JOINT Corp Q3 FY2022 Earnings Call

Good day, and welcome to The Joint Corp. Third Quarter 2022 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to David Barnard, with Investor Relations. Please go ahead.

Thank you, Sarah. Good afternoon, everyone. This is David Barnard of Investor Relations. On the call today, President and CEO, Peter Holt, will review our third quarter 2022 performance metrics and provide an update on the business. CFO, Jake Singleton, will detail our financial results and guidance. 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 https://ir.thejoint.com/events. After the close of the market, The Joint Corp. issued its financial results for the quarter ended September 30, 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 position, and plans and objectives of management. Throughout today's discussion, we will present some important factors relating to our business that could affect these forward-looking statements. The forward-looking statements are made based on our current predictions, expectations, estimates, and assumptions and are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we 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, inflation exacerbated by COVID-19 and the current war in Ukraine, our failure to develop or acquire company-owned or managed clinics as rapidly as we intend, our failure to profitably operate company-owned or managed clinics, our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics due in part to the nationwide labor shortage, short-selling strategies and negative opinions posted on the Internet, which could drive down the market price of our common stock and result in class action lawsuits, our failure to remediate the current or future material weaknesses in our internal control over financial reporting, which could negatively impact our ability to accurately report our financial results, prevent fraud, or maintain investor confidence and other factors described in our filings with the SEC, including the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 14, 2022 and subsequently filed current and quarterly reports. As a result, we caution you against placing undue reliance on these forward-looking statements and encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we are not obligating ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events. Management uses EBITDA and adjusted EBITDA, which are non-GAAP financial measures. These are presented because they are important measures used by management to assess financial performance. Management believes they provide a more transparent view of the company's underlying operating performance and operating trends than GAAP measures alone. A reconciliation of net income to EBITDA and adjusted EBITDA is presented in the press release. The company defines EBITDA as net income or loss before net interest, tax expense, depreciation, and amortization expenses. The company defines adjusted EBITDA as EBITDA before acquisition-related expenses, bargain purchase gain, net gain or loss on disposition or impairment, and stock-based compensation expenses. Management also includes commonly discussed performance metrics. System-wide sales include revenues at all clinics, whether operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company, management believes the information is important in understanding the company's financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health of the franchisee base. Comp sales include revenues from both company-owned or managed clinics and franchise clinics that in each case have been open at least 13 full months and exclude any clinics that have closed. Turning to Slide 3. It is now my pleasure to turn the call over to Peter Holt.

Thank you, David, and I welcome everybody to the call. During the third quarter of 2022, we continued our vigorous pace of clinic openings and these new units delivering strong performance, both reflecting a robust underlying business model particularly in the current macroeconomic environment. I want to take this opportunity to welcome our new and existing investors to the call. The Joint is revolutionizing access to chiropractic care by providing affordable concierge-style membership-based services in convenient retail settings. Since our inception over a decade ago with fewer than a dozen clinics, we've grown tremendously. In fact, we reached the 800-unit milestone in September, which places us in the top 2% of the roughly 3,500 franchisors in the United States according to FRANdata. As we build upon and leverage our national brand recognition, we continue to capitalize on the opportunity for more significant growth. The 2022 IBES World Report noted that the chiropractic market increased from $18 billion to $19.5 billion annually. And in October 2022, a report stated that the global chiropractic care market is expected to reach $52 billion by 2027. Yet the sector remains highly fragmented with over 40,000 chiropractic offices in the United States. The Joint leads the profession as the largest chiropractic chain in the world with the greatest market share, in addition to publishing the most chiropractic care content in the public domain. Based on year-end '21, The Joint is approaching 20% of market share with competitors in aggregate estimated to also approximately 2%. With our nationwide clinic base, we have economies of scale in marketing, talent, and infrastructure. Using our proven protocols and standards, we are systematically expanding in areas of known demand. As a result, during the time of consumer uncertainty, The Joint is continuing to post positive comp rates. Turning to Slide 4. I'll review the summary of our financial highlights for Q3 2022 metrics compared to Q3 2021. Later, Jake will discuss our results in greater detail. System-wide sales grew to $110.4 million, increasing 18%. Our comp sales for clinics that have been open for at least 13 full months grew 6%. Revenue increased 27%. Adjusted EBITDA was $3.1 million. As of September 30, 2022, our unrestricted cash was $10.3 million compared to $9.4 million at June 30, 2022. Turning to Slide 5. During Q3 2022, we opened 38 clinics, up from 33 clinics in the prior year quarter. Regarding franchise clinics, during Q3 2022, we opened 33 and closed 2. Regarding change in ownership, corporate purchased 4 previously franchised clinics, 3 in North Carolina and 1 in Scottsdale, and sold 1 company-managed clinic in California to a franchisee. Regarding greenfield clinics, we opened 5: 3 in California and 2 in our new market, Kansas City. Greenfields are performing well into 2022 with gross sales on par with our class of 2021. This is an important point that validates the strength of our new clinic launch strategy and the growing demand for chiropractic care. For the first 9 months of 2022, we opened 103 clinics, 91 franchised and 12 greenfield. This compares to 87 openings in the first 9 months of 2021 that consisted of 76 franchised and 11 greenfields. The net total purchase of previously franchised clinics was 7, and the closures were 3. Our low unit closure rate of less than 1% annually continues to lead the franchise community. At September 30, 2022, we had 805 clinics in operation, consisting of 690 franchise clinics and 115 company-owned or managed clinics, maintaining a portfolio mix of 86% franchise clinics and 14% corporate clinics. At quarter-end, we also had 252 franchise licenses in active development compared to 283 at December 31, 2021. This metric continues to demonstrate the strength of our strong pipeline for franchise clinic openings and reflects the accelerated number of franchise openings. Subsequent to quarter-end, we acquired 2 previously franchised clinics in North Carolina for approximately $2.2 million. We also opened 2 more greenfield clinics in the Kansas City market. Additionally, we sold 1 company-managed clinic in California to a franchisee. Our corporate portfolio now stands at 118 clinics as of November 30, 2022. Turning to Slide 6. In Q3 2022, we sold 12 franchise licenses compared to 44 in Q3 2021. For the first 9 months of 2022, 58 licenses were sold compared to 132 in the same period last year when COVID led to the pent-up demand of our franchise licenses. Although the number of franchise sales is fewer than last year, we believe it is holding strong considering today's macroeconomic environment, including factors such as high inflation, higher interest rates and decreased bottom line that have been impacted. Further, while higher unemployment is known to be a driver of franchise sales, today, the U.S. has a historically low unemployment rate of around 3.5% to 3.7%. As of September 30, we had 19 regional developers who sold 62% of our franchise licenses year-to-date. Our aggregate 10-year minimum development schedule for the new Regional Developer territories established since 2017 was 642 clinics as of September 30. While this program continues to perform well under certain circumstances, we'll reacquire some of those Regional Developer rights. In October, we reduced Regional Developer count to 18 when we reacquired the right-to-develop franchises in the Philadelphia market. The net consideration for the transaction was $151,000. This was an undeveloped market with 2 clinics, and we believe we have the opportunity to develop another 30 sites. Turning to Slide 7. Let's review our marketing efforts. Although we continue to attract healthy numbers of new patient prospects to our clinics, our average number of new patients per clinic is down compared to our record-breaking year in 2021. One of the challenges we faced was last year, Google changed its algorithms which negatively impacted our organic search traffic. As a result, we've been aggressively adapting our SEO strategy in 2022, which is beginning to pay dividends with positive website traffic growth in August and September. Another challenge is the impact of inflation on consumer confidence. With the average age of our patient base being just 36.4 years, the majority have never lived through an era of high inflation. The average American household is spending $445 more per month to buy the same goods and services that they did a year ago, according to reports. This is forcing consumers into financial trade-offs. Two years ago, we faced somewhat similar circumstances during the COVID-19 pandemic and related government shutdowns and restrictions. At that time, we responded with our essential health care services statement and positioned The Joint to survive and thrive despite the devastating impact to so much of the retail industry. We believe this positioning will continue to serve us well, while consumers make tough choices on where to allocate their discretionary spending. We responded to the lower new patient counts with robust testing of new market tactics, promotions, media channels, and consumer messages. We continue to reinvest our marketing technology. This includes the launch of our new patient portal and an upgraded marketing automation platform planned for 2023. Additionally, our clinic local marketing spending has been robust, particularly for sponsorships of athletic programs in our communities. Our ability to form market co-ops distinguishes us from single practitioners and small competitors as we leverage the power of our combined marketing dollars spent in those markets. According to the American Chiropractic Association, chiropractic care gained wide use among professional and amateur sports teams across the country. Studies have shown that chiropractic care can be linked to faster injury recovery, injury prevention, improved levels of strength, and enhanced sports performance for athletes. It's notable that all NFL teams rely on doctors of chiropractic in various capacities, and 77% of the athletic trainers have referred players to a chiropractor for evaluation or treatment. Finally, we're turning our attention to our annual holiday promotions, our Black Friday package sale in November, our year-end membership promotion in December and January. Each year, these events grow in financial impact and franchisee participation. Our network is energized to make 2022 our best performance yet, and we look forward to reporting on the results. And with that, Jake, I'll turn it over to you.

Thank you, Peter. Turning to Slide 8. I'll review the financial results for Q3 2022 compared to Q3 2021. System-wide sales for all clinics opened for any amount of time increased to $110.4 million, up 18%. System-wide comp sales for all clinics opened 13 months or more were 6%. System-wide comp sales for mature clinics opened 48 months or more were 2%. It's worth noting that both the franchise and corporate clinic cohorts performed positively across both time frames. Revenue was $26.6 million, up $5.6 million or 27%. Company-owned or managed clinic revenue increased 36%, contributing $15.8 million. Franchise operations increased 15%, contributing $10.8 million. The increases represent continued growth in both the corporate portfolio and franchise base. On March 1, we implemented a price increase in approximately 75% of our clinics. However, existing patient memberships are grandfathered at their original price. Therefore, the revenue impact from our price adjustment will be gradual and incremental. At the end of the quarter, about 50% of our active members were on the new price structure. Cost of revenues was $2.5 million, up 8% over the same period last year, reflecting the increase in franchise clinics and the associated higher regional developer royalties and commissions. Selling and marketing expenses were $3.5 million, up 23% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by our company-owned or managed clinics. Depreciation and amortization expenses increased compared to the prior year period, primarily due to the depreciation and amortization expenses associated with our continued greenfield development and acquired clinics. G&A expenses were $18.1 million compared to $12.8 million, up 41%, reflecting the cost to support total clinic and revenue growth and higher payroll to remain competitive in the tight labor market. Operating income was $500,000 compared to $1.3 million in Q3 2021. The Q3 2022 results reflected the compressed margins from continued greenfield developments, the aforementioned higher depreciation and amortization, and higher G&A expenses. While greenfields compress the bottom line until they breakeven, they're an excellent use of capital as their sales accelerate in year 2 and beyond, significantly contributing to the bottom line and increasing our return on investment. Income tax benefit was $16,000 compared to $614,000 in Q3 2021. Net income was $491,000 or $0.03 per diluted share compared to net income of $1.9 million or $0.13 per diluted share in Q3 2021. Adjusted EBITDA was $3.1 million compared to $3.3 million for the same period last year. Franchise clinic adjusted EBITDA increased 25% to $5.4 million. Company-owned or managed clinic adjusted EBITDA was $1.7 million compared to Q3 of last year, decreased $1.1 million, reflecting the margin compression related to greenfield development and higher payroll expenses. Corporate expense as a component of adjusted EBITDA loss was $4 million, increasing $160,000 compared to Q3 2021. On to our balance sheet and cash flow review. At September 30, 2022, our unrestricted cash was $10.3 million compared to $19.5 million at December 31, 2021. During the first 9 months of the year, our investing activities of $14.9 million consisted of the acquisition of regional developer territory rights, franchise clinic acquisitions, and greenfield development. These were partially offset by $5.7 million provided by operating activities. On to Slide 9. I'll review our results for the first 9 months of 2022 compared to the same period in 2021. Revenue increased 26% to $74.1 million, and adjusted EBITDA was $7.5 million compared to $10.5 million in the prior year period. This reflects the compression of earnings by the influx of new corporate greenfield clinics and higher payroll expenses associated with the tight labor market. On to Slide 10 for a review of our guidance for 2022. We have tightened guidance, raising the lower end of our revenue expectations. We now expect revenue for the year to be between $100 million and $102 million compared to $80.9 million in 2021. We've also narrowed and modestly lowered adjusted EBITDA guidance to reflect the impact of the greenfield simulation on our bottom line and lower-than-expected same-store sales. Now we expect adjusted EBITDA to be between $11.5 million and $12.5 million compared to $12.6 million in 2021. We continue to expect franchise clinic openings to be between 110 and 130 compared to 110 in 2021, and we continue to expect to increase our company-owned or managed clinics by between 30 and 40 through a combination of greenfield openings and franchise clinic purchases compared to 32 in 2021. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to Slide 11, we have a remarkable growth opportunity ahead with a young patient base in an expanding chiropractic market. Yet in this environment of uncertainty, the business also faces challenges, and critical work remains. For the remainder of 2022 and for 2023, we are and will continue to be focused on the following actions: attracting new patients and franchise prospects; attracting and developing talent, especially the doctors required to staff our clinics and grow our footprint; enhancing our IT platform and leveraging the power of our data; increasing our pace of build-out, including successfully penetrating underdeveloped and new markets; and finally, optimizing our clinic performance to support growth, profitability, and lifetime patient value. We remain focused on driving long-term growth and stakeholder value. Sarah, I'm ready to begin the Q&A.

Our first question comes from Brooks O'Neil with Lake Street Capital Markets.

I confess I got on a few minutes into your call, so if I ask something that you've already discussed, I can go back and read the transcript. You don't need to repeat yourself. But can you just talk a little bit about headwinds and tailwinds that you think might be affecting new patient starts?

Sure. And it's great to talk to you, Brooks. As we've talked about before, one of the headwinds that we've been facing was changing algorithms with Google, and it really impacted our organic growth search. We've spent a lot of time adapting our SEO strategy. And so if we look at our traffic, our web traffic, for the first time this year in August and September, we were outpacing the web traffic compared to the same period last year. So we feel that we are making some inroads on that new patient count just with those changes to that Google algorithm. We have a very young patient base, as I said, it's 36.4 years old. Those younger individuals are not going to friends and families for recommendations for their medical services. They're doing that search online. So they're going to Dr. Google, they're looking at reviews, they're performing that search. So it's so important to be there. What we've seen now is that about our new patient count historically, we've seen about 40% of it comes through our digital marketing strategy. Right now, we have noted that 61% of our new patients at some point have engaged with our digital campaign, our digital strategy, or our online presence. You can see that's just increasingly important to us. When changes like what Google made can impact our new patient count. I think we also have a macroeconomic issue that has to be taken into consideration. We have increasing inflation and consumer confidence concerns. I don't know if we're going directly into a recession or when it will be, or how deep or how long, but I think that's also impacting some of the performance on the clinics, and we see it in our same-store sales. There are some macroeconomic issues that are impacting that new patient count, and there are also some tactical issues on the digital side that are affecting it. I think the tailwinds for us continue to be just the high performance of our clinics, especially the new greenfields that we've had. We're heading toward a record-breaking number of new openings this year. We're guiding to be between 110 to 130. We're expecting to add somewhere between 30 and 40 new clinics or clinics in our corporate portfolio, and that mix will be both corporate and our acquisitions in greenfields. Through the year, we've seen some strong greenfield openings and getting them to breakeven, which bodes well for number one, that our model continues to work; and number two, there's continued interest in chiropractic care.

Absolutely. That's really helpful. And in fact, you just touched on the second thing. I wanted to ask you a little bit about if you have any metrics about the performance of new corporate stores in the portfolio this year versus years past? Or would you say you're continuing to open as strongly as you have in the past? Again, recognize there are some important and sort of uncontrollable headwinds out there in the market right now.

Yes. And I think, Brooks, we continue to get more sophisticated in how we create and use our grand opening strategy. When I look at the overall portfolio, which includes both franchise and corporate units in terms of their time to breakeven, I would say we're seeing them operating at least equal to 2021, and that's in that 6 to 9 months to breakeven. So very, very strong. When we break out corporate units, I would say we're even stronger compared to 2021. We're seeing that, yes, there are all these headwinds we are talking about. But when we open up those clinics and we're using our grand opening strategy, we are seeing the high performance of those clinics as they get to breakeven.

Our next question comes from George Kelly with ROTH Capital Partners.

To begin with the same-store sales growth, I noticed in your prepared remarks that the growth isn't aligning with your earlier expectations when guidance was provided. I'm curious if you meant that the pricing adjustments are taking longer to implement or if the effects of new patient initiatives are more prolonged than anticipated. Are there any other details you'd like to share regarding your outlook for same-store sales growth?

Yes. Thanks, George. As you touched on, as I think about the pace at which we're rolling on to the new price point, I would say we're at expectation, maybe a tad behind. That's not a material driver. As we look at the three core KPIs of this model, we have to attract new patients, convert them into our subscription or package, and retain them for as long as we can. Conversion has remained steady year-over-year, which 2021 was a banner year for us in terms of conversion. We are still seeing strength in that metric. Attrition has actually seen favorability in that, which one could expect when you grandfather in pricing, maybe your patients are going to stick around a little bit longer. But we've actually seen that metric improve. However, we still face challenges in the area of new patients. If you're not filling the funnel at quite the same rate while the numbers are still strong, that's going to be a headwind for your existing patient base. And that's really where we're seeing those numbers come in a little bit lower than expectation. As we talked about, the greenfields are still performing to my pro forma expectations on the top line. Those cost structures are increasing in terms of time to breakeven, but it's still maintaining a strong pace, as Peter mentioned. When talking about the existing base, I think you must look at that new patient performance as a way to really start moving the needle.

I have a couple more questions for you. Regarding the owned portfolio and the greenfield openings, what was the legacy four-wall margin of that owned base before greenfields started, which my calculation places in the mid-30% EBITDA range? It seems to have decreased significantly, even when excluding greenfield openings. I understand you're dealing with higher labor costs and other impacts. How long do you anticipate it will take to recover or show margin improvement? Additionally, do you think the previous margin profile on a four-wall basis is attainable in the next couple of years, or has the model changed so much that it's unlikely to return to that level?

Yes, a lot of questions rolled in there. I'll try to touch on them all. To start, in terms of the margin expectation, we have a chart in the investor deck that outlines a five-year market maturity and actual system sales against an estimated cost structure. What that would show you on a four-wall basis is we would expect somewhere around a 30% four-wall margin. We have units that do better than that, and we have some that are still progressing toward that number. On average, that's what we would expect is kind of that low 30% mark on a four-wall basis. Now as I think about the increased labor pressures we're seeing, if I roll through the benefits of the price increase over time, we could still get back to the same pro forma expectations at maturity. Our four-wall economics really remain unchanged, as we continue to see the benefits of the price increase roll through. That gives us a little room in case there are additional labor pressures that we could continue to see. But I would still expect over time to reach that 30% plus four-wall margin. In terms of the corporate portfolio and when we would expect those margins to turn around, I think you must factor in the number of greenfields that we've added recently. If you look at the number we did in the last 100 days of 2021, that number was 13. Then we've added another, what, 12 so far this year, 12 through the quarter, 14 overall. Most of them are in their first, call it, 13 months of operations, which historically is a significant period of drag. If you look at it on an annualized basis, you're working through around $75,000 of losses in that first year. In the following year, the sales averages for year 2 are expected to increase around 58%. My sales should have a significant jump from year 1 to year 2, transitioning from expected $75,000 of losses to probably contributing $75,000 in that second year of operation. We're investing quite a bit into our greenfield strategy. It's still an excellent pro forma ramp and a great use of capital, but it takes time to work through that maturity curve.

The point I would add, Jake, is that when you made the comment that things have changed because your models changed, I would say the model hasn’t changed. There’s no question that we are seeing a higher cost of labor. Our labor line is definitely there. We’re offsetting it by implementing the price increase we put in place in March. That will take time to have the full effect. But in terms of the fundamentals of the model, it has not changed to date.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

I want to kind of expand on the last point in terms of looking ahead a little bit towards clinic growth for 2023. Wanted to get an understanding of kind of two things. First, how you expect the composition of that. Is it going to likely replicate what we saw in '22 in terms of greenfield development? Do you expect it to be higher or lower? And then the second part of the question is, look, it's clear that the support staff and clinic doctor costs are higher, maybe quite a bit higher than they were a year ago. I want to think about the potential for margin recovery into next year. So first question is the composition of how you expect clinic growth to look next year? And then the second one is really a question on cost and ability to recapture some of the EBITDA margin loss this year?

Yes, I'll address the first question and then hand it over to Jake. When we consider the composition, we don't provide specific guidance beyond broad ranges for 2023 and beyond. As mentioned on the call, 86% of our system is franchised while 14% is corporate. Although we don't set a specific number, you can expect a similar ratio in the coming years. For significant increases in ownership or the number of greenfields in our portfolio, we would need to significantly change our greenfield strategy as we grow the market. As we look at 2023 and beyond, I believe our ratios will remain relatively stable. We will continue to grow our portfolio of greenfields at a moderate pace and will focus on opportunistic acquisitions throughout the year. We will provide our guidance for 2023 during our fourth-quarter and full-year report, likely in March.

I'll touch on the margin recovery, Jeremy. You're right. We have seen the costs for doctors continue to increase, and we have seen the wellness coordinator position, that hourly retail position, put pressure there as well. When that represents 45% of your costs at maturity, those are significant pressures in terms of the economics. The DC salary goes because that's a more significant driver, and we continue to see pressure there. I have seen it taper. That's not me telling you the labor market is not tight. I would think our franchisees would attest to that. But the rate of increase we have seen start to taper a little bit. The overall margin recovery is going to be driven by the maturation of the portfolio, with all those greenfields coming through and becoming contributors. We have a portfolio right now of 17 executed leases. When you think about our continued investment in greenfields, we still very much believe in that strategy and will continue to develop those, but we have moderated that pace to match what we saw in the late portions of 2021. As we moderate that greenfield pace and allow the existing ones to continue their maturity, I think we will begin seeing those incremental improvements in margin again. In terms of timing, it’s predicated on our level of investment, but we have tapered that greenfield pace, and that will enable those existing units to continue to mature. With so many of them completing their first year of operation, we look forward to their contributions in 2023.

Got it. And just to kind of piggyback on that one a little bit. Slide 14, the year-to-date segment results with the split out of the corporate clinics. How well do you think the corporate clinic performance represents what your franchisees are seeing kind of on a four-wall basis? Are their business model slightly more profitable because they have more maturity? Or how does it compare?

Well, they have a royalty structure, so their overall economics are going to be impacted by that. From a four-wall basis, we would expect similar economics. You can triangulate against kind of what we see in the FDD year-over-year because we do collect those franchisee VP&Ls. If you look at the 2021 results from our latest FDD, I think they did a four-wall number that was 30.8%, and again, that's a mature portfolio, kind of in that year four or year five mark in terms of months in operation, and they’re reaching that same potential. As you look at our corporate margin right now, again, it's being suppressed by the labor pressures without the full benefit of the price increase and all those young units that compress the economics as they continue to work through their maturity.

Got it. And then last one for me. Your cash balance is down quite a bit, almost cut in half from where you were at the start of the year through the first 9 months. Quite a bit of that is due to some acquisition activity. But in terms of thinking about where you are on the balance sheet, is there flexibility limited in terms of what you might do on the acquisition side as we look ahead into 2023 because the cash balance is down? Or do you see that not really as any type of limiting factor in terms of what you might look to do?

Yes. I think cash on hand is one element of that. When you say moderate acquisition activity, I mean, we've done almost $15 million of investing activities so far in the first 9 months of the year, and that's been offset by $5.7 million of cash flow from operations. If you look through the 6 months, I think our net cash provided by operating activities was around $1.5 million. This is still a cash-generative business. We’re choosing to reinvest that right now. The other piece is, while we have the $10.3 million of cash on hand at the end of the quarter, we also have an additional $18 million of credit available through the line with JPMorgan. As I think about it from an overall liquidity perspective, I'm thinking about that entire pool. As I look out and model the potential uses of that capital, I'm not seeing any restrictive elements of that right now.

Our next question comes from Jeffrey Van Sinderen with B. Riley FBR.

Looking ahead to 2023, I understand it's early and considering the broader economic environment, I'm curious about how much the recent price increases might be impacting your ability to attract new patients, especially since you seem to be at a balanced point. Additionally, how do you plan to evolve your marketing strategies for next year? I'm particularly interested in whether you might adjust your approach given your current focus on performance digital. Can you elaborate on these aspects?

Thank you for your question about the effect of pricing on new patients. As we've discussed, affordability is a key principle for us. When we implemented a full price increase in 2016 and made some market adjustments in 2019, we observed that the impact on our new patient numbers and important business metrics was generally neutral or even positive. With our recent price increase, moving from $59, $69, $79 to $69, $79, $89, we've noticed a decline in new patient counts, particularly at the $89 price point, while most of our system remains at $79 a month. We are very aware of how price influences new patient acquisition. This price increase occurred in a macroeconomic environment filled with uncertainty, which may have contributed to the impact. Regarding your second question about strategies for acquiring new patients efficiently, we currently have three main sources. The first is referrals, which account for about 30% to 35% of new patients, driven by providing exceptional service that encourages patient recommendations. The second source is our growing digital marketing efforts, which are evolving rapidly. We're recognizing its importance and allocating resources to it. In 2023, we plan to implement a sophisticated automated marketing platform, along with direct marketing strategies directed at our patients. We're also enhancing our microsites and maximizing SEO opportunities, experimenting with new advertising platforms like TikTok, Yelp, and Nextdoor, and utilizing conversational marketing to manage leads and attract new patients. Finally, the third source is grassroots marketing, which focuses on local retail, using coupons, flyers, science shows, and outreach to schools, gyms, and hospitals, as our core customers typically live, work, and travel within 5 to 15 minutes of our clinics. We're constantly assessing and innovating our digital marketing campaign, which is vital for reaching our target demographic, primarily young patients, with 45% of our patients being millennials and 16% being Gen Z. These groups often rely on online resources for their purchasing decisions, making a strong online presence crucial.

Did you mention that 60% of your new patients are engaging with the digital marketing?

Yes. Again, patient attribution is tricky because individuals may have encountered our brand through multiple channels before visiting us. However, we can measure that of our patient base, 61% of our patient base today has engaged with us digitally prior to their initial visit.

Okay. And then just sort of as a follow-on to that, I know you mentioned the new patient portal. Can you remind us the timing of when you're launching that? And then I also wanted to gauge your experience with the new enterprise software system. What still needs to be done in the current stage there, if anything? Just if you could touch on those items.

Sure, absolutely. Regarding the patient portal, it's set to launch in phases with key components expected to be released by late Q1 to early Q2. We’ll continue to add functionality through the year. We're also implementing a platform for more automated marketing to individual patients based on their specific needs or preferences, which is a more refined marketing approach. In terms of the IT platform, we have certainly experienced some growing pains related to implementing enhancements. The system we are using now has advantages compared to the old system, but also it has some additional complexities that we have had to address. We’ve focused on resolving bugs and enhancing the usability of the platform that our users employ to manage the business. This process of continual refinement and enhancement will remain essential moving forward.

Our next question comes from Thomas McGovern with Maxum Group.

A lot of my questions have already been answered very thoroughly, so I appreciate that. I just have a question going off something other analysts asked about the breakdown of franchises versus corporate clinics. You guys said that it is currently and will remain about 86% franchise and 14% corporate. My question is, is that accounting for a potential recession? If the macro environment does continue to get more difficult to operate in, will that breakdown change potentially in an effort to conserve costs or just allocate resources differently?

Sure, sure. It's a great question. I would answer that if we were to enter a recession with high unemployment rates, historically, you see franchise sales increase. The only exception was the Great Recession, where financing halted entirely, causing franchise growth to come to a standstill. In any other recession, historically in my career, I would expect franchise sales to increase as individuals may seek to purchase franchises for various reasons, including being laid off. Therefore, I would expect that if we enter a recession, there would be heightened interest in franchise sales. Currently, we are experiencing an unemployment rate of around 3.5% to 3.7%, which makes it hard to suggest this would drive people to buy franchises. In terms of our existing breakdown, we remain at 86% franchises and 14% corporate. As we grow, we will continue with measured corporate growth through greenfield and acquisition strategies. Unless there's a fundamental shift in strategy, it’ll be hard to change these percentages significantly without altering our current approach. Before I close, I want to share a few comments. Earlier, I reviewed our marketing co-op sponsorship of athletic programs in their communities. Studies report chiropractic care provides natural preventive benefits that are vital to keeping the body balanced, flexible, and functioning at its best, especially for athletes. I'd like to tell you about our patient, Nicole, an amateur beach volleyball player. A few years ago, she hurt her back and was told she could never play competitive sports again. She was diagnosed with lupus, which severely affected her joints, challenged her athletic activities, and forced her to walk with a cane. After a few months of chiropractic care, Nicole returned to the court. She knows that while volleyball is demanding and still affects her back, The Joint enables her to enjoy frequent competition. To summarize Nicole's testimony, being able to play is a gift. I wouldn't be playing without chiropractic care. My joints generally receive so much relief with the necessary maintenance, and I go weekly, if not more, without fail. Thank you and stay well adjusted.

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