Xponential Fitness, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Xponential Fitness is a global franchisor of boutique fitness brands, operating ten concepts including Club Pilates, CycleBar, StretchLab, Pure Barre, YogaSix, Rumble and BFT. The company reported unaudited consolidated results for the three months ended March 31, 2022, with comparison to the three months ended March 31, 2021. As of March 31, 2022, the system had 2,229 operating studios globally, including 2,030 in North America and 199 internationally, plus contractual commitments for 1,870 additional North American studios and 950 additional international studios.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $50.4 million | $29.1 million | Up 73.3% |
| Operating loss | $14.8 million | $0.2 million | Higher loss |
| Net loss | $15.2 million | $4.8 million | Higher loss |
| Net loss attributable to Xponential Fitness, Inc. | $7.5 million | $4.8 million | Higher loss |
| Adjusted EBITDA | $14.5 million | $3.6 million | Up 306.4% |
| Operating cash flow | $2.9 million | $(0.2) million | Improved |
| Cash, cash equivalents and restricted cash | $15.8 million | $7.4 million | Down from $21.3 million at Dec. 31, 2021 |
Revenue growth was broad-based: franchise revenue increased 85.4% to $25.5 million; equipment revenue increased 91.3% to $7.8 million; merchandise revenue increased 43.7% to $6.1 million; franchise marketing fund revenue increased 78.6% to $4.4 million; and other service revenue increased 45.0% to $6.6 million.
Reported operating margin was approximately negative 29.3%, compared with negative 0.8% in the prior-year quarter. Net margin was approximately negative 30.1%, compared with negative 16.3%. Adjusted EBITDA margin was approximately 28.7%, compared with 12.2%, but adjusted EBITDA excludes substantial items, including equity-based compensation, acquisition and transaction expenses, litigation expenses and other adjustments.
System-wide sales increased to $224.5 million from $131.9 million. Same-store sales were positive 47%, versus negative 24% in the prior-year period. Run-rate AUV increased to $450,000 from $303,000, and 99 net new studios opened compared with 79. Management reported membership levels and visits at 133% and 138%, respectively, of the fourth-quarter 2019 pre-pandemic levels, excluding BFT.
Cash flow, debt and liquidity
Operating cash flow was $2.9 million. Investing cash flow was negative $2.2 million, primarily reflecting $1.8 million of property and equipment purchases, $0.3 million of intangible asset purchases and $0.6 million of notes receivable issued. Financing cash flow was negative $6.3 million, including $4.9 million of preferred stock dividend and deemed dividend payments, $0.7 million of long-term debt repayments and $0.6 million of contingent consideration payments.
Outstanding term loans were approximately $132.5 million at March 31, 2022, with reported long-term debt of $130.3 million after current maturities, discounts and issuance costs. The term loans bear interest at either LIBOR plus 6.50% or the applicable reference rate plus 5.50%; the reference-rate option was 7.50% at quarter-end. Quarterly principal payments and mandatory prepayment provisions apply. The company stated that it was in compliance with its debt covenants.
Cash, cash equivalents and restricted cash totaled $15.8 million, including $1.6 million restricted for marketing activities. Management stated that available cash and expected operating cash flow should cover anticipated debt service, capital expenditures, working capital and other obligations for at least the next twelve months, while cautioning that future cash generation and refinancing availability are not assured.
Material changes versus the prior comparable period
- Revenue increased 73.3%, primarily due to studio reopenings, recovery from COVID-19 capacity restrictions and new studio openings.
- Operating expenses increased 122.4% to $65.1 million. SG&A increased 104.3%, largely due to $15.0 million of additional equity-based compensation, higher accounting, legal and insurance costs.
- Acquisition and transaction expenses increased to $9.5 million from $0.4 million, primarily reflecting non-cash changes in contingent consideration.
- Interest expense declined 35.3% to $2.9 million due primarily to a lower average debt balance.
- Equity-based compensation was $15.2 million, including accelerated expense associated with performance-based awards that vested in March 2022.
- The company adopted ASC Topic 842 on January 1, 2022, recognizing $17.6 million of operating lease right-of-use assets and $21.8 million of lease obligations at adoption.
- Redeemable convertible preferred stock was carried at a maximum redemption value of $327.8 million. A $50.9 million adjustment was recorded as a deemed dividend and increased the accumulated deficit.
Guidance, outlook, commentary and risks
The filing does not provide formal quarterly or full-year revenue or earnings guidance. Management expects continued growth from franchise licensing, studio openings, same-store sales, international expansion and ancillary services, but notes that the timing of openings, financing availability, site selection, hiring, equipment delivery and consumer demand can affect results.
COVID-19 effects had moderated through the first quarter, but new variants, renewed restrictions, supply-chain disruption, inflation and changing fitness behavior remained risks. The company also continues to hold company-owned transition studios while seeking to refranchise them; unsuccessful refranchising could lead to impairment, lease termination and severance costs.
Other material exposures include substantial leverage and variable-rate interest costs, contingent consideration liabilities, the redemption and dividend terms of the preferred stock, potential obligations under the tax receivable agreement, and pending U.S. patent litigation related to the BFT acquisition. The company settled a separate litigation matter in March 2022 and reported $0.5 million of accrued legal liabilities at quarter-end.
After quarter-end, selling stockholders completed a secondary offering of 4.5 million Class A shares at $20.00 per share, with an additional 675,000-share option exercised. The company received no proceeds from the offering. The transaction also caused the company to cease being a controlled company under NYSE rules, subject to applicable transition periods.
Most important facts for investors to verify
- Whether strong system-wide sales, same-store sales and AUV trends continue after the favorable comparison with COVID-affected Q1 2021.
- The sustainability of positive operating cash flow after excluding non-cash adjustments and considering preferred dividends, debt service and contingent consideration payments.
- The company’s ability to manage approximately $132.5 million of term debt, variable interest rates and required amortization.
- The magnitude and timing of future equity-based compensation, acquisition-related charges and contingent consideration remeasurements.
- The terms and potential future cash impact of the $327.8 million preferred stock redemption value and the tax receivable agreement.
- Progress in opening committed studios and refranchising company-owned transition studios.
- Developments in the BFT-related patent litigation and any related indemnification or cancellation-fee exposure.