The Joint Corp - Earnings Call - Q4 2021

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to The Joint Q4 twenty twenty one Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. And please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Chapman, LHA Investor Relations. Please go ahead.

Speaker 1

Thank you, Laurie. Good afternoon, everyone. This is Kirsten Chapman of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our preliminary fourth quarter and annual 2021 performance metrics and provide an update on the business. CFO, Jake Singleton will detail our preliminary financial results and guidance.

Then Peter will close with a summary and open the call for questions. Please note, we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the close of market, The Joint issued its preliminary unaudited financial results for the quarter and year ended 12/31/2021. 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. These fourth quarter and full year twenty twenty one results are preliminary, unaudited and subject to adjustments.

As a result of the foregoing, certain information provided herein is subject to change. As provided on slide two, please be advised that 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 statements we make today. Factors that could contribute to these differences include, but are not limited to the continuing impact of COVID nineteen outbreak on the economy and our operations, including temporary clinic closures, shortened business hours and reduced patient demand 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 to the Internet, could drive down the market price of our common stock and result in class action suits 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 risks described in our filings with the SEC, including the section entitled Risk Factors in our annual report on Form 10 ks for the year ended 12/31/2021 to be filed with the SEC 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 the 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.

A 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. With that, it's my pleasure to turn to Peter Holt on slide three. Thank you very much.

Speaker 2

Thank you very much, Kristin, and I welcome everybody to the call. During the fourth quarter, our retail based chiropractic clinic concept demonstrated continued strength and resilience even as the pandemic evolved with the Omicron variant. Throughout 2021, we successfully executed our long standing strategy to grow by opening new clinics, both franchised and greenfield corporate owned or managed clinics and retail settings. We ended the year with seven zero six clinics, well positioned to achieve our goal of 1,000 clinics in operation by the end of twenty twenty three, creating the foundation for our continued future growth. Before I go in greater detail, I'd like to welcome our new investors and summarize our investment rationale.

The Joint is revolutionizing access to chiropractic care. Located in convenient retail settings, our clinics provide concierge style membership based services. Patients benefit from our attractive pricing convenient hours without the need of insurance or appointments. Our growth strategy is to build our brand, increase awareness of the efficacy of chiropractic care, deliver an exceptional patient experience and open more clinics. We're already the largest and most recognizable provider of chiropractic care in the country.

And yet we only account for approximately 2% of this highly fragmented nearly $18,000,000,000 chiropractic market. As such, we have opportunity to continue increasing our market share as we further refine and expand the market itself. As we turn our attention to 2022, we're focusing efforts on three key areas. We call them our enterprise initiatives. Each are critical to advancing our growth strategy.

Our first initiative is forging the chiropractic dream by offering the best career path for chiropractic doctors. The second initiative is harnessing the power of our data by leveraging our new CRM platform. And finally, third initiative is to accelerate the pace of our clinic growth through continuous improvement of our comprehensive franchise sales and clinic opening strategy. I'll go in more detail on the 2022 enterprise initiatives in a moment. Turning to slide four, I'll review our record breaking operating performance metrics in 2021.

The total number of adjustments performed during the year reached 10,900,000, up from 8,300,000 in 2020 and seven point seven million in 2019. The total number of unique patients treated reached one point four million, up from one 100,000 in 2020 and nine hundred and ninety eight thousand in 2019. 807,000 new patients visited The Joint, up from five and eighty four thousand and five 185,000 patients in 2020 and 2019 respectively. 85% of the system gross sales came from our monthly memberships, the same as 2020 and up from 80% in 2019. We opened 110 new franchise clinics, up from seventy and seventy one in 2020 and 2019 respectively.

We significantly increased our corporate Greenfield clinics to up to 20, up from three and five in 2020 and 2019 respectively. And we sold 156 franchise licenses, up from 121 in 2020 and one 126 in 2019. This high level of performance even in the middle of a pandemic validates our business model and indicates a very positive long term outlook. Turning to slide five, I'll review our 2021 financial highlights. Later Jake will discuss our results in detail.

For 2021 compared to 2020, system wide sales grew to 3 and $61,100,000 increasing 39%. Our comp sales for clinics that have been open for at least thirteen full months grew to 29%. Revenue rose to 38%. Adjusted EBITDA increased to $13,300,000 up 46% compared to 2020 record of $9,100,000 And on 12/31/2021, our unrestricted cash was $19,500,000 compared to $20,600,000 in 12/31/2020. Turning to slide six, let's review our portfolio.

Regarding clinic expansion, during Q4 twenty twenty one, we opened 43 clinics, 34 franchised and nine greenfields, up from the total of 21 clinics opened in Q4 twenty twenty. Our fourth quarter and full year 2021, we closed three clinics. This compares to two closed in Q4 twenty twenty and seven for the full year 2020. We continue to have exceptionally low closure rates of less than 1% annually. During 2021, the total number of new clinics opened reached 130 consisting of 110 franchised and 20 Greenfield clinics, up from 70 clinics and three Greenfield clinics opened in 2020.

In 2021, we acquired 12 previously franchised clinics, up from one acquired in 2020. Our expansion focuses on strategically opening greenfields in new markets and enlarging our presence in existing corporate clinic clusters and finally purchasing previously franchised clinics that will be accretive to our P and L. During 2021, we established corporate clinic foothold in the Southeast Region. Throughout the year, we extended our reach across our corporate portfolio in Virginia, Southern California, New Mexico and Arizona. As we've repeatedly stated, corporate clinics contribute 100% of their top and bottom line.

Therefore, when greenfields mature that they can have a greater economic benefit compared to franchise clinics for the consolidated company financials. However, we expect greenfields to compress margins when they first open. In the fourth quarter twenty twenty one, we opened nine of the 20 greenfields in 2021. As such, the effect of the new corporate clinic margin pressure was greater in the fourth quarter. In summary, on 12/31/2021, we had seven zero six clinics in operation consisting of six ten franchise clinics and 96 company owned or managed clinics.

Compared to September 30, our portfolio mix shifted approximately two percentage points to 14% corporate clinics and 86% franchise clinics. At the quarter end, we had two eighty three franchise licenses in active development. This figure demonstrates a strong pipeline for franchise clinic openings and compares to two ninety five at 09/30/2021 '2 53 at 12/31/2020. This reflects both the accelerated number of franchise openings as well as ongoing increased interest in the franchise system. Turning to slide seven.

In Q4 twenty twenty one, we sold 24 franchise licenses compared to 56 in Q4 twenty twenty with the twenty twenty number reflecting excess pent up demand after the COVID disruption. Our total 2021 franchise license sales reached 156, increasing from 121 franchise license sales in 2020 and January and '26 in 2019. Our franchise concept continues to attract sophisticated well capitalized franchisees and we're experiencing increasing interest in our multiunit licenses. During 2021, 56% of the franchise licenses were to existing owners reinvesting in the brand, which is a very strong validation of the business. In fact, since 2018, the trend has been the existing franchisees by more than half the new licenses in the year.

Also of note, 81% of our franchise licenses were sold by our regional developers during 2021. The RDs performance remained strong as they continue to accelerate our growth. At 12/31/2021, our twenty one RDs supported 71% of our clinics and their territories covered 59% of the Metropolitan Statistical Areas or MSAs. Our aggregate ten year minimum development schedule for the new RD territories established since 2017 is seven thirteen clinics. Keep in mind that a portion of these clinic count is already open, but the remaining unopened clinics still provide a large foundation to fuel our continued clinic expansion and sales growth.

Turning to slide eight. Let's review our marketing efforts. In Q4, we launched our annual holiday promotions, our Back Friday Package Sale and our year end membership promotion. Significantly, both promotions beat prior year performance with Back Friday growing 27% and end of year growing 42%. This demonstrates the continued growth potential of our limited time promotions as well as the engagement of our clinic teams and the success of our marketing best practices.

On December 1, we launched our new national brand campaign targeting millennial consumers with a message touting the power of chiropractic care and living their best lives as well as The Joint's convenient and affordable offering. As a part of the campaign, we produced two new TV spots, updated our print ads and promotional materials, all featuring our new brand tagline, Don't do pain, do you. The work will be featured throughout 2022, reaching new prospects through our national streaming platforms, regional television buys and other media channels. Speaking of new prospects, in 2021, we increased investment in awareness driving market tactics funded by our growing national marketing fund as well as our regional marketing co ops. Tactics like these help build our brands reach and name recognition with the greater public.

This activity continues to record breaking new patient growth and boosted the proportion of our patients who are new to chiropractic. In our most recent annual independently conducted patient survey, we found that thirty six percent of patients who visited our clinics in the 2021 had no previous experience with chiropractic care. In 2013, the first year of this survey, that number was just sixteen percent. In 2020, it was twenty seven percent. This demonstrates our growing ability to attract a larger population of consumers who are initially unaware of the benefit of chiropractic care, which is fulfilling our vision of educating the consumer about the power and efficacy of chiropractic.

Turning to slide nine, I'd like to review our initiatives to improve our technology infrastructure. As you may know, last July, we achieved our milestone of launching our new IT platform, which we call Axis. Because our patients can visit any clinic in our network to receive their chiropractic care after extensive testing, we were required to switch the entire system from our original platform to the AXIS platform overnight instead of a timed regional rollout. It was quite an undertaking. Of course, migrating from our homegrown legacy system to a licensed scalable platform caused a few bumps, but we were pleased to accomplish this without major disruptions.

And again, I want to thank our franchisees and our clinic users for their patience throughout this process. It's important to remember that this launch is only the first iteration of access, primarily a lift and shift in functionality with updated accounting and reporting systems and greatly improved security. Our twenty twenty two-twenty twenty three roadmap has us layering in additional innovations that will unlock greater value. These initiatives include improvements in our user experience, enhanced promotional capabilities, advanced analytics, marketing automation, a native mobile app and elevated risk control measures. I'm also excited to welcome our newest member of our leadership team, Chief Technology Officer, Charles Nellis, who will help lead this mission.

Charles has more than twenty years of experience in healthcare and financial service industries. He and his team will spearhead our technology development, leverage our new IT platform to sustain our position as a trailblazer and utilize our data to improve business performance. We look forward to this contribution as The Joint pursues new growth opportunities to bring routine and convenient and affordable chiropractic care across the nation. With that, Jay, I'll turn it over to you.

Speaker 3

Thank you, Peter, and we'll turn to slide 10. Please remember while the 2020 was impacted by the pandemic, our swift actions enabled The Joint to rebound in the third and fourth quarters of twenty twenty. As a result, full year 2020 delivered strong financial performance in spite of COVID-nineteen. The momentum we gained in 2020 continued to accelerate in 2021, delivering our strongest financial performance for any year to date. First, I'll review preliminary Q4 twenty twenty one compared to Q4 twenty twenty.

System wide sales for all clinics open for any amount of time increased to $102,100,000 up 32%. System wide comp sales for all clinics open thirteen months or more were 22%. System wide comp sales for mature clinics opened forty eight months or more were 15%. Revenue was $22,400,000 up $5,400,000 or 32%. Company owned or managed clinic revenue increased 33% contributing $12,200,000 Franchise operations increased 30% contributing $10,200,000 Cost of revenues was $2,400,000 up 24% over the same period last year, reflecting the increase in franchise clinics, the associated higher regional developer royalties and commissions and higher website hosting costs related to the new IT platform.

Selling and marketing expenses were $2,900,000 up 38% over the same period last year. This reflects the grand opening marketing expenses for nine new greenfields, the larger number of franchised and company under managed clinics and the timing of the national marketing fund spend as well as the new brand campaign. Depreciation and amortization expenses increased for the 2021 as compared to the prior year period, primarily due to the amortization of development rights we acquired in December 2020 and January 2021, the amortization of intangibles related to the 2021 clinic acquisition and depreciation expenses associated with our new IT platform and with our greenfield development. G and A expenses were $14,600,000 compared to $9,500,000 up 53%. The increase was primarily driven by an increase in company owned or managed clinic expenses and an increase in payroll required to remain competitive in the tight labor market and professional fees and IT expenses to support continued clinic count and revenue growth.

We opened nine greenfields during the fourth quarter and anticipate an increased pace of greenfield openings. As such, we expect the G and A as a percentage of revenue to increase over the next several quarters. Operating income was $663,000 which reflects the compressed margins from accelerated greenfield development and the aforementioned depreciation and amortization from reacquired development rights and clinic acquisitions. This compares to $2,800,000 in 2020. Income tax expense was $424,000 compared to an income tax benefit of $7,900,000 in Q4 twenty twenty, which included the reversal of a tax valuation allowance of 8,900,000.0 Net income was $224,000 or $01 per diluted share compared to $10,600,000 or $0.72 per diluted share in Q4 twenty twenty.

Adjusted EBITDA was 2,700,000 decreasing 26% compared to the same period last year. Franchise clinic adjusted EBITDA increased 29% to $4,900,000 Company owned or managed clinic adjusted EBITDA decreased 21% to $2,000,000 reflecting the increase in payroll required to remain competitive in the tight labor market compounded by margin compression with 45% of our new greenfields for the year opening in Q4. Corporate expenses as a component of adjusted EBITDA loss increased to $4,100,000 compared to $2,600,000 in Q4 twenty twenty and three point eight million dollars in Q3 twenty twenty one. On to slide 11 for a review of the preliminary financial results for the year ended 12/31/2021 compared to the same period in 2020. Revenue was $81,200,000 up 38% compared to $58,700,000 Operating income was $6,000,000 up 9% compared to $5,500,000 reflecting the increase in labor costs and expenses related to opening new corporate clinics.

Net income was $7,200,000 down from $13,200,000 in 2020, which included the tax benefit of $7,800,000 And adjusted EBITDA was $13,300,000 up 46% compared to $9,100,000 in 2020. On to our balance sheet and cash flow review. At 12/31/2021, our unrestricted cash was $19,500,000 compared to $20,600,000 at 12/31/2020. During 2021, cash flow activities included $15,200,000 provided by operating activities, which was offset by $14,100,000 of investing activities consisting of acquisitions, greenfield developments and IT capital expenditures, as well as $2,000,000 of net cash used in financing activities, primarily driven by the repayment of the Paycheck Protection Program loan in March. During the annual audit, management along with our audit team determined that our internal controls over financial reporting were not effective as of 12/31/2021 due to a material weakness.

We have undertaken remediation measures to address the material weakness, which we expect will be completed prior to the end of fiscal year 2022. We expect our auditors to express an adverse opinion on the company's internal controls about which we will provide details in our upcoming 10 ks filing for the period ended 12/31/2021. On to slide 12 for a review of our guidance for 2022. In 2021, The Joint like so many retail concepts experienced rising labor costs, which will necessitate a price increase to maintain our status quo. However, one of our core tenants is affordability.

Therefore, we plan to implement a modest price increase. Effective 03/01/2022, every clinic in our system will raise the price of an individual visit, which will be reflected in price increases on our memberships and packages. Our new patient special will remain unchanged at $29 While this is the first national price increase The Joint has undertaken since 2016, we did implement several market price adjustments in certain markets in 2018 and 2019. As existing patient subscriptions will be grandfathered at our current price, the impact to our revenue will be gradual and incremental with the addition of new patients and we do not expect significant incremental lift for approximately six to nine months. Our 2022 guidance is based on our strong performance and market position.

We expect revenue to be between 102,000,000 and $106,000,000 up from $81,200,000 in 2021 with the midpoint equal to a 28% increase over the prior year. We expect adjusted EBITDA to be between 15,000,000 and $17,000,000 compared to $13,300,000 with the 2022 midpoint equal to a 20% increase from our 2021 adjusted EBITDA. Once again, the increased number of greenfields will increase margin compression until those clinics mature. We expect franchise clinic openings to be between one hundred and ten and one hundred and thirty, up from 110 in 2021. We expect to increase our company owned or managed clinics by between thirty and forty through a combination of greenfield openings and franchise clinic purchases, up from 32 in 2021.

And with that, I will now turn the call back over to you, Peter.

Speaker 2

Thanks, Jake. During 2021, The Joint demonstrated remarkable resilience to the pandemic pressures. While managing this, we still delivered record openings through patients, revenue and adjusted EBITDA. As the chiropractic market expands, we continue to fuel our growth as illustrated by our growing number of patients, franchisees, clinics and franchise license sales. While as a nation we focus so much time and energy on the COVID-nineteen pandemic, frankly, are other serious epidemics that we're also facing such as pain, obesity and diabetes.

Increasingly, younger generations seek more holistic ways to treat these elements and frequently choose chiropractic care as a first line of defense. The average age of our patient continues to trend younger. In 2021, sixty one percent of our patients who visited that year were millennial or Gen Z, with Gen Z being the biggest gainer. This is up from fifty eight percent in 2020 and fifty five percent in 2019. As I stated earlier, we've entered into 2022 with a focus on three enterprise initiatives, key to advancing our brand's growth.

Our first initiative is to forge the chiropractic dream. Like most employers, we are navigating a challenging labor market and that some are calling it a great resignation. By leveraging our considerable advantages as market leader, we are creating a must have employment experience by building a modern relevant employer brand and a connected community of doctors of chiropractic. We offer unrivaled career paths that can provide financial success and would provide choices and opportunities that fit the needs of DCs and their interests with exceptional professional development as well as high volume hands on experience. Our second initiative is to harness the power of our data.

As discussed over the past several years, we've allocated considerable resources to technology. Now we have the we've fortified our foundation with improved accounting, reporting and security and we're turning our attention toward the utilization of accumulated data to transform the patient experience, drive business innovation and optimization and sustain our revenue growth. We're excited to build upon our new CRM platform in 2022 and beyond and we look forward to updating you on the progress. Our third initiative is to accelerate the pace of clinic growth. We're implementing new clinic growth strategies through the real estate optimization and strengthening of our development team.

We're utilizing innovation to shorten our development time lines, enabling us to open clinics faster, reduce costs and provide quality direction for our franchisees. In our expansion, we're evaluating additional location profiles that can maintain our brand in an affordable and accessible chiropractic care. For example, we're looking at opening clinics in highly urbanized markets and in micro markets where the franchisee is typically owned by the doctor of chiropractic and on military bases leveraging our agreement to serve the Army and Air Force Exchange Service. Last fall, we've already opened two clinics on bases and are excited about the opportunity to open up more bases going forward. In addition, we're working closely with our high performing franchisees who are looking to further leverage their development.

Increasingly franchisees are doubling down and adding a second clinic within their existing trade area, some even only a mile away. These skilled operators are repeatedly proven that by increasing clinic density and lowering patient wait time, they can uphold The Joint's standard of accessibility and drive sales growth in both the new and their existing clinic. We're on pace to open up 1,000 clinics by the end of twenty twenty three. As previously discussed, we see a near term goal as a stepping stone for further development, both domestically and at the appropriate time internationally. This year as part of our analysis, we reanalyzed the patient demographic and psychographic profiles comparing them to all MSAs across The U.

S. As a result, we've broadened our derived potential clinic count now to a minimum of nineteen forty clinics. Yet we realize this is based upon actual chiropractic usage as of today. With thirty six percent of our new patients also new to chiropractic care, this leaves much room for additional expansion. As only fifty percent of The U.

S. Population knows what chiropractic care is, we have significant opportunities to grow our business as we educate more consumers about the efficacy of chiropractic care. I'm confident in our ability to drive long term growth and stakeholder value. With that, Laurie, I'm ready to begin the Q and A.

Speaker 0

Thank you. And our first question comes from the line of Linda Bolton Weiser of D. A. Davidson. Your line is open.

Speaker 4

Hi. How are you doing?

Speaker 2

Good, Linda. How are you?

Speaker 4

Good, good. So maybe you can comment just with this accelerated pace of greenfield openings, how are they performing? Are they ramping and performing in the early stages as they would be historically? Or are they better or worse than historical openings?

Speaker 3

Yes, Linda, great question. As I look at cohort ramps comparing the last several years, really from 2017 all the way through 2021, we've seen each of those annual cohorts continue to ramp quicker and 2021 was no exception. So that just continues to give us the further confidence in accelerating our greenfield development because we're still seeing successful ramps.

Speaker 4

Okay. And then can you just remind us where in the income statement do we see the biggest impact of the higher costs related to the greenfield? Is it in selling and marketing or G and A or both? Or where does that show up more?

Speaker 3

Sure. The majority of our clinic expenses were going to come through the G and A line. You will see some additional flow through in sales and marketing, specifically when we have those greenfield openings, because we have a large chunk of grand opening marketing expenses that are kind of front loaded with that process. So in quarters where we have a large number of greenfield openings like we did in the fourth quarter this year, you'll see that line tick up a little bit. But the majority of those clinic level costs, all of our payroll clinic level expenses mostly come through G and A for us.

Speaker 4

Okay. And then with that point, I guess I'm curious in I mean on the one hand you have those expenses, but on the other hand you can leverage some of those expenses as your revenue and your top line grows bigger. So in 2022, do you think you can offset the higher G and A expense from openings with leverage such that the ratio actually goes down a bit? Or do you expect that G and A ratio to actually go up?

Speaker 3

I think given the not only the significant pace of development we're projecting for 2022, but with the 2021 development being a little bit back end weighted, I think you're going to see that suppression come through and not necessarily have as much leverage opportunity in the early part of 2022, right? When we talk about the maturity curve, you're reaching that breakeven point at that six months or less mark. So when you have so many back end weighted greenfields in 2021 and an accelerated pace in 2022, it's going to be hard to get full that full leverage cycle in that short term period. But like I said, the ramps are still great. It's still a great use of capital.

You just kind of have this short term suppression that you have to work through.

Speaker 4

Okay. And then when you talk about the expectation for 30 to 40 corporate additions in 2022. I mean, obviously, you can't really anticipate the acquisition opportunities. So is it kind of like if there's no acquisitions, it will be 30? Or you actually are seeing that there's more than 30 that can actually be greenfielded?

Speaker 3

Yeah. I think you had it right. It's just hard to forecast the number of acquisition opportunities. Those will still be an opportunistic piece of our strategy. We have a robust enough pipeline in terms of greenfield development that if we were to accelerate that or slow that we have the ability to control that with so much time left here in the 2022 period.

But just not having a great way to project those opportunistic acquisitions, we give ourselves some travel there.

Speaker 4

Okay. Today on Planet Fitness' call, I know they're a different business, but they have franchisees that are opening stores. They talked about the pandemic like maybe slowing things down a little like it just takes longer to get certain approvals and things in order to open up a new gym. Are you experiencing that as well that things are just taking longer for your franchisees or not?

Speaker 2

I would say, yes. I think that it's always a matter of scale Linda. And so if you look at the Planet Fitness build out versus our 1,200 square foot with default wall and a couple of adjustment tables that it's a smaller and easier build out as you can imagine compared to what they're doing. But we also all have to go to that same municipality to get the permits. And so we have to deal with our landlords who I think in this inflationary period are responding slower to the kind of that whole lease negotiation process.

So while we didn't call it out, I think that as we look at 2022 and think about the impact that could have those macro issues on our development, yes, think that we also will experience part of that, but just at a smaller scale because it's just such a simpler build out.

Speaker 4

Okay. But I mean it doesn't sound like it really affected your expectation for how much you could grow in 2022. Is that fair to say?

Speaker 2

Well, I would say that we took into account some of these macro issues that we don't really control as we've set our guidance. And obviously, set our guidance that we believe that we'll open more clinics in 2022 than we did in 2021. So I'm not saying that we didn't take it into account, but I do think that we are less impacted by it than some of these more complex build outs that are other concepts.

Speaker 4

Okay. And then just on the price increase, can you remind us how much of your revenue is the subscriptions versus the individual visit? And then can you give a percentage price increase on average that you're expecting to make?

Speaker 3

Sure. Yes. 85% of all of our gross sales comes from our subscription. So that is still the vast majority of our gross sales is coming through that offering. In a lot of the markets, we will be moving our price tiers up by $10 So where they were $59.69 dollars $79 you'll see a $69 $79.89 dollars mix across the country.

Speaker 4

Okay. Sounds good. Thanks.

Speaker 2

Thank you very much, Linda.

Speaker 0

Thank you. And our next question comes from the line of Jeremy Hamblin of Craig Hallum Capital. Your line is open. Mr. Hamblin, your line is open.

You may ask your question.

Speaker 5

Thank you. Congratulations on a really strong year and quarter. I wanted to get into a little bit more of the details of the total EBITDA impact based on company operated locations of 30 to 40 new units of this year. I think based on your prior maturity curves and the expectation for an average loss of about $75,000 in year one. Can you give us a total estimate on opening 30 to 40 new stores, new units this year.

I guess part of it's a carryover from the new openings at the end of last year as well. But are we looking at about maybe a $2,000,000 drag on your FY 2022 EBITDA?

Speaker 3

Yeah. I think you do have to factor in the carryover from 2021 just given the back end weighting of those. So that has to be factored in there. We didn't split out the 30,000 to 40,000 in terms of how many are greenfields, but you have it right in terms of around the $75,000 kind of working capital loss that you have to work through in a year one type period. Now again, are going to be scaled depending on when they open.

If you have a Q1 opening, it may reach breakeven and start to offset some of those. The back end waiting all you're going to feel is the strain of those until they get into that maturity curve. Hard to put a quantified number on it without some of those variables, but I think you've got the pieces correct.

Speaker 5

Okay. So it sounds like we're in the ballpark depending on acquisitions. Okay. And then also wanted to have a quick hitter here on expectations around tax. I think you might have mentioned that I just missed it.

We're looking at 27% tax rate?

Speaker 3

Correct. Yes. The federal rate 21%, a blended state rate in the six plus percent range for us across our footprint. So I think that's a pretty fair estimate. We will come out of this year with some NOLs still to utilize and we'll see a lot of that kind of eaten up as we move through 2022.

Speaker 5

Great. And then in terms of kind of the COVID impact with this last surge, a lot of retail businesses had significant impact back December and throughout January, and now it started to see some recovery. What's can you give us a sense of what you saw in your traffic patterns, whether or not you had any impact, kind of where the trends stand today versus maybe where they were at the December?

Speaker 2

Well, what I'd say Jeremy is that in terms of the impact it's had on us is probably it probably suppressed a little bit of our accelerated growth. As I mentioned, our fourth quarter are the big two promotions we have, our Back Friday and our year end promotion. The Back Friday was 27% higher than last year. That year end promotion was 42% higher than compared to last year. So it suggests to you that we had some pretty strong numbers.

I think they would have been stronger if we so there was I'm not saying there wasn't some impact due to the pandemic or whether it was the Omnicom or the Delta before that. I think if I reflect really from the beginning of COVID to where we are to this point is that when it comes to pandemic is that we remain incredibly resilient that our patients see this experience as essential to their health care And that while they may be reluctant to do other things in the marketplace is that they are coming into The Joint. And as we talked about in 2021, what did we see? We saw record breaking new patient counts. So it's not just our existing patients, but we had 807,000 new patients come into The Joint for the very first time.

Now to me what was really the most exciting part of that is we just did our new survey. And last year we were saying okay in 2020 our twenty seven percent of those new patients that came in were new to chiropractic. The most recent survey we just got back is thirty six percent. So the model is working. We're continuing to educate more and more consumers about the power and efficacy of chiropractic by putting it in those retail settings.

And so I think that when I reflect on the impact of the pandemic or kind of as we go through in 2022, are we going to be impacted by some of these macro issues, whether as we're talking about with Linda in terms of municipalities who don't have their permitting people there or addressing inflation issues or who knows what's going to go on with Ukraine is that those macro issues are out there and they certainly can have impact on us. But I would say is I think through the pandemic is that we've been pretty resilient.

Speaker 5

Okay, great. Last one for me. So labor costs, can you give us a sense for the run rates that you're having to pay up for your administrative staff and your clinicians as well?

Speaker 2

What's the Yes.

Speaker 3

Think we're seeing it on sure. Yes. I think we're seeing it on both fronts, whether it be the doctor of chiropractic or our wellness coordinators at the front desk. Those retail positions are becoming highly competitive as well. And then when you have any element of specialized labor, you have to remain competitive.

And that was one of the driving factors. Tougher to quantify given the footprint across the country again. But as we look at it, it's probably a roughly 10% increase potentially if we're going to do some sort of blended average in terms of either a base rate or a part time rate for a chiropractor that's out there or increasing that hourly wage for the wellness coordinator position. So it's really both of our core roles. And quite honestly, it's also our corporate staff.

I mean, it's a phenomenon that's affecting us on a couple of different fronts.

Speaker 5

Got it. Thanks so much for taking the questions. Best wishes.

Speaker 2

Thank you very much.

Speaker 0

Thank you. And our next question comes from the line of George Kelly of ROTH Capital Partners. Your line is open.

Speaker 6

Hi, everybody. Thanks for taking my questions. So to start another greenfield question for you. And I was hoping that you could just walk us through an average opening. So if I don't know if you want to sort of specify it or quantify as much as you can, but what is the pre opening marketing spend just on average?

And then what is the invested until you hit breakeven after X months? If you could give us that kind of time line that would be helpful.

Speaker 3

Sure. Yes, the pre opening marketing, I would peg that around $15,000 Again, there's different tactics by market that we can capitalize on. But I think on a rounded number, you're probably looking at $15,000 per. Your cost structure for your clinic, I would say your breakeven point is again it varies by market. My rent in Virginia is going to be different than my rent in California.

But I think you're looking at an average of $25,000 to $28,000 a month as kind of a breakeven point. And so it's really how quickly can you ramp your revenues to get above that breakeven point, which for us we would say is six months or less.

Speaker 2

And just to add to that, I think that our marketing department is increasingly creating a more sophisticated and effective grand opening strategy, particularly taking into account the pandemic. I mean, the early part of the pandemic or pre pandemic, we had this idea that you're going have this big blow at a moment for two or three days, do all these free adjustments and then kind of tail off from there. And what we recognize is that with the pandemic is that we don't want everybody jammed up in the clinic for three days. And so they spread that out over a period of a month and then they've added a whole series of new programs specifically on I think on the digital side, which we've seen increasingly improve the time to breakeven across the board. So I think we're getting better in our grand opening process and that we're seeing it more effective in our clinics.

Speaker 6

Okay, great. And then next question for me, a modeling question. It's something that's in your queue. Was wondering if for your K, but curious if you could just share with us on the call that so the quarterly breakdown of G and A between unallocated corporate and everything else, do you have that?

Speaker 3

George, I don't have it in front of me at the moment.

Speaker 6

Okay. Okay. Fair enough. And then last question for me is just back to pricing. What happened last when was the last time you took a broad based just an across the board price like you're doing now?

And what happened? Is there really any impact? Or I mean, I guess, what gives you confidence with what you've seen in the past and with the pricing gap with some of your competitors? Like how are you thinking about volume changes or anything else as we approach this

Speaker 3

Yes, it's a great question. The last wholesale price increase we did was back in 2016. And then in really the 2019 ish time frame, we did market adjustments just moving certain markets up a tier. But 2016 was the last time we did an across the board increase similar to the one that we'll be launching on March 1. What typically happens is in each of those scenarios we always grandfather in the existing rates.

So if you're an existing member that will be your pricing on a go forward basis until such time that you cancel. So we always offer that. The phenomenon that that results in is really there's kind of a rush to the window before that price increase for people to kind of lock in the rates. So you get a slight forward buy and then you get some nice kind of retention benefit as people kind of hang on to that pricing a little bit longer. But really what that does is kind of delay some of the new sign ups under that higher rate.

When we looked at those factors and we monitor a lot of KPIs, as we look at new patient interest, as we look at conversions onto our subscription model or retention, So far we've seen very favorable metrics anytime that we've gone through that. So it's something that we always do very carefully. As we mentioned in the script a few different times, affordability is a core tenet of what we do and will always be. So we have to be very mindful anytime that we touch price. But in a time frame where you're facing some of the labor pressures that we are, we felt we needed to make that adjustment to remain competitive.

Speaker 6

Understood. Thank you.

Speaker 0

Thank you. And our next question comes from the line of Jeff Van Sinderen of B. Riley. Your line is open.

Speaker 7

Yes. Hi. Thanks everyone. Just wanted to if we could circle back to the model and some of your assumptions. Any further insight that you could give us around kind of how you're thinking about the quarterly progression or annual assumptions that you're baking in for gross margin selling marketing G and A just kind of considering the new greenfield buybacks and kind of planned amidst a number a larger number of franchise clinics you're expecting to open?

And I guess if there's anything you can give us in terms of first half or second half weighting of any of those elements? Yes.

Speaker 3

Lots of variables there Jeff to work through. The one more predictable element that we can usually count on within our model is the top line performance, right? We've been fortunate to have continued organic growth, so strong comps and then we expect accelerated unit opening. So on the top line, I would project a gradual incremental build throughout the quarters. Cost of revenue for us is largely tied to that, so a fairly predictable line.

You get down to sales and marketing and that is largely such a large driver of that is dependent on the timing of our national marketing fund spend. So while I always go to my Chief Marketing Officer and ask that he spend that perfectly ratably throughout the year, It's just harder to do that. So typically you see a little bit of back end weighting to that national marketing fund spend. And then as we mentioned, some of that will be contingent on clinic level activities. When do we have those pre opening marketing, those grand opening marketing expenses?

As it stands right now, I don't project too much variability between our greenfield openings. But as we saw, I went into 2021 with that same assumption and we ended up a little bit more back end weighted than I would like. So still working through some of that, but the G and A fluctuations are largely tied to the clinics as they build. So it's probably the best I can do on a broad brush.

Speaker 7

Okay. Understood. And then just if we can touch on the new software system, I guess plans and timing to layer on some of the newer applications you're developing or working on this year? When you expect some of those applications to begin to I guess to hit and then to begin to have an impact on the business especially interested in when you can start to mine and leverage patient data?

Speaker 2

Sure. And I think it's a great question, Jeff, and obviously one we're really focused on. And it really is incremental for us and that we're just so excited to have our new CTO, Charles Nillis, who's really helping us to refine that road map. And so we really see this as a progression. And so that we still have some cleanup issues quite frankly in terms of just making our existing system more user friendly for end users that we definitely see doing that patient portal and mobile check-in that will probably be a little bit later.

That won't be early in this year that we're working on the creation of a data warehouse. It really does start unleashing the power of that data, but that's going to take time to develop. So I'm not sitting here and saying, my gosh, okay, we've got to do lift and shift and then you see this huge impact starting in Q1 twenty twenty two. But what I'm expecting is that over time we'll continually refine and improve and add more and more power to that as we build out that road map. So it doesn't give you a lot of detail around it, but I think we have very specific projects that we're working on.

And as they develop and roll out, we'll certainly be sharing them with you in the street.

Speaker 7

Okay, great. Thanks for taking my questions and best of luck.

Speaker 2

Thank you very much. Always a pleasure.

Speaker 0

Thank you. And we have a question from Anthony Vendetti of Maxim Group. Your line is open.

Speaker 8

Thanks. Two questions, one on the Axis IT platform and then one on the material weakness. And so maybe we'll start with the material weakness. So you announced preliminary results. Is the reason for that because of the material weakness the auditors have to finish up?

And I guess when do you expect to have audited numbers? And then what exactly do you need to do to satisfy the auditors' concern? It sounds like it's financial controls, right?

Speaker 3

Yes. Our internal controls and it's a fair question Anthony. And you're right we are still working through the final elements of our audit with our outside auditors. If you remember, we changed auditors in Q1 of twenty twenty one. So this is the first year that we're working through their full financial audit as well as our first year of four zero four SOX compliance and subject to audit of our internal controls with them.

So anytime you go through an audit the first time through, you're going to go through that not to mention it's our first time as an accelerated filer with some of these accelerated deadlines. So we're going to come down to it. We have our filing deadline is March 1. So we'll continue to work with our auditors up and through that deadline to get that audited financials out there and filed.

Speaker 8

Okay. Great. And then on the Access IT platform, how as that has rolled out, how's the reception been among the clinics, the franchisees? And any feedback, any tweaks to it?

Speaker 5

I was just curious what you've heard so far.

Speaker 2

Sure. Anthony, absolutely. Listen in a franchise system you are never short of feedback. So we have a very active and robust franchise community and they share all of their concerns with us and the positive things that are going on as well. And so and I think like in any time that you are taking an existing system and asking everybody overnight to go to the new system, of course, there's going to be disruptions.

And you're almost learning the new language. And then you do all this touching upfront and making sure you're minimizing any of the things that you're going to have to face as you roll this out. But as you know, you can't really get into it until you have thousands of users using these millions of patient records to ensure where all these little bugs are and get those cleaned up. And so I would love to tell you that we rolled it out. The franchisees just said that was the best thing they've ever seen in their life and that everybody is happy.

But I'd say it's a little more complex with that and that there are some changes in the new system that give quite frankly a little less flexibility on that line level that we're working through with our franchise community. But overall, what's been really important is that to make that significant change from just flipping overnight from our existing platform to new platform that the fact that it went through and with such little disruption, I just could not tell you how excited and relieved I'm at that we were able to accomplish that. Now we're really excited to really start unleashing that power. And that was really one of the reasons that we upgraded that position. We have our new CTO that I think that he's been here for less than a month, but just watching and working with him, he's continuing to reach out to our franchise community to really get a real understanding of what we need to do and the order we need to do it, that we can continue to meet the needs of the system.

So we're really excited about it. It's like any time you go through this level of a transition, it's got its issues. But I've never had to deal with fewer issues in an environment like this at least in my career. So I'm pleased with the work that was done to make this conversion.

Speaker 5

Okay, great. Thank you very much. Appreciate it.

Speaker 0

Thank you. And there are no further questions at this time. I will now turn the call over back to Peter Holt, CEO for his closing remarks.

Speaker 2

Thank you, Laurie. And thank you all for your time today. Our mission is improving quality of life through routine and affordable chiropractic care. And I'm proud of the inclusion and cooperative culture we foster with all the joint teams, our corporate staff, our RDs, our franchisees, our doctors, our wellness coordinators, who time and again deliver their best work to help our patients live their best lives. We were recently honored in the Entrepreneur Magazine, Franchise Times and Franchise Business Review, all recognizing The Joint for our outstanding performance in growth, financial strength, stability and brand power.

We look forward to seeing you at the D. A. Davidson Consumer Growth Conference and the Annual ROTH Conference both in March. I'd like to close with the doctor franchisee story. One of our doctors started The Joint in 2018, first as a chiropractor and then as a clinic director before becoming a franchisee owner operator.

And he stated, I became a franchisee because I understood The Joint Chiropractic Model is nothing like anything else in the industry, providing a simple and easy operating model for delivering chiropractic care. It allowed me to do what I love doing without the hassles of the insurance game. So thank you and stay well adjusted.

Speaker 0

Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.