Xponential Fitness, Inc. quarterly report, Q2 FY2022

Xponential Fitness, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Quarterly report for the three and six months ended June 30, 2022. Xponential is a franchisor of ten boutique fitness brands, including Club Pilates, CycleBar, StretchLab, Pure Barre, Rumble and BFT. At quarter-end, the system had 2,357 operating studios globally, including 2,123 in North America and 234 internationally, with 1,881 additional North American and 917 international studios contractually committed to open.

Xponential owned 55.6% of XPO LLC at June 30, 2022; the remaining 44.4% was represented by noncontrolling interests. Results for periods before the July 2021 IPO relate to XPO LLC, limiting certain year-over-year comparability.

Financial Highlights

Metric	Q2 2022	Q2 2021	Six Months 2022	Six Months 2021
Total revenue	$59.6 million	$35.8 million	$109.9 million	$64.8 million
Operating income (loss)	$36.1 million	$(0.4) million	$21.4 million	$(0.6) million
Net income (loss)	$31.5 million	$(8.0) million	$16.3 million	$(12.8) million
Net income attributable to Xponential	$16.8 million	$(8.0) million	$9.3 million	$(12.8) million
Adjusted EBITDA	$17.6 million	$8.3 million	$32.1 million	$11.9 million
Cash flow from operations	Not separately provided	Not separately provided	$26.2 million	$0.5 million

• Q2 revenue increased 66.5%; six-month revenue increased 69.5%, primarily reflecting studio reopenings, higher same-store sales and new studio openings.
• Q2 operating margin was approximately 60.7%, compared with negative 1.1% in the prior-year quarter. The current period benefited from a $31.6 million noncash reduction in acquisition and transaction expenses, principally related to contingent consideration remeasurement.
• Q2 net margin was approximately 52.9%, compared with negative 22.4% in the prior-year quarter. Six-month net margin was approximately 14.8%, compared with negative 19.7%.
• System-wide sales rose to $249.8 million in Q2 from $172.0 million. Same-store sales increased 25% in Q2 and 35% for the first six months.
• Run-rate average unit volume was $480, and trailing-twelve-month average unit volume was $457, versus $384 and $313, respectively, in the prior-year quarter.
• Q2 diluted earnings per Class A share were $0.50; six-month diluted earnings per share were $0.26. The diluted share count includes substantial potential dilution from Class B shares, preferred stock, RSUs and Rumble-related shares.

Liquidity, Cash Flow and Capitalization

• Cash, cash equivalents and restricted cash were $29.3 million at June 30, 2022, including $2.2 million restricted for marketing fund purposes. Management reported $27.1 million of unrestricted cash and cash equivalents.
• Operating cash flow was $26.2 million for the six months, compared with $0.5 million in the prior-year period. Investing cash flow was $(5.6) million, including $4.4 million of capital expenditures and $1.4 million of notes receivable issued. Financing cash flow was $(12.6) million, including $9.8 million of preferred stock dividends and $1.5 million of debt repayments.
• Long-term debt was $129.8 million net of current maturities, discounts and issuance costs; outstanding principal was $131.7 million. The senior secured term loans carried a reference-rate option of 7.51% at quarter-end and mature principally in 2025.
• The company was in compliance with its debt covenants at June 30, 2022. Management stated that available cash and expected operating cash flow should meet anticipated obligations for at least the next twelve months, while noting that future debt service and refinancing depend on economic and operating conditions.
• Total deferred revenue was $135.9 million, including $108.2 million of franchise and area development fees and $11.8 million of brand fees. This represents a significant source of future revenue recognition but also reflects performance obligations that remain unsatisfied.

Material Changes Versus the Prior Comparable Period

• Revenue growth was broad-based: Q2 franchise revenue increased 55.5%, equipment revenue 160.4%, merchandise revenue 49.8%, marketing fund revenue 49.0% and other service revenue 44.8%.
• Costs increased with growth. Q2 selling, general and administrative expense rose 38.3%, including higher equity-based compensation, legal expense and insurance costs. Product cost as a percentage of related revenue increased to 70.7% from 67.7% due to equipment mix.
• Interest expense declined 75.3% in Q2 to $2.9 million, primarily because of lower average debt and the absence of prior-year debt refinancing write-offs and prepayment penalties.
• Equity-based compensation was $19.7 million for the six months, 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. Management stated that the adoption did not materially affect operations or liquidity.
• During Q2, Xponential acquired the BodyFit trademark for total consideration of $10.3 million, consisting of $5.5 million cash and $4.8 million of noncash consideration.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide quantitative full-year revenue or earnings guidance. Management highlighted continued recovery from COVID-19 restrictions, growth in studio openings, franchise license sales, international expansion and improving studio economics. Active paying members and membership visits for Q2 were 139% and 146%, respectively, of Q4 2019 levels, excluding BFT; run-rate AUV was approximately 101% of the pre-pandemic Q4 2019 level including Rumble and BFT.

• COVID-19 variants, renewed capacity restrictions, temporary studio closures, supply-chain disruption, inflation and changes in consumer discretionary spending remain risks.
• Franchisee financing, site selection, construction, staffing and equipment delivery could delay committed studio openings or reduce future revenue.
• The company continues to hold company-owned transition studios while seeking to refranchise them. Failure to sell or operate these studios profitably could result in impairment, lease termination and severance costs.
• The BFT master franchise agreement includes a potential repurchase option in 2023 or 2024 and a potentially material cancellation fee if the option is not exercised under specified circumstances.
• Pending U.S. litigation related to alleged patent infringement remains outstanding in connection with the BFT acquisition. The company has also provided indemnification to the BFT seller.
• In July 2022, the company settled disputes with Rumble sellers, reducing the interest rate on related seller financing and extending its maturity. The sellers borrowed an additional $3.3 million in August 2022.
• Contingent consideration liabilities totaled approximately $31.7 million at quarter-end. The Q2 decline in these liabilities produced a significant noncash benefit and materially inflated reported operating income.
• The company had a full valuation allowance against deferred tax assets and had not recorded approximately $56.7 million of potential tax receivable agreement liability because realization of the related tax benefits was not considered more likely than not.

Investor Verification Points

• Reconcile reported operating income and adjusted EBITDA to underlying recurring performance, excluding the $31.6 million noncash contingent-consideration benefit.
• Assess the sustainability of revenue growth after accounting for post-COVID comparisons, new studio openings and the high-growth equipment revenue component.
• Review debt maturities, variable-rate exposure, covenant requirements and the ability to generate sufficient cash for debt service and mandatory prepayments.
• Evaluate dilution from the 200,000 shares of convertible preferred stock, Class B shares, RSUs and Rumble-related contingent shares.
• Monitor franchisee financial health, accounts receivable, notes receivable and the ability to convert contractual studio commitments into operating locations.
• Review BFT-related litigation, indemnification exposure, potential cancellation fees and the Rumble settlement terms.
• Verify the effect of equity compensation, legal costs, lease adoption and tax receivable agreement obligations on future earnings and cash flow.