Xponential Fitness, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2021. Xponential Fitness operates a portfolio of boutique fitness franchise brands, including Club Pilates, CycleBar, StretchLab, Row House, YogaSix, AKT, Pure Barre, Stride and Rumble. The company operated 1,889 North American studios and 43 company-owned studios at quarter-end, with 1,654 additional North American studios contractually committed to open. The company completed its initial public offering in July 2021 and reports as a holding company that consolidates Xponential Fitness LLC.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $40.9 million | $25.6 million | $105.7 million | $78.8 million |
| Revenue growth | 59.8% | — | 34.1% | — |
| Operating income (loss) | $(3.3) million | $2.7 million | $(3.9) million | $8.4 million |
| Net loss | $(8.9) million | $(1.9) million | $(21.7) million | $(8.6) million |
| Net loss attributable to Xponential Fitness, Inc. | $(4.1) million | $(1.9) million | $(4.1) million | $(8.6) million |
| Loss per Class A share | $(0.38) | Not applicable | $(0.38) | Not applicable |
| Adjusted EBITDA | $6.8 million | $1.5 million | $18.7 million | $6.5 million |
| Net cash from operating activities | Not provided | Not provided | $3.9 million | $(3.9) million |
Revenue was driven primarily by higher franchise revenue, the reopening of studios affected by COVID-19, new studio openings and increased marketing fund and other service revenue. Franchise revenue represented approximately 49% of revenue in both the quarter and nine-month period.
Operating margin was approximately negative 8% in the quarter and negative 4% for the nine-month period, compared with positive 11% in both comparable 2020 periods. Net loss margin was approximately negative 22% in the quarter and negative 20% year to date.
At September 30, 2021, cash, cash equivalents and restricted cash totaled $25.5 million, including $1.1 million of restricted marketing-fund cash. Management separately reported $24.4 million of unrestricted cash and cash equivalents. Total assets were $363.1 million and accumulated deficit was $386.7 million.
Long-term debt, including current maturities and net of discounts and issuance costs, was approximately $94.0 million at September 30, 2021. Outstanding principal under the senior secured term loan was approximately $95.9 million. The facility carried floating-rate interest, including LIBOR plus a 6.50% margin or a reference rate plus a 5.50% margin; the reference-rate option was 7.50% at quarter-end. The company stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased 59.8% in the third quarter and 34.1% for the first nine months, primarily reflecting studio reopenings, new openings and recovery from the COVID-19-affected 2020 periods.
- System-wide sales increased to $192.4 million in the quarter and $495.6 million year to date, versus $99.6 million and $321.1 million, respectively, in 2020.
- Same-store sales improved to 65% in the quarter and 36% year to date, compared with negative 40% and negative 33% in the prior-year periods. The company cautioned that the comparisons benefit substantially from COVID-related closures in 2020.
- Adjusted EBITDA increased to $6.8 million for the quarter and $18.7 million year to date. However, GAAP operating income declined to a loss because operating expenses grew faster than revenue, including higher SG&A, equity compensation, marketing-fund expense, depreciation and acquisition-related costs.
- Interest expense increased 28.5% in the quarter and 29.3% year to date, partly due to debt refinancing costs, debt discount amortization and prepayment penalties. The company also recorded a $3.7 million year-to-date gain from forgiveness of its PPP loan.
- The company acquired the Rumble franchise rights in March 2021 for estimated consideration of $20.5 million, including $8.2 million of goodwill and $12.3 million of identifiable intangible assets.
- The July 2021 IPO generated approximately $111.9 million of net proceeds before offering expenses, and the company issued $200 million of convertible preferred stock. It used $115 million of IPO and preferred-stock proceeds to repay term debt.
- Redeemable noncontrolling interests were $291.4 million at quarter-end, representing the 49% economic interest in XPO Holdings held by continuing pre-IPO members. Xponential Fitness held a 51% economic interest.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that available cash and expected operating cash flow should cover anticipated debt service, capital expenditures, tax receivable agreement obligations and working capital needs for at least the next twelve months, while noting that future cash generation and refinancing capacity are not assured.
Management reported that, as of September 30, 2021, actively paying members had recovered to approximately 111% of January 31, 2020 levels, membership visits were approximately 94% of pre-pandemic levels excluding Rumble, and run-rate AUV was approximately 90% of pre-pandemic levels. COVID-19, new variants, renewed restrictions, supply-chain disruption and changes in consumer behavior remained significant risks.
The company owned and operated 43 studios and was seeking to refranchise them. If studios could not be refranchised by December 31, 2021, the company indicated it might close unprofitable locations and incur impairment, lease termination, severance and related charges. It recorded $781,000 of long-lived asset impairment during the first nine months of 2021.
Subsequent to quarter-end, the company acquired Body Fit Training for $44.3 million in cash, subject to additional sale bonus payments with a stated minimum of approximately $3.7 million and a maximum of approximately $10.3 million. It also added $38 million of incremental term loans to fund the acquisition and related costs. The company had not completed its preliminary purchase-price allocation at the filing date and disclosed potential indemnification exposure for claims against the seller.
The company disclosed an unresolved lawsuit brought by Get Kaisered Inc., Kaiser Fitness LLC and Anna Kaiser. The plaintiffs seek monetary and injunctive relief, but the company stated that a loss range was not estimable and recorded no liability. The company also had $25.9 million of contingent consideration related primarily to Rumble at September 30, 2021.
Disclosure controls and procedures were not effective at September 30, 2021 because of material weaknesses in anti-fraud controls, general information-technology controls and controls over information provided by third-party service providers. Management was implementing remediation measures, but had not completed remediation or validated sustained operating effectiveness.
Important facts for investors to verify
- Reconcile unrestricted cash of $24.4 million with total cash, cash equivalents and restricted cash of $25.5 million.
- Assess recurring profitability and cash generation separately from non-GAAP Adjusted EBITDA, including equity compensation, acquisition-related items, litigation costs and debt refinancing charges.
- Review the effect of the 6.50% convertible preferred coupon, the 7.50% PIK alternative, the $200 million liquidation preference and potential dilution at the $14.40 conversion price.
- Evaluate debt service, floating-rate exposure, mandatory prepayments, covenant requirements and the additional $38 million borrowing used for the BFT acquisition.
- Monitor the ability to refranchise or close company-owned studios and the potential related impairment, lease termination and severance charges.
- Review the Rumble contingent consideration liability and the sensitivity of quarterly fair-value remeasurement to the company’s stock price.
- Assess the unresolved litigation, BFT indemnification obligations and the potential financial impact of the tax receivable agreement, which generally requires payments equal to 85% of realized tax savings.
- Track remediation of the disclosed material weaknesses in internal control over financial reporting.