UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of October 31, 2023, the registrant had
Table of Contents
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Page |
PART I. |
1 |
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Item 1. |
1 |
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1 |
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2 |
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Condensed Consolidated Statements of Changes to Stockholder's Equity (Deficit) |
3 |
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5 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
31 |
Item 3. |
48 |
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Item 4. |
48 |
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PART II. |
49 |
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Item 1. |
49 |
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Item 1A. |
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Item 2. |
49 |
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Item 3. |
49 |
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Item 4. |
49 |
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Item 5. |
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Item 6. |
50 |
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51 |
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Xponential Fitness, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(amounts in thousands, except share and per share amounts)
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September 30, |
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December 31, |
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2023 |
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2022 |
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Assets |
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Current Assets: |
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Cash, cash equivalents and restricted cash |
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$ |
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$ |
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Accounts receivable, net (Note 10) |
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Inventories |
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Prepaid expenses and other current assets |
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Deferred costs, current portion |
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Notes receivable from franchisees, net |
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Total current assets |
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Property and equipment, net |
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Right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Deferred costs, net of current portion |
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Notes receivable from franchisees, net of current portion |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities, redeemable convertible preferred stock and equity (deficit) |
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Current Liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Deferred revenue, current portion |
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Current portion of long-term debt |
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Other current liabilities |
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Total current liabilities |
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Deferred revenue, net of current portion |
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Contingent consideration from acquisitions (Note 16) |
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Long-term debt, net of current portion, discount and issuance costs |
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Lease liability |
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Other liabilities |
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Total liabilities |
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Redeemable convertible preferred stock, $ |
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Stockholders' equity (deficit): |
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Undesignated preferred stock, $ |
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Class A common stock, $ |
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Class B common stock, $ |
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Additional paid-in capital |
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Receivable from shareholder (Note 10) |
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( |
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Accumulated deficit |
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Treasury stock, at cost, |
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( |
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Total stockholders' deficit attributable to Xponential Fitness, Inc. |
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( |
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Noncontrolling interests |
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( |
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Total stockholders' deficit |
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( |
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Total liabilities, redeemable convertible preferred stock and stockholders' deficit |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
1
Xponential Fitness, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except per share amounts)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenue, net: |
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Franchise revenue |
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$ |
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$ |
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$ |
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$ |
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Equipment revenue |
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Merchandise revenue |
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Franchise marketing fund revenue |
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Other service revenue |
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Total revenue, net |
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Operating costs and expenses: |
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Costs of product revenue |
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Costs of franchise and service revenue |
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Selling, general and administrative expenses (Note 10) |
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Depreciation and amortization |
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Marketing fund expense |
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Acquisition and transaction expenses (income) |
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( |
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Total operating costs and expenses |
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Operating income (loss) |
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Other (income) expense: |
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Interest income |
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Interest expense |
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Other expense |
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Total other expense |
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Income (loss) before income taxes |
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Income taxes (benefit) |
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( |
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( |
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Net income (loss) |
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( |
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Less: net income (loss) attributable to noncontrolling interests |
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Net income (loss) attributable to Xponential Fitness, Inc. |
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$ |
( |
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$ |
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$ |
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$ |
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Net income (loss) per share of Class A common stock: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
( |
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$ |
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$ |
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$ |
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Weighted average shares of Class A common stock outstanding: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements.
2
Xponential Fitness, Inc.
Condensed Consolidated Statements of Changes to Stockholders' Equity (Deficit)
(Unaudited)
(amounts in thousands)
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Class A Common Stock |
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Class B Common Stock |
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Treasury Stock |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Additional Paid-In Capital |
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Receivable from |
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Accumulated |
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Noncontrolling |
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Total |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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Conversion of Class B shares to Class A shares |
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— |
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( |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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Payment of preferred stock dividend |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Adjustment of preferred stock to redemption value |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Vesting of Class B Shares |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted share units, net of shares withheld for taxes |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Deemed contribution from redemption of preferred stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Liability-classified restricted stock units vested |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Loan to shareholder and accumulated interest |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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Balance at March 31, 2023 |
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( |
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Equity-based compensation |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Conversion of Class B shares to Class A shares |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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Payment of preferred stock dividend |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Adjustment of preferred stock to redemption value |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Vesting of Class B Shares |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Vesting of restricted share units, net of shares withheld for taxes |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Loan to shareholder and accumulated interest |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Receivable from shareholder arising from the Rumble studios acquisition |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Consideration related to the Rumble studios acquisition |
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— |
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— |
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— |
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— |
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Payment received from shareholder |
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Distributions paid to Pre-IPO LLC Members |
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— |
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— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
||||||
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Conversion of Class B shares to Class A shares |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
||
Payment of preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Vesting of Class B Shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Vesting of restricted share units |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Repurchase and retirement of Class A common stock |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Excise tax on share repurchases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Proceeds from disgorgement of stockholders short-swing profits (Note 10) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Payment received from shareholder |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Distributions paid to Pre-IPO LLC Members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||||||
See accompanying notes to condensed consolidated financial statements.
3
Xponential Fitness, Inc.
Condensed Consolidated Statements of Changes to Stockholders' Equity (Deficit)
(Unaudited)
(amounts in thousands)
|
|
Class A Common Stock |
|
|
Class B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-In Capital |
|
|
Receivable |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||
Balance at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||||
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Conversion of Class B shares to Class A shares |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
||
Payment of preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Vesting of Class B Shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|||||
Equity based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Conversion of Class B shares to Class A shares |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Payment of preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Vesting of Class B Shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Vesting of restricted stock units |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|||||
Equity based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Conversion of Class B shares to Class A shares |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
||
Vesting of Class B Shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Vesting of restricted share units, net of shares withheld for taxes |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Loan to shareholder and accumulated interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Payment of preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at September 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|||||
See accompanying notes to condensed consolidated financial statements.
4
Xponential Fitness, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization and write off of debt issuance cost |
|
|
|
|
|
|
||
Amortization of discount on long-term debt |
|
|
|
|
|
|
||
Change in contingent consideration from acquisitions |
|
|
( |
) |
|
|
( |
) |
Amortization of right-of-use assets |
|
|
|
|
|
|
||
Bad debt expense (recovery) |
|
|
|
|
|
( |
) |
|
Equity-based compensation |
|
|
|
|
|
|
||
Non-cash interest |
|
|
( |
) |
|
|
( |
) |
Write down of goodwill and brand assets |
|
|
|
|
|
|
||
Gain on disposal of assets |
|
|
( |
) |
|
|
( |
) |
Changes in assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
Inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Deferred costs |
|
|
( |
) |
|
|
( |
) |
Notes receivable, net |
|
|
|
|
|
|
||
Accounts payable |
|
|
|
|
|
|
||
Accrued expenses |
|
|
|
|
|
( |
) |
|
Other current liabilities |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Other assets |
|
|
( |
) |
|
|
( |
) |
Other liabilities |
|
|
( |
) |
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
||
Purchase of studios |
|
|
( |
) |
|
|
|
|
Purchase of intangible assets |
|
|
( |
) |
|
|
( |
) |
Notes receivable issued |
|
|
( |
) |
|
|
( |
) |
Notes receivable payments received |
|
|
|
|
|
|
||
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Borrowings from long-term debt |
|
|
|
|
|
|
||
Payments on long-term debt |
|
|
( |
) |
|
|
( |
) |
Debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Payment of preferred stock dividend and deemed cash dividend |
|
|
( |
) |
|
|
( |
) |
Payment of contingent consideration |
|
|
( |
) |
|
|
( |
) |
Payments for taxes related to net share settlement of restricted share units |
|
|
( |
) |
|
|
( |
) |
Payment for tax receivable agreement |
|
|
( |
) |
|
|
|
|
Payments for redemption of preferred stock |
|
|
( |
) |
|
|
|
|
Payments for distributions to Pre-IPO LLC Members |
|
|
( |
) |
|
|
|
|
Repurchase of Class A common stock |
|
|
( |
) |
|
|
|
|
Payment received from shareholder (Note 10) |
|
|
|
|
|
|
||
Loan to shareholder (Note 10) |
|
|
( |
) |
|
|
( |
) |
Proceeds from disgorgement of stockholders short-swing profits (Note 10) |
|
|
|
|
|
|
||
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Increase in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
See accompanying notes to condensed consolidated financial statements.
5
Xponential Fitness, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid |
|
|
|
|
|
|
||
Noncash investing and financing activity: |
|
|
|
|
|
|
||
Capital expenditures accrued |
|
$ |
|
|
$ |
|
||
Adjustment of convertible preferred stock to redemption value |
|
|
( |
) |
|
|
( |
) |
Liability-classified restricted stock units vested |
|
|
|
|
|
|
||
Deemed contribution from redemption of convertible preferred stock |
|
|
|
|
|
|
||
Accrued tax withholding related to convertible preferred stock dividend |
|
|
|
|
|
|
||
Intangible asset acquired in exchange for deferred revenue |
|
|
|
|
|
|
||
See accompanying notes to condensed consolidated financial statements.
6
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 1 – Nature of Business and Operations
Xponential Fitness, Inc. (the “Company” or “XPO Inc.”), was formed as a Delaware corporation on January 14, 2020. On July 23, 2021, the Company completed an initial public offering (“IPO”) of
XPO LLC was formed on August 11, 2017 as a Delaware limited liability company for the sole purpose of franchising fitness brands in several verticals within the boutique fitness industry. XPO LLC is a wholly owned subsidiary of XPO Holdings, which was formed on February 24, 2020, and prior to the IPO, ultimately, H&W Franchise Holdings, LLC (the “Parent”). Prior to the formation of XPO Holdings, the Company was a wholly owned subsidiary of H&W Franchise Intermediate Holdings, LLC (the “Member”).
As of September 30, 2023, the Company’s portfolio of
In connection with the IPO, XPO Inc. entered into a series of transactions to implement an internal reorganization, (the “Reorganization Transactions”). The pre-IPO members of XPO Holdings (the “Pre-IPO LLC Members”) who retained their equity ownership in the form of limited liability company units (the “LLC Units”), immediately following the consummation of the Reorganization Transactions are referred to as “Continuing Pre-IPO LLC Members.” Because XPO Inc. manages and operates the business and controls the strategic decisions and day-to-day operations of XPO LLC through its ownership of XPO Holdings and because it also has a substantial financial interest in XPO LLC through its ownership of XPO Holdings, it consolidates the financial results of XPO LLC and XPO Holdings, and a portion of its net income (loss) is allocated to the noncontrolling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of XPO Holdings’ net income or loss.
Immediately following the closing of the IPO, XPO LLC is the predecessor of the Company for financial reporting purposes. As the sole managing member of XPO LLC, the Company operates and controls all of the business and affairs of XPO LLC. The Reorganization Transactions are accounted for as a reorganization of entities under common control. As a result, the condensed consolidated financial statements of the Company recognize the assets and liabilities received in the Reorganization Transactions at their historical carrying amounts, as reflected in the historical consolidated financial statements of XPO LLC. The Company consolidates XPO LLC on its condensed consolidated financial statements and records a noncontrolling interest related to the Class B units held by the Class B stockholders on its condensed consolidated balance sheet and statement of operations.
Basis of presentation – The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, the Company has made all adjustments necessary to present fairly the condensed consolidated statements of operations, balance sheets, changes in stockholders' equity (deficit), and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”). Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.
7
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Use of estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. Actual results could differ from these estimates under different assumptions or conditions.
Note 2 – Summary of Significant Accounting Policies
Segment and geographic information – The Company operates in
Cash, cash equivalents and restricted cash – The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
The Company has marketing fund restricted cash, which can only be used for activities that promote the Company’s brands. In July 2022, the Company issued a $
The Company's restricted cash consists of marketing fund restricted cash and guarantee of standby letter of credit. Restricted cash was $
Accounts receivable and allowance for doubtful accounts – Accounts receivable primarily consist of amounts due from franchisees and vendors. These receivables primarily relate to royalties, advertising contributions, equipment and product sales, training, vendor commissions and other miscellaneous charges. Receivables are unsecured; however, the franchise agreements provide the Company the right to withdraw funds from the franchisee’s bank account or to terminate the franchise for nonpayment. On a periodic basis, the Company evaluates its accounts receivable balance and establishes an allowance for doubtful accounts based on a number of factors, including evidence of the franchisee’s ability to comply with credit terms, economic conditions and historical receivables. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Credit Losses – Effective January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, which required the recognition of expected credit losses for accounts and notes receivable. The adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements as the expected credit loss model was not significantly different from the Company's prior policy and methodology for determining the allowance for doubtful accounts. For additional information refer to section below titled “Recently adopted accounting pronouncements.”
The Company’s accounts and notes receivable are recorded at net realizable value, which includes an appropriate allowance for estimated credit losses. The estimate of credit losses is based upon historical bad debts, current receivable balances, age of receivable balances, the customer’s financial condition and current economic trends, all of which are subject to change. Actual uncollected amounts have historically been consistent with the Company’s expectations. The Company’s payment terms on its receivables from franchisees are generally
8
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The following table provides a reconciliation of the activity related to the Company’s accounts receivable and notes receivable allowance for credit losses:
|
|
Accounts receivable |
|
|
Notes receivable |
|
|
Total |
|
|||
Balance at January 1, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Bad debt expense recognized during the period |
|
|
|
|
|
|
|
|
|
|||
Write-off of uncollectible amounts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accrued expenses – Accrued expenses consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Accrued compensation |
|
$ |
|
|
$ |
|
||
Contingent consideration from acquisitions, current portion |
|
|
|
|
|
|
||
Sales tax accruals |
|
|
|
|
|
|
||
Legal accruals |
|
|
|
|
|
|
||
Other accruals |
|
|
|
|
|
|
||
Total accrued expenses |
|
$ |
|
|
$ |
|
||
Comprehensive income – The Company does not have any components of other comprehensive income recorded within the consolidated financial statements and therefore does not separately present a consolidated statement of comprehensive income in the condensed consolidated financial statements.
Fair value measurements – Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. ASC Topic 820 establishes a valuation hierarchy for disclosures of the inputs to valuations used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 – Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
The Company’s financial instruments include cash, restricted cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of these financial instruments approximate fair value due to their short maturities, proximity of issuance to the balance sheet date or variable interest rate.
9
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Noncontrolling interests – Noncontrolling interests represent the economic interests of XPO LLC held by Class B common stockholders. Income or loss is attributed to the noncontrolling interests based on the weighted average LLC interests outstanding during the period. The noncontrolling interests' ownership percentage can fluctuate over time as the Class B common stockholders may elect to exchange their shares of Class B common stock for Class A common stock.
Earnings (loss) per share – Basic earnings (loss) per share is calculated by dividing the earnings (loss) attributable to Class A common stockholders by the number of weighted-average shares of Class A common stock outstanding. Shares of Class B common stock do not share in the earnings of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings (loss) per share of Class B common stock under the two-class method has not been presented.
Diluted earnings per share adjusts the basic earnings per share calculation for the potential dilutive impact of common shares such as equity awards using the treasury-stock method. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. Shares of Class B common stock are considered potentially dilutive shares of Class A common stock; however, in loss periods related amounts are excluded from the computation of diluted earnings per share of Class A common stock because the effect would be anti-dilutive under the if-converted and two-class methods.
Income taxes – The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities (“DTAs” and “DTLs”) for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. The Company recognizes DTAs to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. If the Company determines that it would be able to realize DTAs in the future in excess of the net recorded amount, an adjustment to the DTA valuation allowance would be made, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC Topic 740 on the basis of a two-step process in which the Company (1) determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not have any uncertain tax positions. The Company recognizes potential interest and penalties, if any, related to income tax matters in income tax expense. The Company did
Recently adopted accounting pronouncements –
Credit Losses – In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326).” This standard provides a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and applies to trade and notes receivables. The adoption of this accounting standard on January 1, 2023 did not have a material impact on the Company's condensed consolidated financial statements as the expected credit loss model was not significantly different from the prior policy and methodology for determining the allowance for doubtful accounts. For additional information refer to section above titled “Credit Losses.”
Reference Rate Reform – In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the expected transition away from reference rates that are expected to be discontinued, such as London Interbank Offered Rate (“LIBOR”). ASU 2020-04 was effective upon issuance. In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” ("ASU 2022-06"). ASU 2022-06 defers the sunset date of ASC Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in ASC Topic 848. ASU 2022-06 was effective upon issuance. The adoption of this accounting standard did not have a material impact on the Company's condensed consolidated financial statements.
10
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Business Combinations – In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” ("ASU 2021-08"). ASU 2021-08 primarily addresses the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The amendment improves comparability by specifying for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities. This results in better comparability for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years with early adoption permitted. The adoption of this accounting standard, effective January 1, 2023, did not have an impact on the Company's condensed consolidated financial statements.
Recently issued accounting pronouncements – The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, the JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to use this extended transition period.
Note 3 – Acquisitions and Dispositions
The Company completed the following acquisitions and dispositions which contain Level 3 fair value measurements related to the recognition of goodwill and intangibles.
Studios
On
Under the Asset Purchase Agreement, consideration for the acquisition included $
The following summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
|
|
Amount |
|
|
Accounts receivable |
|
$ |
|
|
Inventories |
|
|
|
|
Property and equipment |
|
|
|
|
Right-of-use assets |
|
|
|
|
Goodwill |
|
|
|
|
Deferred revenue |
|
|
( |
) |
Lease liabilities |
|
|
( |
) |
Reduction to receivable from shareholder |
|
$ |
|
|
11
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The resulting goodwill is primarily attributable to synergies from the integration of studios, increased expansion for market opportunities and the expansion of studio membership and is expected to be tax deductible.
The fair value of the property and equipment was based on the replacement cost method. The fair value of the right of use assets was determined using the income approach. The deferred revenue represents prepaid classes and class packages. The Company will recognize revenue over time as the members attend and utilize the classes.
The fair value of the reacquired franchise rights after termination of the existing franchise agreements was based on the excess earnings method and is considered to have an eight-year life.
The acquisition was not material to the results of operations of the Company. During the nine months ended September 30, 2023, the Company did
During the nine months ended September 30, 2023, the Company entered into an agreement with a franchisee under which the Company repurchased
|
|
Amount |
|
|
Property and equipment |
|
$ |
|
|
Reacquired franchise rights |
|
|
|
|
Total purchase price |
|
$ |
|
|
During the nine months ended September 30, 2023 and 2022, the Company refranchised operations at
When the Company believes that a studio will be refranchised for a price less than its carrying value, but does not believe the studio has met the criteria to be classified as held for sale, the Company reviews the studio for impairment. The Company evaluates the recoverability of the studio assets by comparing estimated sales proceeds plus holding period cash flows, if any, to the carrying value of the studio. For studio assets that are not deemed to be recoverable, the Company recognizes impairment for any excess of carrying value over the fair value of the studios, which is based on the expected net sales proceeds. During the three and nine months ended September 30, 2023 and 2022, the Company did
BodyFit Trademark
In the quarter ended June 30, 2022, the Company entered into a Trademark Acquisition Agreement with Vitalize, LLC dba Bodybuilding.com (the "Seller"), whereby the Company acquired all rights, titles, and interests in and to the BodyFit trademark in the United States. The acquisition was recorded as an asset acquisition. The aggregate purchase consideration for the acquisition was $
12
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 4 – Contract Liabilities and Costs from Contracts with Customers
Contract liabilities – Contract liabilities consist of deferred revenue resulting from franchise fees, development fees and master franchise fees paid by franchisees, which are recognized over time on a straight-line basis over the franchise agreement term. The Company also receives upfront payments from vendors under agreements that give the vendors access to franchisees’ members to provide certain services to the members (“brand fees”). Revenue from the upfront payments is recognized on a straight-line basis over the agreement term and is reported in other service revenue. Also included in the deferred revenue balance are non-refundable prepayments for merchandise and equipment, as well as revenues for training, service revenue and on-demand fees for which the associated products or services have not yet been provided to the customer. The Company classifies these contract liabilities as either current deferred revenue or non-current deferred revenue in the condensed consolidated balance sheets based on the anticipated timing of delivery.
|
|
Franchise |
|
|
Brand fees |
|
|
Total |
|
|||
Balance at December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Revenue recognized that was included in deferred |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Deferred revenue recorded as settlement in |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Increase, excluding amounts recognized as revenue |
|
|
|
|
|
|
|
|
|
|||
Balance at September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The following table illustrates estimated revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of September 30, 2023. The expected future recognition period for deferred franchise development fees related to unopened studios is based on management’s best estimate of the beginning of the franchise license term for those studios. The Company elected to not disclose short term contracts, sales and usage-based royalties, marketing fees and any other variable consideration recognized on an “as invoiced” basis.
Contract liabilities to be recognized in revenue in |
|
Franchise |
|
|
Brand fees |
|
|
Total |
|
|||
Remainder of |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
— |
|
|
|
|
|||
|
|
|
|
|
— |
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
The following table reflects the components of deferred revenue:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Franchise and area development fees |
|
$ |
|
|
$ |
|
||
Brand fees |
|
|
|
|
|
|
||
Equipment and other |
|
|
|
|
|
|
||
Total deferred revenue |
|
|
|
|
|
|
||
Non-current portion of deferred revenue |
|
|
|
|
|
|
||
Current portion of deferred revenue |
|
$ |
|
|
$ |
|
||
13
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Contract costs – Contract costs consist of deferred commissions resulting from franchise and area development sales by third-party and affiliate brokers and sales personnel. The total commission is deferred at the point of a franchise sale. The commissions are evenly split among the number of studios purchased under the development agreement and begin to be amortized when a subsequent franchise agreement is executed. The commissions are recognized on a straight-line basis over the initial franchise agreement term to align with the recognition of the franchise agreement or area development fees. The Company classifies these deferred contract costs as either current deferred costs or non-current deferred costs in the condensed consolidated balance sheets. The associated expense is classified within costs of franchise and service revenue in the condensed consolidated statements of operations. At September 30, 2023 and December 31, 2022, there were approximately $
Note 5 – Notes Receivable
The Company previously provided unsecured advances or extended financing related to the purchase of the Company’s equipment or franchise fees to various franchisees. These arrangements have terms of up to
The Company has also provided loans for the establishment of new or transferred franchise studios to various franchisees. These loans have terms of up to
At September 30, 2023 and December 31, 2022, the principal balance of the notes receivable was approximately $
Note 6 – Property and Equipment
Property and equipment consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Furniture and equipment |
|
$ |
|
|
$ |
|
||
Computers and software |
|
|
|
|
|
|
||
Vehicles |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Total property and equipment |
|
$ |
|
|
$ |
|
||
Depreciation expense for the three and nine months ended September 30, 2023, was $
14
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 7 – Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of identifiable net assets acquired related to the original purchase of the various franchise businesses and acquisition of company-owned transition studios. Goodwill is not amortized but is tested annually for impairment or more frequently if indicators of potential impairment exist. During the nine months ended September 30, 2023, there was an increase of $
During the quarter ended September 30, 2022, the Company determined it was necessary to re-evaluate goodwill of the AKT reporting unit for impairment due to declines in forecasted and actual cash flows. Therefore, the Company performed a quantitative assessment of the fair value of the reporting unit using an income approach with assumptions that are considered Level 3 inputs and concluded that the carrying value of the AKT reporting unit exceeded its fair value, resulting in a goodwill impairment of $
During the quarter ended September 30, 2023, the Company determined it was necessary to re-evaluate goodwill of the Stride and Row House reporting units for impairment due to indicators of potential impairment resulting from a decline in forecasted and actual cash flows. Therefore, the Company performed a quantitative assessment of the fair value of the reporting units using an income approach with assumptions that are considered Level 3 inputs and concluded that the carrying value of the Stride and Row House reporting units exceeded their fair value, resulting in a goodwill impairment of $
Intangible assets consisted of the following:
|
|
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Amortization |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||||
Trademarks |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Franchise agreements |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Reacquired franchise rights |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||
Web design and domain |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Deferred video production costs |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Total definite-lived intangible assets |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks |
|
N/A |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total intangible assets |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Amortization expense was $
15
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The anticipated future amortization expense of intangible assets is as follows:
|
|
Amount |
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Note 8 – Debt
On April 19, 2021, the Company entered into a Financing Agreement with Wilmington Trust, National Association, as administrative agent and collateral agent, and the lenders party thereto (the “Credit Agreement”), which consists of a $
Under the Credit Agreement, the Company is required to make: (i) monthly payments of interest on the Term Loans and (ii) quarterly principal payments equal to
The Credit Agreement also contains mandatory prepayments of the Term Loans with: (i)
Unless agreed in advance, all voluntary prepayments and certain mandatory prepayments of the Term Loan made (i) on or prior to the first anniversary of the closing date are subject to a
The Credit Agreement contains customary affirmative and negative covenants, including, among other things: (i) to maintain certain total leverage ratios, liquidity levels and EBITDA levels; (ii) to use the proceeds of borrowings only for certain specified purposes; (iii) to refrain from entering into certain agreements outside of the ordinary course of business, including with respect to consolidation or mergers; (iv) restricting further indebtedness or liens; (v) restricting certain transactions with affiliates; (vi) restricting investments; (vii) restricting prepayments of subordinated indebtedness; (viii) restricting certain payments, including certain payments to affiliates or equity holders and distributions to equity holders; and (ix) restricting the issuance of equity. As of September 30, 2023, the Company was in compliance with these covenants.
The Credit Agreement also contains customary events of default, which could result in acceleration of amounts due under the Credit Agreement. Such events of default include, subject to the grace periods specified therein, failure to pay principal or interest when due, failure to satisfy or comply with covenants, a change of control, the imposition of certain judgments and the invalidation of liens the Company has granted.
16
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
On October 8, 2021, the Company entered into an amendment (the “Amendment”) to the Credit Agreement. The Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $
On September 30, 2022, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $
On January 9, 2023, the Company entered into a fourth amendment (the "Fourth Amendment") to the Credit Agreement. The Fourth Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $
In connection with the Fourth Amendment, the Company wrote off a pro rata portion of debt issuance costs related to the Term Loans aggregating $
On August 3, 2023, the Company entered into a fifth amendment (the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $
In connection with the Fifth Amendment, the Company wrote off a pro rata portion of debt issuance costs related to the Term Loans aggregating $
The Company incurred debt issuance costs of $
17
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Principal payments on outstanding balances of long-term debt as of September 30, 2023 were as follows:
|
|
Amount |
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Total |
|
$ |
|
|
The carrying value of the Company’s long-term debt approximated fair value as of September 30, 2023 and December 31, 2022, due to the variable interest rate, which is a Level 2 input, or proximity of debt issuance date to the balance sheet date.
Note 9 – Leases
The Company leases office space, company-owned transition studios, warehouse, training centers and a video recording studio. Certain real estate leases include one or more options to renew. The exercise of lease renewal options is at the Company's sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation, respectively. The depreciable life of assets and leasehold improvements are limited by the expected lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the rate implicit in the lease contract in determining the present value of lease payments. If the implicit rate is not provided, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including the lease term. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company lease terms may include options to extend or terminate the lease. Currently, it is not reasonably certain that the Company will exercise those options and therefore, the Company utilized the initial, noncancelable, lease term to calculate the lease assets and corresponding liabilities for all leases. The Company has certain insignificant short-term leases with an initial term of twelve months or less that are not recorded in the condensed consolidated balance sheets. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company applied the practical expedient as an accounting policy for classes of underlying assets that have fixed payments for non-lease components, to not separate non-lease components from lease components and instead to account for them together as a single lease component, which increases the amount of lease assets and corresponding liabilities.
ROU assets from operating leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, and are reviewed for impairment when indicators of impairment are present. ASC 360 requires three steps to identify, recognize and measure impairment. If indicators of impairment are present (Step 1), the Company performs a recoverability test (Step 2) comparing the sum of the estimated undiscounted cash flows attributable to the ROU asset in question to the carrying amount. If the undiscounted cash flows used in the recoverability test are less than the carrying amount, the Company estimates the fair value of the ROU asset and recognizes an impairment loss when the carrying amount exceeds the estimated fair value (Step 3). When determining the fair value of the ROU asset, the Company estimated what market participants would pay to lease the assets assuming the highest and best use in the assets' current forms. During the three and nine months ended September 30, 2023, the Company recognized ROU asset impairment charges of $
Supplemental balance sheet information related to leases are summarized as follows:
Operating leases |
|
Balance Sheet Location |
|
September 30, |
|
|
December 31, 2022 |
|
||
ROU assets, net (1) |
|
Right-of-use assets |
|
$ |
|
|
$ |
|
||
Lease liabilities, short-term |
|
Other current liabilities |
|
$ |
|
|
$ |
|
||
Lease liabilities, long-term |
|
Lease liability |
|
$ |
|
|
$ |
|
||
(1) Includes impact of write off of abandoned right-of-use assets of $
18
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Components of lease expense during the three and nine months ended September 30, 2023 and 2022, are summarized as follows:
|
|
Three Months Ended September 30, |
|
|||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||
|
|
Third-party leases |
|
|
Total |
|
|
Related-party lease |
|
|
Third-party leases |
|
|
Total |
|
|||||
Operating lease costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Variable lease costs |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Short-term lease costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Nine Months Ended September 30, |
|
|||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||
|
|
Third-party leases |
|
|
Total |
|
|
Related-party lease |
|
|
Third-party leases |
|
|
Total |
|
|||||
Operating lease costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Variable lease costs |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Short-term lease costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Supplemental cash flow information related to operating leases during the three and nine months ended September 30, 2023 and 2022, are summarized as follows:
|
|
Three Months Ended September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
||
Lease liabilities arising from new ROU assets |
|
$ |
|
|
$ |
|
||
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
||
Lease liabilities arising from new ROU assets |
|
$ |
|
|
$ |
|
||
Other information related to leases is summarized as follows:
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
Maturities of lease liabilities as of September 30, 2023 are summarized as follows:
|
|
Amount |
|
|
|
Remainder of 2023 |
|
$ |
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total future lease payments |
|
|
|
|
|
Less: imputed interest |
|
|
|
|
|
Total |
|
$ |
|
|
|
19
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 10 – Related Party Transactions
The Company has numerous transactions with the pre-IPO Member and pre-IPO Parent and its affiliates. The significant related party transactions consist of borrowings from and payments to the Member and other related parties under common control of the Parent.
In March 2021, the Company recorded a distribution to the Parent of $
In September 2019, the Company entered into a
In December 2022, the Company entered into an agreement with the former owner of Row House, pursuant to which contingent consideration relating to the 2017 acquisition of Row House was settled in exchange for the issuance of
In March 2023, Spartan Fitness Holdings, LLC (“Spartan Fitness”), which currently owns and operates
20
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The Company earns revenues and has accounts receivable from franchisees who are also officers of the Company. Revenues from these affiliates, primarily related to franchise revenue, marketing fund revenue, package and memberships revenue and merchandise revenue, were $
In August 2023, the Company received payments from an officer and a director of the Company totaling $
Note 11 – Redeemable Convertible Preferred Stock
On July 23, 2021, the Company issued and sold in a private placement
At issuance, the Company assessed the Convertible Preferred for any embedded derivatives. The Company determined that the Convertible Preferred represented an equity host under ASC Topic 815, Derivatives and Hedging. The Company’s analysis was based on consideration of all stated and implied substantive terms and features of the hybrid financial instrument and weighing those terms and features on the basis of the relevant facts and circumstances. Certain embedded features in the Convertible Preferred require bifurcation. However, the fair value of such embedded features was immaterial upon issuance and as of September 30, 2023.
The Convertible Preferred ranks senior to the Company’s common stock with respect to the payment of dividends and distribution of assets upon liquidation, dissolution and winding up. It is entitled to receive any dividends or distributions paid in respect of the common stock on an as-converted basis and has no stated maturity and will remain outstanding indefinitely unless converted into common stock or repurchased by the Company. Series A preferred stock will vote on an as-converted basis with the Class A and Class B common stock and will have certain rights to appoint additional directors, including up to a majority of the Company’s board of directors, under certain limited circumstances relating to an event of default or the Company’s failure to repay amounts due to the Convertible Preferred holders upon a redemption. Shares of Series A-1 preferred stock are non-voting; however, any shares of Series A-1 preferred stock issued to any of the lenders party to the Credit Agreement will convert on a one-to-one basis to shares of Series A preferred stock when permitted under relevant antitrust restrictions.
At any time after July 23, 2029, upon a sale of the Company, or at any time after the occurrence and continuance of an event of default, holders of the Convertible Preferred have the right to require the Company to redeem all, but not less than all, of the Preferred shares then outstanding at a redemption price in cash equal to the greater of (i) the fair market value per share of Preferred Stock (based on the average volume-weighted average price per share of Class A common stock for the 10 consecutive trading day period ending on, and including, the trading day immediately preceding the redemption notice), and (ii) the fixed liquidation preference, plus accrued and unpaid dividends.
The Convertible Preferred is recorded as mezzanine equity (temporary equity) on the condensed consolidated balance sheets because it is not mandatorily redeemable but does contain a redemption feature at the option of the Preferred holders that is considered not solely within the Company’s control.
On January 9, 2023, pursuant to a preferred stock repurchase agreement (the “Repurchase Agreement”) between the Company and certain holders of the Convertible Preferred, the Company repurchased
21
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
At September 30, 2023 and December 31, 2022, the Company recognized the preferred maximum redemption value of $
Note 12 – Stockholder's Equity (Deficit)
Common stock – In February 2023, the Company entered into an underwriting agreement with certain existing stockholders, affiliates of H&W Investco and our Chief Executive Officer (collectively the “Selling Stockholders”) and certain underwriters named therein, pursuant to which the Selling Stockholders sold an aggregate of
Noncontrolling interests – Following the IPO, XPO Inc. is the sole managing member of XPO LLC and, as a result, consolidates the financial results of XPO LLC. The Company reported noncontrolling interests representing the economic interests in XPO LLC held by the Continuing Pre-IPO LLC Members. Under the Amended LLC agreement, the Continuing Pre-IPO LLC Members are able to exchange their LLC Units for shares of Class A common stock on a one-for-one basis (simultaneously cancelling an equal number of shares of Class B common stock of the exchanging member), or at the option of the Company for cash. In December 2021, the Company and the Continuing Pre-IPO LLC Members amended the LLC agreement of XPO Holdings, removing the redemption option in cash, except to the extent that the cash proceeds to be used to make the redemption in cash are immediately available and were directly raised from a secondary offering of the Company's equity securities.
During 2023 and 2022, the Company experienced a change in noncontrolling interests ownership due to the conversion of Class B to Class A shares and as such, has rebalanced the related noncontrolling interests balance. The Company calculated the rebalancing based on the net assets of XPO LLC, after considering the preferred shareholders' claim on the net assets of XPO LLC. The Company used the liquidation value of the preferred shares for such rebalancing.
The following table summarizes the ownership of XPO LLC as of September 30, 2023:
Owner |
|
Units Owned |
|
|
Ownership percentage |
|
||
XPO Inc. |
|
|
|
|
|
% |
||
Noncontrolling interests |
|
|
|
|
|
% |
||
Total |
|
|
|
|
|
% |
||
22
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Accelerated Share Repurchase program – On August 1, 2023, the Company's board of directors approved a $
The final number of shares to be received by the Company will be based on the daily volume-weighted average stock price of the Company’s Class A common stock during the duration of the ASR Program, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Program agreement. At settlement, under certain circumstances, the financial institution may be required to deliver additional shares of Class A common stock to the Company, or under certain circumstances, the Company may be required to deliver shares of Class A common stock or to make a cash payment, at its election, to the financial institution. The final settlement under the ASR Program is scheduled to occur in the fourth quarter of 2023, as set forth in the ASR Program agreement (see Note 18).
Note 13 – Equity Compensation
Profit interest units –
Under the pre-IPO plan, the Parent granted time-based and performance-based profit interest units to certain key employees of the Company and its subsidiaries. Subsequent to the IPO, the profit interest units converted to Class B shares. Stock-based compensation related to profit interest units increases noncontrolling interests.
The performance-based grants were awarded with vesting conditions based on performance targets connected to the value received from change of control of the Parent and were subject to certain forfeiture provisions prior to vesting. In June 2021, the Parent amended previously issued profit interest units with performance-based vesting conditions that were based on performance targets connected to the value received from change of control of the Parent. The vesting condition, as amended, was based on the average trading price of XPO Inc. common stock exceeding the IPO threshold price, as defined in the amendment.
The fair value of the time-based grants was recognized as compensation expense over the vesting period (generally
23
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Liability classified restricted stock units –
In November 2021, the Company granted restricted stock unit ("RSU") awards with performance conditions of meeting certain EBITDA targets through the year ending December 31, 2024. The awards were granted with fixed dollar valuation and the number of shares granted depends on the trading price at the closing date of the period in which the EBITDA target is met. As such, these awards are classified as a liability. Management performs a regular assessment to determine the likelihood of meeting the targets and adjusts the expense recognized if necessary. During the first quarter of 2023, the performance condition of an award with a total fixed dollar value of $
Equity classified restricted stock units –
The following table summarizes activity for RSUs for the nine months ended September 30, 2023:
|
|
Shares |
|
|
Weighted Average |
|
||
Outstanding at December 31, 2022 |
|
|
|
|
$ |
|
||
Issued |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited, expired, or canceled |
|
|
( |
) |
|
|
|
|
Outstanding at September 30, 2023 |
|
|
|
|
$ |
|
||
RSUs are valued at the Company’s closing stock price on the date of grant, and generally vest over a - to
During 2022, included in the RSUs described above, the Company granted
Total compensation expense recognized for RSUs was $
At September 30, 2023, the Company had $
Note 14 – Income Taxes and Tax Receivable Agreement
The Company is the managing member of XPO Holdings and, as a result, consolidates the financial results of XPO Holdings in the condensed consolidated financial statements. XPO Holdings is a pass-through entity for U.S. federal and most applicable state and local income tax purposes following a corporate reorganization effected in connection with the IPO. As an entity classified as a partnership for tax purposes, XPO Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by XPO Holdings is passed through to and included in the taxable income or loss of its members, including the Company. The Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated from XPO Holdings, based on its
24
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The provision for income taxes differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate of
As of September 30, 2023, management determined based on applicable accounting standards and the weight of all available evidence, it was not more likely than not (“MLTN”) that the Company will generate sufficient taxable income to realize its deferred tax assets including the difference in tax basis in excess of the financial reporting value for its investment in XPO Holdings. Consequently, the Company has established a full valuation allowance against its deferred tax assets as of September 30, 2023. In the event that management subsequently determines that it is MLTN that the Company will realize its deferred tax assets in the future over the recorded amount, a decrease to the valuation allowance will be made, which will reduce the provision for income taxes.
The Company is subject to taxation and files income tax returns in the United States federal jurisdiction, many state and foreign jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions.
The Company does not expect a significant change in unrecognized tax benefits during the next 12 months.
Tax Receivable Agreement – In connection with the IPO, the Company entered into a Tax Receivable Agreement (“TRA”) pursuant to which the Company is generally required to pay to the other parties thereto in the aggregate 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (ii) increases in the Company's allocable share of existing tax basis and tax basis adjustments that resulted or may result from (x) the IPO Contribution and the Class A-5 Unit Redemption, (y) future taxable redemptions and exchanges of LLC Units by Continuing Pre-IPO LLC Members and (z) certain payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”). The Company expects to benefit from the remaining
The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates each year and the tax rate then applicable. The Company calculates the liability under the TRA using a complex TRA model, which includes an assumption related to the fair market value of assets. The payment obligations under the TRA are obligations of XPO Inc. and not of XPO Holdings. Payments are generally due under the TRA within a specified period of time following the filing of the Company’s tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR (or a replacement rate) plus
The TRA provides that if (i) there is a material breach of any material obligations under the TRA; or (ii) the Company elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any LLC Units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination. The TRA also provides that, upon certain mergers, asset sales or other forms of business combination, or certain other changes of control, the TRA will not terminate but the Company’s or the Company’s successor’s obligations with respect to tax benefits would be based on certain assumptions, including that the Company or the Company’s successor would have sufficient taxable income to fully utilize the increased tax deductions and tax basis and other benefits covered by the TRA.
25
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
As of September 30, 2023, the Company has concluded, based on applicable accounting standards, that it was more likely than not that its deferred tax assets subject to the TRA would not be realized. Therefore, the Company has not recorded a liability related to the tax savings it may realize from utilization of such deferred tax assets. Except for $
Note 15 – Earnings (Loss) Per Share
Basic earnings (loss) per share has been calculated by dividing net income (loss) attributable to Class A common stockholders by the weighted average number of shares of Class A common stock outstanding for the period. Diluted earnings (loss) per share of Class A common stock has been computed by dividing net income attributable to XPO Inc. by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
Because a portion of XPO Holdings is owned by parties other than the Company, those parties participate in earnings and losses at the XPO Holdings level. Additionally, given the organizational structure of XPO Inc, a parallel capital structure exists at XPO Holdings such that the shares of XPO Holdings are redeemable on a one-to-one basis with the XPO Inc. shares. In order to maintain the one-to-one ratio, the preferred stock issued at the XPO Inc. level also exists at the XPO Holdings level. The Company applies the two-class method to allocate undistributed earnings or losses of XPO Holdings, and in doing so, determines the portion of XPO Holdings’ income or loss that is attributable to the Company and accordingly reflected in income or loss available to common stockholders in the Company’s calculation of basic earnings (loss) per share.
Due to the attribution of only a portion of the preferred stock dividends issued by XPO Holdings to the Company in first determining basic earnings (loss) per share at the subsidiary level, the amounts presented as net income (loss) attributable to noncontrolling interests and net income (loss) attributable to XPO Inc. presented below will not agree to the amounts presented on the condensed consolidated statement of operations.
Diluted earnings (loss) per share attributable to common stockholders adjusts the basic earnings or losses per share attributable to common stockholders and the weighted average number of shares of Class A common stock outstanding to give effect to potentially dilutive securities. The potential dilutive impact of redeemable Convertible Preferred shares and Class B common stock is evaluated using the as-if-converted method. The potential dilutive effects of Class B common stock were determined to be anti-dilutive for the three and nine months ended September 30, 2023 and were excluded from the computation of diluted earnings per share. Because the Company reported a net loss for the three months ended September 30, 2022, all potentially dilutive common stock equivalents are antidilutive and have been excluded from the calculation of diluted net loss per share. Weighted average shares of Class B common stock were
26
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The following table presents the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
Less: net (income) loss attributable to noncontrolling interests |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Less: dividends on preferred shares |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Add: deemed contribution (dividend) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Add: deemed contribution from redemption of convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Net income (loss) attributable to XPO Inc. - basic |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Add: net income (loss) attributable to non-controlling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Add: dividends on preferred shares |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Less: deemed (contribution) dividend |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Less: Deemed contribution from redemption of convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
- |
|
Net income (loss) attributable to XPO Inc. - diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares of Class A common stock outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rumble Class A common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Restricted stock units |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Convertible preferred stock |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Conversion of Class B common stock to Class A common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Weighted average shares of Class A common stock outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings (loss) per share attributable to Class A common stock - basic |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Net earnings (loss) per share attributable to Class A common stock - diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Anti-dilutive shares excluded from diluted earnings (loss) per share of Class A common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rumble Class A common stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Conversion of Class B common stock to Class A common stock |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Convertible preferred stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Accelerated Purchase Program - final settlement |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Rumble contingent shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Profits interests, time vesting |
|
|
|
|
|
|
|
|
|
|
|
|
||||
27
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 16 – Contingencies and Litigation
Litigation – In connection with the October 2021 acquisition of BFT, the Company agreed to indemnify the seller for certain claims and lawsuits against the seller that existed at the acquisition date. The claims and lawsuits relate to alleged patent and trademark infringements. Plaintiff alleges that plaintiff has suffered, and is likely to continue to suffer, loss and damage due to breach of the patents by the seller and is seeking damages or in the alternative an account of profits. The seller has filed a cross-claim alleging that the defendant’s two Australian patents are, and always have been, invalid and that they should be revoked. The Court held a trial in December 2020, and on February 14, 2022, the Court issued a decision holding that the plaintiff’s claims of infringement were invalid and that even if they were valid, the seller did not infringe upon these patents and trademarks. In addition, plaintiff has brought related claims for patent infringement against the seller in the United States District Court for Delaware. In November 2022, the Court ruled in favor of the seller on a motion for summary judgment. In April 2023, plaintiff dismissed their appeal of that ruling, concluding the matter.
The Company is subject to normal and routine litigation brought by former or current employees, customers, franchisees, vendors, landlords or others. The Company intends to defend itself in any such matters. The Company believes that the ultimate determination of liability in connection with legal claims pending against it, if any, will not have a material adverse effect on its business, annual results of operations, liquidity or financial position; however, it is possible that the Company’s business, results of operations, liquidity or financial condition could be materially affected in a particular future reporting period by the unfavorable resolution of one or more matters or contingencies during such period. The Company accrued for estimated legal liabilities and has entered into certain settlement agreements to resolve legal disputes and recorded $
Contingent consideration from acquisitions – In connection with the 2017 acquisition of Row House, the Company agreed to pay to the sellers
In connection with the Reorganization Transactions, the Parent merged with and into the Member. The Company recorded contingent consideration equal to the fair value of the shares issued in connection with the Rumble acquisition of $
28
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
In connection with the October 2021 acquisition of BFT, the Company agreed to pay contingent consideration to the seller consisting of quarterly cash payments based on the sales of the franchise system and equipment packages in the U.S. and Canada, as well as a percentage of royalties collected by the Company, provided that aggregate minimum payments of $
In addition, in connection with the October 2021 acquisition of BFT, the Company entered into a Master Franchise Agreement (“MFA”) with an affiliate of the Seller (the “Master Franchisee”), pursuant to which the Company granted the Master Franchisee the master franchise rights for the BFTTM brands in Australia, New Zealand and Singapore. In exchange, the Company will receive certain fees and royalties, including a percentage of the revenue generated by the Master Franchisee under the MFA. The MFA contains an option for the Company to repurchase the master franchise rights granted under the MFA in either 2023 or 2024 at a purchase price based on the Master Franchisee’s EBITDA. If the Company (or a designee of the Company) does not exercise the option pursuant to the terms of the MFA, then the Company might be required to pay a cancellation fee to the Master Franchisee which might be material to the Company. If the Master Franchisee rejects an offer to repurchase the franchise rights, then the cancellation fee is not required to be paid.
Letter of credit – In July 2022, the Company issued a $
Lease guarantees –The Company has guaranteed lease agreements for certain franchisees. The Company’s maximum obligation, as a result of its guarantees of leases, is approximately $
Note 17 – Restructuring
In the third quarter of 2023, the Company began a restructuring plan that involves exiting company-owned transition studios and other measures designed to reduce costs to achieve the Company’s long-term margin goals and focus on pure franchise operations. The plan was approved and initiated in the third quarter of 2023 and is expected to continue throughout 2023 and 2024. The Company expects to recognize additional restructuring charges throughout 2023 and 2024 totaling approximately $
During the three and nine months ended September 30, 2023, the Company recognized restructuring charges of $
29
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The components of the restructuring charges are as follows:
|
|
Three and Nine |
|
|
|
|
2023 |
|
|
Write off of abandoned right-of-use assets (1) |
|
$ |
|
|
Loss on sale or disposal of assets (2)(3) |
|
|
|
|
Other restructuring costs (1) |
|
|
|
|
Total restructuring charges |
|
$ |
|
|
(1)
(2)
(3)
The following table provides the components of and changes in the Company’s restructuring charges, included in accounts payable on the condensed consolidated balance sheets:
|
|
September 30, 2023 |
|
|
Balance at December 31, 2022 |
|
$ |
|
|
Charges incurred |
|
|
|
|
Payments |
|
|
( |
) |
Balance at September 30, 2023 |
|
$ |
|
|
Note 18 – Subsequent Events
On October 2, 2023, the final settlement of the Company's $
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto and the other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled “Factors Affecting Our Results of Operations” and “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2022.
Xponential Fitness LLC (“XPO LLC”), the principal operating subsidiary of Xponential Fitness, Inc. (the “Company,” “XPO Inc.,” “we”, “us,” and “our”), is the largest global franchisor of boutique fitness brands. On July 23, 2021, the Company completed an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock at an initial public offering price of $12.00 per share. Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 66% ownership interest in XPO LLC through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).
We operate a diversified platform of ten brands spanning across verticals including Pilates, indoor cycling, barre, stretching, rowing, dancing, boxing, running, functional training and yoga. In partnership with its franchisees and master franchisees, XPO LLC offers energetic, accessible, and personalized workout experiences led by highly qualified instructors in studio locations throughout the U.S. and internationally, with franchise, master franchise and international expansion agreements in 49 U.S. states and 22 additional countries as of September 30, 2023. The Company's portfolio of brands includes Club Pilates, the largest Pilates brand in the United States; CycleBar, the largest indoor cycling brand in the United States; StretchLab, a concept offering one-on-one and group stretching services; Row House, the largest franchised indoor rowing brand in the United States; AKT, a dance-based cardio workout combining toning, interval and circuit training; YogaSix, the largest franchised yoga brand in the United States; Pure Barre, a total body workout that uses the ballet barre to perform small isometric movements, and the largest barre brand in the United States; Stride, a treadmill-based cardio and strength training concept; Rumble, a boxing-inspired full-body workout; and BFT, a functional training and strength-based program.
As of September 30, 2023, 2,596 studios were open in North America and franchisees were contractually committed to open 2,031 additional studios under existing franchise agreements. In addition, as of September 30, 2023, we had 384 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,042 new studios, of which master franchisees have sold 261 licenses for studios not yet opened as of September 30, 2023.
During the nine months ended September 30, 2023 and 2022, we generated revenue outside the United States of $10.3 million and $9.1 million, respectively. As of September 30, 2023 and December 31, 2022, we did not have material assets located outside of the United States. No franchisee accounted for more than 5% of our revenue. We operate in one segment for financial reporting purposes.
Restructuring Plan
In the third quarter of 2023, we began a restructuring plan that involves exiting company-owned transition studios and other measures designed to reduce costs to achieve our long-term margin goals and focus on pure franchise operations. The plan was approved and initiated in the third quarter of 2023 and is expected to continue throughout 2023 and 2024. During the three and nine months ended September 30, 2023, we recognized restructuring charges of $6.3 million, primarily for write off of abandoned right-of-use assets, loss on sale or disposal of assets, and other restructuring charges.
We expect to recognize additional restructuring charges throughout 2023 and 2024 totaling approximately $8.5 million to $10.5 million, for accelerated right-of-use asset amortization related to company-owned transition studios with a cease use date in the fourth quarter of 2023 and for other restructuring charges. Additionally, we are negotiating lease terminations for operating leases for which we have lease liabilities recorded and for some of which we have accelerated right-of-use asset amortization through the cease use date. Termination of these leases may result in net gains from lease liability decreases in excess of previously accelerated right-of-use assets. Cash outflows related to these lease terminations are expected to be incurred through 2024.
Once completed we estimate annualized gross savings of approximately $9.0 million to $12.0 million under the restructuring plan. Additionally, we may not be able to fully realize the cost savings and benefits initially anticipated from the restructuring plan, the expected charges may be greater than expected, and we may not be able to reach agreement with contractual counterparties, any of which could negatively impact our business.
31
Factors Affecting Our Results of Operations
In addition to the impact of the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, we believe that the most significant factors affecting our results of operations include:
Key Performance Indicators
In addition to our financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees, and monitor our business. While we believe that these metrics are useful in evaluating our business, other companies may not use similar metrics or may not calculate similarly titled metrics in a consistent manner.
Beginning in the quarter ended June 30, 2023, we introduced an additional definition for studios no longer operating to better capture the composition of our studios in operation. A studio is considered no longer operating and excluded from the total number of studios in operation if it has no sales for nine consecutive months or more. If a studio deemed to be no longer operating subsequently generates sales at a future date, it re-enters the operating studio count (and the number of studios no longer operating is reduced). All prior periods presented have been updated to reflect this additional definition. Under application of this additional definition, the number of operating studios remains materially the same as previously reported.
32
The following table sets forth the total number of operating studios in North America for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
Franchisee-owned studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
2,436 |
|
|
|
2,106 |
|
|
|
2,269 |
|
|
|
1,925 |
|
|
New studio openings |
|
|
100 |
|
|
|
94 |
|
|
|
298 |
|
|
|
264 |
|
|
Refranchised studios (1) |
|
|
44 |
|
|
|
1 |
|
|
|
78 |
|
|
|
16 |
|
|
Defranchised studios (2) |
|
|
(4 |
) |
|
|
(25 |
) |
|
|
(68 |
) |
|
|
(29 |
) |
|
Studios no longer operating |
|
|
(11 |
) |
|
|
(1 |
) |
|
|
(12 |
) |
|
|
(1 |
) |
|
Studios operated at end of period |
|
|
2,565 |
|
|
|
2,175 |
|
|
|
2,565 |
|
|
|
2,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Company-owned transition studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
84 |
|
|
|
14 |
|
|
|
55 |
|
|
|
25 |
|
|
New studio openings |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
Franchise acquisitions (2) |
|
|
4 |
|
|
|
25 |
|
|
|
68 |
|
|
|
29 |
|
|
Refranchised studios(1) |
|
|
(44 |
) |
|
|
(1 |
) |
|
|
(78 |
) |
|
|
(16 |
) |
|
Studios no longer operating |
|
|
(13 |
) |
|
|
— |
|
|
|
(14 |
) |
|
|
— |
|
|
Studios operated at end of period |
|
|
31 |
|
|
|
40 |
|
|
|
31 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
2,520 |
|
|
|
2,120 |
|
|
|
2,324 |
|
|
|
1,950 |
|
|
New studio openings |
|
|
100 |
|
|
|
96 |
|
|
|
298 |
|
|
|
266 |
|
|
Studios no longer operating |
|
|
(24 |
) |
|
|
(1 |
) |
|
|
(26 |
) |
|
|
(1 |
) |
|
Studios operated at end of period |
|
|
2,596 |
|
|
|
2,215 |
|
|
|
2,596 |
|
|
|
2,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios contributing to AUV |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating studios (end of period) |
|
|
2,596 |
|
|
|
2,215 |
|
|
NA |
|
|
NA |
|
|
||
Less: studios less than 6 months old |
|
|
(292 |
) |
|
|
(266 |
) |
|
NA |
|
|
NA |
|
|
||
Less: non-traditional studio locations |
|
|
(18 |
) |
|
|
— |
|
|
NA |
|
|
NA |
|
|
||
Less: studios with no sales in the period |
|
|
(7 |
) |
|
|
(12 |
) |
|
NA |
|
|
NA |
|
|
||
Total |
|
|
2,279 |
|
|
|
1,937 |
|
|
NA |
|
|
NA |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios contributing to same store sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating studios (end of period) |
|
|
2,596 |
|
|
|
2,215 |
|
|
|
2,596 |
|
|
|
2,215 |
|
|
Less: studios less than 13 months old |
|
|
(450 |
) |
|
|
(355 |
) |
|
|
(446 |
) |
|
|
(355 |
) |
|
Less: non-traditional studio locations |
|
|
(8 |
) |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
Less: studios without 13 months of consecutive sales |
|
|
(44 |
) |
|
|
(44 |
) |
|
|
(28 |
) |
|
|
(29 |
) |
|
Total |
|
|
2,094 |
|
|
|
1,816 |
|
|
|
2,114 |
|
|
|
1,831 |
|
|
(1) Includes previously franchised company-owned studios that were converted to franchisee-owned studios in the period.
(2) Includes previously franchisee-owned studios that were converted to company-owned studios in the period.
The following table sets forth the total number of operating studios internationally for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
Total Studios |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
372 |
|
|
|
234 |
|
|
|
312 |
|
|
|
176 |
|
|
New studio openings |
|
|
27 |
|
|
|
32 |
|
|
|
90 |
|
|
|
90 |
|
|
Studios no longer operating |
|
|
(15 |
) |
|
|
— |
|
|
|
(18 |
) |
|
|
— |
|
|
Studios operated at end of period |
|
|
384 |
|
|
|
266 |
|
|
|
384 |
|
|
|
266 |
|
|
33
The following table sets forth the total number of operating studios globally for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
Total Studios |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
2,892 |
|
|
|
2,354 |
|
|
|
2,636 |
|
|
|
2,126 |
|
|
New studio openings |
|
|
127 |
|
|
|
128 |
|
|
|
388 |
|
|
|
356 |
|
|
Studios no longer operating |
|
|
(39 |
) |
|
|
(1 |
) |
|
|
(44 |
) |
|
|
(1 |
) |
|
Studios operated at end of period |
|
|
2,980 |
|
|
|
2,481 |
|
|
|
2,980 |
|
|
|
2,481 |
|
|
The following table sets forth our key performance indicators for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
($ in thousands) |
|
|||||||||||||
System-wide sales |
|
$ |
356,705 |
|
|
$ |
264,837 |
|
|
$ |
1,015,754 |
|
|
$ |
739,163 |
|
Number of new studio openings globally, gross |
|
|
127 |
|
|
|
128 |
|
|
|
388 |
|
|
|
356 |
|
Number of studios operating globally (cumulative total as of period end) |
|
|
2,980 |
|
|
|
2,481 |
|
|
|
2,980 |
|
|
|
2,481 |
|
Number of licenses sold globally (cumulative total as of period end)(1) |
|
|
6,088 |
|
|
|
5,193 |
|
|
|
6,088 |
|
|
|
5,193 |
|
Number of licenses contractually obligated to open internationally (cumulative total as of period end) |
|
|
1,042 |
|
|
|
920 |
|
|
|
1,042 |
|
|
|
920 |
|
AUV (LTM as of period end) |
|
$ |
561 |
|
|
$ |
474 |
|
|
$ |
561 |
|
|
$ |
474 |
|
Quarterly AUV (run rate) |
|
$ |
564 |
|
|
$ |
489 |
|
|
NA |
|
|
NA |
|
||
Same store sales |
|
|
15 |
% |
|
|
17 |
% |
|
|
17 |
% |
|
|
28 |
% |
Adjusted EBITDA(2) |
|
$ |
26,521 |
|
|
$ |
20,003 |
|
|
$ |
74,644 |
|
|
$ |
52,092 |
|
(1) Global franchise licenses sold are presented gross of terminations.
(2) The definition of “adjusted EBITDA” and a detailed reconciliation of adjusted EBITDA are set forth below under the section entitled “Non-GAAP Financial Measures”.
The following table presents additional information related to our studio and license key performance indicators for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
||||||||||||||||||
|
|
North America |
|
|
International |
|
|
Global |
|
|
North America |
|
|
International |
|
|
Global |
|
|
||||||
Total Operating Studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Studios operating at beginning of period |
|
|
2,520 |
|
|
|
372 |
|
|
|
2,892 |
|
|
|
2,120 |
|
|
|
234 |
|
|
|
2,354 |
|
|
New studio openings, net |
|
|
76 |
|
|
|
12 |
|
|
|
88 |
|
|
|
95 |
|
|
|
32 |
|
|
|
127 |
|
|
Studios operating at end of period |
|
|
2,596 |
|
|
|
384 |
|
|
|
2,980 |
|
|
|
2,215 |
|
|
|
266 |
|
|
|
2,481 |
|
|
Franchise licenses sold: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Franchise licenses sold (total beginning of period) |
|
|
5,191 |
|
|
|
681 |
|
|
|
5,872 |
|
|
|
4,466 |
|
|
|
469 |
|
|
|
4,935 |
|
|
New franchise license sales |
|
|
170 |
|
|
|
46 |
|
|
|
216 |
|
|
|
209 |
|
|
|
49 |
|
|
|
258 |
|
|
Franchise licenses sold (total end of period) |
|
|
5,361 |
|
|
|
727 |
|
|
|
6,088 |
|
|
|
4,675 |
|
|
|
518 |
|
|
|
5,193 |
|
|
Studios Obligated to Open Internationally under MFAs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross studios obligated to open under MFAs |
|
|
|
|
|
|
|
|
1,411 |
|
|
|
|
|
|
|
|
|
1,186 |
|
|
||||
Less: studios opened under MFAs |
|
|
|
|
|
|
|
|
369 |
|
|
|
|
|
|
|
|
|
266 |
|
|
||||
Remaining studios obligated to open under MFAs |
|
|
|
|
|
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
920 |
|
|
||||
Licenses sold by master franchisees, net (2) |
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
226 |
|
|
||||
34
|
|
Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
North America |
|
|
International |
|
|
Global |
|
|
North America |
|
|
International |
|
|
Global |
|
||||||
Total Operating Studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Studios operating at beginning of period |
|
|
2,324 |
|
|
|
312 |
|
|
|
2,636 |
|
|
|
1,950 |
|
|
|
176 |
|
|
|
2,126 |
|
New studio openings, net |
|
|
272 |
|
|
|
72 |
|
|
|
344 |
|
|
|
265 |
|
|
|
90 |
|
|
|
355 |
|
Studios operating at end of period |
|
|
2,596 |
|
|
|
384 |
|
|
|
2,980 |
|
|
|
2,215 |
|
|
|
266 |
|
|
|
2,481 |
|
Franchise Licenses Sold: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Franchise licenses sold (total beginning of period) |
|
|
4,868 |
|
|
|
582 |
|
|
|
5,450 |
|
|
|
4,062 |
|
|
|
362 |
|
|
|
4,424 |
|
New franchise license sales |
|
|
493 |
|
|
|
145 |
|
|
|
638 |
|
|
|
613 |
|
|
|
156 |
|
|
|
769 |
|
Franchise licenses sold (total end of period) |
|
|
5,361 |
|
|
|
727 |
|
|
|
6,088 |
|
|
|
4,675 |
|
|
|
518 |
|
|
|
5,193 |
|
Studios Obligated to Open Internationally under MFAs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross studios obligated to open under MFAs |
|
|
|
|
|
|
|
|
1,411 |
|
|
|
|
|
|
|
|
|
1,186 |
|
||||
Less: studios opened under MFAs |
|
|
|
|
|
|
|
|
369 |
|
|
|
|
|
|
|
|
|
266 |
|
||||
Remaining studios obligated to open under MFAs |
|
|
|
|
|
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
920 |
|
||||
Licenses sold by master franchisees, net (2) |
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
226 |
|
||||
(1) Global franchise licenses sold are presented gross of terminations.
(2) Reflects the number of licenses for studios which have already been sold, but not yet opened, by master franchisees under master franchise agreements, net of terminations.
System-Wide Sales
System-wide sales represent gross sales by all studios in North America. System-wide sales includes sales by franchisees that are not revenue realized by us in accordance with GAAP. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, this operating metric relates to our revenue because we receive approximately 7% and 2% of the sales by franchisees as royalty revenue and marketing fund revenue, respectively. We believe that this operating measure aids in understanding how we derive our royalty revenue and marketing fund revenue and is important in evaluating our performance. System-wide sales growth is driven by new studio openings and increases in same store sales. Management reviews system-wide sales weekly, which enables us to assess changes in our franchise revenue, overall studio performance, the health of our brands and the strength of our market position relative to competitors.
New Studio Openings
The number of new studio openings reflects the number of studios opened during a particular reporting period. We consider a new studio to be open once the studio begins offering classes. Opening new studios is an important part of our growth strategy. New studios may not generate material revenue in the early period following an opening and their revenue may not follow historical patterns. Management reviews the number of new studio openings in order to help forecast operating results and to monitor studio opening processes.
Studios No Longer Operating
A studio is considered no longer operating and excluded from the total number of studios operating if it has no sales for nine consecutive months or more. If a studio deemed to be no longer operating subsequently generates sales at a future date, it re-enters the operating studio count (and the number of studios no longer operating is reduced).
Number of Studios Operating
In addition to the number of new studios opened and studios no longer operating during a period, we track the number of total studios operating at the end of a reporting period. While nearly all our franchised studios are licensed to franchisees, from time to time we operate a limited number of company-owned transition studios (typically as we take possession of a studio following a franchisee ceasing to operate it and as we prepare it to be licensed to a new franchisee). Management reviews the number of studios operating at a given point in time in order to help forecast system-wide sales, franchise revenue and other revenue streams.
Non-Traditional Studio Locations
Non-traditional studio locations refers to studios that are not operated as standalone studio locations. We currently operate 34 non-traditional studio locations globally, which are comprised of studios operated inside of other fitness facilities and on cruise ships.
35
Licenses Sold
The number of licenses sold in North America and globally reflect the cumulative number of licenses sold by us (or, outside of North America, by our master franchisees), since inception through the date indicated. Licenses contractually obligated to open refer to licenses sold net of opened studios and terminations. Licenses contractually obligated to be sold internationally reflect the number of licenses that master franchisees are contractually obligated to sell to franchisees to open internationally that have not yet opened as of the date indicated. The number of licenses sold is a useful indicator of the number of studios that have opened and that are expected to open in the future, which management reviews in order to monitor and forecast our revenue streams. Of the franchisees that opened their first studio in 2019, on average it took approximately 12.2 months from signing the franchise agreement to open. The length of time increased during 2020 and 2021 due to COVID-related opening restrictions. Of the franchisees that entered into the system in 2021 or later and opened their first studio in 2022, on average it took approximately 10.5 months from signing the franchise agreement to open a studio. Management also reviews the number of licenses sold globally and the number of licenses contractually obligated to open internationally in order to help forecast studio growth and system-wide sales.
Average Unit Volume
AUV is calculated by dividing sales during the applicable period for all studios contributing to AUV by the number of studios contributing to AUV. LTM AUV (last twelve months as of period end) consists of the average sales for the trailing 12 calendar months for all traditional studio locations in North America that have been open for at least 13 calendar months as of the measurement date and that have generated sales for the last 13 calendar months as of the measurement date. Quarterly run-rate AUV consists of average quarterly sales for all traditional studio locations in North America that are at least six months old at the beginning of the respective quarter, and that have sales in the period, multiplied by four. We measure sales for AUV based solely upon monthly sales as reported by franchisees. AUV growth is primarily driven by changes in same store sales and is also influenced by new studio openings. Management reviews AUV to assess studio economics.
Same Store Sales
Same store sales refer to period-over-period sales comparisons for the base of studios. We define the same store sales base to include studios in North America that are in traditional studio locations and that have generated sales for the last 13 consecutive calendar months as of the measurement date. Any transfer of ownership of a studio does not affect this metric. We measure same store sales based solely upon monthly sales as reported by franchisees. This measure highlights the performance of existing studios, while excluding the impact of new studio openings. Management reviews same store sales to assess the health of the franchised studios.
36
Results of Operations
The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Franchise revenue |
|
$ |
36,425 |
|
|
$ |
30,006 |
|
|
$ |
104,524 |
|
|
$ |
83,128 |
|
Equipment revenue |
|
|
12,564 |
|
|
|
11,770 |
|
|
|
40,086 |
|
|
|
31,930 |
|
Merchandise revenue |
|
|
8,456 |
|
|
|
6,264 |
|
|
|
24,021 |
|
|
|
19,100 |
|
Franchise marketing fund revenue |
|
|
6,948 |
|
|
|
5,172 |
|
|
|
19,776 |
|
|
|
14,544 |
|
Other service revenue |
|
|
16,042 |
|
|
|
10,551 |
|
|
|
40,058 |
|
|
|
24,983 |
|
Total revenue, net |
|
|
80,435 |
|
|
|
63,763 |
|
|
|
228,465 |
|
|
|
173,685 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs of product revenue |
|
|
12,709 |
|
|
|
11,840 |
|
|
|
40,967 |
|
|
|
34,951 |
|
Costs of franchise and service revenue |
|
|
3,559 |
|
|
|
4,811 |
|
|
|
11,305 |
|
|
|
13,589 |
|
Selling, general and administrative expenses |
|
|
48,579 |
|
|
|
32,841 |
|
|
|
127,912 |
|
|
|
96,082 |
|
Depreciation and amortization |
|
|
4,216 |
|
|
|
4,154 |
|
|
|
12,701 |
|
|
|
11,225 |
|
Marketing fund expense |
|
|
5,817 |
|
|
|
4,260 |
|
|
|
16,289 |
|
|
|
12,696 |
|
Acquisition and transaction expenses (income) |
|
|
(1,923 |
) |
|
|
16,290 |
|
|
|
(17,433 |
) |
|
|
(5,793 |
) |
Total operating costs and expenses |
|
|
72,957 |
|
|
|
74,196 |
|
|
|
191,741 |
|
|
|
162,750 |
|
Operating income (loss) |
|
|
7,478 |
|
|
|
(10,433 |
) |
|
|
36,724 |
|
|
|
10,935 |
|
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
(24 |
) |
|
|
(402 |
) |
|
|
(1,189 |
) |
|
|
(1,209 |
) |
Interest expense |
|
|
10,638 |
|
|
|
3,333 |
|
|
|
27,242 |
|
|
|
9,060 |
|
Other expense |
|
|
1,845 |
|
|
|
— |
|
|
|
3,097 |
|
|
|
— |
|
Total other expense |
|
|
12,459 |
|
|
|
2,931 |
|
|
|
29,150 |
|
|
|
7,851 |
|
Income (loss) before income taxes |
|
|
(4,981 |
) |
|
|
(13,364 |
) |
|
|
7,574 |
|
|
|
3,084 |
|
Income taxes (benefit) |
|
|
202 |
|
|
|
(308 |
) |
|
|
212 |
|
|
|
(158 |
) |
Net income (loss) |
|
$ |
(5,183 |
) |
|
$ |
(13,056 |
) |
|
$ |
7,362 |
|
|
$ |
3,242 |
|
37
The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 as a percentage of revenue:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Franchise revenue |
|
|
45 |
% |
|
|
47 |
% |
|
|
46 |
% |
|
|
49 |
% |
Equipment revenue |
|
|
16 |
% |
|
|
18 |
% |
|
|
18 |
% |
|
|
18 |
% |
Merchandise revenue |
|
|
10 |
% |
|
|
10 |
% |
|
|
10 |
% |
|
|
11 |
% |
Franchise marketing fund revenue |
|
|
9 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
Other service revenue |
|
|
20 |
% |
|
|
17 |
% |
|
|
18 |
% |
|
|
14 |
% |
Total revenue, net |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs of product revenue |
|
|
16 |
% |
|
|
19 |
% |
|
|
18 |
% |
|
|
20 |
% |
Costs of franchise and service revenue |
|
|
5 |
% |
|
|
8 |
% |
|
|
5 |
% |
|
|
8 |
% |
Selling, general and administrative expenses |
|
|
60 |
% |
|
|
51 |
% |
|
|
56 |
% |
|
|
55 |
% |
Depreciation and amortization |
|
|
5 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
6 |
% |
Marketing fund expense |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
Acquisition and transaction expenses (income) |
|
|
(2 |
)% |
|
|
26 |
% |
|
|
(8 |
)% |
|
|
(3 |
)% |
Total operating costs and expenses |
|
|
91 |
% |
|
|
116 |
% |
|
|
84 |
% |
|
|
94 |
% |
Operating income (loss) |
|
|
9 |
% |
|
|
(16 |
)% |
|
|
16 |
% |
|
|
6 |
% |
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
— |
% |
|
|
(1 |
)% |
|
|
(1 |
)% |
|
|
(1 |
)% |
Interest expense |
|
|
13 |
% |
|
|
5 |
% |
|
|
12 |
% |
|
|
5 |
% |
Other expense |
|
|
2 |
% |
|
|
— |
% |
|
|
2 |
% |
|
|
— |
% |
Total other expense |
|
|
15 |
% |
|
|
5 |
% |
|
|
13 |
% |
|
|
5 |
% |
Income (loss) before income taxes |
|
|
(6 |
)% |
|
|
(21 |
)% |
|
|
3 |
% |
|
|
1 |
% |
Income taxes (benefit) |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
Net income (loss) |
|
|
(6 |
)% |
|
|
(20 |
)% |
|
|
3 |
% |
|
|
2 |
% |
Three Months Ended September 30, 2023 and 2022
The following is a discussion of our consolidated results of operations for the three months ended September 30, 2023 and the three months ended September 30, 2022.
Revenue
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Franchise revenue |
|
$ |
36,425 |
|
|
$ |
30,006 |
|
|
$ |
6,419 |
|
|
|
21.4 |
% |
Equipment revenue |
|
|
12,564 |
|
|
|
11,770 |
|
|
|
794 |
|
|
|
6.7 |
% |
Merchandise revenue |
|
|
8,456 |
|
|
|
6,264 |
|
|
|
2,192 |
|
|
|
35.0 |
% |
Franchise marketing fund revenue |
|
|
6,948 |
|
|
|
5,172 |
|
|
|
1,776 |
|
|
|
34.3 |
% |
Other service revenue |
|
|
16,042 |
|
|
|
10,551 |
|
|
|
5,491 |
|
|
|
52.0 |
% |
Total revenue, net |
|
$ |
80,435 |
|
|
$ |
63,763 |
|
|
$ |
16,672 |
|
|
|
26.1 |
% |
Total revenue. Total revenue was $80.4 million in the three months ended September 30, 2023, compared to $63.8 million in the three months ended September 30, 2022, an increase of $16.7 million, or 26%. The increase in total revenue was primarily due to an increase in same store sales and an increase in open studios.
38
Franchise revenue. Franchise revenue was $36.4 million in the three months ended September 30, 2023, compared to $30.0 million in the three months ended September 30, 2022, an increase of $6.4 million, or 21%. Franchise revenue consisted of franchise royalty fees of $24.2 million, franchise territory fees of $5.3 million, technology fees of $4.0 million and training fees of $2.9 million in the three months ended September 30, 2023, compared to franchise royalty fees of $18.0 million, franchise territory fees of $7.0 million, technology fees of $2.9 million and training fees of $2.1 million in the three months ended September 30, 2022. The increase in franchise royalty fees, technology fees and training fees was primarily due to a 15% increase in same store sales and 499 net new studio openings globally since September 30, 2022. Franchise territory fees decreased due to a decrease in franchise agreement terminations in the current year.
Equipment revenue. Equipment revenue was $12.6 million in the three months ended September 30, 2023, compared to $11.8 million in the three months ended September 30, 2022, an increase of $0.8 million, or 7%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the three months ended September 30, 2023, totaled 116 compared to 136 in the prior year period, primarily due to the timing of installations and a decrease in studio openings compared to the prior year period. The increase in average revenue per install is due to brand mix, international versus North America mix and a higher proportion of equipment installed with brands with higher equipment prices.
Merchandise revenue. Merchandise revenue was $8.5 million in the three months ended September 30, 2023, compared to $6.3 million in the three months ended September 30, 2022, an increase of $2.2 million, or 35%. The increase was due primarily to a higher number of operating studios in the current year period.
Franchise marketing fund revenue. Franchise marketing fund revenue was $6.9 million in the three months ended September 30, 2023, compared to $5.2 million in the three months ended September 30, 2022, an increase of $1.8 million, or 34%. The increase was primarily due to an increase in same store sales and 381 new studio openings in North America since September 30, 2022.
Other service revenue. Other service revenue was $16.0 million in the three months ended September 30, 2023, compared to $10.6 million in the three months ended September 30, 2022, an increase of $5.5 million, or 52%. The increase was primarily due to a $6.1 million increase in package and memberships revenue due to a higher average number of company-owned transition studios, partially offset by a $0.3 million decrease in on-demand revenue and $0.3 million decrease in other preferred vendor commission revenue and brand fee revenue.
Operating Costs and Expenses
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Costs of product revenue |
|
$ |
12,709 |
|
|
$ |
11,840 |
|
|
$ |
869 |
|
|
|
7.3 |
% |
Costs of franchise and service revenue |
|
|
3,559 |
|
|
|
4,811 |
|
|
|
(1,252 |
) |
|
|
(26.0 |
)% |
Selling, general and administrative expenses |
|
|
48,579 |
|
|
|
32,841 |
|
|
|
15,738 |
|
|
|
47.9 |
% |
Depreciation and amortization |
|
|
4,216 |
|
|
|
4,154 |
|
|
|
62 |
|
|
|
1.5 |
% |
Marketing fund expense |
|
|
5,817 |
|
|
|
4,260 |
|
|
|
1,557 |
|
|
|
36.5 |
% |
Acquisition and transaction expenses (income) |
|
|
(1,923 |
) |
|
|
16,290 |
|
|
|
(18,213 |
) |
|
|
(111.8 |
)% |
Total operating costs and expenses |
|
$ |
72,957 |
|
|
$ |
74,196 |
|
|
$ |
(1,239 |
) |
|
|
(1.7 |
)% |
Costs of product revenue. Costs of product revenue was $12.7 million in the three months ended September 30, 2023, compared to $11.8 million in the three months ended September 30, 2022, an increase of $0.9 million, or 7%, compared to an increase in related revenues of 17%. Costs of product revenue as a percentage of related revenue decreased to 60% in the three months ended September 30, 2023, from 66% in the comparable prior year period. The decrease was due to an increase in company-owned transition studio merchandise revenue, which generates higher gross margin.
Costs of franchise and service revenue. Costs of franchise and service revenue was $3.6 million in the three months ended September 30, 2023, compared to $4.8 million in the three months ended September 30, 2022, a decrease of $1.3 million, or 26%. The decrease was primarily due to a $1.5 million decrease in franchise sales commissions, consistent with the related franchise territory revenue decrease, partially offset by an increase in cost of technology fees.
39
Selling, general and administrative expenses. Selling, general and administrative expenses were $48.6 million in the three months ended September 30, 2023, compared to $32.8 million in the three months ended September 30, 2022, an increase of $15.7 million, or 48%. The increase was primarily attributable to restructuring charges of $6.1 million in the current year; increase in salaries and wages of $4.3 million related to a higher average number of company-owned transition studios; increase in occupancy expenses of $3.7 million primarily related to company-owned transition studios; an increase in intangible asset write down of $0.9 million; and a net increase in other variable expenses in 2023 of $2.1 million, partially offset by a decrease in legal expenses of $1.4 million related to various legal matters.
Depreciation and amortization. Depreciation and amortization expense was $4.2 million in each of the three-month periods ended September 30, 2023 and 2022.
Marketing fund expense. Marketing fund expense was $5.8 million in the three months ended September 30, 2023, compared to $4.3 million in the three months ended September 30, 2022, an increase of $1.6 million, or 37% and is consistent with the increase in franchise marketing fund revenue.
Acquisition and transaction expenses (income). Acquisition and transaction expenses (income) was ($1.9) million in the three months ended September 30, 2023, compared to $16.3 million in the three months ended September 30, 2022, a decrease of $18.2 million, or 112%. This income/expense primarily represents the non-cash change in contingent consideration related to 2017 and 2021 business acquisitions.
Other (Income) Expense, net
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Interest income |
|
$ |
(24 |
) |
|
$ |
(402 |
) |
|
$ |
378 |
|
|
|
(94.0 |
)% |
Interest expense |
|
|
10,638 |
|
|
|
3,333 |
|
|
|
7,305 |
|
|
|
219.2 |
% |
Other expense |
|
|
1,845 |
|
|
|
— |
|
|
|
1,845 |
|
|
NA |
|
|
Total other expense, net |
|
$ |
12,459 |
|
|
$ |
2,931 |
|
|
$ |
9,528 |
|
|
|
325.1 |
% |
Interest income. Interest income primarily consists of interest on notes receivable and was insignificant in each of the three-month periods ended September 30, 2023 and 2022.
Interest expense. Interest expense was $10.6 million in the three months ended September 30, 2023, compared to $3.3 million in the three months ended September 30, 2022, an increase of $7.3 million, or 219%. Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs and debt discount. The increase in interest expense is due to higher average debt balances and higher interest rates in the current year period.
Other expense. Other expense consists of Tax Receivable Agreement (“TRA”) expense, which was $1.8 million in the three months ended September 30, 2023.
Income Taxes
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Income taxes (benefit) |
|
$ |
202 |
|
|
$ |
(308 |
) |
|
$ |
510 |
|
|
|
(165.6 |
)% |
Income taxes (benefit). Income taxes (benefit) were $0.2 million in the three months ended September 30, 2023, compared to ($0.3) million in the three months ended September 30, 2022.
Nine Months Ended September 30, 2023 and 2022
The following is a discussion of our consolidated results of operations for the nine months ended September 30, 2023 versus the nine months ended September 30, 2022.
40
Revenue
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Franchise revenue |
|
$ |
104,524 |
|
|
$ |
83,128 |
|
|
$ |
21,396 |
|
|
|
25.7 |
% |
Equipment revenue |
|
|
40,086 |
|
|
|
31,930 |
|
|
|
8,156 |
|
|
|
25.5 |
% |
Merchandise revenue |
|
|
24,021 |
|
|
|
19,100 |
|
|
|
4,921 |
|
|
|
25.8 |
% |
Franchise marketing fund revenue |
|
|
19,776 |
|
|
|
14,544 |
|
|
|
5,232 |
|
|
|
36.0 |
% |
Other service revenue |
|
|
40,058 |
|
|
|
24,983 |
|
|
|
15,075 |
|
|
|
60.3 |
% |
Total revenue, net |
|
$ |
228,465 |
|
|
$ |
173,685 |
|
|
$ |
54,780 |
|
|
|
31.5 |
% |
Total revenue. Total revenue was $228.5 million in the nine months ended September 30, 2023, compared to $173.7 million in the nine months ended September 30, 2022, an increase of $54.8 million, or 32%. The increase in total revenue was primarily due to an increase in same store sales and an increase in open studios.
Franchise revenue. Franchise revenue was $104.5 million in the nine months ended September 30, 2023, compared to $83.1 million in the nine months ended September 30, 2022, an increase of $21.4 million, or 26%. Franchise revenue consisted of franchise royalty fees of $68.8 million, franchise territory fees of $15.9 million, technology fees of $11.4 million and training fees of $8.4 million in the nine months ended September 30, 2023, compared to franchise royalty fees of $49.9 million, franchise territory fees of $20.6 million, technology fees of $6.6 million and training fees of $6.0 million in the nine months ended September 30, 2022. The increase in franchise royalty fees, technology fees and training fees was primarily due to a 17% increase in same store sales and 499 new studio openings globally since September 30, 2022. Franchise territory fees decreased due to a decrease in franchise agreement terminations in the current year.
Equipment revenue. Equipment revenue was $40.1 million in the nine months ended September 30, 2023, compared to $31.9 million in the nine months ended September 30, 2022, an increase of $8.2 million, or 26%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the nine months ended September 30, 2023, totaled 395 compared to 376 in the prior year period, primarily due to the increase of studio openings compared to the prior year period. The increase in average revenue per install is due to brand mix, international versus North America mix and a higher proportion of equipment installed with brands with higher equipment prices.
Merchandise revenue. Merchandise revenue was $24.0 million in the nine months ended September 30, 2023, compared to $19.1 million in the nine months ended September 30, 2022, an increase of $4.9 million, or 26%. The increase was due primarily to a higher number of operating studios in the current year period.
Franchise marketing fund revenue. Franchise marketing fund revenue was $19.8 million in the nine months ended September 30, 2023, compared to $14.5 million in the nine months ended September 30, 2022, an increase of $5.2 million, or 36%. The increase was primarily due to an increase in same store sales and 381 new studio openings in North America since September 30, 2022.
Other service revenue. Other service revenue was $40.1 million in the nine months ended September 30, 2023, compared to $25.0 million in the nine months ended September 30, 2022, an increase of $15.1 million, or 60%. The increase was primarily due to a $13.6 million increase in package and memberships revenue due to a higher average number of company-owned transition studios and a $2.8 million increase in other preferred vendor commission revenue and brand fee revenue, partially offset by a $1.1 million decrease in on-demand revenue.
Operating Costs and Expenses
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Costs of product revenue |
|
$ |
40,967 |
|
|
$ |
34,951 |
|
|
$ |
6,016 |
|
|
|
17.2 |
% |
Costs of franchise and service revenue |
|
|
11,305 |
|
|
|
13,589 |
|
|
|
(2,284 |
) |
|
|
(16.8 |
)% |
Selling, general and administrative expenses |
|
|
127,912 |
|
|
|
96,082 |
|
|
|
31,830 |
|
|
|
33.1 |
% |
Depreciation and amortization |
|
|
12,701 |
|
|
|
11,225 |
|
|
|
1,476 |
|
|
|
13.1 |
% |
Marketing fund expense |
|
|
16,289 |
|
|
|
12,696 |
|
|
|
3,593 |
|
|
|
28.3 |
% |
Acquisition and transaction expenses (income) |
|
|
(17,433 |
) |
|
|
(5,793 |
) |
|
|
(11,640 |
) |
|
|
200.9 |
% |
Total operating costs and expenses |
|
$ |
191,741 |
|
|
$ |
162,750 |
|
|
$ |
28,991 |
|
|
|
17.8 |
% |
41
Costs of product revenue. Costs of product revenue was $41.0 million in the nine months ended September 30, 2023, compared to $35.0 million in the nine months ended September 30, 2022, an increase of $6.0 million, or 17%, compared to an increase in related revenues of 26%. Costs of product revenue as a percentage of related revenue decreased to 64% in the nine months ended September 30, 2023, from 68% in the comparable prior year period. The decrease was due to an increase in company-owned transition studio merchandise revenue, which generates higher gross margin, and a higher percentage of non-branded merchandise revenue in 2023 for which we earn a commission with no corresponding cost of revenue.
Costs of franchise and service revenue. Costs of franchise and service revenue was $11.3 million in the nine months ended September 30, 2023, compared to $13.6 million in the nine months ended September 30, 2022, a decrease of $2.3 million, or 17%. The decrease was primarily due to a $3.1 million decrease in franchise sales commissions, consistent with the related franchise territory revenue decrease, partially offset by an increase in cost of technology fees.
Selling, general and administrative expenses. Selling, general and administrative expenses were $127.9 million in the nine months ended September 30, 2023, compared to $96.1 million in the nine months ended September 30, 2022, an increase of $31.8 million, or 33%. The increase was primarily attributable to restructuring charges of $6.1 million in the current year; an increase in salaries and wages of $16.0 million related to a higher average number of company-owned transition studios and to a one-time $2.6 million employee retention payroll tax credit in the prior year period; increase in occupancy expenses of $8.8 million primarily related to company-owned transition studios; increase in marketing and promotion expense of $1.7 million; increase in bad debt expense of $1.4 million; increase of $4.7 million in intangible asset write down, net of mutual termination agreement income related to the acquisition of 14 Rumble studios; increase in financial transaction fees and related expenses of $1.2 million and a net increase in other variable expenses in 2023 of $3.7 million, partially offset by a decrease in legal expenses of $3.5 million related to various legal matters and a decrease in equity-based compensation expense of $8.3 million primarily due to vesting of performance-based awards in the prior year period offset by an increase in expense related to RSUs granted since September 30, 2022.
Depreciation and amortization. Depreciation and amortization expense was $12.7 million in the nine months ended September 30, 2023, compared to $11.2 million in the nine months ended September 30, 2022, an increase of $1.5 million, or 13%. The increase was due primarily to amortization of intangibles related to the BodyFit trademark acquired in the second quarter of 2022 and to an increase in fixed assets to support our online offerings.
Marketing fund expense. Marketing fund expense was $16.3 million in the nine months ended September 30, 2023, compared to $12.7 million in the nine months ended September 30, 2022, an increase of $3.6 million, or 28% and is consistent with the increase in franchise marketing fund revenue.
Acquisition and transaction income. Acquisition and transaction income was $17.4 million in the nine months ended September 30, 2023, compared to $5.8 million in the nine months ended September 30, 2022, an increase of $11.6 million, or 201%. This income primarily represents the non-cash change in contingent consideration related to 2017 and 2021 business acquisitions.
Other (Income) Expense, net
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Interest income |
|
$ |
(1,189 |
) |
|
$ |
(1,209 |
) |
|
$ |
20 |
|
|
|
(1.7 |
)% |
Interest expense |
|
|
27,242 |
|
|
|
9,060 |
|
|
|
18,182 |
|
|
|
200.7 |
% |
Other expense |
|
|
3,097 |
|
|
|
— |
|
|
|
3,097 |
|
|
NA |
|
|
Total other expense, net |
|
$ |
29,150 |
|
|
$ |
7,851 |
|
|
$ |
21,299 |
|
|
|
271.3 |
% |
Interest income. Interest income primarily consists of interest on notes receivable and was insignificant in each of the nine months ended September 30, 2023 and 2022.
Interest expense. Interest expense was $27.2 million in the nine months ended September 30, 2023 compared to $9.1 million in the nine months ended September 30, 2022, an increase of $18.2 million, or 201%. Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs and debt discount. The increase in interest expense is due to higher average debt balances and higher interest rates in the current year period.
Other expense. Other expense consists of TRA expense, which was $3.1 million in the nine months ended September 30, 2023.
42
Income Taxes
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Income taxes (benefit) |
|
$ |
212 |
|
|
$ |
(158 |
) |
|
$ |
370 |
|
|
|
(234.2 |
)% |
Income taxes (benefit). Income taxes (benefit) were $0.2 million in the nine months ended September 30, 2023, compared to ($0.2) million in the nine months ended September 30, 2022.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, is helpful to investors because it provides consistency and comparability with past financial performance. In addition, our management uses non-GAAP measures to compare our performance relative to forecasts and to benchmark our performance externally against competitors. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate and present similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as tools for comparison. A reconciliation is provided below for the non-GAAP financial measures to the most directly comparable financial measures stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.
We believe that the non-GAAP financial measures presented below, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook.
Adjusted EBITDA
We define adjusted EBITDA as EBITDA (net income/loss before interest, taxes, depreciation and amortization), adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include equity-based compensation and related employer payroll taxes, acquisition and transaction expenses (including change in contingent consideration), litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business), employee retention credit (a tax credit for retaining employees throughout the COVID-19 pandemic), fees for financial transactions, such as secondary public offerings expenses for which we do not receive proceeds (including bonuses paid to executives related to completion of such transactions), expense related to the remeasurement of our TRA obligation, expense related to loss on impairment or write down of our brand intangible assets, restructuring and related charges incurred in connection with our restructuring plan that we do not believe reflect our underlying business performance and affect comparability. EBITDA and adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
We believe that adjusted EBITDA, viewed in addition to, and not in lieu of, our reported GAAP results, provides useful information to investors regarding our performance and overall results of operations because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period.
43
The following table presents a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net income (loss) |
|
$ |
(5,183 |
) |
|
$ |
(13,056 |
) |
|
$ |
7,362 |
|
|
$ |
3,242 |
|
Interest expense, net |
|
|
10,614 |
|
|
|
2,931 |
|
|
|
26,053 |
|
|
|
7,851 |
|
Income taxes |
|
|
202 |
|
|
|
(308 |
) |
|
|
212 |
|
|
|
(158 |
) |
Depreciation and amortization |
|
|
4,216 |
|
|
|
4,154 |
|
|
|
12,701 |
|
|
|
11,225 |
|
EBITDA |
|
|
9,849 |
|
|
|
(6,279 |
) |
|
|
46,328 |
|
|
|
22,160 |
|
Equity-based compensation |
|
|
3,536 |
|
|
|
4,243 |
|
|
|
15,647 |
|
|
|
23,920 |
|
Employer payroll taxes related to equity-based compensation |
|
|
94 |
|
|
|
— |
|
|
|
659 |
|
|
|
— |
|
Acquisition and transaction expenses (income) |
|
|
(1,923 |
) |
|
|
16,290 |
|
|
|
(17,433 |
) |
|
|
(5,793 |
) |
Litigation expenses |
|
|
1,511 |
|
|
|
1,015 |
|
|
|
5,855 |
|
|
|
8,374 |
|
Employee retention credit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,597 |
) |
Financial transaction fees and related expenses |
|
|
327 |
|
|
|
— |
|
|
|
1,971 |
|
|
|
737 |
|
TRA remeasurement |
|
|
1,845 |
|
|
|
1,078 |
|
|
|
3,097 |
|
|
|
1,635 |
|
Write down of goodwill and brand assets |
|
|
4,579 |
|
|
|
3,656 |
|
|
|
11,817 |
|
|
|
3,656 |
|
Restructuring and related charges |
|
|
6,703 |
|
|
|
— |
|
|
|
6,703 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
26,521 |
|
|
$ |
20,003 |
|
|
$ |
74,644 |
|
|
$ |
52,092 |
|
Liquidity and Capital Resources
As of September 30, 2023, we had $43.7 million of cash and cash equivalents, excluding $8.2 million of restricted cash.
We require cash principally to fund day-to-day operations, finance capital investments, service our outstanding debt and address our working capital needs. Based on our current level of operations and anticipated growth, we believe that our available cash balance and the cash generated from our operations will be adequate to meet our anticipated debt service requirements and obligations under our TRA, capital expenditures, payment of tax distributions and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors”, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our credit facility or otherwise to enable us to service our indebtedness, including our credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Credit Facility
On April 19, 2021, we entered into a Financing Agreement with Wilmington Trust, National Association, as administrative agent and collateral agent, and the lenders party thereto (the “Credit Agreement”), which consists of a $212 million senior secured term loan facility (the “Term Loan Facility”, and the loans thereunder, each a “Term Loan” and together, the “Term Loans”). Affiliates of the lenders also separately purchased 200,000 shares of our 6.50% Series A Convertible Preferred Stock (the “Series A Convertible preferred stock”) for $200 million. Our obligations under the Credit Agreement are guaranteed by Xponential Intermediate Holdings, LLC and certain of our material subsidiaries, and are secured by substantially all of the assets of Xponential Intermediate Holdings, LLC and certain of our material subsidiaries.
Under the Credit Agreement, we are required to make: (i) monthly payments of interest on the Term Loans and (ii) quarterly principal payments equal to 0.25% of the original principal amount of the Term Loan. Borrowings under the Term Loan Facility bear interest at a per annum rate of, at our option, either (a) the term secured overnight financing rate (“Term SOFR”) plus a Term SOFR Adjustment (as defined in the Credit Agreement per the fifth amendment discussed below), plus a margin of 6.50% or (b) the Reference Rate (as defined in the Credit Agreement) plus a margin of 5.50% (12.05% at September 30, 2023).
44
The Credit Agreement also contains mandatory prepayments of the Term Loan with: (i) 50% of Xponential Intermediate Holdings, LLC and its subsidiaries’ Excess Cash Flow (as defined in the Credit Agreement), subject to certain exceptions; (ii) 100% of the net proceeds of certain asset sales and insurance/condemnation events, subject to reinvestment rights and certain other exceptions; (iii) 100% of the net proceeds of certain extraordinary receipts, subject to reinvestment rights and certain other exceptions; (iv) 100% of the net proceeds of any incurrence of debt, excluding certain permitted debt issuances; and (v) up to $60 million of net proceeds in connection with an initial public offering of at least $200 million, subject to certain exceptions.
Unless agreed in advance, all voluntary prepayments and certain mandatory prepayments of the Term Loan made (i) on or prior to the first anniversary of the closing date are subject to a 2.0% premium on the principal amount of such prepayment and (ii) after the first anniversary of the closing date and on or prior to the second anniversary of the closing date are subject to a 0.50% premium on the principal amount of such prepayment. Otherwise, the Term Loans may be paid without premium or penalty, other than customary breakage costs with respect to SOFR Term Loans.
The Credit Agreement contains customary affirmative and negative covenants, including, among other things: (i) to maintain certain total leverage ratios, liquidity levels and EBITDA levels (in each case, as discussed further in the Credit Agreement); (ii) to use the proceeds of borrowings only for certain specified purposes; (iii) to refrain from entering into certain agreements outside of the ordinary course of business, including with respect to consolidation or mergers; (iv) restricting further indebtedness or liens; (v) restricting certain transactions with our affiliates; (vi) restricting investments; (vii) restricting prepayments of subordinated indebtedness; (viii) restricting certain payments, including certain payments to our affiliates or equity holders and distributions to equity holders; and (ix) restricting the issuance of equity. As of September 30, 2023, we were in compliance with these covenants.
The Credit Agreement also contains customary events of default, which could result in acceleration of amounts due under the Credit Agreement. Such events of default include, subject to the grace periods specified therein, our failure to pay principal or interest when due, our failure to satisfy or comply with covenants, a change of control, the imposition of certain judgments and the invalidation of liens we have granted.
Immediately following the IPO, on July 23, 2021 we executed a first amendment to the Credit Agreement, which amended the amount of the prepayment premium applicable to the prepayment of the Term Loan, and paid off $115.0 million of the principal balance of the Term Loan.
On October 8, 2021, we entered into a second amendment (the “Amendment”) to the Credit Agreement. The Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $38 million (the “2021 Incremental Term Loan”), the proceeds of which were used to fund the BFT Acquisition and the payment of fees, costs and expenses related to the Amendment. The Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2021 Incremental Term Loan) commencing on December 31, 2021 and (ii) amended the amount of the prepayment premium applicable in the event the 2021 Incremental Term Loan is prepaid within two years of the effective date of the Amendment.
On September 30, 2022, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $7.5 million (the “2022 Incremental Term Loan”), the proceeds of which were used for the acquisition of BodyFit trademark and general corporate purposes, including funding working capital and the payment of fees, costs and expenses related to the Third Amendment. The Third Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2022 Incremental Term Loan) commencing on December 31, 2022 and (ii) amended the amount of the prepayment premium applicable in the event the 2022 Incremental Term Loan is prepaid within two years of the effective date of the Third Amendment.
45
On January 9, 2023, we entered into a fourth amendment (the "Fourth Amendment") to the Credit Agreement. The Fourth Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $130.0 million (the "January 2023 Incremental Term Loan"), the proceeds of which were used to fund the repurchase of a portion of our outstanding Convertible Preferred (the “Repurchase Transactions”) and the payment of fees, costs and expenses related to the Amendment and the Repurchase Transactions. The Fourth Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the January 2023 Incremental Term Loan) commencing on June 30, 2023 and (ii) amended the amount of the prepayment premium applicable in the event the January 2023 Incremental Term Loan is prepaid.
On August 3, 2023, we entered into a fifth amendment (the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $65.0 million (the "August 2023 Incremental Term Loan"), the proceeds of which were used for funding the accelerated share repurchase program; the payment of fees, costs and expenses related to the Fifth Amendment; and general corporate purposes. The Fifth Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the August 2023 Incremental Term Loan) commencing on September 30, 2023 and (ii) replaces the benchmark interest rate based on the LIBOR rate (and related LIBOR-based mechanics) applicable to the loans under the Credit Agreement with a benchmark interest rate based on the forward-looking Term SOFR (and related Term SOFR-based mechanics).
The total principal amount outstanding on the Term Loans was $329.7 million at September 30, 2023. Quarterly principal payments of $1.2 million on the Term Loan as amended were due beginning September 30, 2023.
On January 9, 2023, we entered into a preferred stock repurchase agreement (the "Repurchase Agreement") with certain holders of the Convertible Preferred, pursuant to which we agreed to repurchase 85,340 shares of Convertible Preferred. On January 13, 2023, the repurchase was completed for an aggregate payment of $130.8 million. The excess of fair market value of $12.7 million over the consideration transferred was treated as deemed contribution and resulted in an increase to our accumulated deficit.
At September 30, 2023, there had been no material changes in our cash requirements from known contractual and other obligations as disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2022.
Accelerated Share Repurchase Program
On August 1, 2023, our board of directors approved a $50.0 million accelerated share repurchase program (the "ASR Program") to repurchase shares of our Class A common stock. Under the ASR Program, we paid a fixed amount of $50.0 million on August 9, 2023, to a third-party financial institution and received an initial delivery of 2,010,050 shares of our Class A common stock, which were retired immediately. On October 2, 2023, the final settlement of our ASR Program occurred, and we received an additional 588,827 shares of our Class A common stock from the third-party financial institution. Under the ASR Program, we also incurred $0.4 million in associated expenses, consisting primarily of legal fees and a 1% excise tax liability in accordance with the Inflation Reduction Act of 2022. In total under the ASR Program, we repurchased and immediately retired 2,598,877 shares of Class A common stock at an average price of $19.24 per share for $50.0 million, exclusive of legal fees and excise tax.
Cash Flows
The following table presents summary cash flow information for the nine months ended September 30, 2023 and 2022:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Net cash provided by (used in) operating activities |
|
$ |
38,194 |
|
|
$ |
37,471 |
|
Net cash provided by (used in) investing activities |
|
|
(8,595 |
) |
|
|
(11,574 |
) |
Net cash provided by (used in) financing activities |
|
|
(15,089 |
) |
|
|
(16,322 |
) |
Net increase in cash, cash equivalents and |
|
$ |
14,510 |
|
|
$ |
9,575 |
|
46
Cash Flows from Operating Activities
In the nine months ended September 30, 2023, cash provided by operating activities was $38.2 million, compared to $37.5 million in the nine months ended September 30, 2022, an increase in cash provided of $0.7 million. Of the increase, $4.4 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities, partially offset by $3.7 million primarily due to unfavorable changes in working capital related to prepaid expenses, deferred costs, and deferred revenue, partially offset by favorable changes in working capital related to accounts receivable, other current liabilities, and accrued expenses in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Cash Flows from Investing Activities
In the nine months ended September 30, 2023 and 2022, cash used in investing activities was $8.6 million and $11.6 million, respectively. The change year over year in cash used was primarily attributable to a decrease of cash used to purchase intangibles assets and a decrease in issuing notes receivables; partially offset by a decrease in cash received from collection of notes receivable and an increase in cash used to purchase property and equipment.
Cash Flows from Financing Activities
In the nine months ended September 30, 2023, cash used in financing activities was $15.1 million, compared to $16.3 million in the nine months ended September 30, 2022, a decrease in cash used of $1.2 million. The decrease in cash used was primarily attributable to an increase in cash received from borrowings on long-term debt of $183.7 million, payment received from a shareholder of $8.1 million, and a decrease of $7.3 million in payments related to preferred stock dividend; partially offset by cash used of $50.4 million related to the ASR Program, an increase in tax payments of $6.2 million related to vesting of restricted stock units, distributions to Pre-IPO LLC Members of $7.5 million, and payment of $130.8 million related to the repurchase of convertible preferred stock.
Off-Balance Sheet Arrangements
As of September 30, 2023, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately $3.1 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees at September 30, 2023 was not material, and no accrual has been recorded for our potential obligation under these arrangements. See Note 16 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding these operating leases and guarantees.
In July 2022, we issued a standby letter of credit to a third-party financing company, who provides loans to our qualified franchisees. The standby letter of credit is contingent upon the failure of our franchisees to perform according to the terms of underlying contracts with the third party. We deposited cash in a restricted account as collateral for the standby letter of credit. The estimated fair value of these guarantees at inception was not material, and as of September 30, 2023 an accrual of $0.2 million has been recorded for our potential obligation under this guaranty arrangement. See Note 16 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended as of September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The material set forth in Note 16 (pertaining to information regarding legal contingencies) of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors.
The Company has included in Part 1, Item 1A of Part 1 of its Annual Report on Form 10-K for the year ended December 31, 2022, a description of certain risks and uncertainties that could affect the Company's business, future performance or financial condition (the “Risk Factors”). There have been no material changes to the Risk Factors we previously disclosed in our filings with the SEC. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchases of Class A Common Stock
The following table summarizes our repurchases of our Class A common stock during the three months ended September 30, 2023:
Period |
Total number of shares purchased |
|
|
Average price paid per share |
|
|
Total number of shares purchased as part of publicly announced plans or programs (1) |
|
|
Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
|
||||
|
|
|
|
(in millions) |
|
||||||||||
July 1 — July 31, 2023 |
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
August 1 — August 31, 2023 (1) |
|
2,010,050 |
|
|
|
19.90 |
|
|
|
2,010,050 |
|
|
|
10.0 |
|
September 1 — September 30, 2023 |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.0 |
|
Total |
|
2,010,050 |
|
|
$ |
19.90 |
|
|
|
2,010,050 |
|
|
$ |
10.0 |
|
(1) On August 1, 2023, our board of directors approved a $50.0 million accelerated share repurchase program (the "ASR Program") to repurchase shares of our Class A common stock. Under the ASR Program, we paid a fixed amount of $50.0 million on August 9, 2023, to a third-party financial institution and received an initial delivery of 2,010,050 shares of our Class A common stock, which were retired immediately. The initial delivery of shares of our Class A common stock represented approximately 80% of the fixed amount paid of $50.0 million, which was based on the share price of our Class A common stock on the date of ASR Program execution. Under the ASR Program, we also incurred $0.4 million in associated costs, consisting primarily of legal fees and a 1% excise tax. The average price paid per share was $19.90, excluding legal fees and excise tax, for the third quarter 2023. The final average price paid per share upon final settlement of the ASR Program was $19.24, excluding legal fees and excise tax. The final number of shares repurchased by us was based on the daily volume-weighted average stock price of our Class A common stock during the duration of the ASR Program, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Program agreement. On October 2, 2023, the final settlement of our ASR Program occurred, and we received an additional 588,827 shares of our Class A common stock from the third-party financial institution.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
49
Item 6. Exhibits.
Exhibit Number |
|
Description |
10.1* |
|
|
|
|
|
10.2*** |
|
|
|
|
|
31.1** |
|
|
|
|
|
31.2** |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
** Furnished herewith.
*** Previously filed.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Xponential Fitness, Inc. (Registrant) |
|
|
|
|
|
Date: November 7, 2023 |
|
By: |
/s/ John Meloun |
|
|
|
John Meloun |
|
|
|
Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) |
51