp trans, franchise, sales, opening delays, anything else at this point that you can pinpoint to what’s happening there?

Sure, David. And of course, that’s in the mind of everybody and we’re certainly tracking it as well. Specifically, since you saw this kind of blow up last week. And in our model, where we’re most paying attention to it. Are we seeing any kind of drop on patient visits? As you know, we’re a subscription-based business and so 80% of our sales comes from the membership. And to answer the question, have we – in this last 10 days or in any significant timeframe, and that’s really his last 10 days, it’s time to focus. Have we seen any significant drop in our membership cancellations? Absolutely not. We’ve analyzed on a day-by-day basis to track, where we are with patient visits and in the aggregate, as we look across our system, we have not seen a single drop on a day-by-day basis in those patient visits. We then looked at the one area, where we know we’ve had a lot of attention, of course, is the Seattle area. And then we’ve got nine clinics operating in the State of Washington. So, we analyze that area day-by-day in terms of number of patient visits. And again, they were either up or flat in that same period compared to the last trailing six weeks. So, as we sit here, we’ve seen virtually no impact of the coronavirus on the business. Now, what it holds for the future is of course, we’re all wondering, but right now, we’re not seeing any impact on our – in any measurable ways as we’re operating this business.

Got it. Okay, perfect. And you mentioned 2023 1,000 stores. One, I guess, can I assume that’s guidance and if it is – can we just get just a tad more granular, like projected potential mix range of franchise versus corporate and what you believe kind of normalized EBITDA margins could look at that – look like at that point?

Sure. David, this is Jake. We do fully expect to hit that that 1,000 clinic mark by the end of 2023. We don’t provide more granular forward-looking guidance certainly as it relates to the margin. We know that we have a lot of work to do to hit that goal, but we believe we have the teams and the pipeline in place to achieve it.

Okay. And then next, maybe 90, 10, 85, 15, any sort of thoughts there?

Yes. what I’ll say is the – with the strength of the franchise program and our RD community right now, we’ve seen a lot of traction. You’ve seen the uptick in our franchise license sales. Again, 89% being driven from the RD group. It’s going to be hard to keep up; they’re doing a great job. So, we will continue to look at that over time. We put the line of credit in place to help us feel the growth. But yes, it’s going to be – it’s going to be a lot just to keep up with the franchise group.

Okay, great. And just final one. And I guess Jake, this is also for you, I know that you have one of the pricing adjustments for several territories. Now, I’m just kind of curious as to where that is in the rollout and if you could speak to any impact in terms of margin, I assume that’s full flow through and also any potential churn that you’re seeing from that implementation.

Yes. As we look at the KPIs, we haven’t seen anything different from our tests. So, we’re really encouraged by the results so far. Again, because we grandfather in all the existing memberships, it does take a number of months for that to flow through. So, I think last quarter we said, we’d really look for that, that lift to start really impacting the margins kind of in the second half of 2019. So, nothing that we’ve seen would be any different from what we’ve previously mentioned, but we’re monitoring the KPIs and we’re encouraged by what we’re seeing.

Great. congrats and thanks for the update on the augmentation of door potential universe. It sounds conservative from my standpoint, but I know you have a full computer program. Thanks again. Thank you.

Bye, David.

Thank you. [Operator Instructions] And our next question comes from Jeff Van Sinderen with B. Riley. your line is open.

Good afternoon. Let me add my congratulations on your continued strong metrics. Believe you sold 126 franchise licenses in 2019. How should we think about the growth of franchise license sales this year relevant to what’s baked into your guidance? And then also what’s reflected in your guidance for comps this year? Anything you can help us with on that?

Sure. And to the two questions. Number one, we don’t guide on comps. And so that there’s nothing reflected in the guidance itself, but if we just look at the trends is that while we know these are really remarkably strong comps and the question asks all the time, how long can you keep that up? And it’s a great question. While I don’t – I’m not in any way suggesting we can keep up at a 25% level, but we certainly would believe that we have a considerable period in front of us of strong comps. And why can I say that is number one, one of the things that influences your comps is that you’re having a lot of new young clinics coming in on that second year. So, if you look at our performance, it’s not unusual for those clinics that are coming into that first year. We’ll have 75% to 80% same-store sales compared to their first year. In addition, what you’re looking at is when Jake was telling you, we’ve had almost 300 units that are considered mature and that they’re experienced in a 19% comp and as you’ve heard us say before, we don’t know where the business that taught that this business model is. So, I believe that we should be able to entertain strong comps for several years going forward as this model matures.

Okay, great. And first question again, the franchise license…

franchise license, how does that…

yes.

Yes, I would expect to continue to see acceleration in the number of license sales per year. So, and again, if you just look at the numbers, there was 20 – 22 in 2016, 37 in 2017, 99 in 2018, 126 in 2019. and so are we projecting that we’d expect to see that same trend line absolutely into 2020 and unless there’s something crazy going on with the economy that I would, absolutely, we’ll continue that trend. And then of course, that reflects into more clinics opening in that year and that’s why you see we went from 71 corporate clinics – or excuse me, 71 franchise clinics opened in 2019 to guiding between 80 and 90 in 2009 – and 2020.

Okay. And then as a follow-up to that, just regarding the greenfield portion of the 16 to 20 company-owned or managed clinics you expect that this year of the greenfield or how many of those do you expect to be kind of clustered versus maybe, moving into more virgin territories?

Right now? Right now that – go ahead, Jake.

Yes. So, the first lens we always look through is to cluster then where we have the existing overhead. So, we’re looking at all the infill opportunities that we have in our existing markets, Arizona, New Mexico, Southern California, and kind of that South Carolina and North Georgia area. So that’s the first swat. We constantly evaluate other opportunities that are outside of those RD protected territories. But the first lens is always to look to cluster where we have the overhead.

Okay. Good. Thanks. I’ll let someone else jump in.

Thanks a lot, Jeff.

Thank you. And our next question comes from Mike Malouf with Craig-Hallum. your line is open.

Great, thanks. Thanks for taking my questions and well done this year. Very impressive.

Thank you, Mike.

I’m wondering if we could just go to that one slide that shows those four clinics. If you kind of do the math or back of the envelope math, it looks like those four clinics are sort of averaging around 16,000, maybe $17,000 and so way below sort of where you’ve expected to them. And I know you said it was because they didn’t do some of the best practices around the openings, but I’m wondering now that it’s been several months since they’ve opened, what’s keeping them at those levels. And is there anything regarding maybe, where they are that could give us a little bit of insight? Maybe, they’re just not located very well or not clustered or something to explain it rather than just maybe, the opening process.

Well, that’s a great question, Mike, and you’re absolutely right. It is more than just simply the opening process. But I think that the fact that they were not following the opening process is also indicative of how well they are as a franchisee. And this is one of the challenges you have in any franchise business is the range of performance that you get from your – in all those top performers to those that aren’t following the system and that our arms back having less results as a consequence. I would say that you’re right that we certainly see from that site selection, can have an impact in terms of the success of that market. But we really haven’t seen this trend as you start slow and you stay slow. and that it’s not a coincidence that you’re not following the operating that does grand openings program is that how well are you following the rest of the system? So, we are working closely with them to try – to help boost them up. But again, this is a – as a franchise model, you – it is their business and that – they are licensed to use our operating model, but it’s what they put into it that’s going to create the results.

Okay, great. And then just to follow-up with regards to the balance sheet, obviously, with a little bit more flexibility with this line of credit and debt in place or this debt capacity in place. What – under what scenario, do you think you’d actually use the debt at least on a net basis to be in that net debt capability, because I can run the numbers? I don’t see that necessarily happening. So, just kind of – would be nice to see some color around some of the strategy around the capital. Why put this out there?

Yes. no, I think you had it right, Mike. The key there is flexibility. We generated $7.5 million of cash flow from operations in 2019. We continue that upward trend to continue in terms of our own cash flow generation. But having that flexibility on the balance sheet and the additional liquidity provides us some additional opportunities, certainly, where we can be more opportunistic if some larger scale acquisition type opportunities came to the table. So, in a period where interest rates are at historic lows, into locking a partnership with a top-tier bank and provide us that flexibility to be opportunistic, we felt it was the right time.

Okay, great. Thanks a lot. Appreciate the help.

Thanks a lot, Mike.

Thank you. And our next question comes from Linda Bolton Weiser with D.A. Davidson. Your line is open.

Hi. When we were together, we – you had talked about a labor optimization initiative that you’d be rolling out and implementing this year. Can you give us an update on how that’s going and what your expectations are for that? Thanks.

Yes. great question, Linda. And as we did talk about is that if you look at a traditional clinic for us is once they’ve reached that level of sales of let’s say somewhere around $35,000, $38,000 a month in sales is – it is important to add a second doctor, because to make sure that we’re not getting the wait time with the patients and that we are really focused on helping our franchisees recognize the time when to add that doctor. We have a software program that counts patients per, how many adjustments per hour they’re doing, and it kind of creates a heat map that we can utilize for when we need to add that doctor, because it’s not that you have to automatically hire a doctor and other full time, as you can actually add that part-time doctor and fill in those hours as you build up to that next tier of performance. And that we launched this labor optimization program at our National Conference last year. We’ve done additional outreach in program development through that RD program, I mentioned in my comments and then we’re coming up to our National Conference next month and that will be one of the pre – the key initiatives that we’re continually focusing on in training our pace, our – excuse me, our franchisees to utilize the program and I think that we’re seeing a strong interest in adoption of it, because of course, it’s in their own interests as well.

Thanks. And can I just sneak in another one on your sensitivity to the general economy? I think there’s a lot of investor worry about there, about a general softness in the economy given the macro, can you just talk about your services and how they kind of respond and behave in a – in an economic downturn? Thanks.

Great. So, another great question and to give you actual data about our response in an economic downturn. Of course, we don’t have any that we started in 2010. and so we have been – and we have not gone through a recession. I think there’s evidence out there as it relates to health-related businesses that have gone through a recession, because they feel like there may be a little less immune than compared to something that’s more consumable or like a coffee or a frozen yogurt. As we’ve thought about that question, is that in that downturn, what potential impact would we have on our business? And we think certainly if you go to the lower end of our patient base is that we’ve backed to see a fallout. We talk about the demographic profile of our family income of being somewhere between 50,000 and 105,000. And so when you see that dropped down in that lower amount, you can imagine that they’re going to – and their membership are coming less often. But we also think that as the economy in this downturn is that those people, who are either losing insurance or who haven’t used us, because that they felt that we were too inexpensive could stay to themselves. I really do want my chiropractic care. I’ve lost my insurance. I mean, how bad can it be at The Joint? And so we think that you’ll see people come on the top of that funnel, who historically has seen us is less expensive and therefore maybe, not as good as their own traditional chiropractor. So, we think that between those two things that we would weather a recession, fairly well. And if you just think – if you’re sitting here and trying to make decisions about where to spend your expendable income and you want pain relief or you want a coffee or a frozen yogurt, our feeling is that that pain relief would have a higher significance for some of the other consumable things you’re going to do as a patient or as a customer.

Great. Thank you very much.

Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Your line is open.

Okay, thanks. I guess, Peter, most of the questions have been asked. If you could just talk about your other markets that you’re looking at going into, whether it’s kiosks or airports. And then I just have one follow-up.

Certainly. As that – if you look at our current base of clinics is that we are predominantly in that suburban setting, the strip mall, the 1,000 square feet. And then we know that there’s additional opportunities out there and that we’ve had a couple of them that we experimented so far in 2019. So, we put a concept in a concept with Relax The Back in out of Boston and somewhere in Boston, and that’s going fairly well. We also opened up our first airport facility where we are inside XpresSpa in Austin, Texas. And again, that’s been an interesting experience for us and we’re – that we opened up in September. and so we’re still analyzing the results of that. What we find interesting about that particular side is, just we have so many of our existing customers, who are coming in from other as a member and utilizing the services in the airport as opposed to the airport itself, generating a whole bunch of new patients. So, it’s an interesting experience for us that we’re working through. I think, we have some real opportunities and quite frankly, some of the more rural markets and I don’t want to say super-rural, but we’re realizing especially when the franchisees, the doctor themselves is that we can go into some of these smaller markets. And when you look at that, open up a whole opportunity that we really have not developed to-date. Finally, we’re also experimenting with getting more and more in those super-urbanized market. Well, I’m not going to say we’re in the middle of Manhattan, but in markets like Chicago or Denver, we’re seeing a couple of clinics that are opening up that, that really are in a more urban setting. There’s not parking associated with it and that those have not opened up yet this year. So, we’re going to be monitoring them, learning from them and using that as a guideline as we approach more and more of that urban opportunity.

Okay. So, as a follow-up, obviously, most things in an airport are more expensive, in the model that you have with XpresSpa, it sounds like consumers that have a – that are purchased a pack with you, get to use that at the airport. If they did not have a pack, would that pack or individual treatment costs more at the airport than it would at a location that you had in Texas?

Right now that the pricing structure in the Austin airport is equal to the same pricing structure outside of the airport. So that the business to say that’s in your walking rate is the same that the membership range is the same. So, we have not changed that. We’re looking at that, but right now, it’s equal pricey.

And then so on the price model that you currently have, and I know you just went through an increase, but if you had a look out over the next six to 12 months, assume we don’t go into recession, would you be looking at a price increase end of this year, beginning of next year? And if so, is that would be – would that be a small increase? How do you look at that?

Yes. This is Jake. We constantly evaluate our pricing structure. As of right now having just rolled out the price adjustments in the certain markets in Q4. I don’t think it’s in the near-term horizon, but as we get into the more urban markets or we start evaluating some of those non-traditional opportunities that you’re referring to, say in the airports, we constantly look at that. But right now, I don’t think it’s in the near-term horizon.

Yes. And I just to add to that. As you know Anthony, that we are value proposition. I mean that’s one of the tenants of this model is the inexpensive cost of the high-quality chiropractic care that our patients get. So, it is something that we look at and are very, very thoughtful about.

Okay, great. Thanks very much. Appreciate it.

Thank you.

Thank you. And our next question comes from Oliver Chen with Cowen and Company. Your line is open.

Hi, this is Jonna on for Oliver. Thank you for taking our question. You grew your customer – new patient customer count nicely, how you’re thinking about your customer acquisition costs going forward and could you just talk about your turn rate for new customers versus existing customers and what are some initiatives that you have in place to increase retention? Thank you very much.

Certainly, great question, Jonna. Nice to talk to you that as it relates to our customer acquisition costs, there’s really, we – our customers come from three sources. And right now, the number one source is referral. So, it’s a happy patient referring to their friends and family that, oh my gosh, you’ve got to go to The Joint. This is amazing. 40% of our pay new patients are coming from referral and the cost of that is zero. The cost of that is good service. The cost of that is asking for the referral of the patient, so that I would anticipate that that cost would continue to stay exactly where is that. The second fastest growing component of our new patient count is coming from our digital marketing activities. And then we have an increasingly sophisticated programs that relates to reaching out to patients, who are going online to do their search. They do their due diligence to determine where they’re going to go. And that what we’re finding there is that our – if we compare the total acquisition cost of 2019 to 2018, I think it went up slightly. But I think that’s also because we had a much more aggressive campaign on the paid search for driving patients into the clinics. We do have a very sophisticated program that we’re increasing to do that. But certainly, SEO is part of that, but we also are working with YouTube channels and targeting to people, who are doing certain searches and showing our ads and we’ve had some really positive results with our YouTube promotions are working with the regeneration in that aspect. The final component of where our new patients come from is what I’d just call those gorilla marketing activities. It’s the store front actually acting as your base of bringing people in. It’s that sign thrower. It’s coupons, it’s making sure that you’re reaching out to the community that you’re serving, whether it’s at the gym or the hospital or the apartment building or the office building to make sure that they are aware that we’re there when they need, release from pain. And so that as we focus on to 2020, I would say that the initiatives that we are focused on are really to reinforce those three campaigns. So, if you have more effective in making sure that we’re asking for those referrals and – on a clinic level to grow more, put more dollars and be more sophisticated in how we’re doing the spend for local store or for the digital marketing. And then finally, I mean, because it’s still, it is that small box retail concept in that 1,000 square feet that your customer base really lives works and travels in that five to 15-minute radius around your – around that clinic is to get, again, more and more proactive in those activities that bring awareness on that line level.

Got it. Thank you. And just on the churn rate, are you – did you see anything different in terms of churn for new customers and existing customers does time versus previous years?

What we’re seeing overall is our customers are staying with us for a longer period of time. I’ve been here now for four years. In the last couple of years, I would say that the – in the early part of that period or the average customer stayed with us as a member for four months and that they used us, I want to say somewhere around 2.5 times per month. Today, those numbers look like the average patient stays with us for six months and that they are staying – they are using us a little under three visits a month. What we also find is are those patients that dropped their membership is that 25% of them will come back within the next six months, because their pain comes back. And so that we’re seeing overall what we call an attrition rate and it’s something that we focus very much on is that if you look at our 2019 attrition rate that we’ve seen it improve. So, I think right now, it’s running a little around – almost 10%, 10.5% and it was probably a point higher if you looked at that in 2018.

Got it. Thank you very much.

Thank you. And we have a question from Jeff Geiser with Geiser Wealth Management. Your line is open.

Hey gentlemen, thanks for taking my call. You guys have been through about a decade’s worth of flu seasons and you don’t have a reputation for spreading it in the community. You’re not selling food. I’m just wondering if you could talk a little bit about the precautions that you do take normally, coronavirus or no coronavirus. And if things were to kick up on the coronavirus front or other viruses or flus, are there some things that you can communicate to your customers to reassure them that you guys are not a hot point for transmission?

Hey, Jeff. thank you. That’s a great question. So, when we certainly have thought a lot about, and I think where we have to start is first of all, we are a medical facility. We had trained licensed doctors, who understand fully how to protect themselves and their patients. Whether it’s coronavirus, whether it’s the flu, whether it’s – this is why they go to school. And this is why they had their ongoing education. And that these are certainly, the protocols and the training that they have to protect their patients and to protect themselves and that is some fundamental way, in which we operate our clinics. Secondly, given these concerns, we certainly have reiterated to follow the guidelines and I’m looking at CDC and follow those guidelines on a clinic level to ensure that we’re taking the best care for our patients and protecting our doctors that we have the capacity to reach out, because we have so much information about our patients and certainly, their email and text as long as they’ve opt in for us to receive those notices is that we can immediately send out notice or information that they need to update them on whether we have a clinic that’s closed or if there’s a procedure that’s changed, and to ensure that they are understanding, where we are and taking their own steps to protect the clinic itself. And so we also will be following any of the state and local guidelines that we’re given is, how to operate and wherever this coronavirus takes the rest of the nation.

Great. Thank you very much.

Thank you. And I’m showing no other questions at this time. I’d like to turn the call back to Peter for any closing remarks.

Thank you, Catherine. And thank you all for your interest. Each quarter I provide patient stories and testimonials to illustrate the impact of The Joint chiropractic care. Today’s commentary comes from a veteran in Clarksville, Tennessee, and he wrote us, “For four years since my accident in Iraq, I had severe lower back pain due to uneven legs and a right shoulder injury. Today, I visited The Joint and all of that was fixed. I experienced the greatest pain relief since my accident. In fact, I’ve never felt so good. I know, I can confidently pick up my daughters without pain. Today is the best day of my life.” Thank you and stay well-adjusted.

Ladies and gentlemen, that concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.