Joint Corp (JYNT) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to The Joint Corp. Fourth Quarter 2019 Financial Results Conference Call. (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, Katherine. 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 and provide 2020 guidance. Then Peter will close with our long-term vision and open the call for questions.

Please note, we are 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 and 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 can contribute to these differences include, but are not limited to, 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 for 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 they are 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 that -- than GAAP measures alone. Reconciliation of net income to 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 continued 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've also continued to increase productivity, resulting in improved clinic performance and profitability.

As a result, we met or exceeded our plan, achieved positive adjusted EBITDA for the second full year since going 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 1 million. We performed 7.7 million adjustments during the year, up 28% compared to 2018.

Jake will discuss our financial results in detail. I'll note that in 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 4-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 setting, providing concierge-style membership-based services with no appointments, no assurance, attractive pricing and convenient hours of operation, including evenings and weekends. The Joint's purpose is to alleviate pain and to help move our patients towards a healthier lifestyle, the 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 3 key pillars that support our brand as identified by our extensive consumer 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 5 clinics last year, continuing our 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 8 clinics from franchisees and opened 5 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 2 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 in bringing them to better operating standards and acquiring well-run clinics that have provided us new access to markets 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 franchised 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 in 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 RDs' efforts, combined with the success of The Joint [Franch] concept, are 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 in 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 franchised clinics over the 10-year agreements. This large foundation of franchised clinic commitment bodes well for the continued clinic expansion and sales growth into 2020 and beyond.

In January, we hosted another very successful 3-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 improving operational execution. The fourth quarter is historically our strongest quarter for both gross sales and clinic opening. And once again, this 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 who 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, short for the grand opening elite, means that the clinic achieved at least 400 new patients and $30,000 in sales within the first 2 months of operation. This is a very high bar compared to our historical performance, and I'm proud to say that 4 of the 5 corporate greenfields opened in 2019 attained 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 that it's dynamic. As new clinics from the cohort are added each month, the monthly sales results will change until the entire cohort reaches the full 24 months of operation.

In January 2019, 4 legacy franchisees opened clinics in 4 different regions using older opening guidelines rather than following our new grand opening protocols. As a result, these 4 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 ramp by 60% to 160% throughout the first 11 months of their operations. To illustrate the impact, we've shown the 2019 cohort, net of the 4 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 is 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, we'll play an ever more important role in educating a wider marketplace of consumers 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 and greater quality of life.

Turning to Slide 8. To further strengthen our brand and build a consumer awareness around the clinic, we require 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 was $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 pool 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 this undertaking is to our network. First, we evaluated buy versus bill options. And in September 2018, we chose 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 of all the users is critical to a successful rollout. We anticipate rolling Axis out midyear. However, we will not be tied to an artificial time line. If determined appropriate, we'll extend the rollout date as necessary for the business. We're confident Axis, once implemented, will provide a higher standard point of sale, improve financial and business intelligence, marketing automation and enhanced 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.

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 open for any amount of time grew 34% to $62.5 million. System-wide comp sales for all clinics open 13 months or more increased 26%. System-wide comp sales for mature clinics open 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.

Franchise 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 2 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 and 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 tenth 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 open for any amount of time grew 33% to $220.3 million. System-wide comp sales for all clinics open 13 months or more increased 25%. And significantly, system-wide comp sales for mature clinics open 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-dilutive 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 have 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-free therapies to address the opioid epidemic, the obesity epidemic, and quite frankly, the pain epidemic that plague 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 health care 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 count 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 nontraditional locations like airports and store-in-store concepts. Among retail concept -- retail franchise concepts, the 1,000 units is considered a tipping point for a national brand awareness, which is why we have such a focus on new unit growth. Based on our success, we fully expect to reach our target to open our 1,000th clinic by the end of 2023.

Turning to Slide 16. Overall, our hybrid model of franchised and company-owned or managed clinics enables us to expand in a capital-light fashion. This is essential in helping us to build the brand awareness and name recognition, establish 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 RDs, our corporate team and The Joint colleagues across the country, I thank you. Our significant progress in making chiropractic care more accessible for our patients and the strength 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 through 17 in Dana Point, California.

Katherine, I'm ready to begin the Q&A.

(Operator Instructions) And our first question comes from David Bain with Roth Capital.

Great. 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 trends franchise sales, opening delays, anything else at this point that you can pinpoint to what's happening there?

Sure, David. And then, of course, you know that's in the mind of everybody, and we're certainly tracking it as well, specifically since you saw this kind of blowup last week, and that, in our model, where we're most paying attention to it. Are we are 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 time frame -- and that's really these last 10 days of 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 that we've got 9 clinics operating in the state of Washington. So we analyzed 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 -- the trailing 6 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 -- in any measurable way 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 like at that point?

Sure, David. This is Jake. We do fully expect to hit 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 the mix, 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 fuel the growth. But yes, 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 rolled out] 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 test. 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 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.

(Operator Instructions) And our next question comes from Jeff Van Sinderen with B. Riley.

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 2 questions. Number one, we don't guide on comps, 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 asked all the time is, "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 the young -- 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 will have a 75%, 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 experiencing a 19% comp, and as you've heard us say before, we don't know where the business -- the top of 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?

Franchise license.

Oh, the franchise license sales, 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, it was 22 in 2016, 37 in '17, 99 in '18, 126 in '19. And so we're 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, then I would absolutely believe 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 clinic -- or excuse me, 71 franchised clinics opened in 2019 to guiding between 80 and 90 in 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 to add this year. Of the greenfield, are -- how many of those do you expect to be kind of clustered versus maybe moving into more virgin territories?

Right now the -- go ahead, Jake.

Yes. So the first lens we always look through is to cluster them 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, North Georgia area. So that's the first swath. 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.

And our next question comes from Mike Malouf with Craig-Hallum.

Well done this year. Just very impressive. I'm wondering if we could just go to that one slide that shows those 4 clinics. If you kind of do the math or back of the envelope math, it looks like those 4 clinics are sort of averaging around $16,000, maybe $17,000, and still way below sort of where you've expected to. 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, very well or not clustered or something to explain it rather than just maybe the opening process?

Well, it'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 -- 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 have seen this trend, was you start slow and you stay slow. And that the -- it's not a coincidence that you're not following the operating -- the grand opening program, is then 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 -- as a franchise model, it is their business, and 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 a 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 at least 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, and I don't see that necessarily happening. So I'm just kind of get -- it 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 in 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 and to lock in a partnership with a top-tier bank and provide us that flexibility to be opportunistic, we felt it was the right time.

And our next question comes from Linda Bolton-Weiser with D.A. Davidson.

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?

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, 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 for 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 in another full-time, is 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 key initiatives that we're continually focusing on and training our -- excuse me, our franchisees to utilize the program. And I think that we're seeing a strong interest and adoption of it because, of course, it's in their own interest as well.

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 an economic downturn?

Great. Another great question. And to give you actual data about our response in the economic downturn, of course, we don't have any. We started in 2010. And so we have been -- 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, is they feel like they're maybe 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 expect to see it fall out. 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 drop 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 say 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 as less expensive and, therefore, maybe not as good as their own traditional chiropractor.

So we think that between those 2 things, that we would weather a recession fairly well. And if you just think -- well, if you're sitting there and trying to make decisions about where to spend your expendable income and you want pain relief or you want coffee or a frozen yogurt, our feeling is 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.

Our next question comes from Anthony Vendetti with Maxim Group.

Okay. I guess, Peter, if you -- 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 one of the -- 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 out of Boston, a suburb of 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 site 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 in, 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 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 have 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 cost 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 visits is the same. Walk-in 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 pricing.

And then -- so on the price model that you currently have, and I know you just went through an increase, but if you had to look out over the next 6 to 12 months, assume we don't go into a recession, would you be looking at a price increase end of this year, beginning in next year? And if so, 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 nontraditional 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.

And just to add to that, as you know, Anthony, that we are a value proposition. I mean that's one of the tenets 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.

And our question comes from Oliver Chen with Cowen and Company.

This is Jonna on for Oliver. You grew your customer -- new patient customer count nicely. How are you thinking about your customer acquisition costs going forward? And could you just talk about your churn rate for new customers versus existing customers? And what are some initiatives you have in place to increase retention?

Certainly. Great question, Jonna. Nice to talk to you. That as it relates to our customer acquisition costs, there's really -- our customers come from 3 sources, and right now, the #1 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 new patients are coming from referral and the cost of that is 0. The cost of that is good service. The cost of that is asking for the referral of the patients. So that I would anticipate that cost would continue to stay exactly where it's at.

The second and fastest-growing component of our new patient count is coming from our digital marketing activities. And that we have an increasingly sophisticated program as it relates to reaching out to patients who are going online to do their search, to 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 in 2019 to 2018, I think it went up slightly. But I think that's also because that 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 then certainly SEO is a part of that, but we also are working with YouTube channels intent -- targeting 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 lead generation in that aspect.

The final component of where our new patients come from is what I'd just call as guerrilla marketing activities. It's the storefront 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're aware that we're there when they need release from pain.

And so that as we focus on 2020, I would say that the initiatives that we are focused on are really to reinforce those 3 campaigns. So we get more effective in making sure that we're asking for those referrals on the 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 still is that small box retail concept in that 1,000 square feet that your customer base really lives, works and travels in that 5- to 15-minute radius around that clinic, is to get, again, more and more proactive in those activities that bring awareness on that line level.

Got it. And just on the churn rate, did you see anything different in terms of churn for new customers? And is it existing customers this 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 4 years and the last couple of years, I would say that, in the early part of that period, the average customer stayed with us as a member for 4 months and that they use us, I want to say, somewhere around 2.5 times per month. Today those numbers look like the average patient stays with us for 6 months, and that they are staying -- they are using us a little under 3 visits a month. What we also find is those patients that drop their membership, is that 25% of them will come back within the next 6 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.

And we have a question from Jeff Geiser with Geiser Wealth Management.

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 tick 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?

Jeff, thank you. That's a great question, and it's one 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 have 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 a fundamental way in which that we operate our clinics.

Secondly, given these concerns, we certainly have reiterated to follow the guidelines and 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 e-mail and texts as long as they've opted 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 to make sure 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 wherever this -- the coronavirus takes the rest of the nation.

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, Katherine. 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, and I quote, "For 4 years since my accident in Iraq, I've 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.