Xponential Fitness, Inc. quarterly report, Q3 FY2022

Xponential Fitness, Inc. Form 10-Q Summary

Business context and reporting period

Unaudited quarterly report for the three and nine months ended September 30, 2022, filed November 10, 2022. Xponential is a global franchisor of ten boutique fitness brands, including Club Pilates, CycleBar, StretchLab, Pure Barre, Rumble and BFT. At quarter-end, the system had 2,485 operating studios globally, including 2,219 in North America and 266 internationally, plus contractual commitments for 1,919 additional North American studios and 920 additional international studios.

Xponential Fitness, Inc. is a holding company that owned approximately 56% of Xponential Fitness LLC at September 30, 2022; the remaining economic interest is reflected as noncontrolling interest. The prior-year comparison is affected by the July 2021 IPO and by the acquisitions of Rumble and BFT.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Revenue	$63.8 million	$40.9 million	$173.7 million	$105.7 million
Operating income (loss)	$(10.4) million	$(3.3) million	$10.9 million	$(3.9) million
Net income (loss)	$(13.1) million	$(8.9) million	$3.2 million	$(21.7) million
Net loss attributable to Xponential	$(7.1) million	$(4.1) million	$2.2 million	$(4.1) million
Adjusted EBITDA	$20.0 million	$6.8 million	$52.1 million	$18.7 million
Operating cash flow	Not separately provided	Not separately provided	$37.5 million	$3.9 million

Q3 operating margin was approximately negative 16.4% and net margin was approximately negative 20.5%. Nine-month operating margin was approximately 6.3% and net margin was approximately 1.9%. Adjusted EBITDA margins were approximately 31.4% in Q3 and 30.0% for the nine-month period.

Q3 revenue increased 56.0% year over year, led by franchise revenue of $30.0 million, equipment revenue of $11.8 million and other service revenue of $10.6 million.
Nine-month revenue increased 64.3%, primarily reflecting studio reopenings, higher same-store sales and new studio openings.
System-wide sales increased to $264.8 million in Q3 and $739.2 million for the nine months, compared with $192.7 million and $496.6 million, respectively, in the prior-year periods.
Same-store sales increased 17% in Q3 and 28% for the nine months. Trailing twelve-month AUV was $475, compared with $355 in the prior-year comparison.
Q3 operating results were adversely affected by $16.3 million of acquisition and transaction expenses, largely noncash changes in contingent consideration, and $3.7 million of AKT goodwill and intangible-asset impairment charges.
Nine-month selling, general and administrative expense increased 54.8%, including higher equity-based compensation, legal expense, insurance expense and impairment charges.

Cash flow, liquidity and capital structure

Cash, cash equivalents and restricted cash were $30.9 million at September 30, 2022, including $3.4 million of restricted cash. Management separately reported approximately $27.5 million of unrestricted cash and cash equivalents.
Nine-month operating cash flow was $37.5 million. Investing cash use was $11.6 million, including $5.7 million for property and equipment, $6.8 million for intangible assets and $1.8 million of notes receivable issued. Financing cash use was $16.3 million.
Long-term debt had a carrying value of $134.7 million, including $3.0 million current and $131.7 million noncurrent. Principal outstanding was approximately $136.5 million, with an interest rate of 9.19% at quarter-end under the reference-rate option.
The September 30, 2022 credit amendment added $7.5 million of term loans to fund the BodyFit trademark acquisition and general corporate purposes; $5.5 million was received in September and $2.0 million in October.
Quarterly principal payments of approximately $0.8 million were scheduled to begin December 31, 2022. The company stated that it was in compliance with its debt covenants.
Redeemable convertible preferred stock was recorded at a maximum redemption value of $257.1 million. The preferred stock carries a 6.5% cash coupon, or a 7.5% PIK rate if the coupon is not paid in cash, and may become redeemable beginning in 2029 or upon specified events.
The company stated that available cash and expected operating cash flow should be adequate for anticipated obligations for at least the next twelve months, while noting that future performance, refinancing capacity and debt service remain subject to economic and business conditions.

Material changes versus the prior comparable period

Revenue and operating scale expanded substantially, with 453 additional studios globally since September 30, 2021 and 128 net new openings during Q3 2022 versus 80 in Q3 2021.
Profitability improved for the nine-month period, with a shift from a $3.9 million operating loss and $21.7 million net loss in 2021 to $10.9 million operating income and $3.2 million net income in 2022. Q3 remained loss-making.
Interest expense declined 43.1% in Q3 and 58.6% for the nine months, primarily because of lower average debt and prior-year debt refinancing and repayment costs.
Operating cash flow improved by $33.5 million year over year, although working-capital movements, including higher accounts payable and deferred revenue, contributed materially.
The company adopted the new lease standard on January 1, 2022, recognizing $17.6 million of operating lease right-of-use assets and $21.8 million of lease obligations at adoption. September 30 balances were $22.7 million of right-of-use assets and $27.2 million of lease liabilities.
Goodwill declined by $3.4 million because of impairment related to the AKT reporting unit. The company cited litigation-related declines in forecasted and actual cash flows.

Outlook, commentary, risks and unusual items

The filing does not provide a clear formal revenue, earnings or adjusted EBITDA guidance range. Management emphasized continued growth through new franchise licenses, studio openings, same-store sales, international expansion and ancillary revenue streams.

Franchisee execution remains important: delays in financing, site selection, construction, hiring, equipment delivery or member demand could delay studio openings and revenue.
The company continues to refranchise company-owned transition studios. Failure to sell or operate these studios profitably could result in impairment, lease termination, severance and other charges.
Consumer discretionary spending, inflation, recession, competition and changes in fitness behavior could reduce franchisee sales and royalties.
Acquisition-related contingent consideration is material and subject to fair-value changes. At September 30, 2022, contingent consideration totaled approximately $46.7 million, including $42.2 million related to Rumble.
The company agreed to fund up to an additional $7.65 million of loans to Rumble sellers through July 2023; an additional $1.75 million was advanced in October 2022.
Patent and trademark litigation related to the BFT acquisition remained pending in the U.S. District Court for Delaware. The company also disclosed indemnification obligations and the possibility of material adverse effects from unfavorable litigation outcomes.
The company has a full valuation allowance against deferred tax assets and had not recorded $56.3 million of potential tax receivable agreement liability because realization of the related tax benefits was not considered more likely than not.
Management concluded that disclosure controls and procedures were effective as of September 30, 2022, and reported no material changes in internal control over financial reporting.

Important facts for investors to verify

Reconcile adjusted EBITDA with GAAP losses and assess the recurring nature of equity compensation, contingent-consideration remeasurement, litigation and impairment adjustments.
Verify debt maturity, variable-rate exposure, covenant headroom and the effect of additional borrowings and rising interest rates on cash flow.
Evaluate whether contractual studio commitments convert into opened and profitable studios, particularly given historical COVID-related delays.
Monitor AKT litigation and impairment risks, BFT-related indemnification and other pending legal matters.
Assess the sustainability of same-store sales and AUV growth after comparisons against COVID-affected 2021 periods normalize.
Review the economic impact of the preferred stock’s redemption rights, dividends and potential dilution, as well as Class B exchange activity and noncontrolling interests.
Confirm the timing and potential amount of tax receivable agreement payments and any future recognition of currently unrecorded obligations.