The Joint Corp.

Good day and welcome to the Joint Corp Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'd now like to turn the conference over to David Bernard with LHA Investor Relations. Please go ahead.

Thank you, Sarah. Good afternoon, everyone. This is David Barnard of LHA Investor Relations. On the call today, President and CEO Peter Holt will review our third quarter 2022 performance metrics and provide an update on the business. CFO Jake Singleton will detail our financial results and guidance. Then Peter will close with a summary and open the call for questions. Please note we're using a slide presentation that can be found at httpsir.thejoint.com backslash events. Today, after the close of the market, the joint corporation issued its financial results for the quarter ended September 30, 2022. If you do not already have a copy of this press release, it can be found in the investor relations section of the company's website. As provided on slide two, Please be advised today's discussion includes forward-looking statements, including statements concerning our strategy, future operations, future financial position and plans and objectives of management. Throughout today's discussion, we will present some important factors relating to our business that could affect these forward-looking statements. The forward-looking statements are made based on our current predictions, expectations, estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today. Factors that could contribute to these differences include, but are not limited to, the continuing impact of the COVID-19 outbreak on the economy and our operations, including temporary clinic closures, shortened business hours, and reduced patient demand. Inflation, exacerbated by COVID-19 and the current war in Ukraine. 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. Our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics due in part to the nationwide labor shortage, short-selling strategies, and negative opinions posted on the Internet, which could drive down the market price of our common stock and result in class action lawsuits, our failure to remediate the current or future material weaknesses in our internal control over financial reporting, which could negatively impact our ability to accurately report our financial results, prevent fraud, or maintain investor confidence, and other factors described in our filings with the SEC, including the section entitled Risk Factors. And our annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 14, 2022, and subsequently filed current and quarterly reports. As a result, we caution you against placing undue reliance on these forward-looking statements and encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we 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 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. Management also includes commonly discussed performance metrics. System-wide sales include revenues at all clinics, whether operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company, management believes the information is important in understanding the company's financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health of the franchisee base. Comp sales include the revenues from both company-owned or managed clinics and franchise clinics that in each case have been open at least 13 full months and exclude any clinics that have closed. Turning to slide three, it is now my pleasure to turn the call over to Peter Holt.

Thank you, David, and I welcome everybody to the call. During the third quarter of 2022, we continued our vigorous pace of clinic openings and these new units delivering strong performance. both reflecting a robust underlying business model, particularly in a current macroeconomic environment. I want to take this opportunity to welcome our new and existing investors to the call. The joint is revolutionizing access to chiropractic care by providing affordable concierge-style membership-based services in convenient retail settings. Since our inception over a decade ago with fewer than a dozen clinics, we've grown tremendously. In fact, we reached the 800-unit milestone in September which places us in the top 2% of the roughly 3,500 franchisors in the United States, according to Fran data. As we build upon and leverage our national brand recognition, we continue to capitalize on the opportunity for more significant growth. The 2022 IBIS World Report noted that chiropractic market increased from $18 billion to $19.5 billion annually. And in October 2022, Reporter Linker stated that the global chiropractic care market is expected to reach $52 billion by 2027, yet the sector remains highly fragmented with over 40,000 chiropractic offices in the United States. The joint leads the profession as the largest chiropractic chain in the world with the greatest market share, in addition to publishing the most chiropractic care content in the public domain. Based on year-end 21 sales, the joint is approaching 22% of market share, with competitors in aggregate estimated to also approximately 2%. With our nationwide clinic base, we have economies of scale in marketing, in talent, and in infrastructure. And using our proven protocols and standards, we are systematically expanding in areas of known demand. As a result, during the time of our consumer uncertainty, the joint is continuing to post positive comp rates. Turning to slide four, I'll review a summary of our financial highlights for Q3 2022 metrics compared to Q3 2021. Later, Jake will discuss our results in greater detail. System-wide sales grew to $110.4 million, increasing 18%. Our comp sales for clinics that have been open for at least 13 full months grew 6%. Revenue increased 27%. Adjusted EBITDA was $3.1 million. and as of September 30, 2022, our unrestricted cash was $10.3 million compared to $9.4 million at June 30, 2022. Turning to slide five, during Q3 2022, we opened 38 clinics, up from 33 clinics in the prior year quarter. Regarding franchise clinics, during Q3 2022, we opened 33 and closed two. Regarding change in ownership, corporate purchased four previously franchised clinics, three in North Carolina and one in Scottsdale, and sold one company-managed clinic in California to a franchisee. Regarding Greenfield clinics, we opened five, three in California and two in our new market, Kansas City. Greenfields are performing well in the 2022 with gross sales on par with our class of 2021. This is an important point that validates the strength of our new clinic launch strategy and the growing demand for chiropractic care. For the first nine months of 2022, we opened 103 clinics, 91 franchised, and 12 greenfields. This compares to 87 openings in the first nine months of 2021 that consisted of 76 franchised and 11 greenfields. The net total purchase of previously franchised clinics was seven, and the closures were three. Our low unit closure rate of less than 1% annually continues to lead the franchise community. At September 30, 2022, we had 805 clinics in operation consisting of 690 franchise clinics and 115 company-owned or managed clinics, maintaining that portfolio mix of 86% franchise clinics and 14% corporate clinics. At quarter end, we also had 252 franchise licenses in active development compared to 283 at December 31, 2021. This metric continues to demonstrate the strength of our strong pipeline for franchise clinic openings and reflects the accelerated number of franchise openings. Subsequent to quarter end, we acquired two previously franchised clinics in North Carolina for approximately $2.2 million. We also opened two more Greenfield clinics in Kansas City market. Additionally, we sold one company-managed clinic in California to a franchisee. Our corporate portfolio now stands at 118 clinics as of November 3rd, 2022. Turning to slide six, in Q3 2022, we sold 12 franchise licenses compared to 44 in Q3 2021. For the first nine months of 2022, 58 licenses were sold compared to 132 in the same period last year when COVID had led to the pent-up demand of our franchise licenses. Although the number of franchise sales is fewer than last year, we believe it is holding strong considering today's macroeconomic environment including factors such as high inflation, higher interest rates, and decreased bottom lines that have been impacting by rising costs. Further, while higher unemployment is known to be a driver of franchise sales, today the U.S. has a historically low unemployment rate of around 3.5% to 3.7%. As of September 30th, we had 19 regional developers who sold 62% of our franchise licenses year-to-date. Our aggregate 10-year minimum development schedule for the new RD territories established since 2017 was 642 clinics as of September 30th. While this program continues to perform well under certain circumstances, we'll reacquire some of those RD rights. In October, we reduced the RD count to 18 when we reacquired the right to develop franchises in the Philadelphia market. The net consideration for the transaction was $151,000, This was an undeveloped market with two clinics, and we believe we have the opportunity to develop another 30 sites. Turning to slide seven, let's review our marketing efforts. Although we continue to attract healthy numbers of new patient prospects to our clinics, our average number of new patients per clinic is down when compared to our record-breaking years of 2021. One of the challenges we faced was last year Google changed its algorithms, which negatively impacted our organic search traffic. As a result, we've been aggressively adapting our SEO strategy in 2022, which is beginning to pay dividends with positive website traffic growth in August and in September. Another challenge is the impact of inflation on consumer confidence. With the average age of our patient base at just 36.4 years, the majority have never lived through an era of high inflation. Today, the average American household is spending $445 more per month to buy the same goods and services that they did a year ago, according to CNBC. This is forcing consumers into financial trade-offs. Two years ago, we faced somewhat similar circumstances during the COVID-19 pandemic and related government shutdowns and restrictions. At that time, we responded with our essential healthcare services statement and positioned the joint to survive and thrive despite the devastating impact to so much of the retail industry. We believe this positioning will continue to serve us well while consumers make tough choices on where to allocate their discretionary spending. We responded to the lower new patient counts with robust testing of new market tactics, promotions, media channels, and consumer messages. We continue to reinvest our marketing technology. This includes the launch of our new patient portal and an upgraded marketing automation platform planned for 2023. Additionally, our clinic local marketing spending has been robust, particularly for sponsorships of athletic programs in our communities. Our ability to form market co-ops distinguishes us from the single practitioners and small competitors as we leverage the power of our combined marketing dollars spent in those markets. According to the American Chiropractic Association, chiropractic care has gained wide use among professional and amateur sports teams across the country. Studies have shown that chiropractic care can be linked to faster injury recovery, injury prevention, improved levels of strength, and enhanced sports performance for athletes. According to Consumer Reports, it's estimated that 90% of all world-class athletes use chiropractic care to prevent injuries and increase their performance potential. It's notable that all NFL teams rely on doctors of chiropractic in various capacities, and 77% of athletic trainers have referred players to a chiropractor for evaluation or treatment. Finally, we're turning our attention to our annual holiday promotions, our Back Friday package sale in November, and our year-end membership promotion in December and January. Each year, these events grow in financial impact and franchisee participation. Our network is energized to make 2022 our best performance yet, and we look forward to reporting on our results. And with that, Jake, I'll turn it over to you.

Thank you, Peter. Turning to slide eight. I'll review the financial results for Q3 2020 compared to Q3 2021. System-wide sales for all clinics open for any amount of time increased to $110.4 million, up 18%. System-wide comp sales for all clinics open 13 months or more were 6%. System-wide comp sales for mature clinics open 48 months or more were 2%. It's worth noting that both the franchise and corporate clinic cohorts comp positively across both timeframes. Revenue was $26.6 million, up $5.6 million, or 27%. Company-owned or managed clinic revenue increased 36%, contributing $15.8 million. Franchise operations increased 15%, contributing $10.8 million. The increases represent continued growth in both the corporate portfolio and franchise base. On March 1st, We implemented a price increase in approximately 75% of our clinics. However, existing patient memberships are grandfathered at their original price. Therefore, the revenue impact from our price adjustment will be gradual and incremental. At the end of the quarter, about 50% of our active members were on the new price structure. Cost of revenues was $2.5 million, up 8% over the same period last year, reflecting the increase in franchise clinics and the associated higher regional developer royalties and commissions. Selling and marketing expenses were $3.5 million, up 23% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by our company-owned or managed clinics. Depreciation and amortization expenses increased compared to the prior year period, primarily due to the depreciation and amortization expenses associated with our continued greenfield development and acquired clinics. G&A expenses were $18.1 million, compared to $12.8 million, up 41%, reflecting the cost to support total clinic and revenue growth and higher payroll to remain competitive in the tight labor market. Operating income was $500,000, compared to $1.3 million in Q3 2021. The Q3 2022 results reflected the compressed margins from continued greenfield development, the aforementioned higher depreciation and amortization, and higher G&A expenses. While Greenfield compressed the bottom line until they break even, they're an excellent use of capital as their sales accelerate in year two and beyond, significantly contributing to the bottom line and increasing our return on investment. Income tax benefit was $16,000 compared to $614,000 in Q3 2021. Net income was $491,000 or 3 cents per diluted share. compared to net income of $1.9 million, or 13 cents per diluted share in Q3 2021. Adjusted EBITDA was $3.1 million, compared to $3.3 million for the same period last year. Branchized clinic adjusted EBITDA increased 25% to $5.4 million. Company-owned or managed clinic adjusted EBITDA was $1.7 million, compared to Q3 of last year, a decrease of $1.1 million, reflecting the margin compression related to greenfield development and higher payroll expenses. Corporate expense as a component of adjusted EBITDA loss was $4 million, increasing $160,000 compared to Q3 2021. On to our balance sheet and cash flow review. At September 30, 2022, our unrestricted cash was $10.3 million compared to $19.5 million at December 31, 2021. During the first nine months of the year, Our investing activities of $14.9 million consisted of the acquisition of RD territory rights, franchise clinic acquisitions, and greenfield development. These were partially offset by $5.7 million provided by operating activities. On to slide nine, I'll review our results for the first nine months of 2022 compared to the same period, 2021. Revenue increased 26% to $74.1 million and adjusted EBITDA was $7.5 million compared to $10.5 million in the prior year period. This reflects the compression of earnings by the influx of new corporate greenfield clinics and higher payroll expenses associated with the tight labor market. On to slide 10 for a review of our guidance for 2022. We have tightened guidance, raising the lower end of our revenue expectations. We now expect revenue for the year to be between $100 and $102 million. compared to $80.9 million in 2021. We've also narrowed and modestly lowered adjusted EBITDA guidance to reflect the impact of the greenfield assimilation on our bottom line and lower than expected same-store sales. Now we expect adjusted EBITDA to be between $11.5 and $12.5 million compared to $12.6 million in 2021. We continue to expect franchise clinic openings to be between 110 and 130 compared to 110 in 2021 And we continue to expect to increase our company-owned or managed clinics by between 30 and 40 through a combination of greenfield openings and franchise clinic purchases, compared to 32 in 2021. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to slide 11, we have a remarkable growth opportunity ahead with a young patient base and an expanding chiropractic market. Yet in this environment of uncertainty, the business also faces challenges and critical work remains. In the remainder of 2022 and for 2023, we are and will continue to be focused on the following actions, attracting new patients and franchise prospects, attracting and developing talent, especially the doctors required to staff our clinics and grow our footprint, enhancing our IT platform and leveraging the power of our data, increasing our pace of build-up, including successfully penetrating underdeveloped and new markets, and finally optimizing our clinic performance to support growth, profitability, and lifetime patient value. We remain focused on driving long-term growth and stakeholder value. Sarah, I'm ready to begin the Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brooks O'Neill with Lake Street Capital Markets. Please go ahead.

Good afternoon, guys. I confess I got on a few minutes into your call, so if I ask something that you've already discussed, I can go back and read the transcript. You don't need to repeat yourselves, but Can you just talk a little bit about headwinds and tailwinds that you think might be affecting new patient starts?

Sure. And it's great to talk to you, Brooks. And as we've talked about before, one of the headwinds that we've been facing is that changing algorithms with Google. And it really impacted our organic growth search. We've spent a lot of time adapting our SEO strategy. And so if we look at our traffic, our web traffic, is up for... The first time this year in August and September, we were outpacing that web traffic compared to the same period last year. So we feel that we are making some inroads on that new patient count just with those changes in that Google algorithm. We're a very young patient base. As I said, it's 36.4 years old, and those younger people are not going to friends and families for recommendations for their medical services. They're doing that search online. And so they're going to Dr. Google. They're looking at reviews. They're doing that search. And so it's so important to be there What we're seeing now is that of our new patient count, that historically we've seen about 40% of it come through our digital marketing strategy. And right now we have noted that 61% of our new patients at some point have touched our digital campaign, our digital strategy, our online. So you can see that's just increasingly important to us. And so when changes like what Google did can impact our new patient count. I think we also have a macroeconomic issue that has to be taken into consideration. And so you have the increasing inflation, you have consumer confidence concerns. I don't know if we're going directly into a recession or when it will be or how deep or how long, but I think that's also impacting some of the performance on the clinics, and we see it in our same-store sales. So I think there's some macroeconomic issues that are impacting that new patient count. There's some tactical issues on the digital side that are affecting it. I think the tailwinds for us continue to be just the high performance of our clinics, especially the new greenfields that we've had. We're headed toward a record-breaking number of new openings this year. We're guiding a course between 110 to 130. We're expecting to add somewhere between 30 and 40 new clinics in our corporate portfolio, and that will be that mix of both corporate and our acquisitions and greenfields. But through the year, we've seen some really strong greenfield openings and getting to break even, which bodes well for number one, that our model continues to work, and number two, there's continued interest in chiropractic care.

Absolutely. That's really helpful. In fact, you just touched on the second thing I just wanted to ask you a little bit about. Do you have any metrics about the performance of new corporate stores and in the portfolio this year versus years past? Or would you say you're continuing to open as strongly as you have in the past? Again, recognize there are some important and sort of uncontrollable headwinds out there in the market right now.

Yeah. And I think, Brooks, we continue to get more and more sophisticated in how we create and use our grand opening strategies. And so when I look at just the overall portfolio that includes both franchise and corporate units in terms of their time to break even, I would say we're seeing them operating at least equal to 2021, and that's in that six to nine months to break even. So very, very strong. When we break out corporate units, I would say we're even stronger compared to 2021. So what we're seeing is that, yes, there's all these headwinds out there that we're talking about, but when we open up those clinics, when we're using our grand opening strategy, that we are seeing the high performance of those clinics as they get to break even. That's fantastic.

Thanks a lot for taking my questions. Keep up the great work. You're doing fantastic.

Thanks a lot.

Our next question comes from George Kelly with Ross Capital Partners. Please go ahead.

Hey, everybody. Thanks for taking my questions. So maybe to start on the comp growth, I think in the prepared remarks you commented that the growth is not sort of what you expected, I think, last time you offered guidance. So just curious, is it just that the pricing is taking longer to kind of filter through the system, or maybe the new patient stuff that you've talked about is the impact is lasting longer than expected, or anything else to highlight just as far as your expectations for for comp growth.

Yeah, thanks, George. As you touched on, I think, as I think about the pace in which we're rolling on to the new price point, I would say we're at expectation, maybe a tick behind. But in my mind, that's not a material driver. As we look at the three core KPIs of this model, we have to attract new patients, convert them onto our subscription or package, and retain them as long as we can. Conversion is remaining steady year over year, which 2021 was a banner year for us in terms of conversion. So we're still seeing strength in that metric. Attrition, we've actually seen favorability in that, which one could expect when you grandfather in pricing. Maybe your patients are going to stick around a little bit longer, but we've actually seen that metric improve. But as we said, the metric where we're still seeing challenges is in those new patients. And so if you're not filling the funnel at quite the same rate, while the numbers are still strong, that's going to be a headwind for your existing patient base. And that's really where we're seeing those numbers come in a little bit lower than expectation. As we talked about, the green fields are still performing to my pro forma expectations on the top line. Those cost structures are increasing in terms of that time to break even, but it's still maintaining a strong pace, as Peter mentioned. But when you're talking about the existing base, I think you have to look at that new patient as a way that we can really start to move the needle.

Okay. Okay, and then the second, actually a couple more questions for you. So on the topic you were just talking about, the owned portfolio and the greenfield openings, et cetera, is the legacy four-wall margin of that owned base, you know, before you started doing greenfields, my math has it somewhere in the mid-30% EBITDA kind of range. And that's come in quite a bit, even excluding for greenfield openings. And so I guess the question is, I understand you're absorbing a lot higher labor costs, and there's a bunch of things that you've been hit with. But how long do you think it'll take? I mean, I guess it's a two-part question. How long do you think it'll take to recover or start to show margin improvement there? And the second one is, do you think that that previous kind of margin profile that you had on a four-wall basis is achievable over the next couple years, or is it just kind of the model is so different now that it's unlikely to go back there?

Yeah, a lot of questions rolled in there. I'll try to touch on them all. I think to start in terms of the margin expectation, and we have a chart in the investor deck that kind of takes it to a five-year mark at maturity, and that's actual system sales against an estimated cost structure. And what that would show you on a four-wall basis is we would expect somewhere around a 30% four-wall margin. We have units that do more than that, and we have some that are still marching to that number. But on average, that's what we would expect is kind of that low 30% mark on a four-wall basis. Now, as I think about, you know, with the increased labor pressures that we're seeing, if I roll through, you know, the benefits of the price increase over time, actually still get back to the same pro forma expectations at maturity. So I would say our four-wall economics really remain unchanged as we continue to see the benefits of the price increase roll through. And that gives us a little bit of room in case there's additional labor pressures that we continue to see. But I would still expect over time to reach that 30% plus four-wall margin. As you think about the corporate portfolio and when we would expect those margins to turn around You know, I think you have to put into context just how many greenfields that we've added in the last, you know, portion of time. I think if you look at the number of greenfields we did in the last 100 days of 2021, I think that number was 13. And then we've added, you know, another, what, 12 so far this year. I'm sorry. 12 through the quarter. 12 through the quarter, 14 overall. So, you know, when you add those two together, most of them being in their first call it 13 months of operations, historically, that's a significant period of drag. If you look at it on an annualized basis, you're probably working through around 75,000 of losses in that first 12 months. Now, if you roll forward to the next year, the sales averages for year two are going to increase around 58%. So my sales have a really significant jump from year one to year two And then you really flip from an expected 75K of losses to probably contributing 75K in that second year of operation. And so we've really taken on a lot of investment as it turns to greenfields. It's still an excellent pro forma ramp. It's a great use of capital for us, but it just takes time to work through that maturity curve.

And a thing I'd add to that, Jake, or to George, is that when you made the comment that, you know, have things changed because your model's changed, and I would say the model hasn't changed. I mean, there's no question that we're seeing a higher cost on labor, so our labor line is definitely there. We're offsetting that by putting the price increase that we put in place in March, and that, as we talked about, will take time to have the full effect. But in terms of the fundamentals of the model, it's really, it continues to be a relatively simple business. We're only offering that one service. As we go forward, we can certainly look at offering products and services outside of just pure chiropractic adjustment. But in terms of actual fundamental structure of the model, it has not changed to date.

Okay, thank you. I'll hop back into the queue.

Thanks, George.

Our next question comes from Jeremy Amblin with Craig Howland Capital Group. Please go ahead.

Hey, thanks, guys, for taking the questions. So I want to kind of expand on the last point in terms of, you know, looking ahead a little bit towards the clinic growth for 2023. Wanted to get an understanding of kind of two things. You know, first, how you expect the composition of that. You know, is it going to likely replicate what we saw in 22 in terms of you know, greenfield development, do you expect it to be, you know, higher or lower? And then, you know, the second part of the question is, you know, it's clear that the support staff, you know, in clinics, you know, doc costs are higher, you know, maybe quite a bit higher than they were a year ago. I want to think about the potential for margin recovery into next year. So, you know, first question is the composition of how you expect clinic growth to look next year. And then, you know, second one is really a question on cost and ability to recapture some of the, you know, EBITDA margin loss this year.

Yeah, I'll take that first question and then turn it over to Jake. And I would say that when we think about, obviously we don't guide to composition other than giving some very wide ranges in terms of, as I think, about 23 and beyond. As we said in the call that 86% of our system is franchise, 14% is corporate. While we don't set a specific number out there, I would say that you probably can expect to see that kind of same ratio as we look at 23 and beyond. Just as we continue to grow the market, we'd have to really fundamentally change our greenfield strategy if we're going to significantly increase that portion. of ownership or number of greenfields in that portfolio. So as I think about 23 and going forward, I think our ratios will stay relatively the same and that we'll continue to expand our portfolio through greenfields at a moderate pace. We'll continue to focus on opportunistic acquisitions as we go through the year. And we'll, of course, be setting our guidance for 2023 when we do our fourth quarter and full year report out probably in March.

And then I'll touch on the margin recovery. Jeremy, you're right. We have seen the DC costs continue to increase, and we have seen the wellness coordinator position, that hourly retail position, we've seen pressure there as well. And when that represents 45% of your costs at maturity, those are significant pressures in terms of the economics. Where I've seen the DC salary go, because that's more the significant driver, we continue to see pressure there, but I have seen it taper. That's not me telling you that the labor market's not tight. I don't think us or our franchisees would say that, but the rate of increase I've seen start to taper here recently. So Not to say that we're not done taking on some of those labor pressures because we still are in a tight market, but I have seen the rate of acceleration start to taper a little bit there. In terms of overall margin recovery, that's really going to be driven by the maturation of the portfolio, all those greenfields coming through and being contributors. We've got a portfolio right now of 17 executed leases. So in terms of... You know, our continued investment in greenfields, we still very much believe in that strategy and will continue to develop those. But, you know, we have moderated that pace to kind of what we saw in the late periods of 2021. So as we moderate that greenfield pace and allow the existing ones to continue their maturity, I think you start to see those incremental improvements in margin again. So as far as timeframe, you know, again, it's all predicated on our level of investment, but we have tapered that greenfield pace from what we were doing at the tail end of 2021, and that'll just allow those existing units to continue to mature. And when you've got so many of them that are just really completing the first year of operation, we're looking forward to their contributions in 2023.

Got it. And just to kind of piggyback on that one a little bit, slide 14, the year-to-date segment results, with the split out of the corporate clinics, How well do you think the corporate clinic performance represents what your franchisees are seeing kind of on a four-wall basis? Are their business models slightly more profitable because they have more maturity, or how does it compare?

Well, they have a royalty structure, so their overall economics are going to be impacted by that. From a four-wall basis, we would expect similar economics. You can triangulate against kind of what we see in the FDD year over year, because we do collect those franchisee P&Ls. If you look at the 2021 results from our latest FDD, I think they did a four-wall number that was 30.8%. And again, that's a mature portfolio kind of in that year four, year five mark in terms of months in operation, and they're reaching that same potential. So I think that's you know, a great representation of where the unit economics are and what they can be. As you look at our corporate margin right now, you know, again, it's just being suppressed by the labor pressures without the full benefit of the price increase and all those young units that, you know, suppress as they continue to work through their maturity. Got it.

Okay. And then, you know, last one from me. In terms of your cash balance is down quite a bit, almost cut in half from where you were at the start of the year through the first nine months. Quite a bit of that is due to some acquisition activity. But in terms of thinking of where you are on the balance sheet, You know, is your flexibility limited in terms of what you might do on the acquisition side? You know, as we look ahead into 2023, because the cash balance is, you know, is down or do you see that not really as any type of, you know, limiting factor in terms of what you might, you know, look to do?

Yeah, I think cash on hand is one element of that. You know, when you say moderate acquisition activity, I mean, we've done almost $15 million of investing activities so far in the first nine months of the year, and that's been offset by $5.7 million of cash flow from operations. If you look at through the six months, I think our net cash provided by operating activities was around $1.5 million. So, you know, This is still a cash generative business. We're choosing to reinvest that right now. And I think the other piece is while we have the 10.3 million of cash on hand at the end of the quarter, we also have an additional 18 million of credit available through the line with JP Morgan. So as I think about it from an overall liquidity perspective, I'm thinking about that whole pool. And as I look out and model the potential uses of that capital, I'm not seeing any restrictive elements of that right now. Great.

That's super helpful. All right. Thanks for taking all the questions, guys. Best wishes.

Thank you very much.

Our next question comes from Jeff Wynn. Jeff Wynn with B. Reilly FBR. Please go ahead.

Hi, everyone. Just looking toward 2023, realize it's early, and noting the macroeconomic backdrop, but just thinking relevant to attracting new patients. And I'm wondering how much do you think that the, I realize you're now like kind of a 50-50, but how much do you think the price increases are serving as a headwind to attracting new patients? Then also, how are you planning to further evolve the marketing for next year. Wondering if you maybe shift the mix. I think you do quite a bit of performance digital. Maybe you can just touch on those items.

Yeah, no, Jeff, thank you. To answer your question about the impact that pricing has on those new patients, as we've talked a lot about, of course, one of the tenets of this concept is affordability. And when we went in the past and we did that full price increase in 2016 and some of the market adjustments in 2019, the impact we saw that on new patient counts and the key metrics of the business was relatively neutral or positive. As we look at this most recent increase, so our three tiers went from 59, 69, and 79 to 69, 79, and 89, I'd say that we did see, especially on that 89 number, a degradation a little bit in the new patient count. The majority of our system is on that $79 a month. And so that's the core. But we are very, very sensitive to price as it relates to those new patients. So I think that there's been some impact on that because this is also the first time when we did a price increase in this kind of macroeconomic environment that has so much uncertainty around it. I think as we, your second question was really kind of what are the changes that you're doing or the activities to make sure that you're bringing in as many new patients as you can. And it's again, there's really three sources of new patients for us. One is, you know, referral. And this is patients who, you know, refer their friends and family to the doctor. And right now about 30, 35% of our new patient counts comes directly from that. And that just is a point of delivering you know, world-class service to your patients, and they tell their friends and family to come in. The faster-growing segment is that digital marketing campaign, and it's changing by the day. And I think that we can recognize the importance of it. We're putting more and more resources against it. We talked about in 2023 that we're going to put a platform in that has a much more sophisticated, automated marketing program, direct marketing to our patients. We're creating the patient portal. that we've made changes in our microsites and all these different activities to make sure that we are maximizing the SEO opportunity that's out there. We're doing all kinds of new testing of advertising platforms, both nationally and locally, including TikTok, Yelp, Nextdoor, conversational marketing, that we're doing a lot of lead nurturing just in terms of those leads that come in the door because there's more and more sophisticated software programs that we can use to manage those leads, to bring those digital leads into clothes. And then we're also working in coaching and training our franchisees and their staff to be more effective as they're managing those leads. That third source of new patients is really coming from what I just call that guerrilla marketing activities. And then, you know, we're still small box retail, so it's the coupons, it's the Flyers, it's the sign thrower, it's the reaching out to the schools, the gyms, the hospitals, anything that's around that clinic because your core customers are going to be living, working, and traveling in that five to 50 minute radius around that clinic. So I think that we are continually evaluating and stretching and pushing because this whole digital marketing campaign is so critical to that younger patient who is our database. Right now, 45% of our patients are millennial. 16% are Gen Z. And these are people who are using online to make their consumer purchases and that it's essential that we're effectively there where they are.

And I think you said, did you say 60% of your new patients are touching the digital marketing?

Yes. And again, patient attribution is kind of tricky because how many points did you see it, whether it's in a radio or a TV commercial or something in an ad or something online? So we have a lot of different points that you can be exposed to the brand. And so it's always hard to say, okay, which one is that that really tipped it over and you as a new patient opened that door? But what we can measure is that of our patient base, 61% of our patient base today touched us digitally before they opened up that door.

Okay. And then just sort of as a follow-on to that, I know you mentioned the new patient portal. Can you remind us the timing of when you're standing that up? And then I also wanted to kind of get a gauge from you in terms of what you're experiencing with the new enterprise software system, what still needs to be done in the current phase there, if anything, just if you could touch on those things.

Sure, absolutely. As it relates to the patient portal, it's going to be phased in, and there will be all kinds of components behind it, but the initial work will probably be released in late Q1. early Q2 in terms of a patient portal, and then we'll be continually adding functionality to it as we go through the year. We're also putting in a platform where we can do that more automated marketing to the individual patient so you can go through your information, those people who are golfers or have migraines or whatever, so that you can literally market individually to them. And that's, again, just increasingly a more sophisticated marketing approach where you're seeing all kinds of organizations utilizing In terms of the IT platform, we have certainly had some growing pains associated with it in terms of getting some enhancements put in place. The system we have now has benefits compared to the old system. It also has some more complexity. And so that we've been working through cleaning up some of those bugs and putting in those enhancements to make it more and more effective on that line level of our users. And so what I would tell you is that that is an ongoing, never-ending process. of continually refining and improving the platform that we use to run the business.

Okay, fair enough. Thanks for taking my questions and continued success.

Thank you very much.

Again, if you'd like to ask a question, please press star then one at this time. Our next question comes from Thomas McGovern with Maxim Group. Please go ahead.

Hey, guys. Thank you for taking the time to take my questions. A lot of my questions have already been answered very thoroughly, so I appreciate that as well. I just have a question going off of something another analyst asked about the breakdown of franchises versus corporate clinics. You guys said that it is currently and will remain about 86% franchise and 14% corporate. And my question is, is that accounting for a potential recession? If the macro environment does continue to get more difficult to operate in, will that breakdown change potentially in an effort to conserve cost or just allocate resources differently? Thank you.

Sure. It's a great question, and the way I'd answer that, if we truly grow into a recession, and a recession meaning that you, among whatever else is going on, you have high unemployment, it's historically you see franchise sales increase. The only time that it hasn't happened is in the Great Recession, because during the Great Recession, there was absolutely no financing taking place. And so you saw really franchise growth just come to a screeching halt in that Great Recession. But any other recession, and certainly in my career, it's historically I would expect franchise sales to increase because people are being laid off. Maybe they got a little money. They're tired of being at the whim of an employer. And so they start seeking out buying that franchise. And so I would expect if we truly go into recession, that you would expect that interest in franchise sales to increase. Now, wherever we are today, we've been averaging 3.5 to 3.7 unemployment. And so as long as you see that incredibly low unemployment rate, it's hard to imagine that that's going to be a driver in people to buy franchises. And that In that ratio of that, right now, as we are today, we're 86 to 14%, I would say as you just see the growth both on the franchise side and that measured growth of our corporate portfolio driven by greenfields and acquisitions, it's going to be hard, just given the math that we have now, to change those percentages to any great degree without a fundamental change in strategy. And as we've talked about, it's not our intent to fundamentally change strategy. We don't guide to a specific percentage. But as I was saying earlier in the call, is that if you look at 2023, you can reflect on 2022 and expect similar results.

Okay, great. Thank you for answering my question. That's all I have.

This concludes our question and answer session. I would like to turn the conference back over to Peter Holt for any closing remarks.

Before I close, I want to share a few comments. Earlier, I reviewed our marketing co-op sponsorship of athletic programs in their communities. Studies report chiropractic care provides natural preventative benefits that are vital to keeping the body balanced, flexible, and functioning at its best, especially for athletes. I'd like to tell you about our patient Nicole, an amateur beach volleyball player. A few years ago, she hurt her back and was told she could never play competitive sports again. She was diagnosed with lupus, which really affected her joints, challenged her athletic activities, and forced her to walk with a cane. After a few months of chiropractic care, Nicole returned to the court. She notes, while the volleyball is demanding and still affects her back, the joint enables her to enjoy frequent competition. To summarize Nicole's testimony, being able to play is a gift. I wouldn't be playing without chiropractic care. My joints in general get so much relief with the necessary constant maintenance. I go weekly, if not more, without fail. Thank you and stay well adjusted.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.