Xponential Fitness, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2021. The financial statements are presented for Xponential Fitness LLC, the predecessor operating company, before Xponential Fitness, Inc.’s July 2021 initial public offering. The Company franchises boutique fitness brands, including Club Pilates, CycleBar, StretchLab, Pure Barre, YogaSix, Row House, AKT, Stride and Rumble.
- As of June 30, 2021, 1,824 North American studios were operating, with 1,509 additional studios contractually committed under existing agreements.
- The Company had 15 international studios and master franchise commitments for 738 additional international licenses.
- Rumble was acquired on March 24, 2021 and contributed $20.5 million of goodwill and intangible assets.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $35.8 million | $21.5 million | $64.8 million | $53.2 million |
| Revenue growth | 66.7% | — | 21.8% | — |
| Operating income (loss) | $(0.4) million | $(0.5) million | $(0.6) million | $5.6 million |
| Operating margin | (1.1)% | (2.2)% | (0.9)% | 10.6% |
| Net loss | $(8.0) million | $(4.8) million | $(12.8) million | $(6.7) million |
| Net margin | (22.4)% | (22.1)% | (19.7)% | (12.6)% |
| Adjusted EBITDA | $8.3 million | $(3.1) million | $11.9 million | $5.0 million |
| Cash flow from operations | Not separately provided | Not separately provided | $0.5 million | $(5.4) million |
- Q2 revenue growth was led by franchise revenue of $17.8 million, up 97.7%, franchise marketing fund revenue of $3.3 million, up 349.7%, and other service revenue of $5.4 million, up 79.3%. Equipment revenue declined 7.8% to $4.8 million.
- Six-month revenue increased 21.8%, but operating income declined to a $0.6 million loss, primarily because of higher SG&A, legal expenses, depreciation and amortization, and the absence of prior-year acquisition-related income.
- Interest expense was $11.6 million in Q2 and $16.0 million for the first six months, including approximately $5.0 million of written-off debt issuance costs and a $1.9 million prepayment penalty related to refinancing.
- The Company recognized a $3.7 million gain from forgiveness of its Paycheck Protection Program loan.
- At June 30, 2021, cash, cash equivalents and restricted cash totaled $20.2 million, including $1.3 million restricted for marketing activities. Management reported $18.9 million of unrestricted cash and believed liquidity was adequate for at least the next twelve months.
- Long-term debt totaled $206.9 million, including $204.7 million of non-current debt and $2.1 million current maturities. Outstanding borrowings under the new senior secured term loan were approximately $211.5 million before subsequent IPO-related repayment.
Material changes versus the prior comparable period
- Studios substantially recovered from COVID-19 disruptions. As of June 30, 2021, actively paying members were approximately 103% of January 31, 2020 levels, membership visits were 98%, and run-rate AUV was 88%, excluding Rumble.
- System-wide sales increased to $171.6 million in Q2 from $61.5 million; same-store sales were 129% versus negative 58% in the prior-year quarter. These comparisons benefited substantially from COVID-related closures in 2020.
- North American studios increased to 1,824 from 1,583, and licenses sold increased to 3,568 from 3,185.
- Company-owned studios increased to 52 from 16 a year earlier. The Company is seeking to refranchise them and may close unprofitable studios after December 31, 2021, potentially incurring impairment, lease termination and severance costs.
- The Company refinanced its prior facility in April 2021 with a $212 million senior secured term loan bearing interest at LIBOR plus 6.50% or the reference rate plus 5.50%; the reference-rate option was 7.5% at June 30, 2021.
- In July 2021, the IPO generated approximately $111.9 million of net proceeds and the issuance of convertible preferred stock generated $200 million before offering costs. Approximately $115 million of term-loan principal was repaid after the IPO.
Guidance, outlook, commentary and risks
The filing does not provide formal financial guidance. Management expects continued recovery as studios reopen and vaccination rates improve, but cautions that COVID-19, including the Delta variant, could cause renewed closures, capacity restrictions, lower consumer demand and delayed openings.
- The Company expects franchise growth to depend on attracting qualified franchisees, converting signed licenses into opened studios, increasing same-store sales, expanding internationally and developing ancillary digital and merchandise revenue.
- Substantial indebtedness, floating interest rates, mandatory amortization, restrictive covenants and potential LIBOR replacement create financial and liquidity risks. The Company was in compliance with its debt covenants at June 30, 2021.
- A material weakness remained in internal controls over financial reporting relating to anti-fraud programs and controls, general information technology controls and controls over information supplied by third-party service providers. Disclosure controls were therefore not effective as of June 30, 2021, although management concluded the financial statements were fairly presented after additional procedures.
- The Company is involved in litigation brought by the sellers of the AKT business. The possible loss range was not estimable and no liability was recorded for that matter. The Company recorded $1.7 million of litigation expenses in Q2 and $2.6 million year to date.
- Key additional risks include franchisee financial performance, competition from gyms and at-home fitness, consumer behavior changes, supply-chain dependence, cybersecurity and data privacy, regulatory compliance, brand reputation, impairment of goodwill and intangible assets, and future tax receivable agreement payments.
- The post-IPO tax receivable agreement generally requires payment of 85% of realized tax savings to eligible pre-IPO holders. The filing estimated a total TRA liability of approximately $31.5 million, including $3.9 million recorded after the IPO.
Most important facts for investors to verify
- Whether post-COVID membership, visits, AUV and same-store sales remain durable after unusually favorable year-over-year comparisons.
- The pace and profitability of refranchising or closing the 52 company-owned studios and the related impairment, lease and severance charges.
- Post-IPO debt balances, interest expense, mandatory repayments and compliance with leverage, liquidity and EBITDA covenants.
- Progress in remediating the identified material weaknesses in internal controls.
- The status and potential cost of the AKT litigation and other acquisition-related contingent consideration.
- The conversion rate and timing of the 1,509 North American committed studios and 738 international license commitments into operating locations.
- The future cash burden from the tax receivable agreement and the terms, dividend obligations and seniority of the convertible preferred stock.