Ladies and gentlemen, thank you for standing by and welcome to The Joint Third Quarter 2019 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Mary Magnani with LHA Investor Relations. Thank you and please go ahead, ma'am..

Thank you. Good afternoon, and welcome to The Joint Corp.'s Third Quarter 2019 Results Conference Call. Today, President and CEO, Peter Holt, will review our operating metrics and our growth strategy; CFO, Jake Singleton, will discuss our financial performance; and then Peter will close with our long-term vision and open the call for questions.

Please note we're using a slide presentation that can be found in the events section of the company's Investor Relations website. Today, after the close of the market, The Joint issued its financial results for the quarter ended September 30, 2019.

If you do not already have a copy of this press release, it can be found on the Investor Relations section of the company's website.

As provided on Slide 2, 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'll present some important factors relating to our business that could affect these forward-looking statements.

The forward-looking statements are made based on our current predictions, expectations, estimates and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today.

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 ourself to revise our results publicly and release any updates to these forward-looking statements in light of new information or future events. The company intends to file the SEC Form 10-Q for the quarter ended at September 30, 2019 on November 8.

Management uses EBITDA and adjusted EBITDA, which are non-GAAP financial measures. These are presented because they're 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.

Reconciliation of net income, or loss, to EBITDA and adjusted EBITDA is presented in the press release. The company defines adjusted EBITDA as EBITDA before acquisition-related expenses, bargain purchase gain, loss on disposition or impairment and stock-based compensation expenses.

The company defines EBITDA as net income or loss before net interest, tax expense, depreciation and amortization expenses. It's now my pleasure to turn the call over to Peter Holt. Go ahead, Peter..

Thank you, Mary, and thank you all for joining us. Turning to Slide 3, I'm pleased to report our team's efforts in executing key growth and productivity initiatives over the past 3 years continuing to accelerate our business momentum. For example, our 2016 system-wide sales for the full year were just shy of $100 million.

In 2019, we surpassed $100 million in system-wide sales in the first 6 months of the year. By September 30, our system-wide sales reached $158 million, up 33% compared to the same period last year and nearly equaling our system-wide sales for the full year of 2018.

Another important metric to measure performance of retail concepts is comp sales or same store sales. And for the third quarter 2019, we once again delivered remarkably strong comps relative to the same period last year. Our comp sales for clinics that had been opened for at least 13 full months were up 23%.

In addition, Q3 2019 marked our fourth consecutive quarter of positive net income and our ninth consecutive quarter of positive adjusted EBITDA. Jake will discuss our financial results in further detail.

For a variety of reasons, including our attractive retail concept, market opportunity, strong comps and inclusion in the Russell 2000 index fund, we continue to attract many new investors. I welcome all of the newcomers to the call, and I'll provide some background on our company.

The foundation of The Joint is a revolutionized access to chiropractic care. We do this in a convenient retail setting providing concierge style membership-based services with no appointments, no insurance and convenient hours of operations, including evenings and weekends.

The Joint's purpose is to alleviate pain and help move our patients to a healthier lifestyle; a sweet spot of a growing health and wellness industry. The Joint's mission is to improve the quality of life through routine and affordable chiropractic care.

Our doctors focus on patient care, on pain relief and ongoing wellness to help our patients live the best version of themselves. Patients are attracted to The Joint due to our accessibility, credibility and empathy, the 3 key pillars that support our brand as identified by our extensive market research.

To achieve our goal of increasing shareholder value, we continue to execute on our stated strategies, which are to increase franchise development by leveraging our regional developer system, accelerate the expansion of our corporate clinic portfolio within clustered locations, improve clinic performance, grow new patient counts, improve the security of our IT platform and strengthen our balance sheet.

Turning to Slide 4, let's review our portfolio. We continued to fuel our hybrid business model with corporate-owned or managed as well as franchise clinics to drive national brand recognition faster. First, we're increasing our franchise presence, demonstrating the power of our regional developer network.

Second, we're opportunistically acquiring clinics. We evaluate both turnaround situations in our existing clusters in addition to well-managed clinics that warrant higher valuations and offer other advantages such as entry into a new market within an existing franchise cluster.

And third, we're strategically opening new greenfield clinics in clustered regions that leverage our marketing and infrastructure. The third quarter results reflect this strategy. In September alone, we opened 12 franchise clinics, matching the highest number of franchise units opened in a single month to date.

For the full quarter, we opened 21 franchise clinics and closed 2, bringing the total franchise count to 430 at September 30, 2019. Through the 9-month period, our new franchise openings reached 47, equaling the total amount opened for the full year of 2018 and on track with our guidance of 70 to 80 for the full year.

As you may recall, historically our franchise openings have been more heavily weighted toward the fourth quarter and we expect the same this year. Regarding company-owned or managed clinics, during the quarter we bought 6 clinics from franchisees and opened our fourth greenfield clinic for the year.

Year to date through September 30, we added 11 new corporate-owned or managed clinics. With 1 greenfield and 1 acquisition, we expanded our San Diego portfolio where we now manage 9 of the 14 clinics in the area.

We acquired a clinic in the very successful Phoenix-Scottsdale region, bringing our corporate portfolio to 8 out of the 30 total clinics in this area. The remaining 4 acquisitions established a new corporate clinic cluster in the strong Savannah, Georgia, South Carolina market where 21 clinics are in operation.

We continue to experience unusually low clinic closure rate of less than 1%. Net of 1 closure in March, we reached a total of 58 company-owned or managed clinics. Notably, this year through September 30, we spent $3.7 million on our corporate portfolio expansion, all of which was funded through cash from operations.

In summary, in Q3 we opened 21 franchise clinics, increasing the total clinics opened for the first 9 months of 2019 to 47 compared to 10 and 25 in the same respective periods in 2018. The total clinic count was 488 as of September 30, 2019. The mix continues to be 88% franchise clinics and 12% company-owned or managed clinics.

In October, we acquired our eighth previously franchised clinic this year, and earlier this month we opened our fifth greenfield. Both clinics are located in the Inland Empire region of California, bringing the corporate clinic count for the area to 5.

As of today, this year we've added a total of 13 corporate clinics to our portfolio, exceeding our guidance of 8 to 12 and bringing our total company-owned or managed clinics to 60. In addition, on the various greenfields currently in development, we expect 5 to 6 to open in the next several months.

As previously discussed, external factors such as lease negotiations and permitting can impact the exact timing of these clinics or these openings. Finally, during the quarter we sold 28 franchise licenses, reaching 103 for the first 9 months of 2019 compared to 60 in the third quarter last year and 99 for the full year 2018.

Turning to Slide 5, our regional developer, or RD program, continues to exceed expectations, fueling our accelerated growth. Today our RD supports 77% of our franchisees and cover 53% of the metropolitan statistical areas of the United States. Our 21 RDs were responsible for 93% of the 103 franchise license sales, some of which were multi-unit sales.

In aggregate, our total 10-year minimum development schedule for the 15 new RD territories sold since 2017 comes to 432 clinics. This large foundation of unit commitment bodes well for continued clinic expansion and sales growth in 2019 and beyond. Turning to Slide 6, our clinic operational performance is delivering real improvements.

As noted at the beginning of the call, our accelerated growth momentum is driven by our marketing, operational and IT initiatives, which are focusing on improving clinic performance to drive sustainable profitability.

We prioritized improving new clinic time to breakeven and succeeded in lowering the historical average of time to breakeven from 18 to 24 months in 2016 to 9 months in 2017 and approximately 6 months in 2018. During the year, the cohort average will fluctuate as new clinics are opened and added to the cohort.

2019 started very strong, and as you can see from the graph, it is considerably above the historical sales ramp through September.

These improvements in time to breakeven have been achieved by continually enhancing our grand opening program and enforcing the required franchisee advertising dollar spend that must be allocated for the grand opening activities. For example, clinics now launch our search engine optimization program at the time of signing the lease for the clinic.

And they activate a 90-day plan of social, print and guerrilla marketing programs that raise awareness to the potential new patients well in advance of the clinic actual opening. Some of our new clinics have been so successful that we've introduced a new level of best-in-class grand openings, which we call Go Elite, or Grand Opening Elite.

These top performing clinics achieve at least 400 new patients and $30,000 in sales within the first 2 months of operation. I'm very proud to say that through September 19, we have acknowledged 11 Go Elite members, including 3 of the 4 corporate greenfields.

In fact, our El Cajon greenfield that opened earlier this quarter had the highest month 1 sales of any clinic in the history of the company. Turning to Slide 7, on the marketing front, we continued to implement programs to build a robust and recognizable consumer brand with the power to capture the attention of the millions of pain relief seekers.

As I've noted before, our research indicates that over 50% of people across this country don't yet understand what chiropractic is or how they can benefit from it. To address this, we prioritize educating consumers on the value of chiropractic care.

As part of that effort, we launched a new brand campaign this month called You're Back, Baby, which focused on everyday pain relief and real patient outcomes. This wide ranging campaign was launched across multiple advertising channels including TV, outdoor, direct mail and retail signage, as well as through our web and social media platforms.

Our 2018 consumer research clearly showed that most of our patients visit us due to a problem with pain that they can't solve. And that pain often comes from everyday life situations such as working in the office or keeping up with their kids.

This insight led to our campaign's focus on real people in everyday life situations finding relief from pain and improved quality of life through chiropractic care at The Joint. You're Back, Baby recognizes our patients' desire to live their lives without restrictions.

As our campaign demonstrates, whether you're a dancer, a hairdresser, a US Marine, or have other passions you pursue, chiropractic care can be a key to healthier lifestyle.

This new campaign is a tribute to our patients who come to The Joint seeking pain relief and ongoing wellness, and we believe their stories will connect with the millions of others who have questions about chiropractic care.

We anticipate that You're Back, Baby will be the platform that will enable us to share even more patient stories in a manner that captures the imagination of the wider audience of pain relief seekers. Turning to Slide 8, let's discuss AXIS, our new IT platform.

AXIS will provide our clinics a point of sale system, financial systems, business intelligence, marketing automation and patient feedback capabilities. Since we began our relationship with SugarCRM a little over a year ago to replace our existing IT platform, they've made significant progress.

However, 2 factors have led to the decision to delay its full conversion. First, as stated before, it is essential that we minimize any disruption that the implementation of AXIS can have on our clinics.

Therefore, we will not roll out AXIS until we've completed deep testing, are fully confident that platform is ready, that the clinics are prepared to use it and all of the users have been trained.

Second, our 2 annual promotions, our Black Friday event that focuses on promoting sales of adjustment packages, and our year-end membership drive that offers a year's subscription for the price of 10 months, are in the fourth quarter.

We absolutely do not want the clinics to be distracted with the AXIS rollout during these important promotions that have been and are expected to continue to be significant revenue drivers. Before I turn the call over to Jake Singleton, our CFO, to review the financial results, I reiterate.

We are focused on continuing to deliver strong business performance, and we believe that we're well positioned to build upon our growth momentum. And with that, Jake, I will turn it over to you..

Thank you, Peter. Turning to Slide 9, I will review our financial performance for the third quarter ended September 30, 2019 compared to the third quarter of 2018. We continue to deliver strong metrics – strong growth across all metrics. System-wide sales grew 33% to $56.2 million. Comp sales for all clinics opened 13 months or more increased 23%.

And comp sales for mature clinics opened 48 months or more grew 17%. Turning to Slide 10, revenue grew $12.7 million, up $3.5 million, or 38%, reflecting the system expansion and continued adoption of chiropractic care. Corporate clinics contributed revenue of $6.8 million, increasing 41% from a year ago.

The corporate portfolio expanded by 11 clinics over the last 12 months. Franchised operations contributed $5.9 million, up 34% compared to last year. The franchise portfolio expanded by 56 clinics over the last 12 months.

Cost of revenues was $1.4 million, increasing 32% over the same period last year, reflecting the success of our regional developer program and related royalties and commissions.

Selling and marketing expenses were $1.8 million, or 14% of revenue, compared to $1.2 million, or 13% of revenue in Q3 2018, reflecting the increased local marketing spend associated with corporate clinic expansion. General and administrative expenses were $8.3 million, or 65% of revenue, compared to $6.8 million, or 74% of revenue in Q3 2018.

The absolute dollar increase reflects both the corporate clinic expansion, as well as increases in employee headcount to support our growth. The decrease in G&A expense as a percent of revenue reflects the increasing leverage in the operating model.

During Q3 we continued to acquire clinics opportunistically and purchased 6 clinics, including 4 in a non-RD territory that we control in South Carolina. The acquisition gave us the ability to establish a cluster on the East Coast. These are higher performing, high cash flow generating clinics that we expect to be immediately accretive.

Regarding acquisition valuations, we use a series of quantitative and qualitative criteria such as financial performance, site evaluation, lease obligation and operational assessment. Better performing units warrant higher prices. Most of our recent acquisitions are top performing clinics in our system.

To date, all of our acquisitions and greenfields have been funded by cash from operations for total consideration of approximately $3.7 million. We posted positive GAAP net income for the fourth consecutive quarter. Net income was $617,000, or $0.04 per diluted share, compared to a net loss of $208,000, or $0.02 per share, for Q3 2018.

The improvement reflects the net impact of our total clinic expansion, coupled with operational efficiencies gained from more clinics increasingly using our tools and protocols. Total adjusted EBITDA in Q3 2019 was positive for the ninth consecutive quarter at $1.4 million, improving 134% compared to adjusted EBITDA of $609,000 in Q3 2018.

Franchise adjusted EBITDA income grew 35% to $2.9 million. Corporate clinic adjusted EBITDA income grew 103% to $1.3 million. Corporate expense adjusted EBITDA loss increased 28% to $2.8 million mostly due to increased headcount to support our growth.

Regarding the balance sheet, we ended Q2 with $9 million, during Q3 we spent approximately $3 million on acquisitions. At September 30, 2019, cash and cash equivalents were $7.8 million compared to $8.7 million at December 31, 2018.

Cash flow from operations, bolstered by contributions from the newly acquired clinics, paid for continued investment in corporate clinic expansion and the development of our new IT platform. We maintain a line of credit of $5 million.

Pursuant to the terms of the agreement, we borrowed or required $1 million on our line of credit, which remains unused as part of cash and cash equivalents on the balance sheet at September 30, 2019. We intend to pay off the line of credit before year end. As Peter noted, all acquisitions and greenfields have been funded by cash from operations.

In Q4 of 2019, we began the rollout of price adjustments in additional markets where appropriate. However, as existing members are grandfathered into current pricing, we do not expect the full uplift of this change until mid-2020 and beyond. Onto Slide 11 to review guidance.

Based on our 9-month financial results, we have increased 3 elements of our 2019 guidance as follows. We now believe revenue will grow between 30% and 33%, up from 26% to 32% previously forecasted. We now anticipate adjusted EBITDA will grow between 100% and 110%, up from 67% to 100% previously forecasted.

We continue to expect franchise clinic openings to be between 70 and 80. And we now believe company-owned or managed clinics, through a combination of both greenfields and buybacks, will be 13, exceeding our previous guidance of 8 to 12. I will now turn the call back over to Peter..

Thanks, Jake. Turning to Slide 12, we frequently review our growing market opportunity, which is fueled by the increasing need for a non-opioid treatment for pain, the broadening desire of alternative medicine, especially among millennials and Gen Z, and a growing general awareness of chiropractic care.

Following our mission, The Joint attracted over 100,000 new patients to chiropractic for the first time in 2018. As we continue our focus on strengthening relationships with the chiropractic profession, I'm mindful of our vision to create a career path of choice for chiropractors.

This aspiration is driving us to create multiple paths of opportunity for our doctors. Within our system, doctors of chiropractic can work in clinics providing chiropractic care to patients. Service staff members in our corporate office become franchisees or even regional developers.

What other chiropractic organization offers as many career options for doctors as The Joint? Another way we're pursuing this principle is through ongoing partnerships and collaboration with chiropractic colleges across the country, which enables us to support the future of our profession.

Last April we announced an endowment to the Palmer College of Chiropractic, whose namesake, D.D. Palmer, provided the first ever chiropractic adjustment back in 1895. This is in addition to last year's financial commitment to Sherman College Chiropractic of South Carolina.

Throughout the year, we continued to reach out and attend conventions, career fairs and other related events at numerous chiropractic colleges. Becoming the career path of choice for chiropractors is only part of the bigger picture.

We believe it is our shared responsibility to be the catalyst for growth for the entire profession, attracting future patients and doctors by spreading awareness of the efficacy of chiropractic. To that end, we look forward to announcing other exciting initiatives in the future. In closing, I want to bring up a question that I'm frequently asked.

How long can The Joint expect to continue to post such strong comp sales? The answer's related to a compilation of several revenue drivers, all of which have been reviewed before, which that I'll now bring together.

Simply put, we believe our market opportunity, our ongoing expansion strategy and our new markets development plan will continue to drive growth in our comp sales. First, let's review our market opportunity.

The acceptance of chiropractic care is increasing, reflecting the troubling opioid epidemic and the younger generation's desire for noninvasive medical treatments, among other factors. Yet there's an enormous opportunity in that 50% of the Americans still don't know what chiropractic care is.

With over 480 clinics, we have the largest brand presence in the world to capture patient attention and in an extremely fragmented industry that includes over 40,000 independent clinics.

Further, we're attracting more and more patients as they now are trying chiropractic care for the first time, as evidenced by our 434,000 new patients in 2018, 26% of which had never used chiropractic services before walking into The Joint. Second, our strategic execution is very strong.

Based on the results and leading indicators, we're successfully increasing franchise development by leveraging our regional developer system, accelerating the expansion of our corporate clinic portfolio within clustered locations, improving clinic performance and growing new patient counts.

Through September 30, we opened 47 clinics, up 88%, and sold 103 franchise licenses, up 72% compared to the same period last year. And third, we're evaluating additional models to understand their growth potential.

They include underserved populations in smaller markets, urban markets where there's a significant downtown population and pedestrian flow, and non-traditional markets such as airports and store-in-store concepts like Relax The Back. Before I open up for Q&A, I'd like to let you know that we will be at the ROTH Deer Valley Conference in December.

Finally, I'd like to thank our franchise community, our regional developers and our employees for their remarkable engagement and the contributions to the health and growth of this company. This progress would not be possible without their commitment and hard work. Chris, I'm ready to open it up for Q&A..

Thank you. [Operator Instructions] And our first question comes from the line of David Bain with Roth Capital. Your line is now open..

Great, thank you. I think I'll be the first of many to say nice quarter and performance once again. I guess starting – I have three questions. Peter, on the last earnings call, you suggested that next year's franchise sales could accelerate next year from this year.

And I guess first looking at corporates, can we assume corporate store growth will accelerate near the same percentage pace as franchise sales? And then how should we think about the mix of greenfield versus acquired for margin purposes, and if any weighting of that is more front end or vice versa.

I think you mentioned in your prepared remarks that 5 or 6 were going to open in the next few months..

Right. Thanks for the congrats, Dave. Great to talk to you. And to answer your question is that obviously we haven't guided to 2020.

And that we are – I would expect that we'll continue to try to maintain that margin of corporate versus franchise that are currently out there, which is that 88% which is a corporate unit – or excuse me, is the franchise system, and then 12% is our corporately owned units.

And so that's – we haven't set final numbers for 2020, but that's really what I would reflect on as we sit here on the call today. Concerning your question of as we look at the number of corporate units that we'll develop into 2020 and beyond, and your question was really what's the ratio going to be between the greenfields and the acquisitions.

And what I would say there is when we're talking about greenfields, it's a much more controllable conversation. As you know, there's a very long timeline between the time that we actually go into site review, sign a lease, build that clinic.

And so we have a pretty clear line of sight in terms of the number of greenfields that are going to open up in 2020 because much of that work has to be working – being started right now, which is why we talked about that 5 to 6 units that are going to open up in the next several months.

The acquisitions are a lot more opportunistic in the sense that first of all, they need to be in areas where we already have existing support outside the four walls. And second of all, you have to have a motivated franchisee who's interested in selling at a price that obviously would be interested in buying.

So it's a little harder to predict, but it certainly will continue to be a part of our overall strategy as we add to the corporate side of the clinics of our portfolio..

Got it. Okay, thank you. And then second, I know Jake you touched on the market price adjustment.

Can you give us a sense as to the impact it's having where you've rolled it out in terms of any changes in quantity or pace of signups in those jurisdictions that may be offsetting? Anymore stickiness as to the subscriptions for those that want to retain their grandfathered rate?.

Sure. Yes. And first, context in terms of the rollout, that was effective in those additional markets as of November 1. Regarding the timing and the waiting, typically we give about a month's notice to the patient or consumer base. So what we'll see is a slight forward buy just before the announcement.

You do see some stickiness to those that hang onto that subscription. And then as far as a tail, we typically see by about 6 months out about 50% of the patients rolling onto that new price point just based on attrition. So those are some of the metrics that we have out there..

Okay. Okay, great. And then just last one. I saw some press on the dual concept branding in an Austin airport. I was wondering if you could help us with any sort of early data points as to acceptance there.

And then when you look to the forward year or what have you, just in the future, do you see the store within the store as being potentially significant? Are there large scale retail real estate opportunities, in your view?.

To answer your question first of all in terms of the performance of the clinic in Austin is that if we compare it to historical performance, it's doing extremely well. Now, it's just opened. I think they opened up in kind of mid-September. So we're early in the process.

But overall it seems to be very well accepted, and that there's other opportunities as we look at other airports, particularly with the relationship with XpresSpa. The question is do we have – just the general question is what's your strategy as it relates to non-traditional development.

And David, what I'd tell you is virtually any retail system I've ever worked with over time has their traditional model and then looks at other opportunities in those more non-traditional settings. And that we're no different in the sense that we can look at – put in a small Joint within a spa that's at the airport.

Or as you know we've got the small, The Joint's that inside the chain Relax The Back, or at least one as a test, and that test also seems to be going quite well. So I would say that the non-trad is very much an opportunity in front of us.

I think that if you look at the concept of what we're really trying to do is to build that brand, and the most powerful tool we have to build those brands is those storefronts out in that traditional retail setting. So I would see the non-trad is certainly something to add on and be a part of our overall strategy.

And that you can imagine, okay, there's all kinds of different national chains out there that you could make a link between The Joints and some of the interest that they have in health and wellness services. So is that something that's a possibility for us to explore? Absolutely. Is there something on the table at that size at the moment? No.

But it's definitely there..

Got it, congrats again. Thank you..

Thanks a lot..

And our next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is now open..

Hi, good afternoon guys. Thanks for taking my questions. I know this obviously, Peter and Jake, you've already opened or acquired 13 stores. You commented in your prepared remarks you have 4 or 5 more that could open the next couple months, yet you haven't increased the guidance from what you've already done year to date.

How are you thinking about that, and maybe just what should we expect as we think towards the end of the year?.

Sure. Great to hear from you, Brooks. You're correct that we guided to 13, we're at 13. The guidance was between 8 and 12. That – I'm just telling you, there's this timing that's always out there when you're at the tail end of getting these clinics open.

Whether it's getting the permitting, whether it's – it just seems permitting's been taking more time than ever. Or there's a couple of factors that influence, and so it's hard to say we'll open up in this month or that month. Obviously they're going to open up. The leases are signed. We're in the process of construction.

And so that's why I was saying is that, yes, that there is definitely a path as I look out in the next several months that there will be 5 or 6 greenfields that will be opening.

How many of those could fall into Q4 versus Q1 is that by suggesting that by staying on that 13, it would suggest to you that we think more of them are going to fall into Q1 than in Q4..

All right. That makes sense.

And then maybe you could just talk a little bit about the, maybe a little bit more I should say, about the franchise community, the regional developers, kind of the sense you have of the progress you're making in terms of attracting regional developers, tracking franchisees, the strength and quality of the franchisees you're seeing come to the mix, that type of thing.

Any color would be very helpful to us..

Sure. And what I would say is that I continually am impressed by the increasing quality of prospects who are coming in, whether they're for regional developer territories or for franchisees. Part of that is I think we're getting more sophisticated in our lead generation strategy.

Part of that is the fact that we have a very robust earnings information in our franchise disclosure document, which is often referred to as our Item 19.

And so when you have a sophisticated investor that they typically want to have a very clear understanding of what are the potential revenue expenses of your business are, and because the information that we provide is so detailed that helps people come to a decision very quickly.

And I think it attracts somebody who's very focused on kind of the unique economics of the business model in terms of whether they want to buy into this business or not. What I would say to you is that as we look at – if you look at franchising in general that there's a lot of metrics out there.

And the typical franchise system, I just was reading them is if you're generating 100 inquires, perhaps 10% of them will go to the next level where you provide additional information, and the actual close rate is operating at around 1%. So 1% of those franchise or those prospects that contact you actually will go on to sign the agreement.

That we are seeing overall our closure rate running closer to 3.5%. And I think that's a reflection of once you get somebody in the door and really look at this business, it's really hard to move away from. And so I think that we are seeing a more sophisticated, a higher quality, better financed prospect coming into the business.

Just an anecdotal story. We just had somebody in here recently that they were a doctor of chiropractic. They were very interested in The Joint. That they had a patient of theirs who was a very large, multi-unit operator of a QSR, a quick service restaurant chain that had a couple hundred units.

And because they were good friends, he was asking this patient that had these hundreds of units about the franchise model. He would say, hey, look, I'm thinking of The Joint.

Would this be something to be interested – that I should be considering based on all of your experience? And that his patient was so interested in The Joint that he agreed to fund him. Not only was he saying, yes, this is really interesting; I'd like to fund you for the next 5 or 6 units going forward.

And so I think again, that's an example of just some of the quality that we're drawing into the network..

Yes, that's fantastic. So just one last question. When the 3 of us chatted in September in New York, I had some sense that because of the accelerated growth in franchise units and the remarkable success you're continuing to have with those new units, that that might put actually some upward pressure on the same store or comp sales growth number.

Are you still seeing that really strong year 1, year 2 response from the new franchise units, and how do you think that might affect the comp number going forward?.

It's a great question, and the short answer is, and you can see it in the graph, yes, that we are absolutely experiencing continually improving strong earning performance of those new clinics. And so yes, that's clear and we are very obvious in our deck.

Number two is that when you have a growing number of those comps, and again in the deck you'll see where we talk about the traditional sales from year 1 to year 2 to year 3, and you can kind of get a sense that from year 1 to year 2, you usually see a really strong increase in that comp number.

And so when you have a large number of new units coming in, and so we know we've got – already we have the 5 greenfields in 2019. We have the – we're guiding to the 70 to 80 to 2019 in terms of franchise units. And they all are starting out on average very strong.

And so they will then, when they hit that 13th of the month, go into that next period where they'll have considerably higher same store sales than that, let's take today's average of 23%. And so as you see a large number of new clinics coming into your cohort or your pool of comp sales that that definitely is a factor that helps hold that number up.

And that's one of the reasons we've talked about why we feel strong – why it's still confident that we have a period here where we're going to continue to see strong comp sales..

It's fantastic. Keep up all the great work. I'm really excited for you..

Thank you very much. We appreciate the support..

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

This is Richard Magnusen in for Jeff Van Sinderen, and thank you for taking our call. First, you seem to have done a really good job at letting the customer set price increase part that took effect.

But I was wondering, do you have any way to know how many people that were considering chiropractic for the first time made the choice to start now to avoid the price increase? And then additionally, can you provide us with an estimated impact on gross margin of the price increase?.

Yes, Richard. Good to talk to you. The first part of your question, I think the metric that I look at in assessing whether we're seeing any drivers of the new patients, we have a conversion metric that we track, which is really any new patient prospect that eventually signs up for a membership or a package for us.

As we did the study and as we're continuing to see, we have seen really no effect on our overall conversion rate.

As I mentioned in my remarks to David, we do see a slight forward buy for maybe existing patients that have been contemplating moving into a subscription or a package service that want to lock in that lower price, so we do get that slight forward buy. But as it relates to new patients, we haven't really seen any impact to our overall conversion.

And I think the second part of your question was over –.

Impact on margin..

Impact on margin, yes. And that'll come as we move into 2020. As I mentioned, it takes about half a year to really roll in about half the patient base into that new metric. And then you'll start to move over time into a little bit more creep depending on the attrition of your new patients.

We haven't quantified or guided to any potential forward-looking gross margin impact. We do expect some benefit from that. But again, there's going to be a tail to it just given the grandfathering effect..

Okay. And then sort of on the topic of the new patients still. Can you provide a more detailed insight in how you further expect to develop digital advertising or other forms of reaching these new patients? Because I know you use social media and SEO and you have some other tools that you mentioned.

But it seems like you're continually outperforming the industry with respect to being able to recruit these new people to chiropractic care. So I was wondering what additional information you could give to us on that..

Sure, Richard. This is Peter. I'll answer that question. And you're absolutely right. We are significantly outpacing any of the traditional chiropractors out there in terms of new patient development, and for a lot of reasons.

And part of that is just that whole brand building exercise is that – and the resources that we have to really be very, very focused on that local store marketing to make that awareness.

Then the fact that we're where people live, shop and work, again, only makes it so much easier to make that first step to open the door for the first time to The Joint.

And so just the model itself makes it so much more attractive or easier for that, either that patient new to chiropractic or that patient who's looking to find an alternative to their existing chiropractor to step into our domain.

That I would say as you just overall look at where do our new patients come from, it's not – we really have 3 main sources, and one of them is referral. So it's existing patients who are saying, wow, this is such an important and powerful service. I'm going to tell my friends and family who I'm paying to come in and use it.

And on average, roughly 40% of all of our new patients are coming directly from that referral. And especially if you're a baby boomer like myself, you go out to friends and family when you're looking for who to choose for the medical services that you're looking for.

The younger crowd, the millennials, the Gen Z, the baby boom – or the next gen, they aren't going to friends and family. They're going to Dr. Google. They're going online. They're doing that same validation, but they're doing it online. They're looking at Yelp, they're looking at reviews, they're looking at what kind of presence we have online.

And we have a very, very sophisticated online presence that you can build collectively when you're talking about a network of this size and that – so our SEO and our whole social media strategy really brings us up top of mind when you're doing that digital search, okay, chiropractic, pain, close to home and we'll pop up on that search.

And right now, roughly 35% of our new patients are coming directly from our digital marketing activities, and we're seeing that increase. And we're seeing that as a system we're becoming more and more sophisticated in our ability to be able to track those new patients through that digital marketing campaign. And then finally, this is a retail concept.

And so that balance of patients who are coming in the door for the first time, and finding us through those more traditional guerilla marketing activities, whether it's sign throwers or whether it's mailers sent to their homes or reaching out to the schools or to gyms or to hospitals to create that connection between the people who are utilizing that gym or in that hospital or in that office building, that we're there and can help them get chiropractic care..

Thank you. And our next question comes from the line of Clarke Murphy with Craig-Hallum. Your line is now open..

Hey, guys. I'm on for Mike Malouf here. Just couple questions. First, can you guys talk about how your strategy for corporate clinics is evolving, if you're seeing any increases or slowdown in the willingness of franchisees to sell their clinics about to the company? And overall if you can talk about how you're evaluating greenfield opportunities..

Hey, Clarke. Good to talk to you. As well as change in strategy, I think the pace of Q3 we'd say that there's probably no real slow down in the available of acquisition opportunities. Again, we're being very strategic as to the opportunities that we evaluate, and we'll continue to evaluate those as they become available.

From an overall strategy perspective, I don't think we're deviating at all. We're still targeting clinics that are in our clustered locations, allowing us to leverage that overhead. So I don't think the strategy has changed and I don't think the pace has changed.

The second part of your question was really related to acquisition versus greenfield, is that the – was that the other part of your question?.

Yes, how you're evaluating your greenfield opportunities..

Evaluation..

Oh, the evaluation. Again, same from a strategy perspective. As we build those greenfield units, again, the clustering effect is very real. So we're going to look at putting those clinics where we have the existing overhead in the markets where we current operate. We'll continue to target the infill strategy so that we can have that leverage.

We're getting more and more sophisticated in terms of our real estate site selection. We have a phenomenal group that leads our site selection process and evaluates our real estate. And you can tell by the early returns on some of our greenfield units in 2019 that they're doing a great job siting these for us..

Okay, that's helpful. And then just lastly, if you could give us a sense of how your competition is evolving given the demonstrated success of your model..

Sure, Clarke. This is Peter. And that one other point I wanted to make, just to add on to Jake's point, is that in any franchises in my experience has been there's roughly 10% for sale at any given time.

And there's a variety of reasons, because especially in this kind of small box retail environment is that people have – they want to monetize their investment, they have a health issue, they have a divorce. They just – all the things that happen to people are what happen to franchisees that give them that motivation to sell their clinic.

And so then after – so we know that roughly in any system, there's a rough amount of clinics that are for sale. Then that matrix becomes, okay, where did those fall within where our clusters are or where we are interested in expanding? So that's kind of the metrics that influences where we go and why.

And to answer your question concerning – I'm sorry, I just spaced on that question. I'm sorry. Would you repeat your question? I apologize..

Yes, sure. We were just wondering if you could give us a sense on how your competition is evolving given –.

Thank you very much. Another great question. And again what I would say is it's not unusual when you have a very successful concept like this is that you're going to spawn your competitors, and that you can certainly see that. So we are in fact seeing direct competitors that have started out on a franchise model. Maybe they're direct pay.

Maybe they're no insurance. In fact, some of them you go to their website and look at their clinics; it looks just like us without our name. In terms of any really large competitor out there that has that same level of, or anywhere near the level of our footprint, we have yet to see. You also have to think about this industry.

As we've talked about, the most significant thing about this industry is how fragmented it is. So there aren't a lot of big players with national chains out there. What you have is those 40,000 independent practitioners that are operating across this country.

And so do we expect to see more and more of the competitors who are really trying to replicate the model that we have? Absolutely. The first mover advantage that we have gives us such a head start that it would be really hard to catch up with where we are in our own growth..

Thank you. And our next question comes from the line of Anthony Vendetti with Maxim. Your line is now open..

Thanks. Yes, I was just wondering, Peter, if you could address the metrics you use when you purchase. I know you said about 10% in general in your franchise situation, about 10% of the franchises are available for sale. And I know how you target based on the clusters.

But how are you able to purchase some of these clinics for one-time sales or in some cases 4x to 7x EBITDA? Are the clinics – what's making them agree to that kind of sale price, do you think?.

Sure. And I'm going to ask Jake to pipe in as well, but what I would say is, and really, Anthony, it goes back to the conversation when we're talking about why am I putting my unit up for sale at all. And it all depends on kind of what is that level of motivation that that franchise has.

And is this because – you can just imagine the level of motivation I have in a divorce may be different from if I'm sitting here and I truly just want to monetize my investment, versus I have a very serious health issue that's requiring me to make a move that is on a time frame, a much shorter time frame.

And this is just the fact that as a franchisee, what you're doing is you're building an asset, and that asset definitely is transferrable.

And what happens is so many of these sales are going to either existing franchisees or to new people who say, you know what, I want to get into The Joint, and I'd like to buy an existing unit as opposed to a greenfield, and so they end up in a conversation with that franchisee that's selling it. So you have that model.

And so you still also have from time to time distressed clinics. And so if you look at the clinic we just bought recently in end of October, it was a distressed clinic. It was a franchisee that had – absolutely wanted out of the system. The clinic was not a top performer. And we picked it up for very little expense.

We also talked about the clinics that we bought in the South Carolina. They were top performing clinics. And so that we went through an evaluation metrics, which I'll let Jake talk about, to come to a number that made sense to both parties..

Yes, to touch on the metrics and the evaluation process, we really have a multi-tiered approach. As I mentioned on the comments, it's quantitative and qualitative. So first and foremost, financial performance. How are their sales? How are their new patient numbers? We look at the lease obligation that we're stepping into.

We perform assessments over the real estate. What's the site? What's the center? What's the retail node? We do an assessment of the doctors, their tenure, operational protocols within the clinic.

All things that we can leverage and determine – I kind of have a weighted average approach as to how each of those factor, which kind of gives me a benchmark as to what I would be willing to pay. But again, the ultimate evaluation is really dependent on that negotiation between the buyer and the seller.

And these are private business owners in the United States. So it's hard to draw a public company corollary in terms of valuation against these private, small business owners..

When you're buying them, do you typically come up against competition either from other chiropractors or other small business leaders? Or sometimes they just agree to sell to you because you're the only buyer available at the time?.

Sure. No, it's a great question. And first of all, any franchisee, they are – like I said earlier, they're building an asset, and it's a transferrable asset. But there's also some controls on that asset. So for example is that in every franchisee agreement we have, we have a first right of refusal.

So that they can say, you know what, I'm at a point where I want to monetize my investment. They may use a business broker. They may have a friend. They may want to sell it to a fellow chiropractor.

And they can negotiate the terms and conditions of that deal, and then they need to present it to us to say, do we want to exercise our first right of refusal on that transaction. And that's just a decision.

And it goes then through that matrix such as is it an area where we already have outside the wall of support? Does it fit with one of our clusters? Is it a price that we're willing to pay, because it's certainly possible that the franchisee negotiated a price for that clinic at one that we would not want to pay ourselves.

Because we do have a formula of what we believe that clinic that Jake just walked you through would be worth paying for. So you certainly have that part of the process that we're going through. And after that, you are also going to be looking at just the other market conditions that could influence whether it makes sense for us to buy that or not.

So they're able to sell that to anybody. The last piece of that is that whoever they sell it to has to be qualified and approved by us. So it's not that they just go out there, they find a buyer, they sell it to the buyer.

Every franchisee that comes into this system has to go through a background check, they go through a complete review, and they have to be qualified and approved by us before that they can become a franchisee. So you have a couple of checks there plus the opportunity..

Thank you. And our last question comes from the line of Jeff Geiser with Geiser Wealth Management. Your line is now open..

Hey, gentlemen.

How's it going?.

Good, Jeff.

How you doing?.

Pretty good. Hey Peter, you had a long list of people that you thank at the end of your call, and I just want to express my gratitude to both you and Jake for making my job very easy.

And I do have one quick question, which is at the shareholder meeting, you mentioned that you guys had experimented with some store refreshes that were just done overnight. They were quick and easy, low cost. The stores didn't see any closing time. But you were seeing some early success in the results, or at least that was your impression.

I was wondering if that's ongoing, and if so, how's it going and how many stores might be left at the corporate level and/or if some of the franchisees people are participating in that..

Absolutely. Jeff, great question, and yes, we have continued that refresh process. I would love to say it is in fact an overnight transition, but I think really it's that we can perform the work after clinic hours to not disrupt the flow.

The things that we're talking about there are new flooring, new lighting, new paint, new signage, those types of things. So we are continuing that. We continue to roll that across our corporate clinic portfolio.

As with any franchisee, when they transfer a clinic or when we acquire a clinic, we take that opportunity to refresh the look to our brand standard. So anytime that we talk about an acquisition or a transfer within our system, they're going to go through that refresh process as kind of mandatory lift.

Every franchise agreement has required milestones in terms of refresh spend, and they'll certainly go through that upon their renewal cycle, which is after the first 10 years of their franchise agreement.

So if you think about the history of our company and you kind of look back on our franchise sales, we really started in 2010, but we really had a boost of sales in kind of the 2011, 2012, 2013 period.

So we're coming up on a point where a lot of our franchisees are going to be going through that renewal cycle, and you're going to see a lot of refresh happen at that point..

Awesome. Well, thanks so much to both of you for everything..

Thank you..

Thanks, Jeff..

Thank you, and this concludes today's Q&A session. I would now like to turn the call back to Peter Holt, Chief Executive Officer, for any further remarks..

I want to thank all of you for your interest. As you may know, we began sharing patient testimonials at the end of these calls, and today I want to tell you about a patient featured in our new brand campaign, You're Back, Baby.

Lila, a 22-year old professional dancer from Los Angles, started dancing in college, and the amount of movement on a daily basis really challenged her body. Her instructor advised her that she should try The Joint Chiropractic because it's affordable and trusted by her community of dancers. And it subsequently changed Lila's life.

With chiropractic care, her mobility is significantly deeper and greater. As a result, she feels her performance quality is much improved. Now she can simply dance without pain and credits it all to the routine chiropractic care at The Joint. Thank you,and stay well adjusted..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..