Earnings Call Transcript - JYNT Q3 2023

Operator, Operator

Good day, and welcome to The Joint Corp. Third Quarter 2023 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kirsten Chapman of LHA, Investor Relations. Please go ahead.

Kirsten Chapman, Investor Relations

Thank you, Harmony, and thank you, everyone, for joining us this afternoon. This is Kirsten Chapman of LHA Investor Relations. Joining us on the call today are President and CEO, Peter Holt; and CFO, Jake Singleton. Please note that we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the market closed, The Joint issued its operating metrics and financial results for the quarter ended September 30, 2023. If you do not have a copy of this press release, it can be found in the Investor Relations section of the company's website. Please be advised that today's discussion includes forward-looking statements within the meaning of the safe harbor provisions in the Private Securities Litigation Reform Act of 1995. All statements other than the historical facts may be considered forward-looking statements. Although the company believes the expectations and assumptions in these forward-looking statements are reasonable, it cannot assure that such expectations or assumptions will prove to be correct. Actual results may differ materially from those expressed or implied in forward-looking statements due to various risks and uncertainties. As a result, we caution you against placing undue reliance on these forward-looking statements. For a discussion of these risks and uncertainties that could cause actual results to differ, please review the risk factors detailed in the company's reports on the Forms 10-K and 10-Q as well as other reports the company files from time to time with the SEC. Finally, any forward-looking statements made during this conference call are only valid as of the date of this call, and we do not have any obligation to revise our results or publicly release updates to these forward-looking statements based on new information or future results. Management also includes commonly discussed performance metrics. System-wide sales include revenue at all clinics, whether operated by the company or franchisees, while franchise sales are not recorded as revenues by the company. Management believes this information is important for understanding the company's financial performance because these sales are the basis for calculating and recording royalty fees and indicate the financial health of the franchise base. System-wide comp sales from both company-owned, managed, and franchise clinics are those that have been open for at least 13 months and exclude any closed clinics. The company also uses adjusted EBITDA and provides a reconciliation to GAAP in its press release and presentation. Turning to Slide 3, it’s my pleasure to turn the call over to Peter Holt. Please go ahead, sir.

Peter Holt, President and CEO

Thank you, Kirsten, and I welcome everybody to the call. During Q3 2023, we continue to execute our mission to improve quality of life through routine and affordable chiropractic care. The strength of our franchise concept remains strong as we continue to revolutionize access to chiropractic care by providing affordable, concierge-style, membership-based services in convenient retail settings. However, ongoing economic uncertainty and continued cost pressures have impacted our corporate clinic portfolio performance. After evaluating options for improvement, the Board has authorized management to initiate a plan to refranchise or sell the majority of our company-owned or managed clinics. Management intends to retain a portion of highly performing corporate clinics. This refined strategy will leverage our greatest strength, our capacity to build the franchise to drive long-term growth, both for our franchisees and The Joint as a public company. We intend to use the clinic sales proceeds to support marketing and patient acquisition, and to reinvest in our company through a possible acquisition of regional developer territories and potential stock repurchases. The reduction of the corporate clinic portfolio will also facilitate our unallocated cost reduction efforts. Jake and I will elaborate more on these initiatives and our progress in a moment. Turning to Slide 4, I'll review our operating financial highlights for the third quarter of 2023. System-wide sales grew to $119.3 million, increasing 8% compared to Q3 2022. Comp sales for clinics that have been opened for at least 13 full months were flat at 0%. Revenue increased 11%, compared to Q3 2022. Adjusted EBITDA was $2.9 million for Q3 2023. At September 30, 2023, our unrestricted cash grew to $16 million, compared to $9.7 million on December 31, 2022. Turning to Slide 5, I'll discuss our clinic metrics. During Q3 2023, we opened 26 clinics, 24 franchised and two greenfields. This compares to 38 clinics opened in Q3 2022, 33 franchised and five greenfield. During both Q3 '23 and Q3 '22, we closed two franchise clinics. With today's foundation of over 900 clinics, our closure rate is less than 1%, and remains one of the lowest in the franchise community. At September 30, 2023, we had 914 clinics in operation, consisting of 778 franchise clinics, and 136 corporate-owned or managed clinics. The portfolio mix remains 85% franchise clinics, and 15% company-owned or managed clinics. Regarding our corporate portfolio strategy. In September, we announced that we had earmarked about 10% of our underperforming clinics for sale, relocation or closure. Our team is executing well. Already eight clinics are in various stages of sales negotiations, two are sold in October, and in addition, two corporate clinics are about to be sold. As I mentioned at the beginning of the call, we've increased our goal to refranchise the majority of our corporate clinics. We expect to sell the majority of them to existing franchisees, but we'll also consider qualified franchisees new to The Joint. It's important to note that we'll be selling valuable assets and we will not be in rush negotiations to accelerate the process. We'll retain some corporate clinics due to their maturity and their strong performance, which we believe will yield benefits. For example, they'll continue to be strong financial contributors, we can use them to test price adjustments, new membership plans and various ancillary products and services that we're assessing for wider rollout of our network. Regarding our remaining greenfield pipeline, we have four greenfields in the process of being opened and will uphold our various obligations related to the leases and buildup. In some cases, we may complete the clinic's grand opening and sell the clinic after a patient base is established. In others, we'll transfer permits and contracts to a franchisee prior to the opening. Our regional developer strategy remains consistent. We have demonstrated over the past several years that the natural progression of our territory development can lead to the reacquisition of certain regional developer regions. And we'll continue to execute as the criteria is met. We do not plan to establish any additional regional developer territories. And as such, over time, we expect the regional developer share of franchise royalty fees to decrease as we reacquire regional developer rights. We ended Q3 with a regional developer count of 17, and an aggregate 10-year minimum development schedule for regional developer territories established since 2017 is 590 clinics. Looking ahead, and most importantly, we maintain unwavering dedication to our franchise community. We're focused on improving franchise clinic performance and unit economics. We continue to invest in tools to drive franchise growth and support our nationwide expansion. At the quarter end, we had a solid pipeline for future franchise clinic openings, with 202 franchise licenses in active development. Turning to Slide 6. In Q3 2023, we sold 12 franchise licenses, the same numbers we sold in Q3 2022. This reflects the continued impact of higher interest rates, inflation, and strong employment rates, negatively influencing franchise sales. That said, existing franchisees who have enjoyed the advantages of The Joint clinics continue to reinvest, year-to-date comprising 58% of franchise license sales this year. Turning to Slide 7, we'll review our marketing efforts. This quarter, we welcomed our new Chief Marketing Officer, Lori Abou Habib. She is an expert in digital marketing and building customer loyalty with extensive franchise experience. Lori's initial focus area has been to leverage the power of our data to understand our existing and prospective patients. We're using our patient journey research and the wealth of patient data to craft distinct journeys for patients who have never seen a chiropractor before, patients who are familiar with chiropractic care, and patients we have not seen recently. This research and strategy will inform message optimization and the customer experience from that initial search for a chiropractor through becoming and remaining a patient. In Q4, we will begin to apply these insights on our media buys and content on Meta, highlighting key themes that are most important to each of these patient segments. Additionally, Lori is focused on three main areas. Number one, grow new leads and patients. We're working diligently to increase the flow of new patients to our clinics by introducing new functionality, improving current processes, and mining our local trade areas for new patient growth. We're working on projects to decrease friction for our new patients by improving the intake process, creating a sense of urgency by introducing first visit bookings, and optimizing our local clinic marketing. Number two, increasing lifetime patient value. In addition to getting new patients, we're also taking a more nuanced approach to generating more revenue from our existing patient base. To enable this, we are working on projects like creating a promotional calendar to drive same-store sales, increasing content, and leveraging marketing automation to deliver the right message to the right audience at the right time. And number three, growing brand equity. We have a strong brand with a rich story. By deepening the brand's unique essence and meaning of leveraging our footprint, we can become synonymous with chiropractic care in a way that our competitors cannot. We're working on our brand architecture to evolve our brand positioning and define brand essence to deepen our competitive advantage. And before I turn the call over to Jake, I'm delighted to welcome Jeff Graham, who will join the Board in January of 2024. He's a long-term supporter. We've enjoyed productive conversations with Jeff and look forward to his contribution on how to make this company more effective. And with that, I'll turn it over to you, Jake.

Jake Singleton, CFO

Thanks, Peter. Turning to Slide 8. I'll review our clinic comps for Q3 2023 compared to Q3 2022. System-wide sales for all clinics opened for any amount of time increased to $119.3 million, up 8%. The system-wide comp sales for all clinics opened for 13 months were flat at 0%. System-wide comp sales for mature clinics opened 48 months or more decreased 5%. This comp reflects fewer than anticipated new patients at some of our more mature clinics. Revenue was $29.5 million, up $3 million or 11%. Revenue from franchise operations increased 9%, contributing $11.6 million. Company-owned or managed clinic revenue increased 13%, contributing $17.9 million. The increases represent continued year-over-year growth in both the franchise base and the corporate portfolio. Cost of revenues was $2.6 million, up 11% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $4.3 million, up 22% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise and corporate base, an increase in local marketing expenditures by the company-owned or managed clinics, and the timing of our national marketing fund spend. Depreciation and amortization expenses increased $569,000, up 32% compared to the prior year period, primarily due to the increase in the number of greenfield developments and acquired clinics. G&A expenses were $20.2 million, compared to $17.8 million. The change reflects the cost to support the increased clinic count. However, the year-over-year rate of increase slowed, it was 14% for Q3 '23 over Q3 '22, down from 39% from Q3 '22 compared to Q3 '21. Also, we have continued certain cost control initiatives such as hiring freezes, travel reductions, and the elimination of non-core projects. Loss on disposition or impairment was $905,000 compared to $264,000 in the third quarter of '22. The increase includes those corporate clinics that were announced to be held for sale in September of 2023. Operating loss was $898,000 compared to operating income of $732,000 in the third quarter of '22, reflecting the previously mentioned impairment charges. Income tax benefit was $188,000, compared to the benefit of $24,000 in the third quarter of '22. Net loss was $716,000 or $0.05 per share, compared to net income of $731,000 or $0.05 per diluted share in the third quarter of '22. Adjusted EBITDA was $2.9 million compared to $3.1 million for the same period last year. Franchise clinic adjusted EBITDA was almost flat at $5.3 million. Company-owned or managed clinic-adjusted EBITDA increased 20% to $2 million. Corporate expense as a component of adjusted EBITDA was $4.5 million, approximately $0.5 million higher than Q3 2022, reflecting accounting and professional service costs related to the restatement. On to Slide 9. For the nine months ended September 30, 2023, compared to the same period in 2022, revenue was $87.1 million, up $13.5 million or 18%. Net income, including net employee retention credits and loss on disposition of impairment was $1.3 million or $0.09 per diluted share, compared to a net loss of $137,000 or a loss of $0.01 per share in the first nine months of 2022. Adjusted EBITDA was $8.2 million, up $618,000 or 8%. On to a review of our balance sheet and cash flow. At September 30, 2023, our unrestricted cash was $16.1 million, compared to $9.7 million at December 31, 2022. This reflects $11.3 million in cash flow from operations, including the receipt of the employee retention credits of $4.8 million, and the net of $4.9 million of investment in clinic acquisitions, development of greenfield clinics, and improvements of existing clinics and corporate assets. Also, we continue to have access to additional cash through our line of credit with JPMorgan Chase. Today, we've drawn $2 million and have an additional $18 million available. On to Slide 10 for a review of our guidance. We are reaffirming all elements of our 2023 guidance. Revenue is expected to be between $115 million and $118 million, compared to $101.9 million in 2022. Adjusted EBITDA is expected to be between $11 million and $12.5 million, compared to $11.5 million in 2022. We continue to expect to open between 100 and 120 franchise clinics, compared to 121 in 2022, and between eight to 12 greenfield clinics compared to 16 in 2022. Looking ahead, as discussed, we will initiate our plan to refranchise the majority of our corporate portfolio clinics and retain a portion of high-performing clinics. We will implement this plan with a sense of priority and importance to improve the overall financial performance of the company with an emphasis on profitability. Notably, this is a quality group of clinics that represent assets of value. We will negotiate determinedly and maintain the autonomy to sell at a suitable price. As such, predicting the timing of events will be difficult. As we think about the financial impacts of the refranchising efforts, please note the following. We continue to expect the gross sales for our entire system to grow. However, GAAP revenue will decrease as the corporate portfolio shifts from being recognized as 100% owned or managed to being recorded at 7% franchise royalty fees. As our cost of sales is primarily related to regional developer fees, we expect it to remain fairly static. We expect our sales and marketing expenses to decrease as we reduce the scale of our corporate portfolio. Currently, our corporate clinics spend approximately $3,000 per month per clinic in local advertising. Regarding general and administrative expenses, we expect to see significant reductions in our clinic-level, four-wall operating expenses, our outside-the-four-wall expenses, and our unallocated corporate overhead. These expenses will be reduced proportionately as we reduce the scale of our corporate portfolio. As such, the timing of these G&A reductions will be gradual and incremental. Overall, while we are reducing our top-line revenue, we expect our reduction in G&A to expand our operating margins and increase profitability in the long run. Finally, it's important to note that some of our underperforming clinic valuations may result in noncash impairment charges. Conversely, the better clinics perform, it will create higher sales proceeds and the opportunity for gain on sale. And with that, I'll turn the call back over to you, Peter.

Peter Holt, President and CEO

Thanks, Jake. We're excited to execute our new strategic focus. By converting the majority of our corporate portfolio to franchise clinics, we're taking clear action to strengthen the health of our franchise network to increase our cash flow to reinvest in the business and to innovate additional products and services on the clinical level, and to improve clinic-level performance across the company. We believe these changes will enhance the value and performance of the company, whether from the perspective of a franchisee or a stockholder for the following reasons. Number one, the market opportunity continues to be large. According to IBIS, people in the U.S. spent $19.5 billion a year on chiropractic care, and our franchisees have barely scratched the surface, capturing only 2% of the market to date. Two, the market is expanding. The drivers for chiropractic care, pain, opioid, and obesity epidemic continue to persist. According to Kenley Insight, the industry five-year compounded annual growth rate is greater than 5%, and The Joint gross sales have consistently outperformed that, delivering a 12-year CAGR of 62%. Three, The Joint continues to expand the market. For example, in 2022, of the 845,000 people who opened the door to The Joint for the very first time that year, 35% had never seen a chiropractor before. Four, we have a clear first-to-market advantage. With over 900 clinics, we have a greater presence than all other franchise chiropractic systems combined. Our national brand presence creates economies of scale, which sets the flywheel in motion that drives even greater brand recognition. Five, our digital footprint leads the Internet. Today, The Joint is the largest online publisher for information about chiropractic in the industry, and we intend to leverage it even more to drive increased patient acquisition. Finally, our concept leads franchises and chiropractic care businesses, making The Joint a top choice for entrepreneurs. Our success is frequently recognized with accolades from Franchise Times, Franchise Business Review, Entrepreneur Magazine, FRANdata, and more. And with that, I'd like to thank our community of doctors, chiropractic wellness coordinators, franchisees, regional developers, and employees for their passion and dedication to The Joint. We could not be achieving the success that we are without their dedicated efforts. And with that, Harmony, I'm ready to open up for Q&A.

Operator, Operator

Your first question comes from Jeff Van Sinderen from B. Riley, FBR. Please go ahead.

Richard Magnusen, Analyst

This is Richard Magnusen in for Jeff Van Sinderen. Thank you for taking the call. To start off, you gave us some detail regarding sort of about different cohorts and the comps. But what further detail can you give us about the trends among the different cohorts? And specifically, what are you seeing with the latest cohorts that might stand out?

Jake Singleton, CFO

Yes. Richard, I don't think we'll give any further disaggregated information. I think what we can say is, obviously, flat comps for the quarter is not where we want to be. We've seen some positive momentum as we start Q4. But the issues, especially as it relates to our mature clinic portfolio continue to be centered around our new patient headwinds. And that's why we've dedicated a lot of our efforts in support of Lori and the initiatives that Peter spoke about on the call.

Richard Magnusen, Analyst

Okay. And then what metrics are you seeing in retention and new member adds?

Peter Holt, President and CEO

Sure. We are focusing on three key metrics: new patient counts, conversion rates, and attrition rates. Historically, we have performed well in conversion, with pre-COVID rates between 44% and 45%. This year, those rates have increased to over 50% across the system. Our attrition rate was around 11% to 13% pre-COVID and currently stands at about 11% system-wide, with the corporate portfolio even lower. However, the new patient count has faced challenges, decreasing 14% from the highs of 2021 to 2022, and about another 4% down from quarter to quarter when comparing 2023 to 2022. We believe this metric is bottoming out, and we anticipate improvement in new patient counts soon. Additionally, we recognize the need for a more detailed approach to retain our existing patients longer, and to ensure that when they do leave, we get them back sooner, as approximately 25% of those who leave return within six months. This will be a critical focus for us moving forward.

Richard Magnusen, Analyst

Okay. And then my last question is that, as the new CMO focuses on leveraging patient data, are you layering on new capabilities with your software system at the clinics? And then aside from the new marketing demands on the software, have you achieved most of what we believe you can or what the software can provide in its current form?

Peter Holt, President and CEO

I'm going to address that last question. No, I don't believe we have fully tapped into the potential of our new IT platform to enhance clinic performance. As we've mentioned in previous calls, it has taken longer than expected to resolve some issues, which has posed challenges. However, we have made significant progress this year. We are now concentrating on how to effectively utilize that resource. We are developing a patient portal, implementing mobile check-in, and adding features for automated marketing to ensure patients receive the appropriate messages at the right time and at various stages of their patient journey. I believe there is still much potential to further leverage our IT platform.

Jake Singleton, CFO

And the first follow-up question again?

Richard Magnusen, Analyst

Yes, as the CMO focuses on leveraging patient data, are you having to layer on new capabilities to that software to accommodate that demand?

Peter Holt, President and CEO

Yes, the short answer is yes. We have a program that automates our marketing, which we've implemented through email and are now transitioning to text. Earlier this year, we conducted significant research on the patient journey, and Lori can effectively utilize that as a framework to refine our new patient marketing strategy moving forward.

Operator, Operator

Your next question comes from JP Wollam from ROTH MKM. Please go ahead.

George Kelly, Analyst

If we could maybe just start, in terms of maybe really dialing in on some of the problems we've had with the new member growth. One, is there anything you can point to that, maybe said this is a problem for the industry rather than maybe a problem related to new member acquisition at The Joint? Just something to make sure that we know it's not losing customers to other chiropractic brands, but rather maybe something going on with consumer health. And then as part of that, just anything to point out in terms of consumer spending? And maybe trade down to more 2 times a month visit and less membership or less four-wall plus kind of visiting customers? Anything to point out on your spending in health? Thank you.

Peter Holt, President and CEO

That's a great question. To address it, our ideal patient typically has a family income between $50,000 and $105,000. Reflecting on last year, we were discussing concerns about a potential recession. While we know we're not currently in a recession, 49% of Americans still feel that they are. This suggests that our patient base is affected by economic factors like inflation and rising interest rates, which have resulted in higher mortgages and rent. Affordability is a key aspect of our business, and although we are not officially in a recession, our patients are feeling the impact because the economic growth hasn't been evenly distributed. Regarding competition, we haven't seen any indication that our new patient count is affected by competitors. With 919 clinics operating, I'm actually surprised by the limited competition we face. There are a few small competitors trying to imitate our model, but they're mostly localized, so I don’t believe it's impacting our ability to attract new patients.

George Kelly, Analyst

Understood. That's very helpful. Could we discuss the corporate-owned portfolio for a moment? I realize you may not want to set a timeline or cadence, but as we begin this process, do you have any estimates regarding the size of the corporate portfolio you plan to retain? Additionally, could you elaborate on the progress of the sale negotiations? Are the potential buyers existing franchisees looking to acquire additional units, or what type of buyers are you seeing?

Peter Holt, President and CEO

To address your first question, we have clearly stated our intention to sell off the majority of our corporate portfolio. By the end of the quarter, we had 136 clinics. In September, we announced that we would evaluate our bottom 10 percent of clinics, which we plan to manage by either closing, franchising, or relocating them, and we are actively working on that. So far, we have sold two clinics and have two more that are set to sell. The buyers for this segment, as we noted in September, have primarily been existing franchisees. Moving forward, we expect that most buyers for the clinics we plan to sell will also be existing franchisees, as they have shown interest in expanding their market presence because of their confidence in the business. While we are open to selling to qualified new franchisees, it is crucial for us to ensure that we are selling to capable individuals who can successfully operate clinics. Our approach is not a fire sale; we are not under pressure to sell these assets quickly. We view them as valuable, and considering current market conditions and challenges related to margins, we believe this strategy is effective for our organization.

Operator, Operator

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

Jeremy Hamblin, Analyst

Thank you for taking my question. First, regarding the multiples, I apologize if this has already been addressed. I'm curious about the type of value you aim to achieve. Is it based on a multiple of the cash flow generated by the four walls of the clinic, or is it based on the clinic's revenue? How do you establish the appropriate valuations, especially given that financing is becoming more challenging and expensive for potential franchisees looking to acquire?

Jake Singleton, CFO

Sure, Jeremy, great question. We've really gone on a clinic-by-clinic basis across a range of valuation methodologies. So, looking at the performance on a clinic-by-clinic basis, running individual discounted cash flow models, looking at a range of different valuation multiple techniques, whether it's sales, earnings, cash flow, et cetera, and it's certainly given us an idea and some negotiating ranges on a per clinic basis. There is a range of performance across the portfolio. So, we do have high-performing clinics that will command higher sales proceeds in demand areas that might tick up from a multiple’s perspective. And then that ranges all the way to a small subset of underperformers. And then we've got young clinics that are still ramping. So, each of those has a unique way to view valuation. And for competitive reasons, we probably won't put out metrics on what those multiple targets are or anything of that nature. But we have done a very detailed analysis to give us a basis for what they think they're worth. And then we'll continue those negotiations with the related prospective buyers.

Jeremy Hamblin, Analyst

In terms of the prospective buyer, could you share what type you are looking for? Are you considering mid-tier franchisees, or perhaps clinicians who already own competing chiropractic clinics? What kind of buyer are you targeting?

Peter Holt, President and CEO

It's a great question. I would say it's probably all of the above. Currently, about 35% of our franchise communities have chiropractors as franchisees. The majority are business professionals hiring the chiropractor. There are definitely opportunities for doctors to purchase one or more clinics. If they are already in the business, understand it, and can manage it effectively, that’s a significant advantage for us in ensuring those clinics succeed. From my experience in franchising, it's crucial to have operators who know more than just the basics; we need quality business people who can manage well. While it helps if they have experience with The Joint to avoid steep learning curves, there are successful franchisees from other concepts who have proven they can operate The Joint efficiently. We will focus on the quality of management as a key criterion for sales.

Jeremy Hamblin, Analyst

Got it. And then just coming back to this process, and it can be challenging to go through a refranchising effort. And really, to be matching the lost revenue versus the embedded corporate costs, in particular. Can you give us a sense for what's a reasonable time frame if the majority, in terms of the number of corporate-operated clinics, like 136 at the end of the quarter? Is it feasible to do 25% of those in one year? Or is that just too aggressive in terms of the timing? Is there a range you might be able to provide us with in terms of what you think can happen in year one, year two?

Jake Singleton, CFO

Yes. I can appreciate the desire to want to hone that in. I think it's important to reiterate that these are clinics of value, right? This is not a fire sale. We're not going to be rushed through this process. So, it's really hard to put a defined timeline on that, Jeremy. So, we probably won't state anything publicly as it relates to that. We've got...

Peter Holt, President and CEO

Until we get further into the process.

Jake Singleton, CFO

Absolutely.

Peter Holt, President and CEO

Jeremy, as we get further into this, we'll be much more able to talk about kind of timelines and time frames. But at this stage, it's a little harder to give you, okay, it's going to take x amount of time, or x percentage will be sold by a certain time frame. It's a priority. It's important to us that this is absolutely an adjustment in our strategic focus, where we're focusing on the franchisees and selling off the majority of our corporate portfolio. But again, these are important assets that we will be putting in the hands of great franchisees who can continue to run them effectively.

Operator, Operator

Your next question comes from Aaron Lockman from Lake Street Capital Markets. Please go ahead.

Unidentified Analyst, Analyst

This is Aaron on the line for Brooks. Are you able to hear me okay?

Peter Holt, President and CEO

Yes, no problem at all, Aaron.

Unidentified Analyst, Analyst

So just recognizing that the majority of your revenue and earnings come from the corporate side. How do you think moving to a primarily franchise concept, excuse me, will affect your public investors? Just in a general sense, trying to get a bit more color on your thoughts there.

Peter Holt, President and CEO

Sure. When we started focusing on building a portfolio of corporate units, we accelerated that growth in 2021 and 2022. Reflecting on our current situation and the challenges we face, particularly regarding market economic trends that have affected our business, we've also seen rising costs, especially in labor. This changing environment prompts us to reconsider our strategy regarding the corporate portfolio. It's common for franchise systems to alternate between expanding and reducing corporate units. Looking at our current conditions, I feel we're not receiving adequate recognition for how we've managed our corporate portfolio, and this is another factor to keep in mind as we move forward.

Jake Singleton, CFO

And I think it's important to remember that we're selling the majority, but we are going to maintain a portion of corporate portfolios. And we'll be targeting those high-performing clinics that are in tight kind of concentric geographic areas that will allow us to really scale back that corporate overhead. So, with the strategy, we should be able to maintain a significant chunk of the earnings potential from a smaller number of units and then allow us to continue that hybrid strategy.

Unidentified Analyst, Analyst

Got you. Very helpful. And then just a quick follow-up. You mentioned a little bit in your prepared remarks, but have you identified tangible, and I guess, practical ways to improve the new patient starts in this current environment? Just trying to get a better sense of what that would look like and your thoughts there.

Peter Holt, President and CEO

Yes. No, we have. We've been doing a lot of work. We've been using different forums. So, for example, we're doing a lot with Meta these days. We are also with TikTok, is what I meant to say. We are increasing our spend on Meta. We're doing a whole audit of our marketing spend to understand the efficacy of that and where those resources are best spent. That's one of the projects that Lori is first taking on. From that, we'll also do an RFP of really looking at that whole local store or that whole digital marketing spend. If you look at our new patient count right now, roughly 35% or 30% comes from referrals. So that's just a patient having a great experience with a doctor and telling their friends. We have been able to track, for example, last year that 63% of our new patients touched us at some point digitally. And it's always hard to answer true patient attribution or new patient attribution. But we know that's only increasingly important. And so, we know, we need to be more and more effective on that spend and making sure that we're able to close that gap of generating those leads, whether it's through paid or organic search, and then making sure that we are closing them and bringing them into the clinic. And so, there's some new programs we're putting in place, a call center, for example, that we're experimenting with a program where a new patient is being offered an appointment to be able to create a sense of urgency or willingness to cross over into the clinic. So, there's a number of activities. More to come on that, but we feel that we are definitely moving in the right direction to address the new patient count.

Operator, Operator

Your next question comes from Anthony Vendetti from Maxim Group. Please go ahead.

Anthony Vendetti, Analyst

Thank you. Can you share some insights on the trends you're observing, particularly in certain regions or key performance indicators? Are there any positive trends? Additionally, regarding the comparables, what do you think is causing the relative flatness? Is it primarily due to macroeconomic factors? I'm looking to understand your perspective on these trends.

Peter Holt, President and CEO

Absolutely. We are definitely observing some positive trends, particularly with our key metrics. Our conversion rate remains strong, previously around 44% to 45% pre-COVID, and now it exceeds 50%. During COVID, it peaked at about 60%, likely due to the urgent need for adjustments. Nevertheless, even post-COVID, we continue to experience a solid conversion rate, which is encouraging for the business. A significant 84% of our sales derive from our wellness plan subscriptions, making it a crucial aspect of our operations. Additionally, we’ve noticed an improvement in patient retention, with attrition decreasing from 13% pre-COVID to roughly 11% now. The corporate portfolio shows even lower attrition rates, indicating that patients are staying longer. However, the new patient count has been affected by various factors that we've discussed. This decline does influence our comparisons for the quarter and the year, and some reasons seem linked to macroeconomic conditions impacting our patient demographic. Notably, younger generations in our patient base have felt this uncertainty more acutely than older ones, such as baby boomers. In some of our more established markets, the influx of new patients is being diluted across a larger number of clinics, which is also contributing to lower new patient counts for individual clinics.

Anthony Vendetti, Analyst

Okay. And then on the franchise side, and then I'll hop back in the queue. With just the higher interest rates, are some of the current franchise owners that are looking to expand or new ones, are they a little bit more hesitant? Are they waiting for rates to come down? Or it's not really having much of an impact?

Peter Holt, President and CEO

Yes, it has had an impact. I've spoken with other franchisors, and they all agree that there's significant research indicating it's affecting new franchise sales. This results from rising interest rates, economic uncertainty, and inflation. I believe these factors are reflected in our franchise sales. In 2021, for instance, we had 156 sales. Last year, we had 75, and year-to-date, we are at 50. We're slightly below where we were last year, which I see as a direct correlation to these macroeconomic issues that influence whether someone decides to invest in a franchise, whether it's ours or others. Looking at 2023, 58% of the franchises sold were to existing franchisees. There’s no better validation than someone already in the business wanting to expand, despite the current conditions. For newcomers, especially those not familiar with The Joint, uncertainty can lead to hesitation. Historically, we had a 50-50 split, with half our new franchisees being new to The Joint and half being existing ones. It makes sense in the current environment to see a greater proportion of sales driven by existing franchisees given the uncertainty.

Operator, Operator

Thank you, that concludes our question-and-answer session. I would now like to turn the conference back to Mr. Peter Holt.

Peter Holt, President and CEO

Thank you, Harmony. Before I close, I'd like to note that we'll be at the Roth Deer Valley Conference in December. And today, about 30% of our franchisees are doctors of chiropractic. And I'd like to tell you a story about one of our doctors in our systems. When Dr. P. moved to Las Vegas, he was looking for a chiropractic practice that afforded him the ability to maintain a few business ventures in his prior location. The Joint provided that flexibility, no pun intended. And Dr. P. said, and I quote, 'I quickly fell in love with the brand and everything The Joint represents.' Two years later, he realized his hometown and yet another state didn't have any The Joint clinics. Dr. P. reported, 'I saw this as an ideal opportunity to embrace the challenge of marrying my passion for the brand, my experience as a chiropractor, and my entrepreneurial spirit. It almost felt like it was an opportunity that was meant to be, so we took the leap, and he hasn't looked back since.' Thank you and stay well-adjusted.

Operator, Operator

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