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
The number of outstanding shares (in thousands) of the registrant’s Class A common stock and Class B common stock as of November 1, 2024 was
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 |
33 |
Item 3. |
50 |
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Item 4. |
50 |
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PART II. |
51 |
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Item 1. |
51 |
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Item 1A. |
51 |
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Item 2. |
51 |
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Item 3. |
51 |
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Item 4. |
51 |
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Item 5. |
51 |
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Item 6. |
52 |
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53 |
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Xponential Fitness, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(amounts in thousands, except per share amounts)
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September 30, |
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December 31, |
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2024 |
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2023 |
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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 stockholders' 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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( |
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Accumulated deficit |
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( |
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( |
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Treasury stock, at cost, |
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( |
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( |
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Total stockholders' deficit attributable to Xponential Fitness, Inc. |
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( |
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( |
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Noncontrolling interests |
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( |
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( |
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Total stockholders' deficit |
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( |
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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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2024 |
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2023 |
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2024 |
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2023 |
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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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Impairment of goodwill and other assets |
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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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( |
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( |
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Other expense (income): |
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Interest income |
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( |
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( |
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( |
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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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( |
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( |
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Income taxes |
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Net income (loss) |
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( |
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( |
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( |
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Less: net income (loss) attributable to noncontrolling interests |
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( |
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( |
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( |
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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, 2023 |
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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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( |
) |
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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Issuance of Class A common stock under stock-based compensation plans |
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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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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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— |
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( |
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Distributions paid to Pre-IPO LLC Members |
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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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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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( |
) |
Balance at March 31, 2024 |
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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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( |
) |
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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||
Issuance of Class A common stock under stock-based compensation plans |
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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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— |
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( |
) |
Distributions paid to Pre-IPO LLC Members |
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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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( |
) |
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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( |
) |
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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Balance at June 30, 2024 |
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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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( |
) |
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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|
Issuance of Class A common stock under stock-based compensation plans |
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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 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Distributions paid to Pre-IPO LLC Members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||||||
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 |
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-In Capital |
|
|
Receivable from |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||||
Balance at December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||||||
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Conversion of Class B shares to Class A shares |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Vesting of Class B shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of Class A common stock under stock-based compensation plans, net of shares withheld for taxes |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Deemed contribution from redemption of preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Liability-classified restricted stock units vested |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Loan to shareholder and accumulated interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
||||||
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Conversion of Class B shares to Class A shares |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Adjustment of preferred stock to redemption value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Vesting of Class B shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of Class A common stock under stock-based compensation plans, net of shares withheld for taxes |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Loan to shareholder and accumulated interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Receivable from shareholder arising from the Rumble studios acquisition |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Consideration related to the Rumble studios acquisition |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Payment received from shareholder |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Distributions paid to Pre-IPO LLC Members |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
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 |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of Class A common stock under stock-based compensation plans, net of shares withheld for taxes |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
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.
4
Xponential Fitness, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization and write off of debt issuance costs |
|
|
|
|
|
|
||
Amortization and write off of discount on long-term debt |
|
|
|
|
|
|
||
Change in contingent consideration from acquisitions |
|
|
|
|
|
( |
) |
|
Non-cash lease expense |
|
|
|
|
|
|
||
Bad debt expense |
|
|
|
|
|
|
||
Equity-based compensation |
|
|
|
|
|
|
||
Non-cash interest |
|
|
( |
) |
|
|
( |
) |
Loss (gain) on disposal of assets |
|
|
( |
) |
|
|
( |
) |
Impairment of goodwill and other assets |
|
|
|
|
|
|
||
Changes in assets and liabilities, net of effect of acquisition: |
|
|
|
|
|
|
||
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 |
|
|
|
|
|
|
||
Acquisition of business |
|
|
( |
) |
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Borrowings from long-term debt |
|
|
|
|
|
|
||
Payments on long-term debt |
|
|
( |
) |
|
|
( |
) |
Debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Payments of preferred stock dividend |
|
|
( |
) |
|
|
( |
) |
Payment of promissory note liability |
|
|
( |
) |
|
|
|
|
Payments of contingent consideration |
|
|
|
|
|
( |
) |
|
Payments for taxes related to net share settlement of restricted share units |
|
|
|
|
|
( |
) |
|
Proceeds from issuance of common stock in connection with stock-based compensation plans |
|
|
|
|
|
|
||
Payments 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 provided by (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, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid, net |
|
|
|
|
|
|
||
Non-cash investing and financing activities: |
|
|
|
|
|
|
||
Capital expenditures accrued at period end |
|
$ |
|
|
$ |
|
||
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 |
|
|
|
|
|
|
||
Contingent consideration upon acquisition |
|
|
|
|
|
|
||
Debt issuance costs paid-in-kind - long-term debt |
|
|
|
|
|
|
||
Non-cash proceeds from sale of asset |
|
|
|
|
|
|
||
Preferred stock dividend paid-in-kind |
|
|
|
|
|
|
||
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 for the purpose of facilitating an initial public offering (“IPO”) and entered into a series of transactions to implement an internal reorganization. Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being an ownership interest in Xponential Fitness LLC (“XPO LLC”) through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).
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, 2024, the Company’s portfolio of
On February 13, 2024, the Company divested the Stride brand, including the intellectual property, franchise rights and franchise agreements for open studios. On May 20, 2024, the Company divested the Row House brand, including the intellectual property, franchise rights and franchise agreements for open studios. Additionally, during the three months ended September 30, 2024, the Company announced that it would wind down AKT franchise operations. See Note 3 for additional information.
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.
As the sole managing member of XPO LLC, the Company operates and controls all of the business and affairs 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.
7
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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, 2023, 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.
On January 2, 2024, the Company acquired Lindora Franchise, LLC, a Delaware limited liability company, the franchisor of the Lindora wellness brand (the “Lindora Franchisor” or “Lindora”), and has included the results of operations of Lindora in its condensed consolidated statements of operations from the acquisition date forward. See Note 3 for additional information.
Reclassifications – To conform with current year presentation, the Company has reclassified impairment charges of $
Principles of consolidation – The Company’s consolidated financial statements include the accounts of its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
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's restricted cash consists of marketing fund restricted cash, which can only be used for activities that promote the Company’s brands, and guarantee of standby letter of credit (See Note 16). The interest earned on marketing fund restricted cash accounts is also restricted for use. Restricted cash was $
Accounts receivable and allowance for expected credit losses – 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. The Company’s payment terms on its receivables from franchisees are generally
The Company’s accounts and notes receivable are recorded at net realizable value, which includes an appropriate allowance for expected credit losses. On a periodic basis, the Company evaluates its accounts and notes receivable balances and establishes an allowance for expected credit losses. The estimate of expected credit losses is based upon historical bad debts, current receivable balances, age of receivable balances, the franchisee’s or customer’s financial condition and ability to comply with credit terms and current economic trends, all of which are subject to change. Actual uncollected amounts have historically been consistent with the Company’s expectations. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
8
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The following tables provide 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, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Bad debt expense recognized during the period |
|
|
|
|
|
|
|
|
|
|||
Write-off of uncollectible amounts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Supplemental balance sheet information
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Prepaid expenses |
|
$ |
|
|
$ |
|
||
Tax receivables |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Total prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Accrued expenses |
|
|
|
|
|
|
||
Accrued compensation |
|
$ |
|
|
$ |
|
||
Contingent consideration from acquisitions, current portion |
|
|
|
|
|
|
||
Sales tax accruals |
|
|
|
|
|
|
||
Legal accruals |
|
|
|
|
|
|
||
Other accruals |
|
|
|
|
|
|
||
Total accrued expenses |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
||
Lease liabilities, short-term |
|
$ |
|
|
$ |
|
||
Promissory note |
|
|
|
|
|
|
||
Tax receivable agreement liability, current portion |
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
||
Total other current liabilities |
|
$ |
|
|
$ |
|
||
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.
9
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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, notes payable, and other current liabilities. 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.
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 net income (loss) attributable to Class A common stockholders by the number of weighted-average shares of Class A common stock outstanding for the period. 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. For further discussion, see Note 15.
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: a) 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 b) 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
10
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
have any uncertain tax positions. The Company recognizes potential interest and penalties, if any, related to income tax matters in income tax expense.
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.
Segment Reporting – In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. ASU 2023-07 is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
Income Taxes Disclosures – In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for public entities with annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
Income Statement Expense Disclosures – In November 2024, the FASB issued ASU No. 2024-03, “Income Statement (Subtopic 220-40): Disaggregation of Income Statement Expenses.” ASU 2024-03 requires disaggregated information about specified categories of expenses included in certain captions presented on the face of the income statement including, purchases of inventory, employee compensation, depreciation, amortization, and depletion. ASU 2024-03 is effective for public entities with annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
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 APA, consideration for the acquisition included $
11
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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 |
|
$ |
|
|
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 was considered to have an eight-year life. The acquisition was not material to the results of operations of the Company.
During the year ended December 31, 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 |
|
$ |
|
|
The fair value of reacquired franchise rights was based on the excess earnings method and was considered to have an approximate
During the nine months ended September 30, 2024 and 2023, the Company refranchised operations at
On December 31, 2023, the Company entered into agreements to sell six Rumble company-owned transition studios (the “Rumble Held for Sale Studios”). These agreements triggered the reclassification of Rumble Held for Sale Studios to assets held for sale. Based on the expected net sales proceeds the Company determined the Rumble Held for Sale Studios to be fully impaired and recognized an impairment of $
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
12
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
September 30, 2024 and 2023, the Company did
Xponential Procurement Services acquisition – On
XPS specializes in the custom manufacturing of display cases, engraved wood signs, point of sale displays, custom acrylic panels, and other products. The acquisition contributes to the Company’s vertical integration of its product offerings to its franchisees.
The transaction was accounted for as a business combination using the acquisition method of accounting, which requires the assets acquired to be recorded at their respective fair value as of the date of the transaction. The Company determined the estimated fair values after review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and estimates made by management. The fair values assigned to tangible and intangible assets acquired were based on management's estimates and assumptions. The acquisition was not material to the results of operations of the Company.
The following summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
|
|
Amount |
|
|
Inventory |
|
$ |
|
|
Property and equipment |
|
|
|
|
Goodwill |
|
|
|
|
Intellectual property |
|
|
|
|
Other intangible assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable and accrued expenses |
|
|
|
|
Net assets acquired |
|
$ |
|
|
The goodwill recognized in this acquisition was attributable to the synergies that the Company expects to achieve. Goodwill and intangible assets recognized from this acquisition are expected to be tax deductible.
Lindora acquisition – On
The transaction was accounted for as a business combination using the acquisition method of accounting, which requires the assets acquired to be recorded at their respective fair value as of the date of the transaction. The Company determined the estimated fair values after review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and estimates made by management. The fair values assigned to intangible assets acquired are based on management's estimates and assumptions. The acquisition was not material to the results of operations of the Company.
13
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The following summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
|
|
Amount |
|
|
Trademarks |
|
$ |
|
|
Franchise agreements |
|
|
|
|
Goodwill |
|
|
|
|
Total assets acquired |
|
$ |
|
|
The goodwill recognized in this acquisition was attributable to the synergies that the Company expects to achieve. The fair values, which are Level 3 measurements, of the recognizable intangible assets are comprised of trademarks and franchise agreements. The fair value of the trademarks was estimated by the relief from royalty method and are considered to have an
During the three and nine months ended September 30, 2024, the Company incurred $
Pro forma financial information and revenue from the date of acquisition have not been provided for these acquisitions as they are not material either individually or in the aggregate.
Divestiture of Stride brand – On February 13, 2024, the Company entered into an agreement with a buyer, pursuant to which the Company divested the Stride brand, including the intellectual property, franchise rights and franchise agreements for open studios. The buyer of the Stride brand is a member of management and shareholder of the Company. The Company received no consideration from the divestiture of the Stride brand and will assist the buyer with transition support including cash payments of approximately $
Divestiture of Row House brand – On May 20, 2024, the Company entered into an agreement with a buyer, pursuant to which the Company divested the Row House brand, including the intellectual property, franchise rights and franchise agreements for open studios, and retained certain liabilities, including liabilities related to known litigation, pre-litigation, and disputes as of the closing of the divestiture. The Company received no consideration from the divestiture of the Row House brand. The divestiture allows the Company to better focus and utilize its resources on its other brands. The Company recognized a loss on divestiture of $
Wind down of AKT brand franchise operations – During the three months ended September 30, 2024, the Company announced that it would wind down AKT franchise operations. As part of the wind down, the Company began terminating franchise agreements with existing AKT studios and signed a licensing agreement with a former franchisee for no consideration received. As a result of the ongoing wind down of the AKT brand, the Company recognized net charges of $
Note 4 – Contract Liabilities and Costs from Contracts with Customers
Contract liabilities – Contract liabilities consist of deferred revenue resulting from franchise development fees (franchise fees, development fees and master franchise fees paid by franchisees), which are recognized over time on a straight-line basis over the
14
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Revenue recognized that was included in deferred |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Decrease in deferred revenue due to divestiture |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Increase, excluding amounts recognized as revenue |
|
|
|
|
|
|
|
|
|
|||
Balance at September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
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, 2024. 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 |
|
Franchise |
|
|
Brand fees |
|
|
Total |
|
|||
Remainder of |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
— |
|
|
|
|
|||
|
|
|
|
|
— |
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
The following table reflects the components of deferred revenue:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Franchise and area development fees |
|
$ |
|
|
$ |
|
||
Brand fees |
|
|
|
|
|
|
||
Equipment and other |
|
|
|
|
|
|
||
Total deferred revenue |
|
|
|
|
|
|
||
Non-current portion of deferred revenue |
|
|
|
|
|
|
||
Current portion of deferred revenue |
|
$ |
|
|
$ |
|
||
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 or
15
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
initial franchise agreement is executed. The commissions are recognized on a straight-line basis over the initial
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, 2024 and December 31, 2023, 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, |
|
||
|
|
2024 |
|
|
2023 |
|
||
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, 2024, was $
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, 2024, there was an increase of $
16
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
goodwill at September 30, 2024 and December 31, 2023, totaled $
During the quarter ended June 30, 2024, the Company determined it was necessary to re-evaluate goodwill of the CycleBar reporting unit 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 unit using an income approach with assumptions that are considered Level 3 inputs and concluded that the carrying value of the CycleBar reporting unit exceeded its fair value, resulting in a goodwill impairment of $
In connection with the wind down of the AKT brand, as discussed in Note 3, the Company determined that the deferred video production costs and web design and domain intangible assets related to AKT were impaired and recognized an 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, 2024 |
|
|
December 31, 2023 |
|
||||||||||||||||||
|
|
Amortization |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||||
Trademarks |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Franchise agreements |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Reacquired franchise rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Intellectual property |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||||
Web design and domain |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Deferred video production costs |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Other intangible assets |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||||
Total definite-lived intangible assets |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks |
|
N/A |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Total intangible assets |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Amortization expense was $
17
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
the Company recorded a write down of franchise agreements, net of reacquired franchise rights, in the amount of $
The anticipated future amortization expense of intangible assets is as follows:
|
|
Amount |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
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, 2024, 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
18
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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.
On January 9, 2023, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. 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. In connection with the Fifth Amendment, the Company wrote off a pro rata portion of debt issuance costs related to the Term Loans aggregating $
On February 13, 2024, the Company entered into a sixth amendment (the “Sixth Amendment”) to the Credit Agreement. The Sixth Amendment provides for, among other things, additional term loans in an aggregate principal amount of approximately $
In connection with the Sixth Amendment, the Company wrote off a pro rata portion of debt issuance costs related to the Term Loans of $
On August 23, 2024, the Company entered into a seventh amendment (the “Seventh Amendment”) to the Credit Agreement. The Seventh Amendment provides for, among other things: (i) additional term loans in an aggregate principal amount of $
The Company incurred debt issuance costs of $
Principal payments on outstanding balances of long-term debt as of September 30, 2024 were as follows:
|
|
Amount |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total |
|
$ |
|
|
The carrying value of the Company’s long-term debt approximated fair value as of September 30, 2024 and December 31, 2023, due to the variable interest rate, which is a Level 2 input.
19
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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, 2024, the Company recognized ROU asset impairment charges of $
Supplemental balance sheet information related to leases is summarized as follows:
Operating leases |
|
Balance Sheet Location |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
ROU assets, net (1) |
|
Right-of-use assets |
|
$ |
|
|
$ |
|
||
Lease liabilities, short-term |
|
|
$ |
|
|
$ |
|
|||
Lease liabilities, long-term |
|
Lease liability |
|
$ |
|
|
$ |
|
||
The following table presents the components of lease expense:
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Operating lease costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
20
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
The following table presents the supplemental cash flow information related to operating leases:
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Lease liabilities arising from new ROU assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table presents other information related to leases:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
Maturities of lease liabilities as of September 30, 2024 are summarized as follows:
|
|
Amount |
|
|
|
Remainder of 2024 |
|
$ |
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
2028 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total future lease payments |
|
|
|
|
|
Less: imputed interest |
|
|
|
|
|
Total |
|
$ |
|
|
|
Note 10 – Related Party Transactions
The Company had numerous transactions with the pre-IPO Member and pre-IPO Parent and its affiliates. The significant related party transactions consisted of borrowings from and payments to the Member and other related parties that were under common control of the Parent.
In March 2021, the Company recorded a distribution to the Parent of $
21
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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
The Company earns revenues and has accounts receivable from franchisees comprised of a former member of the Company's senior management and a current employee of the Company. Revenues from these affiliates, primarily related to franchise revenue, marketing fund revenue and merchandise revenue, were $
In August 2023, the Company received payments from an officer and a director of the Company totaling $
In May 2024, the Company’s board of directors approved the sale of one of the Company’s vehicles to the Company’s former Chief Executive Officer and board member, for $
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
22
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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, 2024.
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
During the three months ended June 30, 2024, the Company elected the paid-in-kind option for the Convertible Preferred quarterly preferential coupon resulting in an increase in the fixed liquidation preference of $
At September 30, 2024 and December 31, 2023, 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 former Chief Executive Officer (collectively the “Selling Stockholders”) and certain underwriters named therein, pursuant to which the Selling Stockholders sold an aggregate of
23
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
LLC Members exchanged their LLC units for
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. Future redemptions or exchanges of LLC Units by the Continuing Pre-IPO LLC Members will result in a change in ownership and reduce the amount recorded as noncontrolling interest and increase additional paid-in capital.
During 2024 and 2023, 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, 2024:
Owner |
|
Units Owned |
|
|
Ownership percentage |
|
||
XPO Inc. |
|
|
|
|
|
% |
||
Noncontrolling interests |
|
|
|
|
|
% |
||
Total |
|
|
|
|
|
% |
||
Accelerated Share Repurchase program – On August 1, 2023, the Company's board of directors approved a $
In total under the ASR Program, the Company repurchased and immediately retired
24
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 13 – Equity Compensation
Profit interest units – Under the pre-IPO plan, the Parent granted 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 fair value of the time-based grants was recognized as compensation expense over the vesting period (generally
Liability classified restricted stock units – In November 2021, the Company granted 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 –
|
|
Shares |
|
|
Weighted Average |
|
||
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Issued |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeited, expired, or canceled |
|
|
( |
) |
|
$ |
|
|
Outstanding at September 30, 2024 |
|
|
|
|
$ |
|
||
RSUs are valued at the Company’s closing stock price on the date of grant, and generally vest over a - to
During 2023,
Stock-based compensation expense –
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Selling, general and administrative |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total stock-based compensation expense, before tax |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Total stock-based compensation expense, after tax |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
25
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Income tax benefit (expense) relates to vested RSUs. Due to the Company's full valuation allowance on its net deferred tax assets, there is no income tax benefit on the unvested RSUs. At September 30, 2024, the Company had $
During the second quarter of 2024, the Company reversed $
Note 14 – Income Taxes
Income taxes – 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
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, 2024, 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, 2024. 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 and 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 Rumble Holdings LLC and H&W Investco Blocker II, LP (the “Blocker Companies”) in the mergers of the Blocker Companies with and into XPO Inc. (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
26
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
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.
As of September 30, 2024, 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 (loss) 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. Weighted average shares of Class B common stock were
27
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 loss per share of Class A common stock:
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Less: net (income) loss attributable to noncontrolling interests |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Less: dividends on preferred shares |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Less: deemed contribution |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Add: deemed contribution from redemption of convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Net income (loss) attributable to XPO Inc. - basic |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Add: dividends on preferred shares |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Less: deemed contribution |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Less: Deemed contribution from redemption of convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net loss attributable to XPO Inc. - diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares of Class A common stock outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible preferred stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Weighted average shares of Class A common stock outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings (loss) per share attributable to Class A common stock - basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Net loss per share attributable to Class A common stock - diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Anti-dilutive shares excluded from diluted loss per share of 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 |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Treasury share options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rumble contingent shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Profits interests, time vesting |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
28
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
Note 16 – Contingencies and Litigation
Litigation – The Company has in the past been, is currently and expects to continue in the future to be a party to or involved in pre-litigation disputes, individual actions, putative class actions or other collective actions, U.S. and state government regulatory inquiries and investigations and various other legal proceedings arising in the normal course of its business, including with 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, except for those matters discussed below. 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.
As of the end of each applicable reporting period, the Company reviews each of its legal proceedings and, where it is probable that a liability has been incurred, the Company accrues for all probable and reasonably estimable losses. The Company accrued for estimated legal liabilities, where appropriate, or settlement agreements to resolve legal disputes and recorded an aggregate accrual of $
The Company maintains insurance coverage which may cover certain losses and legal costs incurred. When losses exceed the applicable policy deductible and realization of recovery of the loss from existing insurance policies is deemed probable, the Company records receivables from the insurance company for the excess amount. The Company has not recorded any provision for insurance reimbursement as of September 30, 2024.
On November 22, 2023, former employees of a former franchisee of the Company filed a putative class action complaint in the United States District Court for the Southern District of Ohio, captioned Shannon McGill et al. v. Xponential Fitness LLC, et al., Case No. 2:23-cv-03909, against the Company, as well as against a former franchisee of the Company and the franchisee’s legal entity, MD Pro Fitness, LLC. The complaint alleges violations of the Fair Labor Standards Act, as well as employment laws from different states in connection with the franchisee’s owner-operated studio locations. The Company was served with the complaint on December 4, 2023. The Company intends to defend itself in this litigation. The Company recorded an accrual for estimated loss contingencies associated with this matter, which is included in accrued expenses in the condensed consolidated balance sheets as of September 30, 2024, based on currently available information. The accrual does not reflect the Company’s views of the merits of claims in this action.
On February 28, 2024 , the landlord (the "New York Rumble Landlord") for a Rumble studio located in New York, New York (the "New York Studio") filed an Affidavit of Confession of Judgment with the Supreme Court of the State of New York, County of New York (the “Court”), against Rumble Fitness, LLC (the “Rumble Sellers”), in its capacity as the former tenant under the lease for the New York Studio (the "New York Lease"), for rent arrears; which filing was triggered by the Company's failure to pay rent. As the current tenant under the New York Lease, the Company had been negotiating a settlement with the New York Rumble Landlord to settle all rent arrears, future rent, and to terminate the New York Lease. On October 15, 2024, the Company entered into two settlement agreements with the New York Rumble Landlord pursuant to which the parties agreed to terminate the New York Lease and settle all amounts owed for rent arrears and future rent. The Company recorded an accrual for estimated loss contingencies associated with this matter, which is included in accrued expenses in the condensed consolidated balance sheets as of September 30, 2024.
On February 9, 2024, a federal securities class action lawsuit was filed against the Company and certain of the Company’s officers in the United States District Court for the Central District of California. The complaint alleged, among other things, violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, regarding misstatements and/or omissions in certain of the Company’s financial statements, press releases, and SEC filings made during the putative class period of July 26, 2021 through December 7, 2023. On July 26, 2024, plaintiffs filed an amended complaint, adding three Company directors as defendants, as well as the underwriters from the Company’s April 6, 2022 secondary offering, additionally bringing claims under Sections 11, 12(a)(2), and 15 of the Securities Act, and alleging a putative class period of July 23, 2021 through May 10, 2024. The Company intends to defend itself against this action and filed a motion to dismiss the amended complaint on October 8, 2024. The Court has scheduled a hearing on the Company’s motion to dismiss for February 14, 2025. The litigation is preliminary in nature and involves substantial uncertainties and the Company believes that a loss is not probable or estimable at this time. However, there can be no assurance that such legal proceedings will not have a material adverse effect on the Company’s business, results of operations, financial condition, or cash flows.
On March 10, 2024, a shareholder derivative lawsuit was filed in the United States District Court for the Central District of California by Gideon Akande, allegedly on behalf of Xponential Fitness, Inc., against certain current officers and directors as defendants,
29
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
and Xponential Fitness, Inc., as nominal defendant, for alleged wrongdoing committed by the individual defendants from July 26, 2021 to December 7, 2023. Plaintiff alleges claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, abuse of control, waste of corporate assets, violations of Section 14(a) of the Exchange Act, violations of Sections 20(a) and 10(b) and Rule 10b-5 of the Exchange Act, and against Messrs. Geisler and Meloun for contribution or indemnification under Sections 10(b) and 21D of the Exchange Act. Plaintiffs seek, inter alia, damages with pre- and post-judgment interest, and an order directing the Company and the individual defendants to improve the Company’s corporate governance, and restitution by the individual defendants. On April 3, 2024, the court entered an Order granting the parties’ Joint Stipulation to Stay Proceedings, which stayed the proceeding pending final resolution of the securities class action. On May 10, 2024, a second derivative lawsuit was filed in the United States District Court for the Central District of California by Patrick Ayers, purportedly on behalf of Xponential Fitness, Inc., alleging similar claims. On June 24, 2024, the Court stayed the Ayers action pending resolution of the securities class action and consolidated the proceedings with the Gideon Akande derivative lawsuit. The litigation is preliminary in nature and involves substantial uncertainties and the Company believes that a loss is not probable or estimable at this time. However, there can be no assurance that such legal proceedings will not have a material adverse effect on the Company’s business, results of operations, financial condition, or cash flows.
Government investigations – On December 5, 2023, the Company was contacted by the Securities and Exchange Commission (the “SEC”), requesting that the Company provide it with certain information and documents. The Company received notice on May 7, 2024 of an investigation by the U.S. Attorney’s Office for the Central District of California (the “USAO”). On July 29, 2024, the Company received a civil investigative demand from the United States Federal Trade Commission (the “FTC”). The Company intends to cooperate fully with the SEC, USAO and FTC in these investigations, and the Company has incurred, and may continue to incur, significant expenses related to legal and other professional services in connection with matters relating to or arising from these investigations. At this stage, the Company is unable to assess whether any material loss or adverse effect is reasonably possible as a result of these investigations or estimate the range of any potential loss.
Contingent consideration from acquisitions – 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 $
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 $
30
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
(income). The Company paid
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 on a global basis, excluding the United States and Canada. In exchange, the Company is entitled to 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 at a purchase price based on the Master Franchisee’s EBITDA, which has been extended to 2025. 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. The Company believes the likelihood of a cancellation payment being required is remote as of September 30, 2024, and therefore no accrual has been recorded.
In connection with the January 2024 acquisition of Lindora, the Company agreed to pay contingent consideration to the seller subject to the achievement of certain milestones. Payment of additional consideration is contingent on Lindora reaching two milestones based on a certain gross sales target and the number of operating clinics during the 15-month and 24-month period following the acquisition date, respectively. At the acquisition date, the Company determined that the fair value of the estimated contingent consideration liability was $
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 into 2025; however ultimate timing will depend on lease termination negotiations. During the fourth quarter of 2023 the Company's restructuring plan was expanded due to the addition of Rumble company-owned transition studios to the restructuring plan and a refranchising plan that was terminated by the Company due to the refranchisor’s non-compliance with the franchise agreements and the subsequent closure of certain studios. This refranchise termination resulted in the Company incurring losses for contract termination expenses, other expenses associated with exiting the studios, and loss contingencies related to the refranchisor’s unpaid payroll. The Company expects to recognize additional restructuring charges throughout 2024 and 2025 totaling approximately $
31
Xponential Fitness, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(amounts in thousands, except per share amounts)
for certain studios for which the Company has lease liabilities recorded and the expected cash payments and expenses to exit the lease may be greater than expected rent expense for that period, depending on the outcome of lease termination negotiations.
The components of the restructuring charges were as follows:
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Impairment and accelerated amortization of right-of-use assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contract termination and other associated costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss on lease terminations and sale or disposal of assets, net (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total restructuring charges, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The restructuring charges are recorded within the following financial statement captions on the Company’s condensed consolidated statements of operations:
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Costs of product revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Impairment of goodwill and other assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total restructuring charges, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table provides the components of and changes in the Company’s restructuring charges, included in accounts payable and accrued expenses on the condensed consolidated balance sheets:
|
|
September 30, 2024 |
|
|
Balance at December 31, 2023 |
|
$ |
|
|
|
|
|
||
Payments |
|
|
( |
) |
Balance at September 30, 2024 |
|
$ |
|
|
32
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, 2023. 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, 2023.
Xponential Fitness LLC (“XPO LLC”), the principal operating subsidiary of Xponential Fitness, Inc. (the “Company” or “XPO Inc.,” “we,” “us,” and “our”), is the largest global franchisor of boutique fitness brands. Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 66.7% ownership interest in XPO LLC through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).
We operate a diversified platform of nine brands spanning across verticals including Pilates, indoor cycling, barre, stretching, dancing, boxing, functional training, metabolic health 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 North America and internationally, with franchise, master franchise and international expansion agreements in 49 U.S. states, Puerto Rico, and 27 additional countries as of September 30, 2024. 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; “AKT,” a dance-based cardio workout concept that combines 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; Rumble, a boxing-inspired full-body workout; BFT, a functional training and strength-based program; and Lindora, a provider of medically guided wellness and metabolic health solutions, which was acquired on January 2, 2024.
As of September 30, 2024, 2,722 studios were open in North America (consists of Canada, the United States and U.S. territories) and franchisees were contractually committed to open 1,735 additional studios under existing franchise agreements. In addition, as of September 30, 2024, we had 456 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,093 new studios, of which master franchisees have sold 245 licenses for studios not yet opened as of September 30, 2024.
During the nine months ended September 30, 2024 and 2023, we generated revenue outside the United States of $10.4 million and $10.3 million, respectively. As of September 30, 2024 and December 31, 2023, 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.
Appointment of New Chief Executive Officer and Director
On May 10, 2024, Mr. Anthony Geisler, our former Chief Executive Officer and member of our board of directors, was removed by our board of directors from his duties and suspended indefinitely as Chief Executive Officer. At that time, our board of directors appointed Ms. Brenda Morris, a member of our board of directors since 2019, to serve as our interim Chief Executive Officer. On May 13, 2024, Mr. Geisler resigned as Chief Executive Officer, effective immediately.
On June 17, 2024, we announced that our board of directors had unanimously appointed Mr. Mark King as Chief Executive Officer effective June 17, 2024. Mr. King also joined our board of directors. At that time, Ms. Morris ceased serving as interim Chief Executive Officer but continues to serve as a member of our board of directors. Mr. King is a highly innovative, growth-oriented leader with an established track record scaling iconic global consumer brands and franchisors.
Lindora Acquisition
On December 1, 2023, we entered into an agreement to acquire Lindora Franchise, LLC, a Delaware limited liability company, the franchisor of the “Lindora” wellness brand (the “Lindora Franchisor”), for cash consideration of $8.5 million. The transaction also includes up to $1.0 million of contingent consideration which is subject to the achievement of certain milestones. The Lindora Franchisor was a subsidiary of Lindora Wellness, Inc. (“Lindora Wellness”). Lindora Wellness has owned and operated each of the Lindora clinics in California for at least 25 years and currently owns and operates 30 Lindora clinics in California and a single Lindora clinic in the state of Washington. Immediately prior to the execution of the purchase agreement on December 1, 2023, Lindora Wellness signed 31 franchise agreements with the Lindora Franchisor pursuant to which Lindora Wellness will continue to operate its Lindora clinics as a franchisee of the Lindora Franchisor. The acquisition of the Lindora Franchisor was completed on January 2, 2024. Lindora complements
33
our existing brands and will help us deliver on consumers’ increasing demand for a holistic approach to health. See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information.
Divestiture of Stride and Row House Brands
On February 13, 2024, we entered into an agreement with a buyer, pursuant to which we divested the Stride brand, including the intellectual property, franchise rights and franchise agreements for open studios. The buyer of the Stride brand is a member of management and one of our shareholders. We received no consideration from the divestiture of the Stride brand and will assist the buyer with transition support including cash payments of approximately $0.3 million payable over the 12-month period following divestiture.
On May 20, 2024, we entered into an agreement with a buyer, pursuant to which we divested the Row House brand, including the intellectual property, franchise rights and franchise agreements for open studios, and retained certain liabilities, including liabilities related to known litigation, pre-litigation, and disputes as of the closing of the divestiture. We received no consideration from the divestiture of the Row House brand.
These divestitures allow us to better focus and utilize our resources on our other brands.
Wind down of AKT brand franchise operations
During the three months ended September 30, 2024, we announced that we would wind down AKT franchise operations. As part of the wind down, we began terminating franchise agreements with existing AKT studios and signed a licensing agreement with a former franchisee for no consideration received.
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 2024; however, ultimate timing will depend on lease termination negotiations. During the fourth quarter of 2023, our restructuring plan was expanded due to the addition of Rumble company-owned transition studios to the restructuring plan and a refranchising plan that was terminated by the Company due to the refranchisor’s non-compliance with the franchise agreements and the subsequent closure of certain studios. This refranchise termination resulted in us incurring losses for contract termination expenses, other expenses associated with exiting the studios, and loss contingencies related to the refranchisor’s unpaid payroll. During the three and nine months ended September 30, 2024, we recognized total restructuring charges of $12.2 million, net of gains, and $21.4 million, net of gains, respectively, primarily for contract termination and other associated costs, loss on lease terminations and sale or disposal of assets, impairment of right-of-use assets, and other restructuring charges.
We expect to recognize additional restructuring charges throughout 2024 and 2025 totaling approximately $11.5 million to $15.5 million for rent expense, including amortization of the right-of-use assets and accretion of the operating lease liability, lease termination gains or losses, and other variable lease costs related to company-owned transition studios and other restructuring charges. We are considering subleases or negotiating lease terminations for operating leases for certain studios for which we have lease liabilities recorded and the expected cash payments and expenses to exit the lease may be greater than expected rent expense for that period, depending on the outcome of lease negotiations. Cash outflows related to these lease terminations are expected to be incurred throughout 2024 and 2025.
Once completed we estimate annualized savings of approximately $13.5 million to $15.5 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. See Note 17 of Notes to Condensed Consolidated Financial Statements for additional information.
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, 2023, we believe that the most significant factors affecting our results of operations include:
34
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.
All metrics in this “Key Performance Indicators” section are presented on an adjusted basis to reflect historical information of Lindora prior to the acquisition by the Company in January 2024 and on an adjusted basis to remove historical information for both Stride and Row House prior to their divestitures by the Company in February 2024 and May 2024, respectively. Historical information has not been adjusted to reflect the wind-down of AKT. All references to these metrics in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” use this same basis of reporting, unless noted otherwise.
35
The following table sets forth our key performance indicators for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
($ in thousands) |
|
|||||||||||||
System-wide sales |
|
$ |
431,160 |
|
|
$ |
356,745 |
|
|
$ |
1,249,075 |
|
|
$ |
1,013,768 |
|
Number of new studio openings globally, gross |
|
|
125 |
|
|
|
127 |
|
|
|
344 |
|
|
|
385 |
|
Number of studios operating globally (cumulative total as of period end) |
|
|
3,178 |
|
|
|
2,898 |
|
|
|
3,178 |
|
|
|
2,898 |
|
Number of licenses sold globally (cumulative total as of period end) |
|
|
6,209 |
|
|
|
5,696 |
|
|
|
6,209 |
|
|
|
5,696 |
|
Number of licenses contractually obligated to open internationally (cumulative total as of period end) |
|
|
1,093 |
|
|
|
1,042 |
|
|
|
1,093 |
|
|
|
1,042 |
|
AUV (LTM as of period end) |
|
$ |
650 |
|
|
$ |
580 |
|
|
$ |
650 |
|
|
$ |
580 |
|
Quarterly AUV (run rate) |
|
$ |
631 |
|
|
$ |
585 |
|
|
NA |
|
|
NA |
|
||
Same store sales |
|
|
5 |
% |
|
|
15 |
% |
|
|
7 |
% |
|
|
16 |
% |
The following table presents additional information related to our studio and license key performance indicators for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||||||||||
|
|
North America |
|
|
International |
|
|
Global |
|
|
North America |
|
|
International |
|
|
Global |
|
||||||
Total operating studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Studios operating at beginning of period |
|
|
2,660 |
|
|
|
442 |
|
|
|
3,102 |
|
|
|
2,434 |
|
|
|
372 |
|
|
|
2,806 |
|
New studio openings, net |
|
|
62 |
|
|
|
14 |
|
|
|
76 |
|
|
|
80 |
|
|
|
12 |
|
|
|
92 |
|
Studios operating at end of period |
|
|
2,722 |
|
|
|
456 |
|
|
|
3,178 |
|
|
|
2,514 |
|
|
|
384 |
|
|
|
2,898 |
|
Franchise licenses sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Franchise licenses sold (total beginning of period) |
|
|
5,278 |
|
|
|
847 |
|
|
|
6,125 |
|
|
|
4,799 |
|
|
|
681 |
|
|
|
5,480 |
|
New franchise license sales |
|
|
60 |
|
|
|
24 |
|
|
|
84 |
|
|
|
170 |
|
|
|
46 |
|
|
|
216 |
|
Franchise licenses sold (total end of period) |
|
|
5,338 |
|
|
|
871 |
|
|
|
6,209 |
|
|
|
4,969 |
|
|
|
727 |
|
|
|
5,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Studios obligated to open internationally under MFAs: |
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||||||||||||||||
Gross studios obligated to open under MFAs |
|
|
|
|
|
1,533 |
|
|
|
|
|
|
|
|
|
1,411 |
|
|
|
|
||||
Less: studios opened under MFAs |
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
369 |
|
|
|
|
||||
Remaining studios obligated to open under MFAs |
|
|
|
|
|
1,093 |
|
|
|
|
|
|
|
|
|
1,042 |
|
|
|
|
||||
Licenses sold by master franchisees, net (1) |
|
|
|
|
|
245 |
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
||||
|
|
Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||||||||||
|
|
North America |
|
|
International |
|
|
Global |
|
|
North America |
|
|
International |
|
|
Global |
|
||||||
Total operating studios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Studios operating at beginning of period |
|
|
2,583 |
|
|
|
411 |
|
|
|
2,994 |
|
|
|
2,241 |
|
|
|
312 |
|
|
|
2,553 |
|
New studio openings, net |
|
|
139 |
|
|
|
45 |
|
|
|
184 |
|
|
|
273 |
|
|
|
72 |
|
|
|
345 |
|
Studios operating at end of period |
|
|
2,722 |
|
|
|
456 |
|
|
|
3,178 |
|
|
|
2,514 |
|
|
|
384 |
|
|
|
2,898 |
|
Franchise licenses sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Franchise licenses sold (total beginning of period) |
|
|
5,106 |
|
|
|
759 |
|
|
|
5,865 |
|
|
|
4,474 |
|
|
|
582 |
|
|
|
5,056 |
|
New franchise license sales |
|
|
232 |
|
|
|
112 |
|
|
|
344 |
|
|
|
495 |
|
|
|
145 |
|
|
|
640 |
|
Franchise licenses sold (total end of period) |
|
|
5,338 |
|
|
|
871 |
|
|
|
6,209 |
|
|
|
4,969 |
|
|
|
727 |
|
|
|
5,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Studios obligated to open internationally under MFAs: |
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||||||||||||||||
Gross studios obligated to open under MFAs |
|
|
|
|
|
1,533 |
|
|
|
|
|
|
|
|
|
1,411 |
|
|
|
|
||||
Less: studios opened under MFAs |
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
369 |
|
|
|
|
||||
Remaining studios obligated to open under MFAs |
|
|
|
|
|
1,093 |
|
|
|
|
|
|
|
|
|
1,042 |
|
|
|
|
||||
Licenses sold by master franchisees, net (1) |
|
|
|
|
|
245 |
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
||||
36
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 (a) the Company has reason to believe, after reasonable inquiry, that the studio is permanently closed, with no plans for re-opening or relocation, or (b) it has no sales for nine consecutive months or more, whichever comes first. 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). Studios classified as no longer operating are deemed permanently closed.
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. This number represents studios that have already opened, are generating revenue, and are regularly holding classes, though this number could include some number of studios that have temporarily suspended operations, but that are not permanently closed and have not yet met the definition for a Studio No Longer Operating. The number of studios that have temporarily suspended operations is an immaterial percentage of our total studio base.
Please see the table in the “Same Store Sales” section, sub header “North America studios contributing to same store sales.” The line “studios without 13 months of consecutive sales as of the last month that had positive sales within the period being measured” is an indicator for the number of North America traditional location studios that are older than 13 months, and that have had a recent or current disruption in sales, but that are still included in the Number of Studios Operating count. For the three and nine months ended September 30, 2024, this represented 0.7% and 0.6%, respectively, of our North America studio base. 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.
The following tables contain information about changes in the number of our North America operating studios for the three and nine months ended September 30, 2024 and 2023, respectively:
37
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
North America franchisee-owned studios |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
2,659 |
|
|
|
2,364 |
|
|
|
2,562 |
|
|
|
2,200 |
|
New studio openings |
|
|
96 |
|
|
|
100 |
|
|
|
270 |
|
|
|
295 |
|
Refranchised studios (1) |
|
|
— |
|
|
|
36 |
|
|
|
10 |
|
|
|
61 |
|
Defranchised studios (2) |
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
(59 |
) |
Studios no longer operating |
|
|
(34 |
) |
|
|
(11 |
) |
|
|
(121 |
) |
|
|
(12 |
) |
Studios operated at end of period |
|
|
2,721 |
|
|
|
2,485 |
|
|
|
2,721 |
|
|
|
2,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
North America company-owned transition studios |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
1 |
|
|
|
70 |
|
|
|
21 |
|
|
|
41 |
|
New studio openings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Franchise acquisitions (2) |
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
59 |
|
Refranchised studios(1) |
|
|
— |
|
|
|
(36 |
) |
|
|
(10 |
) |
|
|
(61 |
) |
Studios no longer operating |
|
|
— |
|
|
|
(9 |
) |
|
|
(10 |
) |
|
|
(10 |
) |
Studios operated at end of period |
|
|
1 |
|
|
|
29 |
|
|
|
1 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total North America studios |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
2,660 |
|
|
|
2,434 |
|
|
|
2,583 |
|
|
|
2,241 |
|
New studio openings |
|
|
96 |
|
|
|
100 |
|
|
|
270 |
|
|
|
295 |
|
Studios no longer operating |
|
|
(34 |
) |
|
|
(20 |
) |
|
|
(131 |
) |
|
|
(22 |
) |
Studios operated at end of period |
|
|
2,722 |
|
|
|
2,514 |
|
|
|
2,722 |
|
|
|
2,514 |
|
The following table sets forth the total number of operating studios internationally for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Total studios |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
442 |
|
|
|
372 |
|
|
|
411 |
|
|
|
312 |
|
New studio openings |
|
|
29 |
|
|
|
27 |
|
|
|
74 |
|
|
|
90 |
|
Studios no longer operating |
|
|
(15 |
) |
|
|
(15 |
) |
|
|
(29 |
) |
|
|
(18 |
) |
Studios operated at end of period |
|
|
456 |
|
|
|
384 |
|
|
|
456 |
|
|
|
384 |
|
The following table sets forth the total number of operating studios globally for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Total studios |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Studios operated at beginning of period |
|
|
3,102 |
|
|
|
2,806 |
|
|
|
2,994 |
|
|
|
2,553 |
|
New studio openings |
|
|
125 |
|
|
|
127 |
|
|
|
344 |
|
|
|
385 |
|
Studios no longer operating |
|
|
(49 |
) |
|
|
(35 |
) |
|
|
(160 |
) |
|
|
(40 |
) |
Studios operated at end of period |
|
|
3,178 |
|
|
|
2,898 |
|
|
|
3,178 |
|
|
|
2,898 |
|
Non-Traditional Studio Locations
Non-traditional studio locations refers to studios that are not operated as standalone studio locations. There are currently 22 non-traditional studio locations globally, which are comprised of studios operated inside of other fitness facilities and on cruise ships.
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. The number of licenses sold is not reduced by terminations. The number of licenses sold does not generally include license renewals or licenses issued in connection with a change in
38
ownership of operating studios. 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 contractually obligated to open is a useful indicator of the number of studios that may open in the future, although it is not certain that these studios will open. Management reviews the number of licenses sold and the number of licenses contractually obligated to open to help monitor and forecast studio growth, system-wide sales and revenue streams.
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. All traditional studio locations in North America are included in the AUV calculation, so long as they meet certain time since opening and sales criteria (as defined immediately below). In particular, AUV (LTM as of period end) and Quarterly AUV (run rate) are calculated as follows:
We measure sales for AUV based solely upon monthly sales as derived through the designated point-of-sale system. AUV is impacted by changes in same store sales, studio openings, and studio closures. Management reviews AUV to assess studio economics.
The following table reconciles our North America operating studios for the three and nine months ended September 30, 2024 and 2023, respectively, to the total studios contributing to both AUV (LTM as of period end) and Quarterly AUV (run rate):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
North America studios contributing to AUV (LTM as of period) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating studios (end of period) |
|
|
2,722 |
|
|
|
2,514 |
|
|
|
2,722 |
|
|
|
2,514 |
|
Studios no longer operating but generated sales in the period |
|
|
7 |
|
|
|
1 |
|
|
|
7 |
|
|
|
1 |
|
Less: studios less than 13 months old |
|
|
(451 |
) |
|
|
(446 |
) |
|
|
(451 |
) |
|
|
(446 |
) |
Less: non-traditional studio locations |
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(8 |
) |
Less: studios without 13 months of consecutive sales as of measurement date |
|
|
(19 |
) |
|
|
(50 |
) |
|
|
(19 |
) |
|
|
(50 |
) |
Total |
|
|
2,253 |
|
|
|
2,011 |
|
|
|
2,253 |
|
|
|
2,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
North America studios contributing to Quarterly AUV (run rate) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating studios (end of period) |
|
|
2,722 |
|
|
|
2,514 |
|
|
NA |
|
|
NA |
|
||
Studios no longer operating but generated sales in the period |
|
|
44 |
|
|
|
2 |
|
|
NA |
|
|
NA |
|
||
Less: studios less than 6 months old |
|
|
(270 |
) |
|
|
(294 |
) |
|
NA |
|
|
NA |
|
||
Less: non-traditional studio locations |
|
|
(6 |
) |
|
|
(18 |
) |
|
NA |
|
|
NA |
|
||
Less: studios with no sales in the period |
|
|
— |
|
|
|
(7 |
) |
|
NA |
|
|
NA |
|
||
Total |
|
|
2,490 |
|
|
|
2,197 |
|
|
NA |
|
|
NA |
|
||
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 monthly sales for any traditional studio location in North America. If the studio has generated at least 13 months of consecutive positive sales and opened at least 13 calendars months ago as of any month within the measurement period, the respective comparable months will be included. We measure same store sales based solely upon monthly sales as derived through the designated point-of-sale system. 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.
39
The following table reconciles our North America operating studios for the three and nine months ended September 30, 2024 and 2023, respectively, to the total studios contributing to same store sales:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
North America studios contributing to same store sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating studios (end of period) |
|
|
2,722 |
|
|
|
2,514 |
|
|
|
2,722 |
|
|
|
2,514 |
|
Studios no longer operating but generated sales in the period |
|
|
20 |
|
|
|
1 |
|
|
|
64 |
|
|
|
4 |
|
Less: studios less than 13 months old |
|
|
(451 |
) |
|
|
(446 |
) |
|
|
(451 |
) |
|
|
(446 |
) |
Less: non-traditional studio locations |
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(8 |
) |
Less: studios without 13 months of consecutive sales as of the last month that had positive sales within the period being measured |
|
|
(18 |
) |
|
|
(40 |
) |
|
|
(15 |
) |
|
|
(24 |
) |
Total |
|
|
2,267 |
|
|
|
2,021 |
|
|
|
2,314 |
|
|
|
2,040 |
|
Results of Operations
The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Franchise revenue |
|
$ |
44,458 |
|
|
$ |
36,425 |
|
|
$ |
129,232 |
|
|
$ |
104,524 |
|
Equipment revenue |
|
|
14,681 |
|
|
|
12,564 |
|
|
|
41,506 |
|
|
|
40,086 |
|
Merchandise revenue |
|
|
6,538 |
|
|
|
8,456 |
|
|
|
20,593 |
|
|
|
24,021 |
|
Franchise marketing fund revenue |
|
|
8,565 |
|
|
|
6,948 |
|
|
|
24,777 |
|
|
|
19,776 |
|
Other service revenue |
|
|
6,249 |
|
|
|
16,042 |
|
|
|
20,421 |
|
|
|
40,058 |
|
Total revenue, net |
|
|
80,491 |
|
|
|
80,435 |
|
|
|
236,529 |
|
|
|
228,465 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs of product revenue |
|
|
17,071 |
|
|
|
12,709 |
|
|
|
44,328 |
|
|
|
40,967 |
|
Costs of franchise and service revenue |
|
|
4,867 |
|
|
|
3,559 |
|
|
|
15,822 |
|
|
|
11,305 |
|
Selling, general and administrative expenses |
|
|
46,164 |
|
|
|
43,908 |
|
|
|
120,308 |
|
|
|
116,003 |
|
Impairment of goodwill and other assets |
|
|
4,502 |
|
|
|
4,671 |
|
|
|
16,591 |
|
|
|
11,909 |
|
Depreciation and amortization |
|
|
4,226 |
|
|
|
4,216 |
|
|
|
13,179 |
|
|
|
12,701 |
|
Marketing fund expense |
|
|
6,423 |
|
|
|
5,817 |
|
|
|
20,785 |
|
|
|
16,289 |
|
Acquisition and transaction expenses (income) |
|
|
3,664 |
|
|
|
(1,923 |
) |
|
|
6,962 |
|
|
|
(17,433 |
) |
Total operating costs and expenses |
|
|
86,917 |
|
|
|
72,957 |
|
|
|
237,975 |
|
|
|
191,741 |
|
Operating income (loss) |
|
|
(6,426 |
) |
|
|
7,478 |
|
|
|
(1,446 |
) |
|
|
36,724 |
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
(481 |
) |
|
|
(24 |
) |
|
|
(1,231 |
) |
|
|
(1,189 |
) |
Interest expense |
|
|
11,843 |
|
|
|
10,638 |
|
|
|
34,644 |
|
|
|
27,242 |
|
Other expense |
|
|
51 |
|
|
|
1,845 |
|
|
|
913 |
|
|
|
3,097 |
|
Total other expense |
|
|
11,413 |
|
|
|
12,459 |
|
|
|
34,326 |
|
|
|
29,150 |
|
Income (loss) before income taxes |
|
|
(17,839 |
) |
|
|
(4,981 |
) |
|
|
(35,772 |
) |
|
|
7,574 |
|
Income taxes |
|
|
131 |
|
|
|
202 |
|
|
|
216 |
|
|
|
212 |
|
Net income (loss) |
|
$ |
(17,970 |
) |
|
$ |
(5,183 |
) |
|
$ |
(35,988 |
) |
|
$ |
7,362 |
|
40
The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 as a percentage of revenue:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Franchise revenue |
|
|
55 |
% |
|
|
45 |
% |
|
|
55 |
% |
|
|
46 |
% |
Equipment revenue |
|
|
18 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
|
18 |
% |
Merchandise revenue |
|
|
8 |
% |
|
|
10 |
% |
|
|
9 |
% |
|
|
10 |
% |
Franchise marketing fund revenue |
|
|
11 |
% |
|
|
9 |
% |
|
|
10 |
% |
|
|
8 |
% |
Other service revenue |
|
|
8 |
% |
|
|
20 |
% |
|
|
9 |
% |
|
|
18 |
% |
Total revenue, net |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs of product revenue |
|
|
21 |
% |
|
|
16 |
% |
|
|
19 |
% |
|
|
18 |
% |
Costs of franchise and service revenue |
|
|
6 |
% |
|
|
5 |
% |
|
|
7 |
% |
|
|
5 |
% |
Selling, general and administrative expenses |
|
|
57 |
% |
|
|
54 |
% |
|
|
51 |
% |
|
|
51 |
% |
Impairment of goodwill and other assets |
|
|
6 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
5 |
% |
Depreciation and amortization |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
6 |
% |
Marketing fund expense |
|
|
8 |
% |
|
|
7 |
% |
|
|
9 |
% |
|
|
7 |
% |
Acquisition and transaction expenses (income) |
|
|
5 |
% |
|
|
(2 |
)% |
|
|
3 |
% |
|
|
(8 |
)% |
Total operating costs and expenses |
|
|
108 |
% |
|
|
91 |
% |
|
|
101 |
% |
|
|
84 |
% |
Operating income (loss) |
|
|
(8 |
)% |
|
|
9 |
% |
|
|
(1 |
)% |
|
|
16 |
% |
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
(1 |
)% |
|
|
— |
% |
|
|
(1 |
)% |
|
|
(1 |
)% |
Interest expense |
|
|
15 |
% |
|
|
13 |
% |
|
|
15 |
% |
|
|
12 |
% |
Other expense |
|
|
— |
% |
|
|
2 |
% |
|
|
1 |
% |
|
|
2 |
% |
Total other expense |
|
|
14 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
13 |
% |
Income (loss) before income taxes |
|
|
(22 |
)% |
|
|
(6 |
)% |
|
|
(16 |
)% |
|
|
3 |
% |
Income taxes |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
Net income (loss) |
|
|
(22 |
)% |
|
|
(6 |
)% |
|
|
(16 |
)% |
|
|
3 |
% |
Three Months Ended September 30, 2024 and 2023
The following is a discussion of our consolidated results of operations for the three months ended September 30, 2024 versus the three months ended September 30, 2023.
Revenue
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Franchise revenue |
|
$ |
44,458 |
|
|
$ |
36,425 |
|
|
$ |
8,033 |
|
|
|
22.1 |
% |
Equipment revenue |
|
|
14,681 |
|
|
|
12,564 |
|
|
|
2,117 |
|
|
|
16.8 |
% |
Merchandise revenue |
|
|
6,538 |
|
|
|
8,456 |
|
|
|
(1,918 |
) |
|
|
(22.7 |
)% |
Franchise marketing fund revenue |
|
|
8,565 |
|
|
|
6,948 |
|
|
|
1,617 |
|
|
|
23.3 |
% |
Other service revenue |
|
|
6,249 |
|
|
|
16,042 |
|
|
|
(9,793 |
) |
|
|
(61.0 |
)% |
Total revenue, net |
|
$ |
80,491 |
|
|
$ |
80,435 |
|
|
$ |
56 |
|
|
|
0.1 |
% |
Total revenue. Total revenue was $80.5 million in the three months ended September 30, 2024, compared to $80.4 million in the three months ended September 30, 2023, an increase of $0.1 million, or 0%. The increase in total revenue was primarily due to an increase in franchise revenue and equipment revenue, partially offset by a decrease in other service revenue.
Franchise revenue. Franchise revenue was $44.5 million in the three months ended September 30, 2024, compared to $36.4 million in the three months ended September 30, 2023, an increase of $8.0 million, or 22%. Franchise revenue consisted of franchise royalty fees of $29.7 million, franchise territory fees of $7.5 million, technology fees of $4.3 million and training fees of $3.0 million in the three months ended September 30, 2024, compared to 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. The increase
41
in franchise royalty fees and technology fees was primarily due to an increase in same store sales and an increase in number of operating studios globally since September 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024), which also contributed to the increase in franchise territory fees. The increase in franchise territory fees is also attributed to an increase in franchise agreement terminations year-over-year.
Equipment revenue. Equipment revenue was $14.7 million in the three months ended September 30, 2024, compared to $12.6 million in the three months ended September 30, 2023, an increase of $2.1 million, or 17%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the three months ended September 30, 2024, increased compared to the prior year period. The average revenue per installation increased in the three months ended September 30, 2024, when compared to the three months ended September 30, 2023. The increase in average revenue was due to brand mix and a higher proportion of equipment installed with brands with higher equipment prices.
Merchandise revenue. Merchandise revenue was $6.5 million in the three months ended September 30, 2024, compared to $8.5 million in the three months ended September 30, 2023, a decrease of $1.9 million, or 23%. The decrease was due primarily to a decrease in demand from studios, current year sales promotions and a lower number of company-owned transition studios in the current year period.
Franchise marketing fund revenue. Franchise marketing fund revenue was $8.6 million in the three months ended September 30, 2024, compared to $6.9 million in the three months ended September 30, 2023, an increase of $1.6 million, or 23%. The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America since September 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024).
Other service revenue. Other service revenue was $6.2 million in the three months ended September 30, 2024, compared to $16.0 million in the three months ended September 30, 2023, a decrease of $9.8 million, or 61%. The decrease was primarily due to a $8.2 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios.
Operating Costs and Expenses
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Costs of product revenue |
|
$ |
17,071 |
|
|
$ |
12,709 |
|
|
$ |
4,362 |
|
|
|
34.3 |
% |
Costs of franchise and service revenue |
|
|
4,867 |
|
|
|
3,559 |
|
|
|
1,308 |
|
|
|
36.8 |
% |
Selling, general and administrative expenses |
|
|
46,164 |
|
|
|
43,908 |
|
|
|
2,256 |
|
|
|
5.1 |
% |
Impairment of goodwill and other assets |
|
|
4,502 |
|
|
|
4,671 |
|
|
|
(169 |
) |
|
|
(3.6 |
)% |
Depreciation and amortization |
|
|
4,226 |
|
|
|
4,216 |
|
|
|
10 |
|
|
|
0.2 |
% |
Marketing fund expense |
|
|
6,423 |
|
|
|
5,817 |
|
|
|
606 |
|
|
|
10.4 |
% |
Acquisition and transaction expenses (income) |
|
|
3,664 |
|
|
|
(1,923 |
) |
|
|
5,587 |
|
|
|
(290.5 |
)% |
Total operating costs and expenses |
|
$ |
86,917 |
|
|
$ |
72,957 |
|
|
$ |
13,960 |
|
|
|
19.1 |
% |
Costs of product revenue. Costs of product revenue was $17.1 million in the three months ended September 30, 2024, compared to $12.7 million in the three months ended September 30, 2023, an increase of $4.4 million, or 34%, compared to an increase in related revenues of 1%. Costs of product revenue as a percentage of related revenue increased to 80% in the three months ended September 30, 2024, from 60% in the comparable prior year period. The increase was due to current year sales promotions that decreased gross margin and to an increase in write downs of slow-moving inventory.
Costs of franchise and service revenue. Costs of franchise and service revenue was $4.9 million in the three months ended September 30, 2024, compared to $3.6 million in the three months ended September 30, 2023, an increase of $1.3 million, or 37%. The increase was primarily due to a $1.3 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase.
Selling, general and administrative expenses. Selling, general and administrative expenses were $46.2 million in the three months ended September 30, 2024, compared to $43.9 million in the three months ended September 30, 2023, an increase of $2.3 million, or 5%. The increase was primarily attributable to an increase in legal expenses of $9.8 million related to various legal matters; an increase in restructuring and related charges of $2.8 million in the current year period; and an increase in equity-based compensation expense of $1.4 million primarily due to an increase in the number of equity-classified restricted stock units (“RSUs”) outstanding during the current year period, partially offset by a decrease in salaries and wages of $4.9 million related to a lower average number of company-owned transition studios; a decrease in occupancy expenses of $4.9 million primarily related to a decrease in the number of company-owned
42
transition studios; a decrease in marketing and advertising expenses of $1.4 million; and a net decrease in other variable expenses of $0.5 million.
Impairment of goodwill and other assets. Impairment of goodwill and other assets was $4.5 million in the three months ended September 30, 2024, compared to $4.7 million in the three months ended September 30, 2023, a decrease of $0.2 million, or 4%. The decrease was primarily due to a write down of right-of-use assets and intangible assets of $4.5 million related to studio exits in conjunction with our restructuring plan and wind down of AKT franchise operations in the current year period compared to $4.7 million in the prior year primarily related to goodwill and intangible asset write downs related to Stride and Row House.
Depreciation and amortization. Depreciation and amortization expense was $4.2 million in the three months ended September 30, 2024, compared to $4.2 million in the three months ended September 30, 2023.
Marketing fund expense. Marketing fund expense was $6.4 million in the three months ended September 30, 2024, compared to $5.8 million in the three months ended September 30, 2023, an increase of $0.6 million, or 10% and is consistent with the increase in franchise marketing fund revenue.
Acquisition and transaction expenses (income). Acquisition and transaction expense was $3.7 million in the three months ended September 30, 2024, compared to income of $1.9 million in the three months ended September 30, 2023, an increase to expense of $5.6 million, or 291%. This expense primarily represented the non-cash change in contingent consideration related to 2021 business acquisitions and to the Lindora acquisition.
Other Expense (Income), net
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Interest income |
|
$ |
(481 |
) |
|
$ |
(24 |
) |
|
$ |
(457 |
) |
|
|
1,904.2 |
% |
Interest expense |
|
|
11,843 |
|
|
|
10,638 |
|
|
|
1,205 |
|
|
|
11.3 |
% |
Other expense |
|
|
51 |
|
|
|
1,845 |
|
|
|
(1,794 |
) |
|
|
(97.2 |
)% |
Total other expense, net |
|
$ |
11,413 |
|
|
$ |
12,459 |
|
|
$ |
(1,046 |
) |
|
|
(8.4 |
)% |
Interest income. Interest income primarily consists of interest on notes receivable, which was $0.5 million in the three months ended September 30, 2024, compared to $0.0 million in the three months ended September 30, 2023.
Interest expense. Interest expense was $11.8 million in the three months ended September 30, 2024, compared to $10.6 million in the three months ended September 30, 2023, an increase of $1.2 million, or 11%. 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 in the current year period.
Other expense. Other expense consists of TRA expense, which was $0.1 million in the three months ended September 30, 2024, compared to $1.8 million in the three months ended September 30, 2023.
Income Taxes
|
|
Three Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Income taxes |
|
$ |
131 |
|
|
$ |
202 |
|
|
$ |
(71 |
) |
|
|
(35.1 |
)% |
Income taxes. Income taxes were (0.7)% of pre-tax book income (loss) in the three months ended September 30, 2024, compared to (4.0)% in the three months ended September 30, 2023.
43
Nine Months Ended September 30, 2024 and 2023
The following is a discussion of our consolidated results of operations for the nine months ended September 30, 2024 versus the nine months ended September 30, 2023.
Revenue
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Franchise revenue |
|
$ |
129,232 |
|
|
$ |
104,524 |
|
|
$ |
24,708 |
|
|
|
23.6 |
% |
Equipment revenue |
|
|
41,506 |
|
|
|
40,086 |
|
|
|
1,420 |
|
|
|
3.5 |
% |
Merchandise revenue |
|
|
20,593 |
|
|
|
24,021 |
|
|
|
(3,428 |
) |
|
|
(14.3 |
)% |
Franchise marketing fund revenue |
|
|
24,777 |
|
|
|
19,776 |
|
|
|
5,001 |
|
|
|
25.3 |
% |
Other service revenue |
|
|
20,421 |
|
|
|
40,058 |
|
|
|
(19,637 |
) |
|
|
(49.0 |
)% |
Total revenue, net |
|
$ |
236,529 |
|
|
$ |
228,465 |
|
|
$ |
8,064 |
|
|
|
3.5 |
% |
Total revenue. Total revenue was $236.5 million in the nine months ended September 30, 2024, compared to $228.5 million in the nine months ended September 30, 2023, an increase of $8.1 million, or 4%. The increase in total revenue was primarily due to an increase in the number of open studios, partially offset by a decrease in other service revenue.
Franchise revenue. Franchise revenue was $129.2 million in the nine months ended September 30, 2024, compared to $104.5 million in the nine months ended September 30, 2023, an increase of $24.7 million, or 24%. Franchise revenue consisted of franchise royalty fees of $85.6 million, franchise territory fees of $22.2 million, technology fees of $12.6 million and training fees of $8.8 million in the nine months ended September 30, 2024, compared to 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. The increase in franchise royalty fees, technology fees and training fees was primarily due to an increase in same store sales and an increase in number of operating studios globally since September 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024), which also contributed to the increase in franchise territory fees. The increase in franchise territory fees is also attributed to an increase in franchise agreement terminations year-over-year.
Equipment revenue. Equipment revenue was $41.5 million in the nine months ended September 30, 2024, compared to $40.1 million in the nine months ended September 30, 2023, an increase of $1.4 million, or 4%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the nine months ended September 30, 2024, decreased compared to the prior year period, primarily due to the decrease in studio openings compared to the prior year period. The average revenue per installation increased in the nine months ended September 30, 2024, when compared to the nine months ended September 30, 2023. The increase in average revenue is due to brand mix and a higher proportion of equipment installed with brands with higher equipment prices.
Merchandise revenue. Merchandise revenue was $20.6 million in the nine months ended September 30, 2024, compared to $24.0 million in the nine months ended September 30, 2023, a decrease of $3.4 million, or 14%. The decrease was due primarily to a decrease in demand from studios, current year sales promotions and a lower number of company-owned transition studios in the current year period.
Franchise marketing fund revenue. Franchise marketing fund revenue was $24.8 million in the nine months ended September 30, 2024, compared to $19.8 million in the nine months ended September 30, 2023, an increase of $5.0 million, or 25%. The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America since September 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024).
Other service revenue. Other service revenue was $20.4 million in the nine months ended September 30, 2024, compared to $40.1 million in the nine months ended September 30, 2023, a decrease of $19.6 million, or 49%. The decrease was primarily due to a $17.5 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios.
44
Operating Costs and Expenses
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Costs of product revenue |
|
$ |
44,328 |
|
|
$ |
40,967 |
|
|
$ |
3,361 |
|
|
|
8.2 |
% |
Costs of franchise and service revenue |
|
|
15,822 |
|
|
|
11,305 |
|
|
|
4,517 |
|
|
|
40.0 |
% |
Selling, general and administrative expenses |
|
|
120,308 |
|
|
|
116,003 |
|
|
|
4,305 |
|
|
|
3.7 |
% |
Impairment of goodwill and other assets |
|
|
16,591 |
|
|
|
11,909 |
|
|
|
4,682 |
|
|
|
39.3 |
% |
Depreciation and amortization |
|
|
13,179 |
|
|
|
12,701 |
|
|
|
478 |
|
|
|
3.8 |
% |
Marketing fund expense |
|
|
20,785 |
|
|
|
16,289 |
|
|
|
4,496 |
|
|
|
27.6 |
% |
Acquisition and transaction expenses (income) |
|
|
6,962 |
|
|
|
(17,433 |
) |
|
|
24,395 |
|
|
|
(139.9 |
)% |
Total operating costs and expenses |
|
$ |
237,975 |
|
|
$ |
191,741 |
|
|
$ |
46,234 |
|
|
|
24.1 |
% |
Costs of product revenue. Costs of product revenue was $44.3 million in the nine months ended September 30, 2024, compared to $41.0 million in the nine months ended September 30, 2023, an increase of $3.4 million, or 8%, compared to a decrease in related revenues of 3%. Costs of product revenue as a percentage of related revenue increased to 71% in the nine months ended September 30, 2024, from 64% in the comparable prior year period. The increase was due to current year sales promotions, that decreased gross margin and an increase in write downs of slow-moving inventory.
Costs of franchise and service revenue. Costs of franchise and service revenue was $15.8 million in the nine months ended September 30, 2024, compared to $11.3 million in the nine months ended September 30, 2023, an increase of $4.5 million, or 40%. The increase was primarily due to a $3.6 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase.
Selling, general and administrative expenses. Selling, general and administrative expenses were $120.3 million in the nine months ended September 30, 2024, compared to $116.0 million in the nine months ended September 30, 2023, an increase of $4.3 million, or 4%. The increase was primarily attributable to an increase in restructuring and related charges of $13.1 million in the current year period; an increase in legal expenses of $9.8 million related to various legal matters; an increase in expense due to $3.5 million mutual termination agreement income related to the acquisition of 14 Rumble studios in the prior year period and a loss on brand divestitures and wind down of $1.8 million in the current year period; and a net increase in other variable expenses of $0.6 million, partially offset by a decrease in salaries and wages of $8.9 million related to a lower average number of company-owned transition studios; a decrease in occupancy expenses of $10.6 million primarily due to a decrease in the number of company-owned transition studios; a decrease in equity-based compensation expense of $2.5 million primarily due to a decrease in the current year common stock price, resulting in lower expense to be recognized on current-year RSU grants; and a decrease in marketing and advertising expenses of $2.5 million.
Impairment of goodwill and other assets. Impairment of goodwill and other assets was $16.6 million in the nine months ended September 30, 2024, compared to $11.9 million in the nine months ended September 30, 2023, an increase of $4.7 million, or 39%. The increase was primarily due to a write down of franchise agreements intangible asset and goodwill of $12.1 million related to the CycleBar reporting unit and a write down of right-of-use assets of $4.3 million in the current year compared to a $7.2 million intangible asset write down related to the acquisition of 14 Rumble studios and a $4.6 million write down of goodwill and intangible asset related to Stride and Row House in the prior year period.
Depreciation and amortization. Depreciation and amortization expense was $13.2 million in the nine months ended September 30, 2024, compared to $12.7 million in the nine months ended September 30, 2023, an increase of $0.5 million, or 4%. The increase was due primarily to an increase in fixed assets to support our online offerings.
Marketing fund expense. Marketing fund expense was $20.8 million in the nine months ended September 30, 2024, compared to $16.3 million in the nine months ended September 30, 2023, an increase of $4.5 million, or 28% and is consistent with the increase in franchise marketing fund revenue.
Acquisition and transaction expense (income). Acquisition and transaction expense was $7.0 million in the nine months ended September 30, 2024, compared to income of $17.4 million in the nine months ended September 30, 2023, an increase to expense of $24.4 million, or 140%. This expense primarily represents the non-cash change in contingent consideration related to 2021 and 2024 business acquisitions and $0.5 million of acquisition related expenses in the current year period.
45
Other Expense (Income), net
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Interest income |
|
$ |
(1,231 |
) |
|
$ |
(1,189 |
) |
|
$ |
(42 |
) |
|
|
3.5 |
% |
Interest expense |
|
|
34,644 |
|
|
|
27,242 |
|
|
|
7,402 |
|
|
|
27.2 |
% |
Other expense |
|
|
913 |
|
|
|
3,097 |
|
|
|
(2,184 |
) |
|
|
(70.5 |
)% |
Total other expense, net |
|
$ |
34,326 |
|
|
$ |
29,150 |
|
|
$ |
5,176 |
|
|
|
17.8 |
% |
Interest income. Interest income primarily consists of interest on notes receivable, which was $1.2 million in the nine months ended September 30, 2024, compared to $1.2 million in the nine months ended September 30, 2023.
Interest expense. Interest expense was $34.6 million in the nine months ended September 30, 2024, compared to $27.2 million in the nine months ended September 30, 2023, an increase of $7.4 million, or 27%. Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization and write off 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 $0.9 million in the nine months ended September 30, 2024, compared to $3.1 million in the nine months ended September 30, 2023.
Income Taxes
|
|
Nine Months Ended September 30, |
|
|
Change from Prior Year |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
|
|
($ in thousands) |
|
|
|
|
||||||||||
Income taxes |
|
$ |
216 |
|
|
$ |
212 |
|
|
$ |
4 |
|
|
|
1.9 |
% |
Income taxes. Income taxes were (0.6)% of pre-tax book income (loss) in the nine months ended September 30, 2024, compared to 2.8% in the nine months ended September 30, 2023.
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 (income) (including change in contingent consideration and transaction bonuses), litigation expenses (consisting of legal and related fees for specific proceedings
46
that arise outside of the ordinary course of our business), fees for financial transactions, such as secondary public offering expenses for which we do not receive proceeds (including bonuses paid to executives related to completion of such transactions) and other contemplated corporate transactions, expense related to the remeasurement of our TRA obligation, expense related to loss on impairment or write down of goodwill and other assets, loss on brand divestitures and wind down, executive transition costs (consisting of costs associated with the transition of our former CEO, such as professional services, legal fees, executive recruiting costs and other related costs), one-time costs associated with rebranding one studio to the KINRGY brand, and 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.
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Net income (loss) |
|
$ |
(17,970 |
) |
|
$ |
(5,183 |
) |
|
$ |
(35,988 |
) |
|
$ |
7,362 |
|
Interest expense, net |
|
|
11,362 |
|
|
|
10,614 |
|
|
|
33,413 |
|
|
|
26,053 |
|
Income taxes |
|
|
131 |
|
|
|
202 |
|
|
|
216 |
|
|
|
212 |
|
Depreciation and amortization |
|
|
4,226 |
|
|
|
4,216 |
|
|
|
13,179 |
|
|
|
12,701 |
|
EBITDA |
|
|
(2,251 |
) |
|
|
9,849 |
|
|
|
10,820 |
|
|
|
46,328 |
|
Equity-based compensation |
|
|
4,983 |
|
|
|
3,536 |
|
|
|
13,121 |
|
|
|
15,647 |
|
Employer payroll taxes related to equity-based compensation |
|
|
(7 |
) |
|
|
94 |
|
|
|
415 |
|
|
|
659 |
|
Acquisition and transaction expenses (income) |
|
|
3,664 |
|
|
|
(1,923 |
) |
|
|
6,962 |
|
|
|
(17,433 |
) |
Litigation expenses |
|
|
10,435 |
|
|
|
1,511 |
|
|
|
14,521 |
|
|
|
5,855 |
|
Financial transaction fees and related expenses |
|
|
— |
|
|
|
327 |
|
|
|
620 |
|
|
|
1,971 |
|
TRA remeasurement |
|
|
51 |
|
|
|
1,845 |
|
|
|
913 |
|
|
|
3,097 |
|
Impairment of goodwill and other assets |
|
|
4,502 |
|
|
|
4,671 |
|
|
|
16,591 |
|
|
|
11,909 |
|
Loss on brand divestitures and wind down (excluding impairments) |
|
|
408 |
|
|
|
— |
|
|
|
1,609 |
|
|
|
— |
|
Executive transition costs |
|
|
— |
|
|
|
— |
|
|
|
690 |
|
|
|
— |
|
Non-recurring rebranding expenses |
|
|
— |
|
|
|
— |
|
|
|
331 |
|
|
|
— |
|
Restructuring and related charges (excluding impairments) |
|
|
9,194 |
|
|
|
6,611 |
|
|
|
19,583 |
|
|
|
6,611 |
|
Adjusted EBITDA |
|
$ |
30,979 |
|
|
$ |
26,521 |
|
|
$ |
86,176 |
|
|
$ |
74,644 |
|
Liquidity and Capital Resources
As of September 30, 2024, we had $24.8 million of cash and cash equivalents, excluding $13.0 million of restricted cash consisting of marketing fund restricted cash and a guarantee of standby letter of credit.
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, 2023. 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
47
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 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.
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, 2024, we were in compliance with these covenants.
On February 13, 2024, we entered into a sixth amendment (the “Sixth Amendment”) to the Credit Agreement. The Sixth Amendment provides for, among other things, additional term loans in an aggregate principal amount of approximately $38.7 million, with an original issue discount of $4.1 million, (the “Sixth Amendment Incremental Term Loans”). The original issue discount was paid-in-kind by increasing the principal amount of the Credit Agreement. The proceeds of the Sixth Amendment were used to repay an aggregate of $38.7 million in existing term loans under the Credit Agreement and for the payment of fees, costs and expenses related to the making of the Sixth Amendment Incremental Term Loans. The Sixth Amendment, among other things, also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the Sixth Amendment Incremental Term Loans) commencing on June 30, 2024 to $1.3 million, (ii) included a prepayment premium on the Sixth Amendment Incremental Term Loans and (iii) extended the maturity date for all outstanding term loans under the Credit Agreement to March 15, 2026.
On August 23, 2024, we entered into a seventh amendment (the “Seventh Amendment”) to the Credit Agreement. The Seventh Amendment provides for, among other things, additional term loans in an aggregate principal amount of $25.0 million, with an original issue discount of $0.8 million, (the “Seventh Amendment Incremental Term Loans”). The proceeds of which will be used for general corporate purposes, including working capital, lease liabilities, and legal expenses arising from previously disclosed regulatory matters. The Seventh Amendment, among other things, also increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the Seventh Amendment Incremental Term Loans) commencing on September 30, 2024 to $1.3 million and included a prepayment premium on the Seventh Amendment Incremental Term Loans.
The total principal amount outstanding on the Term Loans was $353.8 million at September 30, 2024. See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information about our debt.
Material Cash Requirements
At September 30, 2024, 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, 2023.
Cash Flows
The following table presents summary cash flow information for the nine months ended September 30, 2024 and 2023:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net cash provided by (used in) operating activities |
|
$ |
10,915 |
|
|
$ |
38,194 |
|
Net cash provided by (used in) investing activities |
|
|
(13,934 |
) |
|
|
(8,595 |
) |
Net cash provided by (used in) financing activities |
|
|
3,699 |
|
|
|
(15,089 |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
$ |
680 |
|
|
$ |
14,510 |
|
Cash Flows from Operating Activities
In the nine months ended September 30, 2024, cash provided by operating activities was $10.9 million, compared to $38.2 million in the nine months ended September 30, 2023, a decrease in cash provided of $27.3 million. Of the decrease, $26.4 million was due to lower net income after adjustments to reconcile net income (loss) to net cash provided by operating activities and $0.9 million in unfavorable changes in working capital related to deferred revenue, accounts payable, and other liabilities, partially offset by favorable changes in working capital related to prepaid expenses and other current assets, deferred costs, inventories, accounts receivable, accrued
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expenses, and operating lease liabilities in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.
Cash Flows from Investing Activities
In the nine months ended September 30, 2024 and 2023, cash used in investing activities was $13.9 million and $8.6 million, respectively. The change year over year in cash used of $5.3 million was primarily attributable to cash used of $8.5 million for our acquisition of Lindora; partially offset by decreases in cash used to purchase property and equipment and intangible assets of $1.3 million and $1.0 million, respectively.
Cash Flows from Financing Activities
In the nine months ended September 30, 2024, cash provided by financing activities was $3.7 million, compared to cash used in financing activities of $15.1 million in the nine months ended September 30, 2023, a decrease in cash used of $18.8 million. The decrease in cash used was primarily attributable to prior year payments of $130.8 million related to repurchase of convertible preferred stock, $50.4 million for share repurchases, $8.1 million payment for taxes on net share settlements, and a $4.4 million loan to a shareholder compared to no similar payments in the current year. The decrease in cash used was partially offset by net borrowings on long-term debt of $186.1 million and a payment received from a shareholder of $8.1 million in the prior year compared to net borrowings on long-term debt of $20.4 million in the current year.
Off-Balance Sheet Arrangements
As of September 30, 2024, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately $1.8 million and would only require payment upon default by the primary obligor. We determined the fair value of these guarantees at inception was not material, and as of September 30, 2024 a $0.8 million accrual has been recorded for our potential obligation under the guaranty arrangements. See Note 16 of Notes to Condensed Consolidated Financial Statements 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, 2024 a $0.3 million accrual has been recorded for our potential obligation under this guaranty arrangement. See Note 16 of Notes to Condensed Consolidated Financial Statements 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, 2023.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk to our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily due to potential interest rate risk and potential increases in inflation. We do not hold financial instruments for trading purposes.
Interest Rate Risk
We are exposed to changes in interest rates as a result of the outstanding balance under our Credit Agreement. Our primary exposure is an increase in SOFR, which increases the interest rate we pay on the outstanding principal balance of our debt. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. Any increases in our outstanding indebtedness will amplify the effects of increased interest rates.
As of September 30, 2024, the outstanding principal balance of $353.8 million on the Credit Agreement was subject to variable interest rates. Based upon a sensitivity analysis, a hypothetical 1% change in interest rates on our debt outstanding would change our annual interest expense by approximately $3.5 million.
Inflation Risk
The inflation rate has been falling after reaching a nearly three decade high in 2022. Although inflation has decreased, interest rates remain high and may continue to increase our interest expense and our operating costs as well as the operating costs of our franchisees. Although we do not believe that inflation has had a material effect on our business, there can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.
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, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2024, 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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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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, 2023, 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, except as set forth in our Form 10-Q for the quarter ended June 30, 2024 under the caption Item 1.A. Risk Factors, which disclosure is incorporated by reference herein. 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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2024, one of the Company’s officers,
51
Item 6. Exhibits.
Exhibit Number |
|
Description |
10.1* |
|
|
|
|
|
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.
52
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 8, 2024 |
|
By: |
/s/ John Meloun |
|
|
|
John Meloun |
|
|
|
Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) |
53