JOINT Corp Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to The Joint Corp Q4 2020 Financial Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Moriah Shilton of LHA Investor Relations. Thank you. Please go ahead, madam.

Thank you, Justin. Good afternoon, everyone. This is Moriah Shilton of Investor Relations. On the call today, President and CEO, Peter Holt, will review our year-end and fourth quarter 2020 performance metrics and provide an update on the business. CFO, Jake Singleton, will detail our financial results. Then Peter will close with a summary and open the call for questions. Please note, we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the close of the market, The Joint Corp issued its financial results for the year and quarter ended December 31, 2020. If you do not already have a copy of this press release, it can be found in the Investor Relations section of the company's website. As provided on Slide 2, please be advised today's discussion includes forward-looking statements, including statements concerning our strategy, future operations, future financial performance, position, plans, and objectives of management. Throughout today's discussion, we will present some important factors relating to our business that could affect these forward-looking statements. The forward-looking statements are made based on our current predictions, expectations, estimates, and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today. Factors that could contribute to these differences include, but are not limited to, the continuing impact of the COVID-19 outbreak on the economy and our operations, including temporary clinic closures, shortened business hours, and reduced patient demand, our failure to develop or acquire company-owned or managed clinics as rapidly as we intend, and our failure to profitably operate company-owned or managed clinics and the other factors described in Risk Factors in our annual report on Form 10-K. As filed with the SEC for the year ended December 31, 2019. As updated for any material changes described in any subsequently filed quarterly reports on Form 10-Q as they may be revised or updated in our subsequent filings. We anticipate filing our December 31, 2020, 10-K on March 5. As a result, we caution you against placing undue reliance on these forward-looking statements. And encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we are not obligating ourselves to revise the results or publicly release any updates to these forward-looking statements in light of new information or future events. Management uses EBITDA and adjusted EBITDA, which are non-GAAP financial measures. These are presented because they are important measures used by management to assess financial performance. Management believes they provide a more current view of the company's underlying operating performance and operating trends than GAAP measures alone. Reconciliation of net income to EBITDA and adjusted EBITDA is presented in the press release. The company defines EBITDA as net income or loss before net interest, tax expense, depreciation and amortization expenses. The company defines adjusted EBITDA as EBITDA before acquisition-related expenses, bargain purchase gain, net gain or loss on disposition or impairment, and stock-based compensation expenses. Turning to Slide 3, and it is my pleasure to turn the call over to Peter Holt.

Thank you, Moriah, and welcome everybody to the call. I'm delighted to speak with you today to review our company's performance in a year like no other. Our operational success in managing the impact of the pandemic on our business, supported by our clinic staff treating throughout this unpredictable environment, resulted in our strong financial performance and further validates the opportunity before us. I've said it before when reflecting upon 2020, and I do so now, today, I am so grateful for our entire system, our doctors, wellness coordinators, franchisees, regional developers, and corporate staff for their dedication to our mission of improving the quality of life for our patients. This pandemic has shown chiropractic care truly is essential healthcare for our patients. The Joint is revolutionizing access to chiropractic care. Located in convenient retail settings, we provide concierge-style membership-based services without the need for insurance or appointments with attractive pricing and convenient hours. Our growth strategy is to build our brand, increase awareness of the efficacy of chiropractic care, attract new patients, and open more clinics. We're already the largest, most recognizable provider of chiropractic care in the country. Given the high level of fragmentation in the chiropractic industry, we have a significant opportunity to continue to increase our market share as we redefine and expand the market itself. Our core concept has remained steadfast. In adapting to the pandemic, the primary change we made to our operational practices was to increase sanitization and cleanliness procedures. This compares favorably to many other retail concepts that need to reinvent their business models just to survive. While we experienced that initial negative financial impact in the second quarter of 2020, our resilient business model and effective crisis management enabled us to quickly rebound. During the year, once again, we increased our productivity, resulting in improved clinic performance and greater company profitability. As a result, our adjusted EBITDA, positive for the third consecutive year, exceeded our plan and further strengthened our foundation. With our growth momentum reignited, we're optimistic about 2021. Turning to Slide 4. I'll review the performance metrics for the full year of 2020. The total number of adjustments performed during the year reached 8.3 million, up from 7.7 million in 2019. The total number of unique patients treated reached 1.1 million, up from 998,000 in 2019. 584,000 patients opened the door to The Joint for the very first time, relatively flat compared to the 585,000 in 2019. 27% of our new patients had never been to a chiropractor before, up from 26% in 2019. 85% of the system-wide gross sales came from monthly memberships, up from 80% in 2019. We opened 70 new franchise clinics, nearly equal to the 71 new franchise clinics opened in 2019. And we sold 121 franchise licenses, pretty darn close to the 126 sold in 2019. We believe that achieving this level of performance in the 2020 environment is a powerful indicator of the positive long-term outlook for our business. Turning to Slide 5, where Jake will discuss our financial results in greater detail in a moment, I'll provide highlights to our strong fourth quarter results. System-wide sales increased 24% compared to the fourth quarter last year. Our comp sales for clinics that have been open for at least 13 full months grew 16% compared to the same period in 2019. Revenue grew 23% compared to the fourth quarter of 2019, bringing the full year revenue to $58.7 million. Adjusted EBITDA increased to $3.7 million, topping Q3 2020 and making it the strongest quarter in the company's history. Full year 2020 adjusted EBITDA rose to $9.1 million, up 47% from 2019. At December 31, 2020, our unrestricted cash reached $20.6 million compared to $18.3 million at September 30, 2020, driven primarily from an increase in cash flow from operations. Turning to Slide 6. Let's review our portfolio. During the fourth quarter, we opened 21 new franchise clinics and no greenfields, slightly off the pace from the 25 opened in Q4 2019, which was one of our most active quarters in clinic openings in our history. Also during the quarter, we closed 2 franchise clinics and acquired 1 franchise clinic. For the full year 2020, we opened 70 franchise clinics and 3 greenfields compared to 71 franchised and 5 greenfield clinics in 2019. While our pre-COVID-19 guidance for the year was originally higher for franchise openings, we believe a flat number of openings in this environment is a win. In 2020, we closed 7 franchise clinics and acquired 1 franchise clinic compared to the 4 closures and 8 acquisitions in 2019. Despite the pandemic, we continue to experience an unusually low closure rate of 1.2% in 2020. At December 31, 2020, we had 579 clinics in operation, consisting of 515 franchise clinics and 64 company-owned or managed clinics, maintaining a mix of 89% franchise and 11% corporate. At year-end, we had 253 franchise agreements with some level of development. This compares to the 204 at December 31, 2019, and is reflective of the increased interest in our franchise system. Turning to Slide 7. In the fourth quarter 2020, the year of the pandemic, we achieved the highest number of quarterly franchise license sales as a public company. We sold 56, up from 30 in the third quarter and 23 in the fourth quarter of 2019. For the full year 2020, we sold 121 new franchise licenses, only a handful less than the previous annual last year at 126 licenses sold. Frankly, for any franchise system to be selling licenses in a business is exceptional, and we're proud of our sales team and our dedication to attracting great franchise candidates. Frequently, I comment that franchising is a nationwide brand-building exercise in a small box retail environment; our storefronts are our most effective way to build our brand. We have and will continue to use regional developers or RDs to extend our reach and accelerate our brand-building, particularly in new markets. They've been integral to our franchise sales growth since 2017; they've been responsible for 81% of our franchise sales. With RDs, we entered into a 10-year agreement to sell and support a minimum number of franchise clinics in a territory and can negotiate extensions to that territory as appropriate. Typically, the minimum development schedule is front-loaded. When markets reach maturity, it's not unusual for the franchisor to repurchase the RD rights. Recently, we did so in 2 well-run mature markets: North Carolina on December 31, 2020, and Georgia on January 1, 2021. These transactions totaled $2.4 million. As a result, 69 franchise clinics and 37 signed franchise license agreements for unopened clinics shifted from management by RDs to corporate management, thereby eliminating the payments made to these RDs for franchise sales commissions and royalties of 3% on the gross sales for their clinics. The transactions are immediately accretive and expand our margin contribution. At December 31, 2020, 419 of our clinics, or 72%, were supported by our 22 RDs, which covered 61% of the metropolitan statistical areas, or MSAs, at December 31, 2020. And on January 1, 2021, we reduced that to 378 or 65% of our clinics that were now supported by 20 RDs. We'll continue to evaluate new R&D opportunities. Recently, we expanded the RD for the Wisconsin region to include a portion of Michigan. Today, our aggregate 10-year minimum development schedule for RD territories established since 2017 comes to 475 clinics. This large foundation of clinic commitment bodes well for our continued clinic expansion and sales growth. We're investing in the future and plan to expand our entire portfolio between franchise and corporate units well over 100 units in 2021. Our strong license sales set the stage for increased future franchise clinic openings as we remain committed to achieving our goal of opening 1,000 clinics by the end of 2023, resulting in increased revenue, scale, and brand recognition. Turning to Slide 8. Let's review our franchise system for a moment. Strengthening our franchisee relationship is a long-standing priority for The Joint, and I'm pleased to report that we continue to make positive inroads. According to Franchise Business Review, an independent organization we've engaged to conduct our franchisee satisfaction surveys, most recently in October 2020, The Joint has achieved a franchise satisfaction index, or FSI, of 75%. This is up from 65% in November of 2018 and 58% in April '17. An FSI score represents the weighted sum of positive responses and discounts the negative responses. FSI ratings allow a franchisor to benchmark their franchisee satisfaction against various industry sectors. We scored in the top tier, validating our continued efforts to improve our relationships with our franchisees. Turning to Slide 9. Let's turn our attention to marketing. In Q4, we launched our annual holiday promotions, our Black Friday sale, and our year-end membership promotion. With our clinic teams highly engaged and using our best promotional practices, both promotions exceeded our previous records. Black Friday sales per clinic were up 98% over the prior year, and our year-end sales per clinic grew 42% over the prior year. Clearly, our patients responded enthusiastically to these limited-time opportunities to save even more on chiropractic care. Sales growth in clinic expansion have increased the flow of dollars into our national marketing fund. And we're using these resources to invest in new strategic partnerships to fuel our growth. In 2020, we began working with a new public relations firm to build our national profile and grow awareness of chiropractic. In 2021, we've launched 2 new additional partnerships with media and creative agencies to elevate our brand advertising, and we look forward to releasing a new national campaign in Q2 of this year. Finally, among the many useful patient profile insights from our most recent annual independently conducted survey, I'd like to highlight that 27% of the patients who visited our clinics in 2020 had no previous experience with chiropractic care. In 2013, this number was only 14%. Nearly doubling our first-time users demonstrates The Joint's growing ability to reach an increasing number of American consumers who have yet to benefit from chiropractic care. Turning to Slide 10. Let's review Axis, our new IT platform. Axis is our most important initiative in 2021. It will provide an integrated purchase system, financial systems, business intelligence, marketing automation, and patient feedback capabilities among many other features. In Q2 2020, we redirected our efforts to implement Axis to focus on helping our franchise community respond to the impact of the pandemic. In the fall, we re-engaged the Axis project. We are currently finalizing the user interface testing and preparing critical training programs, as well as end-user and clinic certification processes necessary for launching the platform. It's essential that the new platform be fully tested and that every franchisee is prepared and trained for the acceptance of the new system. As we complete this crucial project, we will not jeopardize it by rushing or shortcutting the process to meet an artificial timeline. Currently, we plan to begin the formal rollout in early summer. And with that, Jake, I'll turn it over to you.

Thank you, Peter. Turning to Slide 11. Comparing fourth quarter 2020 to fourth quarter 2019, system-wide sales for all clinics open for any amount of time increased to $77.6 million, up 24% year-over-year. System-wide comp sales for all clinics opened 13 months or more were 16% compared to 26% in the prior year. System-wide comp sales for mature clinics opened 48 months or more were 10% compared to 19% in the prior year. Revenue was $17 million, up $3.2 million or 23%. Company-owned or managed clinics contributed revenue of $9.2 million, increasing 22% from the same period a year ago. Franchise operations contributed $7.8 million, up 24% compared to the same period last year. Increased revenue for both categories is due to the greater number of clinics and continued organic growth. Cost of revenues was $1.9 million, up 19% over the same period last year, reflecting the increase in franchises, resulting in higher regional developer royalties and commissions. Selling and marketing expenses were $2.1 million, up 15% over the same period last year, reflecting the timing of the advertising spend in the fourth quarter. General and administrative expenses were $9.5 million compared to $8.5 million. The $1 million increase was primarily due to higher payroll and related expenses to support revenue growth and a greater number of clinics. We had record operating income of $2.8 million compared to $1.3 million in 2019. We recorded a net tax benefit of $7.9 million pretax expense of $33,000 in 2019. This was driven by the reversal of the valuation allowance on our deferred tax assets of $8.9 million. Net income, including the benefit from the reversal of the tax valuation allowance, was $10.6 million or $0.72 per diluted share compared to $1.3 million or $0.09 per diluted share in the fourth quarter of 2019. We delivered record total adjusted EBITDA of $3.7 million, which increased 74% compared to the same period last year. Franchise clinic adjusted EBITDA increased 23% to $3.8 million. Company-owned or managed clinic adjusted EBITDA increased 49% to $2.5 million. Corporate expense as a component of adjusted EBITDA decreased 1% to $2.6 million, reflecting our cost control efforts. Turning to Slide 12, I will now compare the full year 2020 to 2019. Gross sales for all clinics open for any amount of time grew 18% to $260 million. System-wide comp sales for all clinics opened 13 months or more increased 9%. And significantly, system-wide comp sales for mature clinics opened 48 months or more, which now represents 352 clinics, increased 5%, which is remarkable in today's retail environment. Revenue increased by 21% to $58.7 million, meeting our guidance. Operating income was $5.5 million compared to $3.4 million in 2019. Net income, including the previously mentioned $8.9 million benefit from the reversal of the tax valuation allowance, was $13.2 million or $0.90 per diluted share compared to $3.3 million or $0.23 per diluted share in 2019. Adjusted EBITDA increased 47% to $9.1 million, exceeding our guidance. At December 31, 2020, we had $20.6 million of unrestricted cash. This compares to $8.5 million at December 31, 2019. During the year, cash inflows from operating activities were $11.2 million. Cash inflows from financing activities were $5.6 million, which were partially offset by $4.6 million in investing activities, including $1 million for the December RD territory repurchase. The balance for capital expenditures related to IT and corporate clinic development. Subsequent to year-end, the company repaid the PPP loan of $2.7 million, which will be reflected on the March 31, 2021 balance sheet. On to Slide 13 to review guidance. For 2021, we expect revenue to be between $73 million and $77 million compared to $58.7 million in 2020. Adjusted EBITDA to be between $10.5 million and $12 million compared to $9.1 million in 2020. Franchise clinic openings to be between 80 and 100 compared to 70 in 2020. And company-owned or managed clinics through a combination of both greenfields and acquisitions to increase between 20 and 30 compared to 4 in 2020. Following our strategic plan, we expect the majority of these to be greenfields. This will be complemented by acquisitions, which continue to be opportunistic. There's pent-up demand that will fuel openings in 2021. This is evidenced by the 253 franchise licenses in development at the end of 2020. We're investing in our future and expect the entire portfolio of clinics to increase by over 100 units. Therefore, we continue to believe we'll achieve our goal of opening 1,000 clinics by the end of 2023. I will turn the call back over to you, Peter.

Thanks, Jake. As Jake just said, we are investing in our future on our drive to 1,000 clinics, and we believe this is just the first milestone of many as we bring chiropractic care into the mainstream. Looking at our long-term potential, we have advantages that we'll continue to leverage to create additional opportunities for expanded growth. For example, we can evaluate potential extensions such as ancillary products and services; expand in nontraditional settings, including military bases or store-in-store concepts; and finally, international expansion in those markets that already have a strong chiropractic acceptance. It's important to understand what are the today's market drivers that fuel our growth. First, there is a great opportunity to capture more market share as $90 billion is spent annually in the United States on back pain, and of that, $16 billion is spent specifically on chiropractic care. Next, the fragmented market of approximately 41,000 practitioners yields opportunity to gain market share as the power of our size creates synergies in marketing, operations, and IT. This has happened in other healthcare sectors, such as dentistry. Today, dental service organizations represent 12% of the dentistry field. We estimate that today, all chains in chiropractic care account for roughly 3% of the market share, including The Joint, which accounts for around 1%. Finally, our specific business model continues to expand faster when compared to the chiropractic market as a whole. By making chiropractic care available to a broader consumer market in an accessible and convenient retail setting, we're revolutionizing access and demonstrating the power and efficacy of chiropractic care, which results in attracting new clients. As mentioned, in 2020, 27% of our patients were new to chiropractic and had never visited before they visited The Joint. We're not just taking existing market share, but most importantly, we're expanding the market. This is why we significantly outpaced our industry. While the chiropractic care market is expected to grow at a 1.4% CAGR over the next 5 years, The Joint delivered a 10-year CAGR of 70%. Our rapid growth is illustrated by our 4-year stacked comp sales even with the pandemic, which was now a remarkable 80%. Our strong performance has been recognized. Recently, The Joint was named or increased its ranking on 3 important lists: 2021 America's Best Small Companies list named The Joint number 13 out of 100 companies that have market values between $300 million and $2 billion, positive sales growth over the last 12 months and a share price of at least $5. The Franchise Times Fast and Serious List 2021 evaluated the smartest growing franchise brands with The Joint moving up 17 spots compared to last year's ranking. The Franchise Times created a formula to identify fast-growing franchise systems that have staying power as an antidote to multiple other rankings that include too many one-year wonders. And finally, Entrepreneur's 2021 Franchise 500 moved The Joint up 20 spots compared to last year's ranking to number 58. The key factors in Entrepreneur's evaluation include cost and fees, size and growth, support, brand strength and financial strength and stability. I've said it before; while we cannot predict the ultimate end of the pandemic, what we've experienced is that our patients have continued to rely on chiropractic care as essential to their health and our doctors have continued to treat their needs. Once again, I'd like to close by expressing my deepest appreciation to all of the chiropractic teams that continue to selflessly serve during this pandemic. Their dedication to our mission is humbling. It's remarkable that in 2020, we delivered the performance we did, including record-breaking quarterly franchise license sales and record annual adjusted EBITDA. To our franchise community, our RDs, our corporate team, and The Joint colleagues across the country, I thank you. You are truly making a difference in all the lives that you touch. Justin, I'm ready to begin the Q&A.

And our first question comes from Jeff Van Sinderen from B. Riley. Your line is now open.

First, let me say congratulations on a terrific year despite COVID. Really kind of a multipart question here. Any more color you can add on what you're experiencing in areas that are more reopened in the U.S., such as maybe Texas versus areas that are not especially reopened? And I guess, how does that influence your thinking about how business could trend as the U.S. does fully reopen in the pandemic stage? And then I guess, how are you thinking about kind of the pandemic fading into the rearview mirror, given that you added a lot of new customers that were due to chiro care, do you think that might accelerate as the pandemic care?

Jeff, thank you for the congrats and great questions. To give a little color on the kind of the regional impact of the pandemic as we look across the country, what I'm most struck by is we have not seen any real clear geographical impact, whether the market's open. We talked about this in earlier calls, as we're looking at comps in California compared to the Texas markets or the Florida market. There's nothing that really stands out other than perhaps Colorado, where we had the significant situation where, with the directive of the Colorado Governor, our clinics were closed there for 37 days. They were allowed to reopen, but they now have to take appointments as opposed to walk-ins. So there's still some impact there. But outside of an example like that, what we've been seeing is really consistent performance across the country. Regarding your second question, we consider whether the pandemic encouraged individuals who hadn’t previously tried chiropractic services to explore them. As we transition into a new normal post-pandemic, this aligns with our overall strategy of showcasing the benefits and effectiveness of chiropractic care. Our observations show that when people visit for the first time, they tend to utilize our services repeatedly, as indicated by our comparable store sales and growth metrics. Our medical services are predominantly gained through referrals; if someone has a positive experience with a chiropractor, they are likely to recommend us to friends and family suffering from pain. Given that pain issues are on the rise in the country and there’s a growing reluctance to resort to opioids or surgery, we believe that as more people access our chiropractic services, which we are consistently making more available, we will continue to experience the robust growth we've seen over the past four to five years.

If I could squeeze in one more, just wondering about the latest trends that you're seeing around chiropractors operating independently, those independent practitioners how they're doing as far as staying in business or exiting the business? And then kind of the availability and quality of doctors that you're seeing out there that might be inclined to join The Joint platform?

In terms of trends among independent practitioners in the industry, the observations are largely anecdotal. Operating independently in fragmented markets like chiropractic, hair care, or frozen desserts during a pandemic is extremely challenging. Our success in responding to the pandemic can be attributed to the strength of teamwork among our franchisees. They have collaborated, shared experiences, pooled resources, and worked together to educate consumers about The Joint. It’s difficult to fathom the number of businesses across the country that have closed and might not reopen, particularly in the QSR sector. Chiropractic has also faced significant challenges, but I don’t have concrete data beyond anecdotal evidence to inform you of the specific impact. What we all know is just really tough to be out there if you don't have some kind of support in this environment. As for the status of doctors, there's no question that this is essential for our growth. We have a very simple model, and it rests on our doctors. We have seen an increasing number of doctors apply and work for us or express interest in buying a franchise. I think part of that is the pressure that's on the overall industry and that we are continually improving opportunities for them to find a secure and safe place to work. I would expect that to continue. It's a strategic initiative on our part to continue to improve our ability to attract and retain doctors at the heart of our organization.

Overall, do you feel like when you think about all those things, do you feel like the quality of the doctors you are attracting is improving?

I do. I think we have not done. I think we can continue to make inroads. We've spent a lot of time working with our doctors and helping them understand our business model and how to be more effective in patient care. Obviously, I'm not a doctor of chiropractic; I can't tell a doctor how to practice, but we can certainly share with them the best practices associated with working in a clinic in our business model, and that's what we focus on. And then, of course, operate as a doctor.

And our next question comes from Linda Bolton-Weiser from D.A. Davidson. Your line is now open.

Congratulations on great results. So I was curious, in looking at your long-term target for 1,000 clinics going out a couple of years, that would average out to at least having to open 140 per year. Your guidance for 100 to 130 new clinics in 2021 is slightly below that. Is that because this is just the period immediately following COVID, and you expect the number to ramp even more in 2022 and 2023? Or are you just kind of being conservative in the guidance that you're giving?

Great to talk with you, and thank you for that question. You're absolutely right. When you do the math, we want to be opening up 140 clinics in the next 3 years to hit 1,000. I would say, in other franchise systems where I've seen this, when you're really working with a concept that has legs, that has a market only increasing, you see acceleration from year over year. So I wouldn't expect our growth to be linear; okay, take those numbers, divide by 3, say 140. We're expecting to open up over 100 units in 2021. I would expect that to increase as a percentage in total number of units opened in '22 and further increasing in 2023 to get to that 1,000 unit goal. Our unit goal is going to be a lot of work to get to 1,000 units, but we have a concept that's only becoming more relevant to the consumer. We have an RD system that's only becoming more successful in their performance. We have a concept that's attracting more sophisticated franchisees. As we open more clinics, we have more of those high-quality leads to close. I believe we can accomplish that; otherwise, we would pull back on our goal.

Can you remind us about the capital expenditure per greenfield clinic, given the expected increase in greenfield openings in 2021? Also, do you have CapEx guidance for 2021?

Sure. We haven't given CapEx guidance for 2021. What we said is that we expect to expand the portfolio by 20 to 30, and the majority of those will be greenfield units, right, marching towards that growth goal. From an economic perspective, typically, the build-out cost, and again, we're targeting square footage in the range of 1,000 to 1,200 square feet, is around $180,000, depending on your market. California markets might be a little bit more, for example. But that's the kind of build-out cost. Then you've got some working capital losses as they march through that time to breakeven.

Great. Does your guidance for 2021 bake in a certain same-store sales growth number that you can share with us?

We haven't provided that. We do expect continued organic growth. When you look at the overall ranges, the top end of that range is a 30% increase on the top line, and that will be a complement of both unit growth and organic growth, but we haven't specifically broken out the comp figure of that.

And just finally, given the challenges of the COVID year and having to slightly change your operating procedures in the clinics, is there anything about COVID that actually kind of gave you new learnings at the clinic level that you think will actually help your operating procedures on a kind of permanent basis going forward?

I think absolutely. It really applies to all levels of our business, not just in the clinic. In the clinic level itself, I think these enhanced procedures during these times are powerful, and we'll continue to utilize them. Right now, we're mandating an entire system in our clinic. Depending on the jurisdictions of the state, we're not requiring patients to wear a mask if the jurisdiction they're operating doesn’t. But we do require, regardless of what the local or state directives are, that all of our doctors and wellness providers use a mask. Do I expect that to continue going forward? No. I think we would love to get away from that. But I think there are other procedures that really focus on cleanliness and sanitization that we'll continue to use for the rest of the business. If we look at the whole way in which a franchise system operates, one of the ways we addressed the pandemic was with an incredibly enhanced level of communication. We were conducting almost weekly system-wide calls and webinars on every topic imaginable, all focused on safety and protection of our clinics and our patients. Many of those increased forms of communication will continue to remain in use. We recognize the power and importance of that. There are several other things that I think are transformative in how we will be a stronger company having gone through this pandemic.

The only things I would layer on there would be maybe on the marketing side. We had to step back and really look at our grand opening process and how to navigate that. It used to be that you would have a grand opening weekend and a large rush of patients interested in that new store opening. Well, due to COVID, we had to spread that out, and we realized that there was actually some benefit to that. We reviewed this and redesigned what was already a successful program in terms of our grand opening marketing, and we're going to have a much longer introductory period as it relates to attracting those new patients. Do we bring that type of promotion back in the 2021 cycle? Those are ongoing discussions.

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

Congratulations on continued terrific performance. I'm going to do the unthinkable and ask you one and only one question. Can you just talk a little bit about what you see as the primary challenges to accelerating company store growth and how you plan to deal with those challenges?

If you think about the numbers, we added 4 corporate clinics last year, and we've now guided to between 20 and 30. That will not come without unique challenges. We've had to step back and think through the resources. The one thing we won't do is be under-resourced as we try to navigate that level of growth. We've redesigned our field overhead structure to allow us to scale. We're also looking at new markets. Traditionally, we've focused on an infill strategy as it relates to greenfield growth, trying to cluster around our existing infrastructure. We're going to embark on some new territory in 2021. So we need to consider those.

No, I think that's right, Jake. We've learned a lot. This isn't the first time this company has tried to accelerate growth in corporate units. We started that back in '15 and '16 and learned some painful lessons. But we've learned those lessons. As Jake was saying, we're being very thoughtful in making sure we effectively grow those corporate locations, ensuring we have the right resources. You have the normal issues any fast-growing company faces, and that is are there enough doctors? Are there good sites? Are we acquiring good sites at a price that makes sense? We feel we have a remarkably talented team to ensure we meet our goals.

And our next question comes from Jeremy Hamblin from Craig-Hallum Capital. Your line is now open.

I'll add my congratulations on a truly impressive year, really in any environment, but let alone COVID. I wanted to just follow up on the development of company-operated clinics. The first question is can you provide some CapEx guidance for 2021? And number two, have you seen any changes or anticipate any changes in terms of the cost per new unit, kind of the upstart cost of the company-operated clinics and what you expect for kind of the 4-wall loss in year one?

The first part of the question was around CapEx guidance. We haven't provided any forward-looking information, but we can do some back-of-the-napkin calculations. We've guided to expand that portfolio by 20 to 30 units. A build-out cost is around $180,000 to a little over $200,000, maybe in some of the more expensive markets. That would be your kind of CapEx investment at the greenfield level. In addition to that, opportunistically, we do look at acquiring franchise units back. The CapEx investment would be based on valuation. The stronger performing unit would warrant a higher investment. It's hard to estimate. The last point is we're continuing to roll out the Axis IT project, which will also incur capitalized expenditures. So those are going to be your largest buckets. We haven't provided a number on that, but that's the larger drivers of CapEx in 2021, focusing on the greenfield clinics. The second part of your question is the 4-wall impact. If those greenfield units are riding through the initial part, our time to breakeven is typically around 6 to 9 months. There are working capital losses associated with grand opening marketing costs, hiring and training a doctor before opening the doors. In its simplest form, you're looking at probably $100,000 of loss on an adjusted EBITDA basis for each one of those greenfields as you're working through all those upfront costs.

There's a third question that snuck in there, and that was what's the trend moving in terms of build-out costs. We're seeing some changes by market. For example, in California, build-out costs are higher than Arizona. We're anticipating some softness in real estate, which is a significant cost associated with operating these clinics. We're not seeing a lot of that because the type of units or locations we're pursuing remain highly competitive. We're continuously value engineering the actual build-out cost and looking for ways to reduce expenses while maintaining quality.

In terms of thinking about that customer base and the stickiness of your customer base, if you were to flash back to your customers that came into a joint location in Q4 of 2019, what percentage of those customers came back for at least one visit in Q4 2020?

It's going to be more anecdotal, Jeremy, than data. When we look at the data historically, I can tell you that we have seen a significant increase in the total number of memberships as a percentage of sales of the clinic when compared to 2019. In 2019, roughly 80% of sales were from membership, and in 2020, it was 85%. This indicates that those patients coming in are, in fact, remaining members longer. What we've also done is those clinics who actually do make the journey are converting and joining as a member at a higher rate than we've ever seen in the history of the company. During the 2020 metrics most impacted negatively were our new patient counts. What we find is that if you're in a pandemic and in pain, you must be in serious pain to visit a chiropractic clinic for the first time. Those clinics who do visit are converting at a significantly higher rate. We are seeing people stay with us; our attrition rate has flattened or improved.

And our next question comes from Michael from Roth Capital.

This is Michael from Roth Capital on for Dave Bain. I just have 2 for you. So as we roll forward our model a few years, the company begins to accumulate a fair amount of cash with almost no leverage. Assuming you keep the same balance of corporate-owned clinics versus franchise, is there a longer-term thought on the return of capital to shareholders?

It’s a highly cash flow generative model. In 2020, we generated $11 million in operational cash flow on a balance of over 500 units. As you roll that number forward, there’s a lot of cash flow opportunity in the out years. Right now, we have a very clear strategic plan to increase our scale and size. So all the investing activities will be in support of growth and our infrastructure. At some point in the future, we will need to make those decisions.

Great. Last one. Are there any updates regarding store-within-a-store concepts, particularly as we exit COVID and benefit from more traditional retail foot traffic? Can we get a sense of the CapEx and return dynamic differences versus the traditional store opening economics?

I'm going to answer the second part first, and the answer is we don't have the data to respond to that. We've had very limited store concepts. We've had one clinic within a existing concept called Relax it Back and another inside an airport within XpresSpa. Our limited experience means we don't have solid data on the economics of these nontraditional growth methods versus our traditional clinics. This remains an area of great opportunity. We're focused primarily on the core of our traditional clinic, but we absolutely will continue to invest in exploring the other opportunities as we go forward.

I would now like to turn the call back over to Peter Holt, CEO, for closing remarks.

Thank you very much, Justin. I really thank you all for your time today. We plan to participate virtually later this month in the D.A. Davidson growth in the consumer conference and the Roth Annual conference. We've heard so many patient stories relaying their personal experiences on how The Joint has helped them during the pandemic. I'd like to share a couple of them with you. An ICU Nurse from Arizona wrote, 'COVID hit us hard and really took a toll on my back. My patients are typically on a ventilator, which can take a toll on your back. So I started seeing chiropractic care. It's made my mobility so much better over the months, and I will continue to go.' A breast cancer survivor and a Yoga instructor from Texas reports, 'Seeing my doctor once a week has helped me maintain the balance I need to fill in my spine. Regular visits, especially during COVID has been a light. I'm so grateful for the service and attention I get from every adjustment.' Finally, a COVID survivor from Nevada noted, 'I contracted COVID-19 in March 2020 and have been suffering ever since with severe pain covering my entire ribcage, sternum, back, and neck. This pain radiates from my head and all over, which is quite debilitating. During intense flare-ups, my shortness of breath will completely knock me out, and I'm unable to work or even go upstairs in my home. A friend recommended I try The Joint, and I couldn't be happier. My weekly visits enable the doctor to assess misaligned ribs in sore neck and work everything out gently and comfortably. I'm so grateful for my doctor in The Joint. I've not had a headache in weeks and can now work continuously without taking time off since I've joined The Joint.' Thank you all. Stay well adjusted.

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