The Joint Corp - Earnings Call - Q4 2019
March 5, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to The Joint Corp. Fourth Quarter twenty nineteen Financial Results Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Ms. Julie LHA Investor Relations. Please go ahead, ma'am.
Speaker 1
Thank you, Catherine. Good afternoon, everyone. This is Julie Cimino of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our fourth quarter and year end 2019 operating metrics and our growth strategy. CFO, Jake Singleton, will detail our financial performance 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 end year end 12/31/2019. 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 two, please be advised today's discussions include forward looking statements, including statements concerning our strategy, future operations, future financial position and plans and objectives of management.
Throughout today's discussion, we will present some important factors relating to our business that could affect these forward looking statements. The forward looking statements are made based on our current predictions, expectations, estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we are making today. Factors that could contribute to these differences include but are 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 ks as filed with the SEC for the year ended December 3138 as updated for any material changes described in any subsequently filed quarterly reports on Form 10 ks, 10 Q and in our annual report on Form 10 ks for the year ended December 3139 which we expect to file with the SEC on or around 03/06/2020, as they may be revised or updated in our subsequent filings. As a result, we caution you against placing undue reliance on these forward looking statements and encourage you to view 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 to 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. Turning to Slide three, it is my pleasure to turn the call over to Peter Holt. Please go ahead.
Speaker 2
Thank you, Julie, and thank you all for joining us. As projected in 2019, we accelerated our business momentum and continue to deliver strong sustainable growth and profitability. We leveraged our regional developers to drive franchise sales and clinic openings, and we expanded our corporate clinic portfolio within cluster 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 a 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 five thirteen at December 3139, up 16% compared to December 3138. Hundred and eighty five thousand patients opened the door to The Joint for the very first time, up thirty four percent compared to 2018. And the total number of unique patients treated in a twelve month period approached one million.
We performed 7,700,000 adjustments during the year, up 28 compared to 2018. Jake will discuss our financial results in detail. I'll note that the 2019, our system wide sales increased 33% as compared to last year. Our comp sales for clinics that were open for at least thirteen full months grew 25 compared to 2018 and bring our four year stacked comp sales to a remarkable 99%. As we continue to welcome new investors to our call, I'd like to provide a little background on our company.
The driving force behind The Joint is not that we're reinventing chiropractic care, which has been around since the nineteenth 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 three key pillars that support our brand as identified by our extensive consumer research. Turning to Slide four, 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 four forty two clinics and opened an additional 76.
We closed five clinics last year, continuing our unusually low closure rate of less than 1%. We ended the year with five thirteen clinics, maintaining our clinic mix of 88% franchised with four fifty three clinics and 12% company owned or managed with 60 clinics. At December 3139, we were in 34 states. Regarding the corporate portfolio, during the year, we bought back eight clinics from franchisees and opened five greenfields for a total of 13 additional clinics. As reported previously in March, we took the opportunity to improve the profitability by merging two closely located clinics And therefore, the year end, we had a net increase of 12 to the corporate portfolio.
Our acquisitions from franchisees are opportunistic, including purchasing clinics at attractive valuations and applying our expertise and bringing them to better operating standards and acquiring well run clinics that have provided us new access to markets 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 $3,900,000 on our corporate portfolio expansion, all of which was funded through cash from operations. In 2020, we'll continue our corporate portfolio expansion.
We expect to add 16 to 20 company owned or managed clinics and 80 to 90 franchise clinics. As has been our trend for several years, we expect these new openings will be weighted toward the second half of the year. Also, we're pleased to announce our first Greenfield opening in 2020. Located in Inglewood, California, this clinic increases our cluster in the Los Angeles region and brings our corporate portfolio to 61 clinics as of today. Turning to Slide five.
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 RD's efforts combined with the success of the joint French 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 multiunit 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 four thirty two new franchise clinics over their ten year agreements. This large foundation of franchise clinic commitments bodes well for the continued clinic expansion and sales growth into 2020 and beyond. In January, we hosted another very successful three day RD training conference in Scottsdale with 100% attendance.
We celebrated our 2019 performance and reviewed key 2020 initiatives to improve site selection and lease signing protocols to shorten the time from franchise sales to grand opening among other key topics. Turning to Slide six, 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 December, in conjunction with our Black Friday sale, we posted system wide sales of $1,000,000 in one day for the very first time.
And then we repeated the accomplishment in January associated with our year end membership Moving forward, these promotions will continue to be an important part of our annual marketing plan. Reviewing operations, we continue to prove that clinics that start strong tend to stay strong. Those clinics that start slow have a longer trajectory to achieve breakeven and experience a slower overall sales ramp. Our ENHANZE grand opening programs yielded 15 clinics achieving the GOALLETE 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 two months of operation.
This is a very high bar compared to our historical performance, and I'm proud to say that four of the five corporate greenfields opened in 2019 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 operation. In January 2019, four legacy franchisees opened clinics in four different regions using older opening guidelines rather than following our new grand opening protocols.
As a result, these four clinics have underperformed compared to the overall 2019 cohort, negatively affecting the lead of the trend line. More importantly, the entire 2019 cohort outperformed our historical ramp by 60% to 160% throughout the first eleven months of their operations. To illustrate the impact, we've shown that 2019 cohort net of the four underperforming clinics opened in January. You can see that our twenty nineteen clinics using the grand opening protocols outperformed or were in line with the same very high performance standards set in 2018. Turning to Slide seven, 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 fifty percent 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 storefronts and build on marketing muscle, we'll play an ever more important role in educating the wider marketplace of consumers seeking health seeking pain relief and building demand for chiropractic care. A case in point, last October, we launched our new brand campaign called You're Back Baby, which focuses on how chiropractic care at The Joint can help alleviate pain from everyday activities such as office work or keeping up with the family.
It also features several of our actual patients who share their personal testimonials of how chiropractic care has helped at The Joint has helped them get back to their desired lifestyles. This wide ranging campaign launched across multiple advertising channels and web platforms is resonating with consumers who want to learn more about chiropractic. And this is only the beginning. We have stories to share with the marketplace about the value The Joint provides and how chiropractic care is a natural solution that millions of Americans are turning to for pain relief and greater quality of life. Turning to Slide eight, to further strengthen our brand and build a consumer awareness around the clinic, we require each clinic to spend a minimum of 25,000 to $3,000 per month, dollars 2,500 to $3,000 per month in local advertising.
In 2019, we estimated The Joint's off balance sheet spend is between 15,000,000 and $18,000,000 Note that this is on top of the 2% each clinic contributes toward the national marketing spend, which is $4,400,000 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 nine, those investors closely following The Joint know that we're in the process of rolling out a new IT system named Access 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 OXIS out midyear. However, we will not be tied to an artificial timeline. If determined appropriate, we'll extend the rollout date as necessary for the business. We're confident AXIS, once implemented, will provide a higher standard point of sale, improved financial and business intelligence, marketing automation and enhance patient feedback systems.
Before I turn the call over to Jake, our CFO, to review our financial results, I'll reiterate, we are focused on continuing to deliver strong business performance and believe that we're well positioned to build upon the growth momentum. And with that, Jake, I'll turn it over to you.
Speaker 3
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 twenty nineteen to fourth quarter twenty eighteen. Gross sales for all clinics open for any amount of time grew 34% to $62,500,000 System wide comp sales for all clinics opened thirteen months or more increased 26%.
System wide comp sales for mature clinics opened 48 or more increased 19%. Turning to Slide 11. Revenue for the 2019 grew to $13,900,000 up $3,900,000 or 39%. Company owned or managed clinics contributed revenue of $7,600,000 increasing 45% from the same period a year ago. Franchise operations contributed $6,300,000 up 33% compared to the same period last year.
Our increased revenue for both categories is due to the greater number of clinics, continued organic growth and two successful fourth quarter promotions. Cost of revenues was $1,600,000 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 $1,800,000 or 13 percent of revenue in the 2019 compared to $1,200,000 or 12% of revenue in the fourth quarter of twenty eighteen. In addition to operating more corporate clinics, we invested in advertising to fuel our brand refresh in October.
General and administrative expenses were $8,500,000 or 61% of revenue compared to $6,600,000 or 666% of revenue in the fourth quarter of twenty eighteen. We posted net income of $1,300,000 or $09 per diluted share, which improved $855,000 when compared to a net income of $437,000 or $03 per diluted share for the fourth quarter of twenty eighteen. Total adjusted EBITDA for the 2019 was positive for the tenth consecutive quarter at $2,100,000 improving $1,000,000 compared to adjusted EBITDA of $1,100,000 in the same quarter last year. Franchise adjusted EBITDA income increased 42% to $3,100,000 Company owned or managed clinics adjusted EBITDA income increased 77% compared to last year, increasing $1,700,000 Corporate expense adjusted EBITDA loss increased 29% to $2,600,000 Turning to Slide 12, I will now compare the year ended 2019 to 2018. Gross sales for all clinics opened for any amount of time grew 33% to $220,300,000 System wide comp sales for all clinics opened thirteen months or more increased 25%.
And significantly, system wide comp sales for mature clinics opened 48 or more, which was a base of two ninety clinics, increased 19%, which is remarkable in today's retail environment. Revenue increased by 32% to $48,500,000 Net income improved by $3,200,000 to $3,300,000 and adjusted EBITDA more than doubled to $6,200,000 Regarding the balance sheet, as of December 3139 unrestricted cash was $8,500,000 compared to $8,700,000 at December 3138. 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 $7,500,000 including a $5,500,000 developmental line of credit and a $2,000,000 revolving line of credit, which has an uncommitted accordion feature of $2,500,000 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 ks 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 61,000,000 to $63,000,000 compared to $48,500,000 in 2019 adjusted EBITDA of $8,500,000 to $9,500,000 compared to $6,200,000 in 2019 and franchise clinic openings to range from 80,000,000 to 90,000,000 up from 71,000,000 in 2019 and company owned or managed clinic expansion through a combination of greenfields and franchise 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, dollars 7,500,000.0 of cash flow from operations and our new line of credit that strengthened our balance sheet in a non dilutive way and positioned us well for growth. I will now turn the call back
Speaker 2
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 plagued this nation.
Further, the younger generations are more open to natural holistic forms of pain relief, increasing the use of chiropractic care. Turning to Slide 15, as The Joint is revolutionizing access to chiropractic care, we're making it more available to people than ever before. As a healthcare franchise concept, we're able to collect and track all of the demographic and psychographic information from our customer base. At the close of 2019, using this collected patient data, we analyzed the exact qualities of our users and compared them to the existing demographics across the country. We identified more than 1,800 points of distribution that meet the criteria for The Joint Clinic, up from our former 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 national brand awareness, which is why we've had such a focus on new unit growth. Based on our success, we fully expect to reach our target to open our one thousandth clinic by the end of twenty twenty three. Turning to Slide 16.
Overall, our hybrid model of franchising 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 thirty second Annual ROTH Conference on March '17 in Dana Point, California. Catherine, I'm ready to begin the Q and A.
Speaker 0
Thank And our first question comes from David Bain with ROTH Capital. Your line is open.
Speaker 4
Great. Thanks so much and congrats again on the results and great KPIs. First, can you just confirm with regard to the coronavirus if you've seen any sort of downtick in renewals, frequency of visits, comp trans franchise sales, opening delays, anything else at this point that you can pinpoint to what's happening there?
Speaker 2
Sure, David. And 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 blow up last week. And that in our model, where we're most paying attention to it, are we seeing any kind of drop on patient visits? As you know, we're a subscription based business, and so 80% of our sales comes from the membership.
And to answer the question, have we in these last ten days or in any significant time frame, and that's really the last ten days is 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 nine clinics operating in the state of Washington. So we analyze that area day by day in terms of number of patient visits. And again, they were either up or flat in that same period compared to the last trailing six weeks. So as we sit here, we've seen virtually no impact of the coronavirus on the business.
Now what it holds for the future is, of course, we're all wondering, but right now, we are not seeing any impact on our in any measurable way as we're operating this business.
Speaker 4
Got it. Okay, perfect. And you mentioned twenty twenty three, 1,000 stores. One, I guess, can I assume that's guidance? And if it is, can we just get just a tad more granular like projected potential mix range of franchise versus corporate?
And what you believe kind of normalized EBITDA margins could look at that look like at that point?
Speaker 3
Sure, David. This is Jake. We do fully expect to hit that 1,000 clinic mark by the end of twenty twenty three. We don't provide more granular forward looking guidance certainly as it relates to the margins. 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.
Speaker 4
Okay. And the mix maybe ninety-ten, 80 five-fifteen, any sort of thoughts there?
Speaker 3
Yes. What I'll say is the with the strength of the franchise program in 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 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 to be a lot just to keep up with the franchise group.
Speaker 4
Okay, great. And just final one, and I guess, Jake, is also for you. I know that you have one of the pricing adjustments for several territories now. I'm just kind of curious as to where that is in the rollout and if you could speak to any impact in terms of margin, I assume that's full flow through and also any potential churn that you're seeing from that implementation?
Speaker 5
Yes. As we look at
Speaker 3
the KPIs, we haven't seen anything different from our tests. So we're really encouraged by the results so far. Again, because we grandfather in all the existing memberships, it does take a number of months for that to flow through. So I think last quarter we said, we'd really look for that lift to start really impacting the margins kind of in the second half of twenty nineteen. 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.
Speaker 4
Great. Congrats and thanks for the update on the augmentation of door potential universe. It sounds conservative from my standpoint, but I know you have a full computer program. Thanks again. You.
Speaker 0
Thank you. And our next question comes from Jeff Van Sinderen with B. Riley. Your line is open.
Speaker 6
Good afternoon. Let me add my congratulations on your continued strong metrics. I believe you sold 126 franchise licenses in 2019. How should we think about the growth 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?
Speaker 2
Sure. I mean, the two 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.
Well, 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 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.
Speaker 5
Okay, great.
Speaker 2
First question again? Franchise license sales. 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 twenty twenty two in 2016, 37 in 2017, 99 in 2018, 126 in 2019.
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 economy that I would absolutely believe will 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 excuse me, 71 franchise clinics opened in 2019 to guiding between eighty and ninety in 2020.
Speaker 6
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?
Speaker 2
Right now the the go ahead, Jake.
Speaker 3
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 and North Georgia area. So that's the first swap. 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.
Speaker 6
Okay, good. Thanks. I'll let someone else jump in.
Speaker 2
Thanks a lot, Jeff.
Speaker 0
Thank you. And our next question comes from Mike Malouf with Craig Hallum. Your line is open.
Speaker 7
Great. Thanks for taking my questions and well done this year. Just very impressive.
Speaker 2
Thank you, Mike.
Speaker 7
I'm wondering if we could just go to that one slide that shows those four clinics. If you kind of do the math or back of the envelope math, it looks like those four clinics are sort of averaging around $16,000 maybe $17,000 and still way below sort of where And I know you said it was because they didn't do some of the best practices around the openings. But I'm wondering now that it's been several months since they've opened, what's keeping them at those levels? And is there anything regarding maybe where they are that could give us a little bit of insight?
Maybe they're just not located very well or not clustered or something to explain it rather than just maybe the opening process.
Speaker 2
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 are in fact having less results as a consequence. I would say that you're right that we certainly see from site selection can have an impact in terms of the success of that market.
But we really haven't seen this trend was you start slow and you stay slow. And that 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, is their business. They are licensed to use our operating model, but it's what they put into it that's going to create the results.
Speaker 7
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 capacity in place. 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 just kind of get would be nice to see some color around some of the strategy around the capital. Why put this out there?
Speaker 3
Yes. No, I think you had it right, Mike. The key there is flexibility. We generated $7,500,000 of cash flow from operations in 2019. We continue that upward trend to continue in terms of our own cash flow generation.
But having that flexibility on the balance sheet and the additional liquidity provides us some additional opportunities, certainly where we can be more opportunistic if some larger scale acquisition type opportunities came to the table. So in a period where interest rates are at historic lows, into locking a partnership with a top tier bank and provide us that flexibility to be opportunistic, we felt it was the right time.
Speaker 7
Okay, great. Thanks a lot. Appreciate the help.
Speaker 2
Thanks a lot, Mike.
Speaker 0
Thank you. And our next question comes from A. Davidson. Your line is open.
Speaker 8
Hi. When we were together we you had talked about a labor optimization initiative that you'd be rolling out and implementing this year. Can you give us an update on how that's going and what your expectations are for that? Thanks.
Speaker 2
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 $38,000 a month in sales is it's important to add a second doctor because to make sure that we're not getting away time with the patients and that we are really focused on helping our franchisees recognize the time when to add that doctor. We have a software program that counts patients per how many adjustments per hour they're doing and it kind of creates a heat map that we can utilize for when we need to add that doctor because it's not that you have to automatically hire a doctor and another full time, as you can actually add that part time doctor and fill in those hours as you build up to that next tier of performance. And that we launched this labor optimization program at our national conference last year.
We've done additional outreach and 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 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 interests as well.
Speaker 8
Thanks. And can I just sneak in another one on your sensitivity to the general economy? I think there's a lot of investor worry about there about a general softness in the economy given the macro. Can you just talk about your services and how they kind of respond and behave in an economic downturn? Thanks.
Speaker 2
Great. Another great question. And to give you actual data about our response in the economic downturn, of course, don't have any. That 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, because they feel like they're maybe a little less immune and 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, you go to the lower end of our patient base is that we expect to see a fallout. We talk about the demographic profile of our family income of being somewhere between 50,000 and $105,000 And so when you see that 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, not as good as their own traditional chiropractor. So we think that between those two things that we would weather a recession fairly well. And if you just think if you're sitting there and trying to make decisions about where to spend your expendable income and you want pain relief or you want coffee or frozen yogurt, our feeling is that that pain relief would have a higher significance for some of the other consumable things you're going to do as a patient or as a customer.
Speaker 8
Great. Thank you very much.
Speaker 0
Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Your line is open.
Speaker 5
Okay, thanks. Guess, Peter, if you most of 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.
Speaker 2
Certainly. 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 in out of Boston, in the suburb of Boston. That's going fairly well.
We also opened up our first airport facility where we are inside Express Spa 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 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 markets. 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 approach more and more of that urban opportunity.
Speaker 5
Okay. So as a follow-up, obviously, things in an airport are more expensive. In the model that you have with Express SPA, 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?
Speaker 2
Right now, the pricing structure in Austin Airport is equal to the same pricing structure outside of the airport. So that the visit is the same, walking rate is the same, that the membership range is the same. So we have not changed that. We're looking at that, but right now it's equal pricing.
Speaker 5
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 six to twelve months, assume we don't go into a recession, would you be looking at a price increase end of this year, beginning of next year? And if so, that would be would that be a small increase? How do you look at that?
Speaker 3
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, the airports, we constantly look at that. But right now, I don't think it's in the near term horizon.
Speaker 2
And just to add to that, as you know, Anthony, that we are a value proposition. I mean, that's one of the tenants of this model is the inexpensive cost of the high quality chiropractic care that our patients get. So it is something that we look at and are very, very thoughtful about.
Speaker 5
And
Speaker 0
our next question comes from Oliver Chen with Cowen and Company. Your line is open.
Speaker 9
Hi, this is Jonah on for Oliver. Thank you for taking our question. 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? Thank you very much.
Speaker 2
Certainly. Great question, Jon. Nice to talk to you. That as it relates to our customer acquisition costs, there's really our customers come from three sources. And right now, the number one source is referral.
So it's a happy patient referring to their friends and family that, oh my gosh, you've got to go to The Joint, this is amazing. 40% of our pay new patients are coming from referral and the cost of that is zero. The cost of that is good service. The cost of that is asking for the referral of the patients. So that I would anticipate that, 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 of 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 certainly SEO is part of that, but we also are working with YouTube channels and targeting people who are doing certain searches and showing our ads.
And we've had some really positive results with our YouTube promotions, working with the lead generation in that aspect. The final component of where our new patients come from is what I just call those 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 three campaigns. So 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 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 five to fifteen minute radius around that clinic is to get again more proactive in those activities that bring awareness on that line level.
Speaker 9
Got it. Thank you. And just on the churn rate, are you did you see anything different in terms of churn for new customers and existing customers this time versus previous years?
Speaker 2
What we're seeing overall is our customers are staying with us for a longer period of time. I've been here now for four years. In the last couple of years, I would say that in the early part of that period, the average customer stayed with us as a member for four months and that they used us, I want to say somewhere around 2.5 times per month. Today, those numbers look like the average patient stays with us for six months and that they are using us a little under three visits a month. What we also find is those patients that drop their membership is that twenty five percent of them will come back within the next six months because their pain comes back.
And so that we're seeing overall what we call an attrition rate, and it's something that we focus very much on, is that if you look at our 2019 attrition rate that we've seen it improve. So I think right now it's running a little around almost ten percent, ten point five percent and it was probably a point higher if you looked at that in 2018.
Speaker 9
Got it. Thank you very much.
Speaker 0
Thank you. And we have a question from Jeff Geiser with Geiser Wealth Management. Your line is open.
Speaker 10
Hey gentlemen. Thanks for taking my call. You guys have been through about a decade's worth of flu seasons and you don't have a reputation for spreading it in the community. You're not selling food. I'm just wondering if you could talk a little bit about the precautions that you do take normally, coronavirus or no coronavirus.
And if things were to 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?
Speaker 2
Hey, Jeff, thank you. That's a great question and one we certainly have thought a lot about. And I think where we have to start first of all, we are a medical facility. We have 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 that's 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 email and text as long as they've opted 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 as how to operate wherever this coronavirus takes the rest of the nation.
Speaker 10
Great. Thank you very much.
Speaker 0
Thank you. And I'm showing no other questions at this time. I'd like to turn the call back to Peter for any closing remarks.
Speaker 2
Thank you, Catherine, and thank you all for your interest. Each quarter I provide patient stories and testimonials to illustrate the impact of The Joint Chiropractic Care. Today's commentary comes from a veteran in Clarksville, Tennessee, and he wrote us, and I quote, For four 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, all 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. End of his quote. Thank you, and stay well adjusted.
Speaker 0
Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a