Xponential Fitness, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Xponential Fitness operates a franchising platform comprising 10 boutique fitness brands, including Club Pilates, CycleBar, StretchLab, Pure Barre, YogaSix, Rumble and BFT. The company owns approximately 66% of XPO LLC and consolidates its results, with the remaining interest reported as noncontrolling interest.
- 2,756 studios operating globally at quarter-end, including 2,411 in North America and 345 internationally.
- 115 net new studio openings during the quarter.
- 5,638 cumulative global licenses sold; 1,968 North American and 1,078 international studio commitments remained to be opened.
- 87 company-owned transition studios were operated at March 31, 2023, versus 20 a year earlier.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $70.7 million | $50.4 million | +40.4% |
| Operating loss | $(7.2) million | $(14.8) million | Improved by $7.6 million |
| Net loss | $(15.0) million | $(15.2) million | Improved by $0.2 million |
| Net loss attributable to Xponential | $(10.0) million | $(7.5) million | Worsened by $2.5 million |
| Basic and diluted loss per Class A share | $(1.38) | $(1.51) | Improved |
| Adjusted EBITDA | $22.9 million | $14.5 million | +58.2% |
| Operating cash flow | $11.4 million | $2.9 million | +292.9% |
| Cash, cash equivalents and restricted cash | $28.1 million | $15.8 million | Year-over-year increase |
- Revenue mix: franchise revenue $33.0 million, equipment $13.1 million, merchandise $7.2 million, marketing fund $6.2 million and other services $11.3 million.
- Operating margin was approximately negative 10.2%, compared with negative 29.3% in the prior-year quarter. Net margin was approximately negative 21.2%, compared with negative 30.1%.
- Adjusted EBITDA margin was approximately 32.4%, compared with 28.7% in Q1 2022. Adjusted EBITDA is non-GAAP and excludes, among other items, equity compensation, acquisition expenses, litigation expenses, transaction fees and TRA remeasurement.
- System-wide sales increased to $317.8 million from $224.5 million. Same-store sales growth was 20%, compared with 47% in the prior-year quarter. AUV was $519,000 on a last-twelve-month basis and $542,000 on a run-rate basis.
Liquidity, debt and capital structure
- Cash, cash equivalents and restricted cash totaled $28.1 million at March 31, 2023, including $5.9 million of restricted cash. Management reported $22.2 million of unrestricted cash and cash equivalents.
- Operating activities generated $11.4 million; investing activities used $2.4 million, primarily for property, equipment and intangible assets; financing activities used $18.2 million.
- Long-term debt had a principal balance of $266.7 million and a carrying value of approximately $261.9 million. The debt bears variable interest, with the stated rate at 11.30% as of March 31, 2023. Quarterly principal payments of approximately $1.1 million begin June 30, 2023.
- The January 2023 Fourth Amendment added $130.0 million of term debt, primarily funding the repurchase of preferred stock.
- Convertible preferred stock declined to 115 shares with a recorded maximum redemption value of $227.3 million, from 200 shares and $308.1 million at December 31, 2022.
- Total stockholders’ deficit was $278.8 million at March 31, 2023, compared with $208.1 million at year-end 2022.
- The company stated that it was in compliance with its credit agreement covenants and expected available cash and operating cash flow to meet anticipated obligations for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue benefited from higher same-store sales, 527 additional studios opened since March 31, 2022, and increased equipment installations.
- Operating loss improved despite a $6.2 million increase in acquisition and transaction expenses, which primarily reflected non-cash changes in contingent consideration.
- Interest expense increased 178.8% to $8.0 million because of higher debt balances and interest rates.
- SG&A increased only 2.8%; lower equity-based compensation largely offset higher staffing and occupancy costs associated with transition studios.
- Operating cash flow increased substantially, mainly from favorable changes in accounts receivable, accounts payable and accrued expenses.
- Financing cash use included $130.8 million for preferred stock repurchases, $7.9 million of tax payments related to vested restricted stock units and $126.1 million of new debt borrowings.
Guidance, outlook, commentary and risks
The filing does not provide specific quarterly or full-year revenue, EBITDA or studio-opening guidance. Management expects growth to depend on licensing new studios, opening committed studios, increasing same-store sales and expanding internationally. Management also expects to continue refranchising company-owned transition studios.
- Transition studios may require additional operating costs and could generate lease termination, severance or other closure charges if they cannot be refranchised profitably.
- Growth is exposed to franchisee financing availability, location and construction delays, equipment delivery, labor availability, consumer discretionary spending, inflation, recession and competition.
- Debt carries a high variable interest rate and is secured by substantially all assets of certain subsidiaries. Failure to meet covenants or other events of default could accelerate repayment.
- Contingent consideration from acquisitions totaled $43.7 million at March 31, 2023, including a material increase recorded as acquisition and transaction expense.
- The company had $93.4 million of unrecorded tax receivable agreement liability because realization of the related tax benefits was not considered more likely than not. Recorded current and non-current TRA liabilities totaled $2.5 million.
- Related-party exposure includes a $20.0 million shareholder receivable, additional committed loans to the Rumble sellers of up to $2.8 million through July 2023, and an additional $1.3 million advance disclosed as a subsequent event in April 2023.
- Lease guarantees for franchisees had a maximum potential obligation of approximately $2.8 million. A $0.75 million standby letter of credit supported financing for qualified franchisees.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the strong Adjusted EBITDA result with GAAP operating and net losses, including the substantial excluded acquisition, equity compensation, litigation and transaction items.
- Assess leverage, interest-rate exposure and debt maturity concentration, including approximately $259.2 million of scheduled principal payments in 2025.
- Evaluate whether the 20% same-store sales growth rate can be sustained as it moderates from 47% in the prior-year quarter.
- Monitor the pace and profitability of refranchising the 87 company-owned transition studios.
- Review contingent consideration, the unrecorded TRA liability and related-party receivables and advances for potential future cash requirements.
- Confirm the status and potential exposure of litigation, franchisee guarantees and the BFT master-franchise repurchase or cancellation provisions.