Q3 2022 Joint Corp Earnings Call

Good day and welcome to the Joint Corp, third quarter 2022 financial results Conference call.

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Now I'd like to turn the conference over to you David Pickard with L. O J Investor Relations. Please go ahead.

Thank you Sarah Good afternoon, everyone. This is David Barnard L. A trade investor relations on the call today, President and CEO , Peter Holt will review, our third quarter 2022 performance metrics and provide an update on the business CFO , Jake Singleton will detail our financial results and guidance and then Peter will close with the summer.

And open the call for questions. Please note, we're using a slide presentation that can be found at H T. T. P. S IR dot the joint Dot com.

Slash events.

Today after the close of the market. The joint Corp issued its financial results for the quarter ended September 32022, who do not already have a copy of this press release. It can be found in the Investor Relations section of the company's website.

As provided on slide two please be advised today's discussion includes forward looking statements, including statements concerning our strategy future operations future financial position and plans and objectives of management throughout today's discussion we will present, some important factors relating to our business that could affect these forward looking statements. Therefore looking statements are made based on there.

Current predictions expectations estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today factor.

Factors that could contribute to these differences include but are not limited to the continuing impact of the COVID-19 outbreak on the economy, and our operations, including temporary clinic closures shortened business hours and reduced patient demand inflation exacerbated by COVID-19, and the current war in Ukraine, our failure to develop or acquire company owned or managed clinics as well.

Happily 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.

Negative opinions posted on the Internet, which could drive down the market price of our common stock and result in class action lawsuits or failure to remediate the current or future material weaknesses in our internal control over financial reporting which could negatively impact our ability to accurately report our financial results prevent fraud.

Or maintain investor confidence and other factors described in our filings with the SEC, including the section entitled Risk factors in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 14th 2022, and subsequently filed current and quarterly reports.

As a result, we caution you against placing undue reliance on these forward looking statements and encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock.

Finally, we're 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.

They 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 in GAAP measures alone reconciliation of net income to EBITDA and adjusted EBITDA is presented in the press release. The company defines EBITDA as net income or loss before net interest tax expense depreciation and amortization expenses.

The company defines adjusted EBITDA as EBITDA before acquisition related expenses bargain purchase gain net gain or loss on disposition or impairment and stock based compensation expenses.

Management also includes commonly discussed performance metrics system wide sales include revenues at all clinics, where they are operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company management believes the information is important in understanding the company's financial performance because these sales are the base.

On which the company calculates and recorded as royalty fees and are indicative of the financial health of the franchisee base comp sales include the revenues from both company owned or managed clinics and franchise clinics and in each case had been opened at least 13 full months and excludes any clinics that have closed.

Turning to slide three it's now my pleasure to turn the call over to Peter Holt.

Thank you, David and I welcome everybody to the call during the third quarter of 2022, we continued our vigorous pace of clinic openings and these new units delivering strong performance, both reflecting our robust underlying business model, particularly in the current macroeconomic environment.

I want to take this opportunity to welcome our new and existing investors to the call. The joint is revolutionizing access to car parts of care by providing affordable concierge style membership based services and convenient retail settings.

Since our inception inception over a decade ago with fewer than a dozen clinics we've grown tremendously.

We reached the 800 unit milestone in September , which places us in the top 2% of the roughly 3500 franchise doors in the United States. According to <unk> data.

As we build upon and leverage our national brand recognition, we continue to capitalize on the opportunity for more significant growth with.

For 2022 Ibis World report noted that car Practic market increased from $18 billion to $19 $5 billion annually.

And in October 2022 reported linker stated that the global car Practic care market is expected to reach $52 billion by 2027.

Yes, the sector remains highly fragmented with over 40000 per car practic offices in the United States.

Leave the profession is the largest car Patrick chain in the world with the greatest market share. In addition to publishing the most car practic care content in the public domain.

Based on year end 'twenty, one sell the joint is approaching 20.

2% of market share with competitors in aggregate estimated to also approximately 2%.

With our nationwide critic base, we have economies of scale in marketing and talent and in infrastructure and using our proven protocols and standards. We are systematically expanding in areas of known demand as a result during the time of our consumer uncertainty that joins us continuing to post positive comp rates.

Turning to slide four I'll review, a summary of our financial highlights for Q3 2022 metrics compared to Q3 2021.

Later, Jake will discuss our results in greater detail.

System wide sales grew to $110 4 million increasing 18%.

Our comp sales for clinics that have been open for at least full 13 full months grew 6%.

Revenue increased to 27% adjusted.

Adjusted EBITDA was $3 1 million.

As of September 32022, our unrestricted cash was $10 3 million.

Compared to $9 4 million at June 32022.

Turning to slide five during Q3 2022, we opened 38 clinics up from 33 clinics in the prior year quarter.

Regarding franchise clinics. During Q3 2022, we opened 33 and closed two.

Regarding change in ownership corporate purchase for previously franchised clinics, three in North Carolina, and one in Scottsdale and sold one company managed clinics in California to a franchisee.

Regarding greenfield clinics, we opened five three in California, and two in our new market, Kansas City.

Greenfields are performing well and the 2022 with gross sales on par with our class of 2021. This is an important point that validates the strength of our new clinic launch strategy and the growing demand for car Practic care.

For the first nine months of 2022, we opened 103 clinics 91 franchised and 12 Greenfield. This compares to 87 openings in the first nine months of 2021 consisted of 76 franchised and 11 Greenfield.

The net total purchase of previously franchise clinics was 7% and the closures were three.

Our low unit closure rate of less than 1% annually continues to lead the franchise community.

At September 32022, we had 805 clinics in operation consisting of 690 franchise clinics and 115 company owned or managed clinics, maintaining that portfolio mix of 86% franchise clinics and 14% corporate clinics.

And we also had 252 franchise licenses in active development compared to 283 at December 31 2021.

This metric continues to demonstrate the strength of our strong pipeline for franchise clinic openings and reflects the accelerated number of franchise openings.

Subsequent to quarter end, we acquired two previously franchised clinics in North Carolina for approximately $2 2 million.

We also opened two more greenfield clinics in Kansas City market <unk>.

Additionally, we sold one company managed clinics in California to a franchisee.

Our corporate portfolio now stands at 118 clinics as of November three 2022.

Turning to slide six in Q3 2022, we sold 12 franchise licenses compared to <unk> 44 in Q3 2021 for the first nine months of 2022 58 licenses were sold compared to 132 in the same period last year. When Covid had led to the pent up demand of our franchise licenses.

Although the number of franchise sales with fewer than last year. We believe it is holding strong considering today's macroeconomic environment, including factors such as high inflation higher interest rates and discrete and decreased bottom lines that have been impacting by rising costs.

Further while higher unemployment is known to be a driver of franchise sales today. The U S is a historically low unemployment rate of around three 5% to three 7%.

As of September 30, we had 19 regional developers, who sold 62% of our franchise licenses year to date.

Our aggregate 10 year minimum development schedule for the New Rd territories established since 2017 was 642 clinics as of September 30.

While this program continues to perform well under certain circumstances will require some of those Rd rights and.

In October we reduced the Rd count to 18, when we reacquired the rights to develop franchises in the Philadelphia market.

The net consideration for the transaction was $151000. This was an undeveloped market with two clinics and we believe we have the opportunity to develop another 30 sites.

Turning to slide seven let's review our marketing efforts.

Although we continue to attract healthy numbers of new patient prospects to our clinics. Our average number of new patients per clinic is down when compared to our record breaking year 'twenty one.

One of the challenges, we face with last year, Google changes algorithms, which negatively negatively impacted our organic search traffic.

As a result, we have been aggressively adopting.

<unk>, our CEO strategy in 2022, which is beginning to pay dividends with positive website traffic growth in August and September .

Another challenge is the impact of inflation on consumer confidence with the average age of our patient base that just 36 four years. The majority of never lived through an era of high inflation.

Today, the average American household spending $445 more per month by the same goods and services that they did a year ago. According to CNBC. This is forcing consumers into financial tradeoffs.

Two years ago, we faced somewhat similar circumstances during the COVID-19, pandemic and related government shutdowns and restrictions.

At that time, we responded with our essential health care services statement and positioned the joint to survive and thrive despite the devastating impact to so much of the retail industry.

We believe this positioning will continue to serve us well, while consumers make tough choices on where to allocate their discretionary spending.

We responded to the lower new patient counts with robust testing of new market tactics promotions media channels and consumer messages. We continue to reinvest our marketing technology. This includes the launch of our new patient portal and an upgraded marketing automation platform planned for 2023.

Additionally, our clinic local marketing spending has been robust, particularly for sponsorships of athletic programs in our communities.

Our ability to form market coughs distinguishes us from the single practitioners and small competitors as we leverage the power of our combined marketing dollars spent in those markets.

According to the American car Practic Association car Practic care has gained wide use among professional and amateur sports teams across the country studies have shown that chiropractic care can be linked to faster injury recovery injury prevention improved levels of strength and enhanced or its performance for athletes.

According to consumer reports, it's estimated that 90% of all world class athletes used car practic care to prevent injuries and increase their performance potential.

It's notable that all NFL teams rely on doctors of chiropractic in various capacities and 77% of athletic trainers have referred players to our car prechter for evaluation or treatment.

Finally, we are turning our attention to our annual holiday promotions are back Friday package sale in November and our year end membership promotion in December and January each year. These events grow in financial impact and franchisee participation. Our network is energized to make 2022, our best performance, yet and we look forward to reporting on our results.

And with that Jake I'll turn it over to you.

Thank you Peter turning to slide eight I'll review the financial results for Q3 2020 compared to Q3 2021.

System wide sales for all clinics opened for any amount of time increased to $110 $4 million.

Up 18%.

System wide comp sales for all clinics opened 13 months or more were 6%.

System wide comp sales for mature clinics opened 48 months or more were 2%.

It's worth noting that both the franchise and corporate clinic cohorts comp positively across both time frames.

Revenue was $26 6 million up $5 6 million or 27%.

Company owned or managed clinic revenue increased 36% contributing $15 8 million.

Franchise operations increased 15% contributing $10 8 million.

The increases represent continued growth in both the corporate portfolio and franchise base.

On March one we implemented a price increase and approximately 75% of our clinics. However, existing patient memberships are grandfathered at their original price.

Therefore, the revenue impact from a price adjustment will be gradual and incremental.

At the end of the quarter about 50% of our active members were on the new price structure.

Cost of revenues was $2 5 million up 8% over the same period last year, reflecting the increase in franchise clinics and the associated higher regional developer royalties and commissions.

Selling and marketing expenses were $3 5 million up 23% over the same period last year driven by an increase in advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by our company owned or managed clinics.

Depreciation and amortization expenses increased compared to the prior year period, primarily due to the depreciation and amortization expenses associated with our continued Greenfield development.

And acquired clinics.

G&A expenses were $18 1 million compared to $12 8 million up 41%, reflecting the cost to support total clinic in revenue growth and higher payroll to remain competitive in the tight labor market.

Operating income was $500000 compared to $1 3 million in Q3 2021.

The Q3 2022 results reflected the compressed margins from continued Greenfield development, the aforementioned higher depreciation and amortization and higher G&A expenses.

While greenfield compressor bottomline until they breakeven they are an excellent use of capital as their sales accelerate in year, two and beyond significantly contributing to the bottom line and increasing our return on investment.

Income tax benefit was $16000 compared to $614000 in Q3 2021.

Net income was $491000 or <unk> <unk> per diluted share compared to net income of $1 9 million or <unk> 13 per diluted share in Q3 2021.

Adjusted EBITDA was $3 1 million.

Compared to $3 3 million for the same period last year.

Franchise clinic, adjusted EBITDA increased 25% to $5 4 million.

Company owned or managed clinic, adjusted EBITDA was $1 7 million compared.

Compared to Q3 of last year and decreased $1 1 million.

Reflecting the margin compression related to Greenfield development and higher payroll expenses.

Corporate expense is a component of adjusted EBITDA loss was $4 million Inc.

Increasing $160000 compared to Q3 2021.

Onto our balance sheet and cash flow review.

At September 32022, our unrestricted cash was $10 $3 million.

Compared to $19 5 million at December 31, 2021 during.

During the first nine months of the year, our investing activities of $14 $9 million consisted of the acquisition of Rd territory rights franchise clinic acquisitions and Greenfield development.

These were partially offset by $5 $7 million provided by operating activities.

Onto slide nine I will review our results for the first nine months of 2022 compared to the same period 2021.

Revenue increased 26% to $74 1 million and adjusted EBITDA was $7 5 million compared.

Compared to $10 5 million in the prior year period.

This reflects the compression of earnings by the influx of new corporate Greenfield clinics and higher payroll expenses associated with the tight labor market.

On to slide 10 for a review of our guidance for 2022.

We have tightened guidance raising the lower end of our revenue expectations. We now expect revenue for the year to be between 101 hundred $2 million.

Compared to $80 9 million in 2021.

Tommy optimizing our clinic performance to support growth profitability and lifetime patient value.

We remain focused on driving long term growth and stakeholder value.

Sarah I'm ready to begin the Q&A.

We will now begin the question and answer session.

Yeah <unk> than the one on your telephone keypad.

Thank you are using a speaker phone please pick up your handset before pressing the key.

To withdraw your question please thank.

Thank you.

At this time, we will pause momentarily to symbolize off Sir.

Okay. First question comes from Brooks, Danielle with like Street capital markets. Please go ahead.

Good afternoon guys.

First I got out in a few minutes into your call.

Something that you've already discussed I can go back and read the transcript.

To repeat yourselves, but can you just talk a little bit about headwinds and tailwinds that you think might be affecting new patient starts.

Sure and and it's Greg Tartary Brooks as as we've talked about before one of the headwinds that we've been facing those that changing algorithms with Google.

It really impacted our organic growth search.

We've spent a lot of time adapting our SCO strategy and so if we look at our traffic our web traffic is up for the first time. This year in August and September were outpacing that web traffic compared to the same period last year. So we feel that we are making some inroads on that on that new patient count just with those changes in that the that Google algorithm, when they're very young page.

<unk> face so as I said, it's $36 four years old and those younger people are not going to friends and families for recommendations for their medical services. They are doing that search online and so they're going to the doctor Google They're looking at reviews. They are doing that search and so is so important to be there. While we're seeing now is that.

About our new patient count.

Historically, we've seen about 40% of that come through our digital marketing strategy and right. Now we have noted that 61% of our new patients at some point of touched our digital campaign are digital strategy online. So you can see that's just increasingly important to us and so on changes like what Google did go can impact our new Competion count.

I think.

We also have macroeconomic issue that has to be taken into consideration.

So you have the increase in inflation you have consumer confidence because of concerns I don't know, if we're going directly into recession or when it will be or how deep or how long, but I think that's also impacting some of the performance or the performance on the clinics and we see it in our in our same store sales.

So I think there's some macroeconomic issues that are impacting that new patient count.

There's some some.

Tactical issues on the digital side that are affecting it.

I think the tailwind for it continue to be just a high performance of our clinics, especially the new Greenfield.

That we've had.

The world, we're headed toward a record breaking number of new opening this year with Guy and of course between 110 to 130, we're expecting to add somewhere between 30 and 40, new clinics are clinics in our corporate portfolio and that will be that mix of both corporate and.

Our acquisitions in Greenfield, but through the year, we've seen some really strong greenfield openings and getting to breakeven, which bodes well for number one that our model continues to work and number two there is continued interest in chiropractic care.

Absolutely that's really helpful. Thank you just touched on the second thing I, just wanted to add a little bit about.

Do you have any netflix about the poor.

Performance of new corporate stores in the portfolio this year versus years past or what did you say, you're you're continuing to open as strongly as you have in the past again recognize there is some.

Important and sort of uncontrollable headwinds out there in the market right now.

And I think Brooks, we've continued to get more and more sophisticated in how we how we create and use our grand opening strategy and so what I look at it just do overall portfolio that includes both franchise and corporate units in terms of their time to breakeven I would say we are seeing them operating at least equal to <unk>.

21, and that's in that 69 months to breakeven so very very strong when we breakout appropriate units.

Would say we are even stronger compared to 2021. So what we're seeing is that yes. There is all these headwinds out there that we're talking about but when we're open up those clinics when we're using our grand opening strategy that we are seeing that that the high performance of those clinics as they get to breakeven.

That's fantastic. Thank you for taking my questions keep up the great work you are doing fantastic.

Thanks, a lot.

Our next question comes from George Kelly.

Okay can you. Please go ahead.

[noise], Hey, everybody. Thanks for taking my questions.

So maybe it's just started on the comp gross I think it is.

The prepared remarks, you covered it.

Comp crosas not sort of what you expected I think last time you offered guidance.

I'm just curious.

Pricing is taking longer to kind of filter through the system or maybe the new patient suggest that you've talked about ish.

Impacts is lasting longer than expected or anything else to highlight just as far as your expectations for for comp growth.

Yeah. Thanks George.

As you touched on I think.

As I think about the pace in which we're rolling onto the new price point.

I would say we're at expectation, maybe a TIK behind.

In my mind, that's not a material material driver.

We look at the three core Kpis of this model, we have to attract new patients convert mono or subscription or package and retain them as long as we can.

Conversion is remaining steady year over year, which.

<unk> 2021 was a banner year for us in terms of conversion. So we're still seeing strength in that metric attrition, we've actually seen favorability and that.

Which one could expect when your grandfather and pricing maybe your patient is you're going to stick around a little bit longer but was actually seen that metric improve.

But as we said the metric where we're still seeing challenges as in those new patients.

And so if.

If you are not feeling the funnel that quite the same rate while the numbers are still strong that's going to be a headwind for your existing patient base and that's really where we're seeing.

Those numbers come in a little bit lower than expectation as we talked about the greenfields are still performing.

To my pro forma expectations on the top line those cost structures are increasing.

In terms of that time to breakeven, but it's still maintaining a strong pace as Peter mentioned.

But when you are talking about the existing base I think you have to look at that new patient.

As a way that we can really start to move the needle.

Okay, Okay, and then the second.

Actually have a couple more questions for you on the topic you were just talking about it.

Portfolio Greenfield openings et cetera.

Is there.

The legacy for wall margin of that owned face before you started doing Greenfields My math has it somewhere in the mid 30% EBITDA kind of ranch and that's come in quite a bit excluding for greenfield openings.

So I guess the question is I understand you're absorbing a lot.

Higher labor costs and.

A bunch of things that you've been hit with.

But how long do you think it'll take I mean, I I guess, it's a two part question how long do you think it will take to recover her start to show margin improvement there and the second one is do you think that that previous kind of margin profile that you had on it for awhile basis.

Achievable over the next couple of years or is it just kind of the model is so different now as it sounds.

Unlikely to go back there.

Yeah, a lot of questions will then they're all trying to touch on a mall I think to start in terms of the margin expectation.

And we have a chart and the investor deck that kind of takes it to a five year market maturity and that's actual assistant sales against an estimated cost structure and what that will show you want a four wall basis as we would expect.

Somewhere around 30% for wall margin.

Have units that do more than that.

And we have some that are still marching to that number but on average that's what we would expect is kind of that low 30% Mark.

On a four wall basis, now as I think about it.

The increased labor pressures that we're seeing.

If I roll through the benefits of the price increase over time actually still get back to the same pro forma expectations that maturity. So I would say our four while economics really remain unchanged as we continue to see the benefits of the price increase roll through.

And that gives us a little bit of room in case, there is additional labor pressures that we continue to see but I would still expect over time to reach that 30% plus four wall margin.

As you think about the corporate portfolio and when we would expect those margins to turn around I think you have to put into context, just how many greenfields that we've added in the last.

Portion of time I think if you if you look at the number of Greenfields, we did it and the last.

100 days of 2021, I think that number was 13.

And then we've added.

Another 12, so far this year I'm, sorry, 12 through the quarter of 12 through the quarter 14 overall, so when you when you add those two together and most of them being in their first call at 13 months of operations. Historically, that's a significant period of drag if you look at it on an annualized basis.

You're probably working through around 75000 of losses and that first 12 months now if you roll forward to the next year the.

Sales averages for a year or two or going to increase around 58%. So.

Sales have a really significant jumps from year once a year or two and then you really flipped from an expected 75 K of losses to probably contributing 75, K and that second year of operation and so.

We really taken on a lot of investment as it turns to greenfields.

Still an excellent pro forma ramp it's a great use of capital for us, but it just takes time to work through that maturity curve.

And I think I would add to that or to George is that when you made the comment that have things change because your models change and I would say the model hasn't changed.

There is no question that we're seeing a higher cost and labor. So our labor mine is definitely there were upsetting that by putting the price increase that we put in place a margin that.

Talked about will take time to be.

Full effect, but in terms of the fundamentals of the model. It's really a continues to be a relatively simple business. We're only offering that one service as we go forward. We can certainly look at are offering products and services outside of just pure <unk> adjustments.

But in terms of actual fundamental.

Structure of the model is.

It has not changed to date.

Okay. Thank you we will have to act in the queue.

Thanks to us.

Your next question comes from Jeremy.

<unk> with K talent capital V. Please go ahead.

Alright, Thanks, guys for taking the question. So I wanted to kind of expand on the last point in terms of.

Looking ahead, a little bit towards the clinic growth for 2023.

Wanted to get an understanding of kind of two things.

First.

How you expect the composition of that.

Yeah.

Coin too like we replicate what we saw on 22 in terms of.

Greenfield development do you expect it to be higher or lower.

And then.

Part of the question is.

Okay, it's clear that the support staff.

And clinic.

Doc costs are.

Higher.

Maybe quite a bit higher than they were a year ago I I want to think about the potential for margin recovery.

Next year so.

First the first question is composition of how you expect clinic growth.

Next year and then the second one is really a question on on costs and the ability to recapture some of the.

<unk> margin loss this year.

Yeah I'll take the first question and then turn it over to Jack and I would say that when we think about obviously, we don't guide.

Two composition other than giving some very wide range is in terms of as I think about 23 and beyond as we said in the call that 86% of our system is franchise, 14% as corporate.

Well, we don't set it.

Specific number out there I would say that you probably can expect to see that kind of the same ratio as we look at 23 and beyond just as we continue to grow the market.

We would have to fundamentally change our greenfield strategy, if we're going to significantly increase that portion of ownership or.

Number of Greenfield in the portfolio.

So as I think about 23.

Going forward.

I think our ratios will stay relatively the same.

And that will continue to <unk>.

Expand our portfolio through Greenfield at a moderate pace will continue to focus on opportunistic.

Acquisitions.

As we go through the year.

Will of course be sending our guidance for 2023, when we do our fourth quarter and full year report out next probably in March.

And then I'll touch on the margin recovery, Jeremy right, we have seen.

The D C costs continue to increase and we have seen the wellness coordinator position that hourly retail position, we've seen pressure there as well.

And when that represents 45% of your your cost set maturity.

Those are significant pressures in terms of the economics.

Where I've seen the D C salary goes because that's more of the significant driver.

We continue to see pressure, there, but I have seen a taper.

Not me, telling you that.

The labor market is not tight I don't think sort of our franchisees when would say that but the rate of increase I'd seen start to taper.

Here recently so.

Not to say that we're not done taking on some of those labour pressures.

Cause we still are in a tight market, but I have seen the rate of acceleration start to tape or a little bit there.

In terms of overall margin recovery, that's really going to be driven by the maturation of the portfolio all those greenfields coming through and being contributors. We've got a portfolio right now of 17 executed leases so in terms of.

Our continued investment in Greenfields, we still very much believe in that strategy.

And will continue to develop those but we have moderated that pace.

What we saw in the late periods of 2021, so as we moderate that greenfield pace and allow the existing ones to continue their maturity I think you start to see those incremental improvements in margin again, so as far as timeframe again, it's all predicated on our level of investment, but we have tapered that greenfield pace.

From what we were doing at the tail end of 2021 and that will just allow those existing units to continue to mature and when you've got so many of them that are just really completing the first year of operation. We're looking forward to their contributions in 2023.

Got it.

And just kind of piggyback on that one a little bit at 514.

Year to date segment results.

With the split out of the corporate clinic.

How to how well do you think the corporate clinic performance represents what Youre franchisees are seen kind of on a formal basis.

Or they're busy I think holds like slightly more profitable because they have more maturity or.

How does it compare.

Well they have a royalty structure. So their overall economics, they're going to be impacted by that from a four wall basis. We would expect similar economics, you can triangulate against kind of what we see in the.

The F D a year over year, because we do collect those franchisee p&l's if you look at the the.

2021 results from our latest FTE.

I think they did a four wall number that was 38%.

And again, that's a mature portfolio kind of in that year for year five mark in terms of months in operation.

And they're reaching that that same potential so I think that's a.

Great representation of where the unit economics are and what they can be as you look at our corporate margin right. Now again, it's just being suppressed by the labour pressures without the full benefit of the price increase and all those young units that suppressed as they continue to work through their maturity.

Got it.

Okay, and then last one for me.

In terms of your cash balances is down quite a bit almost cut in half from where you were at the start of the year through the first nine months.

You're quite a bit of that is due to some acquisition activity, but in terms of thinking of where you are on the balance sheet.

Is your flexibility limited in terms of what you might do on the acquisition side as we look ahead in the 2023.

Because the cash balances.

Down or.

Or do you see that not really has any type of.

Limiting factor in terms of what you might.

Look to do.

Yes, I think I think cash on hand is one element of that.

When you say moderate acquisition activity I mean, we've done almost $15 million of investing activities.

So far in the first nine months of the year and that's been offset by $5.7 million of cash flow from operations. If you look at through the six months I think our net cash provided by operating activities was around $1.5 million.

So.

This is still a cash generative business, we're choosing to reinvest at right now and I think the other pieces, while we have the $10.3 million of cash on hand at the end of the quarter. We also have an additional 18 million of credit available through the line with J P. Morgan So as I think about it from an overall liquidity perspective.

I'm thinking about that whole pool.

And as I look out and model the potential uses of that capital C.

Seeing any any restrictive elements of that right now.

Right. That's super helpful. Thanks for taking all my questions guys best wishes.

Okay. Thank you very much.

Our next question comes from Jeff Man.

<unk> be Riley F. B I. Please go ahead.

Oh hi, everyone.

Just looking toward 2023 thoroughly.

Noting the macroeconomic backdrop.

But just thinking relevant to attracting new patients.

And I'm wondering how much do you think that the I realize you know like kind of a 50 50, but how much do you think the price increases.

R.

Serving as a headwind to attracting new patients. Then also how are you planning to further evolve the marketing.

For next year wondering if you know you.

You may be shifts the Mick so.

No I think you do quite a bit of performance digital maybe you can just touch on those items.

Yeah, no Jeff Thank you.

Answer your question about the impact of pricing has on those new patients as we've talked a lot about it of course, one of the tenants of this concept is affordability.

And when we went in the past when we do the full.

Prices increase in 2016, and some of the market adjustments in 2019 <unk>.

Impact we saw that on new patient counts and the key metrics of the business was relatively neutral or positive.

As we look at the most recent increase.

Increase so we went our three tiers went from 50 969, 79% 69, 70, 989, I would say that we did see especially on the 89 number.

Ah degradation, a little bit and the new patient count the majority of our system is on that $79 a month and so that's the core but we are very very sensitive to price as it relates to those new patients. So I think that there has been some impact on that because this is also the first time when we do the price increase in this.

Macroeconomic environment that has so much uncertainty around it.

I think as we.

Second question was really kind of what are the the changes that you are doing a activities to make sure that you are bringing in as many new patients as you can and that's again, there's really three sources of new patients for US one is referral and this is patients who refer their friends and family to the Doctor and right now about 30, 35% of our.

New patient comes comes directly from them and that just as a point of delivering world class service to your to your patients and they tell their friends and family to come in.

Faster growing segment is that digital marketing campaign, and it's changing by the day.

And I think that we can recognize the importance of it we're putting more and more resources against that we talked about in 2023 that we're going to put a platform in that has a much more sophisticated automated marketing program direct marketing to our patients were going to create in the patient portal that.

That we've made changes in our.

Microsize and all these different activities to make sure that we are maximizing the SCO opportunity. That's out there we're doing all kinds of new testing of advertising platforms, both nationally and locally including Tiktok yell for next door <unk>.

Conversational marketing.

That we're doing a lot of lead nurturing just in terms of those needs to come in the door, because there's more and more sophisticated software programs that we can use to manage those leads to bring those digital leads into clothes and then we're also working in coaching and training our franchisees and their staff to be more effective.

They are managing those Lee.

The third source of new patients is really coming from what I just call that grill marketing activities.

Still smallpox retail so it's the coupons for good <unk>.

Priors.

The science or.

Reaching out to the schools.

The gym.

The hospitals or anything that's around that clinic, because your core customers are gonna be living working and traveling and that.

<unk> I would say five to 15 minute radius around that clinic. So I think that we are continually evaluating and stretching and pushing because of this whole digital marketing campaign is so critical to that younger patients who is our database right now 45% of our patients are millennial <unk>.

15% of our Gen Z.

These are people who are using online to make their their consumer purchases.

It's essential that we are effectively there where they are.

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

Yes, and again, that's patient attribution is kind of tricky because how many how many points where you did you see it where there isn't a radio or television commercial or something.

Add or something online. So we have a lot of different points that you can be exposed to the brand.

So it's always hard to say, okay, which one is that really tipped it over and you as a new patient open that door, but what we can measure is of our patient base, 61% of our patient base today touched us digitally before they opened up that door.

Mhm, Okay, and then just sort of as a follow on to that I know you mentioned, the new patient portal, you remind us the timing of when you're standing that up and then I also wanted to kind of get a gauge from you in terms of.

What you're experiencing with the new enterprise software system, what still needs to be done in their current stays there if anything.

Just if you could touch on those things.

Sure absolutely as it relates to the patient portal, it's going to be phased in and there'll be all kinds of components behind it but the initial.

Work will probably be released in late Q1 early Q2 in terms of a patient.

Patient portal and then we'll be continually adding functionality to it as you go through the year. We're also putting in a platform where we can do that more automated marketing to the individual patient. So you can go through your information those people are golfers or have migraines or whatever so that you can literally market individually to them and that's again just increasingly.

More sophisticated marketing approach, where you're seeing all kinds of organizations utilize.

In terms of the platform.

We have certainly had some growing pains associated with it in terms of getting some enhances put in place of the system. We have now has benefits compared to the whole system. It also has a more complexity and so we've been working through.

Cleaning up some of those bugs and put it in those enhancement to make up more and more effective.

On on that line level of our users and so what I would tell you is that that is an ongoing never ending process of continually refining and improving the platform that we used to run a business.

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

Thank you very much.

Again, if you'd like to ask a question. Please press one at this time for.

Our next question comes from Thomas <unk>. Please go ahead.

Hey, guys. Thank you for taking the time to take.

Taking my questions a lot of my questions have already been answered very thoroughly so I appreciate that as well I just have a question going off of something another analyst asked about the breakdown of franchises versus corporate clinics. You guys said that it is currently and will remain about 86% franchise and four.

14% corporate and.

My question is is that accounting for a potential recession.

If if the macro environment does continue to get more difficult to operate and will that breakdown.

Breakdown change potentially in an effort to conserve cost or is it just alice allocated resources differently. Thank you sure sure. It's a great question and the way I'd answer that if we truly grow into a recession in a recession, meaning that you are among whatever else is going on you have high unemployment is historically you see for.

<unk> sales increase.

The only time that it hasn't happened is within the great recession, because during the great recession. There was absolutely no financing taking place and so you saw a really franchise growth has come to a screeching halt in that great recession, but any other recession certainly my career is historically I would expect the franchise sales to increase because people are being laid off maybe they got a little.

Money they are tired of being.

At the whim of an employer and so they start seeking out buying that franchise and so I would expect if we truly go into recession that you would expect that interest in franchise sales to increase now wherever we are today, we've been averaging 3.5% to 3.7% unemployment and so [laughter].

As long as you see that incredibly low unemployment rate, it's hard to imagine that that's going to be a driver and people to buy franchises.

And that and that ratio of that right now.

We are today, where <unk>.

2%.

Says you just see the growth both on the franchise side and that measured growth of our corporate portfolio driven by Greenfield and acquisitions, it's going to be hard just given them. The Mac that we have now to change those percentages.

To any great degree without a fundamental change in strategy and as we've talked about is that it's not our intent to fundamentally change strategy. We don't guides a specific percentage, but as a senior earlier in the call is that if you look at 2023.

Reflect between two and expect similar results.

Okay, great. Thanks for answering my question and that's all I have.

This concludes that question and answer session I would like to turn the call them <unk> for any Clinton Goodbye.

Before I close I wanted to share a few comments earlier I reviewed our marketing corporate sponsorship.

Programs in their communities studies report carpet to care provides natural preventative benefits that are vital to keeping the body balanced flexible and function at its best especially for athletes.

I would like to tell you about our patient Nicole an amateur beach volleyball player a few years ago. She hurt her back and was told you could never play competitive sports again.

She was diagnosed with lupus, which really affected her joints challenger athletic activities and forced her to walk with a cane.

After a few months of carbohydrate care Nicole returned to the court. She notes, while the volleyball is demanding and still effects are back the joint enables her to enjoy frequent competition to summarize Nichols testimony being able to play as a gift I wouldn't be playing with a chiropractic care my joints in general get so much relief with unnecessary constantly.

I go weekly if not more without fail.

Thank you and say well adjusted.

<unk> concluded. Thank you for telling me to these presentations you may now disconnect.

[music].

[music].

Good day and welcome to the Joint Corp, third quarter 2022 financial results Conference call.

All participants will be in listen only mode.

So if you need assistance. Please signal our conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask question box.

Basket question you made quite Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I'd now like to turn the conference over to David Dennard with L. A J Investor Relations. Please go ahead.

Thank you Sarah Good afternoon, everyone. This is David Barnard a L. H, a investor relations on the call today, President and CEO , Peter Holt will review, our third quarter 2022 performance metrics and provide an update on the business CFO , Jake Singleton will detail our financial results and guidance and then Peter will close with a summary.

And open the call for questions. Please note, we're using a slide presentation that can be found at H T. T. P. S. IR dot the joint Dot Com backslash events.

Today after the close of the market. The joint Corp issued its financial results for the quarter ended September 32022, if you're not already have a copy of this press release. It can be found in the Investor Relations section of the company's website.

As provided on slide two please be advised today's discussion includes forward looking statements, including statements concerning our strategy future operations future financial position and plans and objectives of management throughout today's discussion we will present, some important factors relating to our business that could affect these forward looking statements are forward looking statements are made based on it.

Current predictions expectations estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today.

Doctors that could contribute to these differences include but are not limited to the continuing impact of the COVID-19 outbreak on the economy, and our operations, including temporary clinic closures shortened business hours and reduced patient demand inflation exacerbated by COVID-19, and the current war in Ukraine, our failure to develop or acquire company owned or managed clinics as wrap.

Lee 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.

Negative opinions posted on the Internet, which could drive down the market price of our common stock and result in class action lawsuits or 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.

Or maintain investor confidence and other factors described in our filings with the SEC, including the section entitled Risk factors in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 14th 2022, and subsequently filed current and quarterly reports.

As a result, we caution you against placing undue reliance on these forward looking statements and encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock Phi.

Finally, we're 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.

Are presented because they are important measures used by management to assess financial performance.

Management believes they provide a more transparent view of the company's underlying operating performance and operating trends than GAAP measures alone reconciliation of net income to EBITDA and adjusted EBITDA is presented in the press release. The company defines EBITDA as net income or loss before net interest tax expense depreciation and amortization expenses.

The company defines adjusted EBITDA as EBITDA before acquisition related expenses bargain purchase gain net gain or loss on disposition or impairment and stock based compensation expenses management. Also includes commonly discussed performance metrics system wide sales include revenues at all clinics, where there operate.

By the company or by franchisees, while franchise sales are not recorded as revenues by the company management believes the information is important in understanding the company's financial performance. Because these sales are the basis on which the company calculates and recorded as royalty fees and are indicative of the financial health of the franchisee base.

Comp sales includes revenues from both company owned or managed clinics and franchise clinics and in each case have been opened at least 13 full months and excludes any clinics that have close turning to slide three it's now my pleasure to turn the call over to Peter Holt.

Thank you, David and I welcome everybody to the call during the third quarter of 2022, we continued our vigorous pace of clinic openings and these new units delivering strong performance, both reflecting our robust underlying business model, particularly in the current macroeconomic environment.

Want to take this opportunity to welcome our new and existing investors to the call.

<unk> revolutionizing access to chiropractic care by providing affordable concierge style membership based services and convenient retail settings.

Since our inception inception over a decade ago with fewer than a dozen clinics we've grown tremendously.

Fact, we reach the 800 unit milestone in September , which places us in the top 2% of the roughly 3500 franchise doors in the United States. According to <unk> data.

As we build upon and leverage our national brand recognition, we continue to capitalize on the opportunity for more significant growth.

2022, Ibis World report noted that car Practic market increase from 18 billion to $19 $5 billion annually.

And in October 2022 reported linker stated that the global car Practic care market is expected to reach $52 billion by 2027.

Yet the sector remains highly fragmented with over 40000 car practic offices in the United States.

Leave the profession is the largest chiropractic chain in the world with the greatest market share. In addition to publishing the most car practic care content in the public domain.

Based on year end 'twenty, one sells the joint is approaching 20.

2% of market share with competitors in aggregate are estimated to also approximately 2%.

With our nationwide clinic base, we have economies of scale in marketing and talent and in infrastructure and using our proven protocols and standards. We are systematically expanding in areas of known demand as a result during the time of our consumer uncertainty that joined us continuing to post positive comp rates.

Turning to slide four I'll review, a summary of our financial highlights for Q3 of 2022 metrics compared to Q3 2021.

Later, Jake will discuss our results in greater detail.

System wide sales grew to $110 $4 million increasing 18%.

Our comp sales for clinics that have been opened for at least full 13 full months grew 6%.

Revenue increased to 27% adjusted.

Adjusted EBITDA was $3 1 million.

And as of September 32022, our unrestricted cash was $10 3 million compared to $9 4 million at June 32022.

Turning to slide five during Q3 2022, we opened 38 clinics up from 33 clinics in the prior year quarter.

Regarding franchise clinics. During Q3 2022, we opened 33 and closed two.

Regarding change in ownership corporate purchase for previously franchised clinics, three in North Carolina, and one in Scottsdale and sold one company managed clinics in California to a franchisee.

Regarding greenfield clinics, we opened five three in California, and two in our new market, Kansas City.

Greenfields are performing well in the 2022 with gross sales on par with our class of 2021. This is an important point that validates the strength of our new clinic launch strategy and the growing demand for chiropractic care.

For the first nine months of 2022, we opened 103 clinics 91 franchised and 12 Greenfield. This compares to 87 openings in the first nine months of 2021 that consisted of 76 franchised and 11 Greenfield.

The net total purchased previously franchised clinics was 7% and the closures were three.

Our low unit closure rate of less than 1% annually continues to lead the franchise community.

At September 32022, we had 805 clinics in operation consisting of 690 franchise clinics and 115 company owned or managed clinics, maintaining that portfolio mix of 86% franchise clinics and 14% corporate clinics.

At quarter end, we also had 252 franchise licenses in active development compared to 283 at December 31 2021.

This metric continues to demonstrate the strength of our strong pipeline for franchise clinic openings and reflects the accelerated number of franchise openings.

Subsequent to quarter end, we acquired two previously franchise clinics in North Carolina for approximately $2 2 million.

We also opened two more greenfield clinics in Kansas City market.

Additionally, we sold one company managed clinics in California to a franchisee.

Our corporate portfolio now stands at 118 clinics as of November three 2022.

Turning to slide six in Q3 2022, we sold 12 franchise licenses compared to 44 in Q3 2021 for the first nine months of 2022 58 licenses were sold compared to 132 in the same period last year. When Covid had led to the pent up demand of our franchise licenses.

Although the number of franchise sales as fewer than last year. We believe it is holding strong considering today's macroeconomic environment, including factors such as high inflation higher interest rates and discrete and decreased bottom lines that have been impacting our by rising costs.

Further while higher unemployment is known to be a driver of franchise sales today. The U S is a historically low unemployment rate of around three 5% to three 7%.

As of September 30, we had 19 regional developers, who sold 62% of our franchise licenses year to date.

Our aggregate 10 year minimum development schedule for the New Rd territories established since 2017 was 642 clinics as of September 30.

While this program continues to perform well under certain circumstances will require some of those Rd rights and.

Tober, we reduced the Rd count to 18, when we reacquired the rights to develop franchises in the Philadelphia market.

Net consideration for the transaction was $151000. This was an undeveloped market with two clinics and we believe we have the opportunity to develop another 30 sites.

Turning to slide seven let's review our marketing efforts.

Although we continue to attract healthy numbers of new patient prospects to our clinics. Our average number of new patients per clinic is down when compared to our record breaking this into 'twenty one.

One of the challenges, we face with last year, Google changes algorithms, which negatively negatively impacted our organic search traffic.

As a result, we've been aggressively adopting adapting our strategy in 2022, which is beginning to pay dividends with positive website traffic growth in August and in September .

Another challenge is the impact of inflation on consumer confidence with the average age of our patient base at just 36 four years. The majority of never lived through an era of high inflation.

Today, the average American household spending $445 more per month by the same goods and services that they did a year ago. According to CNBC. This is forcing consumers into financial tradeoffs.

Two years ago, we faced somewhat similar circumstances during the COVID-19, pandemic and related government shutdowns and restrictions.

At that time, we responded with our essential health care services statement and positioned the joint to survive and thrive despite the devastating impact to so much of the retail industry.

We believe this positioning will continue to serve us well, while consumers make tough choices on where to allocate their discretionary spending.

We responded to the lower new patient counts with robust testing of new market tactics promotions media channels and consumer messages, we continue to reinvest our marketing technology and this includes the launch of our new patient portal and upgraded marketing automation platform planned for 2023.

Additionally, our clinic local marketing spending has been robust, particularly for sponsorships of athletic programs in our communities our ability to form market Cogs distinguishes us from the single practitioners and small competitors as we leverage the power of our combined marketing dollars spent in those markets.

According to the American car Practic Association Chiropractic care has gained wide use among professional and amateur sports teams across the country studies have shown a chiropractic care can be linked to faster injury recovery injury prevention improved levels of strength and enhance or its performance for athletes.

According to consumer reports, it's estimated that 90% of all world class athletes used car practic care to prevent injuries and increase their performance potential.

Notable that all NFL teams rely on doctors of car practic in various capacities and 77% of athletic trainers have referred players or to a car prechter for evaluation or treatment.

Finally, we are turning our attention to our annual holiday promotions are back Friday package sale in November and our year end membership promotion in December and January .

Each year these events grow in financial impact and franchisee participation. Our network is energized to make 2022, our best performance, yet and we look forward to reporting on our results.

And with that Jake I'll turn it over to you.

Thank you Peter turning to slide eight I'll review the financial results for Q3 2020 compared to Q3 2021.

System wide sales for all clinics opened for any amount of time increased to $110 4 million up 18%.

System wide comp sales for all clinics opened 13 months or more were 6%.

System wide comp sales for mature clinics opened 48 months or more or 2%.

It's worth noting that both the franchise and corporate clinic cohorts comp positively across both time frames.

Revenue was $26 6 million up $5 6 million or 27%.

Company owned or managed clinic revenue increased 36% contributing $15 8 million.

Franchise operations increased 15% contributing $10 8 million.

The increases represent continued growth in both the corporate portfolio and franchise base on March one we implemented a price increase and approximately 75% of our clinics. However, existing patient memberships are grandfathered at their original price. Therefore, the revenue impact from a price adjustment will be gradual and incremental.

At the end of the quarter about 50% of our active members were on the new price structure.

Cost of revenues was $2 5 million up 8% over the same period last year, reflecting the increase in franchise clinics and the associated higher regional developer royalties and commissions.

Selling and marketing expenses were $3 5 million up 23% over the same period last year driven by an increase in advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by our company owned or managed clinics.

Depreciation and amortization expenses increased compared to the prior year period, primarily due to the depreciation and amortization expenses associated with our continued Greenfield development and.

And acquired clinics.

G&A expenses were $18 1 million compared to $12 8 million up 41%.

Collecting the cost to support total clinic in revenue growth and higher payroll to remain competitive in the tight labor market.

Operating income was $500000 compared to $1 3 million in Q3 2021.

The Q3 2022 results reflected the compressed margins from continued Greenfield development, the aforementioned higher depreciation and amortization and higher G&A expenses.

While greenfield compressor bottomline until they breakeven they are an excellent use of capital as their sales accelerate in year, two and beyond significantly contributing to the bottom line and increasing our return on investment.

Income tax benefit was $16000 compared to $614000 in Q3 2021.

Net income was $491000 or <unk> <unk> per diluted share compared to net income of $1 9 million or <unk> 13 per diluted share in Q3 2021.

Adjusted EBITDA was $3 1 million.

Compared to $3 3 million for the same period last year.

Franchise clinic, adjusted EBITDA increased 25% to $5 4 million.

Company owned or managed clinic, adjusted EBITDA was $1 $7 million.

Compared to Q3 of last year and decreased $1 1 million, reflecting the margin compression related to Greenfield development and higher payroll expenses.

Corporate expense is a component of adjusted EBITDA loss was $4 million, increasing $160000 compared to Q3 2021.

Onto our balance sheet and cash flow review.

At September 32022, our unrestricted cash was $10 $3 million.

Compared to $19 $5 million at December 31, 2021 during.

During the first nine months of the year, our investing activities of $14 9 million consisted of the acquisition of Rd territory rights franchise clinic acquisitions and Greenfield development.

These were partially offset by $5 $7 million provided by operating activities.

Onto slide nine I will review our results for the first nine months of 2022 compared to the same period 2021.

Revenue increased 26% to $74 1 million and adjusted EBITDA was $7 5 million compared.

Compared to $10 5 million in the prior year period.

This reflects the compression of earnings by the influx of new corporate Greenfield clinics and higher payroll expenses associated with the tight labor market.

On to slide 10 for a review of our guidance for 2022.

We have tightened guidance raising the lower end of our revenue expectations. We now expect revenue for the year to be between 101 hundred $2 million.

Compared to $80 9 million in 2021.

We've also narrowed it modestly lowered adjusted EBITDA guidance to reflect the impact of the Greenfield assimilation on our bottom line and lower than expected same store sales now we expect.

<unk> adjusted EBITDA to be between 11, five and $12 5 million.

Compared to $12 6 million in 2021.

We continue to expect franchise clinic openings to be between 110 to 130 compared to 110 in 2021.

And we continue to expect to increase our company owned or managed clinics by between 30% and 40% through a combination of greenfield openings and franchise clinic purchases compared to 32 and 2021.

And with that I'll turn the call back over to you Peter.

Thanks, Jake turning to slide 11, we have a remarkable growth opportunity ahead with a young patient base and expanding car practic market yet in this environment of uncertainty the business also faces challenges in critical work remains the remainder of 2022 and for 2023, we are and will continue to be focused on the following actions attracting.

New patients and franchise prospects.

<unk> and developing talent, especially the doctor's required to staff, our clinics and grow our footprint.

Hence in our it platform and leveraging the power of our data.

Increasing our pace of buildup, including successfully penetrating underdeveloped in new markets and.

And finally, optimizing our clinic performance to support growth profitability and lifetime patient value.

We remain focused on driving long term growth and stakeholder value.

Sarah I'm ready to begin the Q&A.

Thank you.

We'll now begin the question and answer session.

You ask a question you May press Star then one on your telephone keypad.

Thank you Rajeev B cell phone please pickup your handset before pressing the Keith.

John Your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Brooks O'neil with Lake Street Capital markets. Please go ahead.

Well good afternoon guys.

I got on a few minutes into your call.

So if I ask something that you've already discussed I can go back and read the transcript.

To repeat yourself, but can you just talk a little bit about headwinds and tailwind that you think might be affecting new patient starts.

Sure.

It's Greg talked to Brooks as we've talked about before one of the headwinds that we've been facing is that changing algorithms with Google.

And it really impacted our organic growth search.

We've spent a lot of time adapting our strategy and so if we look at our traffic our web traffic is up for the first time. This year in August and September we were outpacing that web traffic compared to the same period last year. So we feel that we are making some inroads on that on that new patient count just with those changes in that that Google algorithm.

Very young patient base, so as I've said, it's $36 four years old and those younger people are not going to friends and families for recommendations for their medical services Theyre doing that search online and so theyre going to the Doctor Google They're looking at reviews Theyre doing that search and so it's so important to be there what we're seeing now is that we.

Above our new patient count.

Historically, we've seen about 40% of that come through our digital marketing strategy.

Right now we have noted that 61% of our new patients at some point have touched our digital campaign, our digital strategy. Our online. So you can see that is increasingly important to us and so on changes like what Google did can impact our new patient count.

I think.

We also have a macroeconomic issue that has to be taken into consideration and so you have the increase in inflation you have consumer confidence have concerns.

If we're going directly into recession or when it will be or how deep or how long, but I think that's also impacting some of the performance or the performance on the clinics and we see it in our in our same store sales.

So I think there are some macroeconomic issues that are impacting our new patient count.

There is some some.

Tactical issues on the digital side that are affecting it.

I think the tailwind for us continue to be just the high performance of our clinics, especially the new Greenfield.

We've had.

World, we're headed toward a record breaking number of new openings. This year. We're guiding of course between 110 to 130, we're expecting to add somewhere between $30 40, new clinics are our clinics in our corporate portfolio and that will be that mix of both corporate and.

Our acquisitions and Greenfields.

But through the year, we've seen some really strong greenfield openings and getting to a breakeven, which bodes well for number one that our model continues to work and number two there is continued interest in chiropractic care.

Absolutely that's really helpful. And then in fact, you just touched on the second thing I just wanted to ask you a little bit about.

Do you have any metrics about the performance of new corporate stores in the portfolio. This year versus years past or would you say youre continuing to open historically as you have in the past again, recognizing there is some.

Important in sort of uncontrollable headwinds out there in the market right now.

Yes, and I think Brooks will continue to get more and more sophisticated in how we how we create and use our grand opening strategy and so when I look at just the overall portfolio that includes both franchise and corporate units in terms of their time to breakeven I would say, we're seeing them operating at least.

2021, and that's in that six to nine months to breakeven so very very strong when we breakout corporate units.

They were even stronger compared to 2021, so what we're seeing is that yes. There is all these headwinds out there that we're talking about but when we open up those clinics when we're using our grand opening strategy that we are seeing that the high performance of those clinics as they get to breakeven.

That's fantastic. Thanks, a lot for taking my questions keep up the great work you are doing fantastic.

Okay. Thanks, a lot.

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

Hey, everybody thanks for taking my questions.

So maybe just start on the comp growth I think in the prepared remarks, you commented that.

Sure.

Comp growth is not sort of what you expected I think last time you offered guidance.

Just curious.

Pricing is taking longer to kind of filter through the system.

Maybe the new patient steps that you've talked about is the impact is lasting longer than expected or anything else to highlight just as far as your expectations for for comp growth.

Yes, Thanks George.

As you touched on I think.

As I think about the pace in which we're rolling onto the new price point I would say were at expectation maybe a tick behind.

In my mind, that's not a material material driver as we look at the three core Kpis of this model, we have to attract new patients convert them onto our subscription or package and retain them as long as we can.

Conversion is remaining steady year over year.

Which 2021 was a banner year for us in terms of conversion. So we're still seeing strength in that metric.

Tricia and we've actually seen favorability in that which one could expect when your grandfather and pricing maybe are patients going to stick around a little bit longer, but we've actually seen that metric improve but as we said the metric where we're still seeing challenges is in those new patients.

So if youre not filling the funnel at quite the same rate while the numbers are still strong that's going to be a headwind for your existing patient base and thats really where were seeing.

Those numbers come in a little bit lower than expectation as we talked about the greenfields are still performing.

<unk> pro forma expectations on the top line those cost structures are increasing.

In terms of that time to breakeven, but it is still maintaining a strong pace as Peter mentioned.

But when youre talking about the existing base I think you have to look at that new patient as a way that we can really start to move the needle.

Okay, Okay, and then the second.

A couple more questions for you. So on the topic you were just talking about Poland.

Owned.

Portfolio.

Fueled openings et cetera.

Is that the.

Legacy four wall margin.

Owned face before you started doing Greenfields my math has it somewhere in the mid 30% EBITDA kind of range and thats come in quite a bit.

Excluding for Greenfield openings and so I guess the question is I understand you're absorbing a lot higher labor costs.

There is a bunch of things that you've been hit with.

But how long do you think it will take I mean, I guess, it's a two part question. How long do you think it will take to recover or start to show margin improvement there.

And the second one is do you think that that previous kind of margin profile that you had on a four wall basis.

Achievable over the next couple of years.

Just kind of the model is so different now is it.

Sounds likely to go back there.

Yes.

<unk> rolled in there I'll try to touch on the mall I think to start in terms of the margin expectation.

And we have a chart in the investor deck that kind of takes it to a five year market maturity and Thats actual system sales against an estimated cost structure and what that will show you on a four wall basis as we would expect.

Somewhere around 30% four wall margin.

Have units that do more than that and we have some that are still marching to that number but on average that's what we would expect is kind of that low 30% Mark.

On a four wall basis, now as I think about.

With the increased labor pressures that we're seeing.

If I roll through the benefits of the price increase over time actually still get back to the same pro forma expectations at maturity. So I would say our four wall economics really remain unchanged as we continue to see the benefits of the price increase roll through.

And that gives us a little bit of room in case, there is additional labor pressures that we continue to see but I would still expect over time to reach that 30% plus four wall margin.

As you think about the corporate portfolio and when we would expect those margins to turn around I think you have to put into context, just how many greenfields that we've added in the last.

A portion of time I think if you if you look at the number of Greenfields, we did it in the last.

100 days of 2021, I think that number was 13.

And then we've added.

Another.

12, so far this year I'm, sorry, 12 through the quarter of <unk> during the quarter of 2014 overall, so when you when you add those two together and most of them being in their first call. It 13 months of operations historically Thats a significant period of drag if you look at it on an annualized basis, you're probably working through around <unk>.

<unk> 5000 of losses in that first 12 months now if you roll forward to the next year.

The sales averages for year or two we're going to increase around 58%. So.

<unk> sales have a really significant jump from year, one to year. Two and then you really flipped from an expected 75 K of losses to probably contributing 75 K in that second year of operation and so we've really taken on a lot of investment as it turns to greenfields.

It's still an excellent pro forma ramp that's a great use of capital for us, but it just takes time to work through that maturity curve.

And I think I'd add to that J R to George is that when you made the comment that have things change because your models change and I would say the model hasn't changed.

There is no question that we're seeing a higher cost of labor. So our labor line is definitely there were offsetting that by putting the price increase that we put in place in March.

But it will take time to be.

Full effect, but in terms of the fundamentals of the model. Its really a continues to be a relatively simple business were only offering that one service as we go forward. We can certainly look at offering products and services outside of just pure chiropractic adjustments.

But in terms of actual fundamental.

The structure of the model.

It has not changed to date.

Okay. Thank you I'll hop back in the queue.

Thanks, Josh.

Your next question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

Alright, Thanks, guys for taking the question. So I wanted to kind of expand on the last point in terms of.

Looking ahead, a little bit towards the clinic growth for 2023.

Wanted to get an understanding of kind of two things first.

How you expect the composition of that.

Is it going to likely replicate what we saw in 'twenty two in terms of.

Greenfield development do you expect it to be higher or lower.

And then.

Part of the question is yes.

Okay, it's clear that the support staff.

In clinic.

Dock costs are.

Higher.

Maybe quite a bit higher than they were a year ago.

Wanted to think about.

Central for margin recovery into next year so.

First first question is the composition of how you expect clinic growth.

Look next year and then second one is really a question on costs and ability to recapture some of the.

EBITDA margin loss this year.

Yes, I'll take that first question and then turn it over to Jack and I would say that when we think about obviously, we don't guide.

Composition other than giving some very wide ranges in terms of as I think about 'twenty three and beyond as we said in the call that 86% of our system is franchised, 14% as corporate.

While we don't set.

Perfect number out there I would say that you probably can expect to see that kind of same ratio as we look at 'twenty three and beyond just as we continue to grow the market would.

We'd have to really fundamentally change our greenfield strategy, if we're going to significantly increase that portion of ownership.

Our.

Number of Greenfields in the portfolio.

So as I think about 23.

Going forward.

I think our ratios will stay relatively the same.

And that will continue to.

Expand our portfolio through Greenfield at a moderate pace will continue to focus on opportunistic.

Acquisitions.

As we go through the year.

And we will of course be setting our guidance for 2023, when we do our fourth quarter and full year report out next probably in March.

And then I will touch on the margin recovery, Jeremy you're right we have seen.

The DC costs continue to increase and we have seen the wellness coordinator position that hourly retail position, we've seen pressure there as well and when that represents 45% of your costs at maturity.

Theres significant pressures in terms of the economics.

Where I've seen the DC salary goes because thats more of the significant driver.

We continue to see pressure there, but I have seen it taper that's not me telling you that.

The labor market is not tight I don't think so our franchisees win would say that but the rate of increase I'd seen start to taper.

Sure.

Here recently so.

Not to say that we're not done taking on some of those labor pressures because we still are in a tight market, but I have seen the rate of acceleration start to taper a little bit there.

In terms of overall margin recovery.

Really going to be driven by the maturation of the portfolio all those greenfields coming through and being contributors. We've got a portfolio right now of 17 executed leases so in terms of.

Our continued investment in Greenfields, we still very much believe in that strategy.

And we will continue to develop those but we have moderated that pace to kind of what we saw in the late periods of 2021, so as we moderate that greenfield pace and allow the existing ones to continue their maturity I think you start to see those incremental improvements in margin again.

So as far as timeframe again, it's all predicated on our level of investment, but we have tapered that greenfield pace from what we're doing at the tail end of 2021 and that will just allow those existing units to continue to mature and when you've got so many of them that are just really completing the first year of operation. We're looking forward to there.

Contributions in 2023.

Got it.

And just to kind of piggyback on that one a little bit at slide 14.

Year to date segment results.

With the split out of the corporate clinics.

How does it how well do you think the corporate clinic performance represents what your franchisees are seeing kind of on a four wall basis.

Are there business I think it feels like slightly more profitable because they have more maturity or.

How does it compare.

Well they have a royalty structure. So their overall economics theyre going to be impacted by that from a four wall basis. We would expect similar economics, you can triangulate against kind of what we see in.

The FTE year over year, because we do collect those franchisee P&L if you look at the.

2021 results from our latest Ft D. I think they did a four wall number that was 38% and again, that's a mature portfolio kind of in that year four year five mark in terms of months of operation.

And they are reaching that that same potential so I think thats.

Great representation of where the unit economics are and what they can be as you look at our corporate margin right. Now again, it's just being suppressed by the labor pressures without the full benefit of the price increase and all those young units that suppressed as they continue to work through their maturity.

Got it.

Okay, and then last one for me.

In terms of your cash balances.

Is down quite a bit almost cut in half from where you were at the start of the year through the first nine months.

You're quite a bit of that is due to some acquisition activity, but in terms of thinking of where you are on the balance sheet.

Yes.

Is your flexibility limited in terms of what you might do on the acquisition side as we look ahead into 2023.

Does the cash balances is down or.

Or do you see that not really as any type of.

Limiting factor in terms of what you might do.

Look to do.

Yes, I think I think cash on hand is one element of that.

When you say moderate acquisition activity I mean, we've done almost $15 million of investing activities. So.

So far in the first nine months of the year and that's been offset by $5 7 million of cash flow from operations. If you look at through the six months I think our net cash provided by operating activities was around $1 5 million.

So.

This is still a cash generative business, we're choosing to reinvest that right now and I think the other piece is while we have the $10 3 million of cash on hand at the end of the quarter. We also have an additional $18 million.

Of credit available through the line with J P. Morgan So as I think about it from an overall liquidity perspective.

I'm thinking about that whole pool.

And as I look out and model the potential uses of that capital I'm not seeing any any restrictive elements of that right now.

Great. That's super helpful. All right. Thanks for taking all my questions guys best wishes.

Okay. Thank you very much.

Our next question comes from Jeff Van <unk>.

This is Ryan <unk> with B Riley FBR. Please go ahead.

Hi, everyone.

Just looking towards 2023 realize it's early and noting the macroeconomic backdrop.

But just thinking relevant to attracting new patients.

And I'm wondering how much do you think that the I realize youre now like kind of a 50 50, but how much do you think the price increases.

Our.

Serving as a headwind to attracting new patients and then also how.

Are you planning to further evolve the marketing.

For next year wondering if.

You may be shifting the mix.

I think you do quite a bit of performance digital maybe you can just touch on those items.

Yes, no Jeff Thank you.

Answer your question about the impact that pricing has on those new patients as we've talked a lot about of course, one of the tenants of this concept is affordability.

And when we went in the past when we did the full.

Prices increased in 2016, and some of the market adjustments in 2019, the impact we saw that on new patient counts in the key metrics of the business was relatively neutral or positive.

As we look at the most recent.

Increased so we went three tiers went from 50, 969%, 39% to $69 $79 89, I'd say that we did see especially on the 89 number.

Degradation, a little bit and the new patient count the majority of our system is on that $79 a month and so.

The core, but we are very very sensitive to price as it relates to those new patients. So I think that there has been some impact on that.

This is also the first time when we did a price increase in this kind of macroeconomic environment that has so much uncertainty around it.

I think as we.

Your second question was really kind of what are the changes that youre doing or the activities to make sure that youre, bringing in as many new patients as you can.

Again, there's really three sources of new patients for US one is referral.

This is patients who refer their friends and family to the Doctor and right now about 30%, 35% of our new patient counts comes directly from them and that just as a point of delivering world class service to your to your patients and they tell their friends and family to come in.

The faster growing segment as the digital marketing campaign, and it's changing by the day.

Zinc that we can recognize the importance of it we are putting more and more resources against it we talked about in 2023 that we're going to put a platform in that has a much more sophisticated automated marketing program direct marketing to our patients were creating the patient portal.

We've made changes in our.

Micro sites and all these different activities to make sure that we are maximizing the opportunity that's out there we're doing all kinds of new testing of advertising platforms, both nationally and locally including tick Tock Yelp next door comp.

Conversational marketing.

That we're doing a lot of lead nurturing just in terms of those leads are coming in the door, because theres more and more sophisticated software programs that we can use to manage those leads to bring those digital leads into closed and then we're also working in coaching and training our franchisees and their staff to be more effective as they're managing those leads.

The third source of new patients is really coming from what I just call that grille marketing activities, we're still small box retail so it's the coupons.

The Flyers.

Science or reaching out to the schools.

Jim the hospitals or anything thats around that clinic, because your core customers are going to be living working and traveling.

I would say, 5% to 50 minute radius around that clinic. So I think that we are continually evaluating and stretching and pushing because of this whole digital marketing campaigns is so critical to that younger patients who is our database right now 45% of our patients are millennial.

16% of Gen Z and these are people who are using online to make there.

<unk> purchases and that it's essential that we're effectively there where they are.

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

Yes, and again this patient attribution is kind of tricky because how many how many points where you did you see it whether it's radio or TV commercial or something.

The ad or something online. So we have a lot of different points that you can be exposed to the brand.

So it's always hard to say, okay, which one is that really tipped it over and you have the new patient open that door, but what we can measure is that of our patient base at 61% of our patient base today.

<unk> digitally before they opened up that door.

Okay.

Okay, and then just sort of as a follow on to that I know you mentioned the new patient portal you remind us the timing of when you are standing that up and then I also wanted to kind of get a gauge from you in terms of.

What you are experiencing with the new enterprise software system.

Still needs to be done in the current stage there if anything.

Just if you could touch on those things.

Sure absolutely as it relates to the patient portal, it's going to be phased in.

All kinds of components.

Behind it but the initial.

Work will probably be released in late Q1 early Q2 in terms of.

Patient portal and then we'll be continually adding functionality to it as we go through the year.

We're also putting in a platform, where we can do that more automated marketing to the individual patients. So you can go through your information those people are golfers or have migraines or whatever so that you can literally market individually to them and that's again, just increasingly more sophisticated marketing approach, where youre seeing all kinds of organizations utilize it.

In terms of the it platform.

We have certainly had some growing pains associated with it in terms of getting some enhancements put in place. The system. We have now has benefits compared to the old system that also has some more complexity and so that we've been working through.

Cleaning up some of those bugs and put it in those enhancements to make it more and more effective.

On that line level of our users and so what I would tell you is that that is an ongoing never ending process of continually refining and improving the platform that we used to run the business.

Okay fair enough. Thanks for taking my questions.

<unk> success.

Thank you very much.

Again, if you would like to ask a question. Please press Star then one at this time.

Our next question comes from Thomas Devlin with box.

Please go ahead.

Hey, guys. Thank you for taking the time to.

My question is a lot of my questions have already been answered very thoroughly so I appreciate that as well.

I just have a question I'm going off of something another analyst asked about the breakdown of franchises versus corporate clinics. You guys said that it is currently and will remain about 86% franchise and 14% corporate and my question is is that accounting for a potential recession.

If the macro environment does.

<unk> to get more difficult to operate and will that.

Breakdown change potentially in an effort.

<unk> cost or just.

Allocate resources differently. Thank you sure sure. It's a great question and the way I'd answer that if we truly growing to a recession and a recession, meaning that you are among whatever else is going on you have high unemployment is historically you see franchise sales increase.

The only time that it hasnt happened is when the great recession, because during the great recession. There was absolutely no financing taking place and so you saw really franchise growth just come to a screeching halt in that great recession, but any other recession certainly in my career is historically I would expect franchise sales to increase because people are being laid off maybe they've got a little <unk>.

They are tired of being.

The whim of employer and so they start seeking out buying that franchise and so I would expect if we truly go into recession.

You would expect that the interest in franchise sales to increase now wherever we are today, we've been averaging three five to $3 seven unemployment and so.

As long as you can see that incredibly low unemployment rate, it's hard to imagine that thats going to be a driver in people to buy franchises.

And that and that ratio right now.

Today, we're 80, 614%.

I would say is you just see the growth both on the franchise side in that measured growth of our of our corporate portfolio driven by Greenfields and acquisitions, it's going to be hard just given the math that we have not changed those percentages to any great degree without a fundamental change in strategy and as we've talked about is that it's not our intent to.

Fundamentally changed strategy, we don't guide to a specific percentage, but as I stated earlier in the call is that if you look at 2023.

You can flex up in 'twenty, two and expect similar results.

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

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

Yes.

Before I close I wanted to share a few comments earlier I reviewed our marketing co op sponsorship programs in their communities Studies report car Practic care provides natural preventative benefits that are vital to keeping the body balanced flexible and function that it's best especially for athletes.

Like to tell you about our patient Nicole and amateur beach volleyball player.

Two years ago. She heard her back and was told you could never play competitive sports again, she was diagnosed with lupus, which really affected her joints challenger athletic activities enforcer to walk with a cane.

After a few months of car Practic care, Nicole returned to the court. She notes, while the volleyball is demanding and still effects or back the joint enables her to enjoy frequent competition to summarize Nichols testimony being able to play as a gift I wouldnt be planning without car Practic care my joints in general get so much relief with the necessary constant mainly.

I go weekly if not more without fail.

Thank you and stay well adjusted.

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