Xponential Fitness, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2022. Xponential is a franchisor of ten boutique fitness brands, including Club Pilates, Pure Barre, CycleBar, StretchLab, YogaSix, Rumble and BFT. The company operates primarily through franchisees and reports one operating segment. Xponential owns 56% of XPO Holdings and consolidates XPO LLC, with the remaining economics reported as noncontrolling interests.
At year-end, the system had 2,641 global operating studios, including 2,329 in North America and 312 internationally, and 5,450 cumulative franchise licenses sold. Franchisees were contractually committed to open 1,939 additional North American studios; master franchisees were obligated to sell licenses for 1,094 additional international studios.
Financial and operating metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $245.0 million | $155.1 million | +58.0% |
| Operating income (loss) | $15.1 million | $(30.8) million | Improved |
| Net income (loss) | $2.9 million | $(51.4) million | Improved |
| Net income (loss) attributable to Xponential | $1.9 million | $(18.8) million | Improved |
| Adjusted EBITDA | $74.3 million | $27.3 million | +171.8% |
| Net cash provided by operating activities | $51.7 million | $14.5 million | +257.2% |
| System-wide sales | $1.033 billion | $709.7 million | +45.6% |
| Same-store sales | +25% | +41% | Growth decelerated |
| Run-rate AUV | $522 thousand | $446 thousand | +17.0% |
Revenue growth reflected higher same-store sales, 511 net global studio openings, and increased equipment, merchandise, franchise and service revenue. Franchise revenue was $115.3 million, including $70.0 million of royalty fees. Approximately 71% of 2022 revenue was considered recurring, compared with 77% in 2021.
Operating margin was 6.2% in 2022 versus negative 19.9% in 2021. Net margin was 1.2% versus negative 33.2%. Reported results benefited from lower acquisition-related expenses and lower interest expense, but included $29.0 million of equity-based compensation, $10.3 million of litigation expenses included in adjusted EBITDA adjustments, and $3.7 million of brand and goodwill impairment charges related to AKT.
Liquidity, debt and cash flow
Cash, cash equivalents and restricted cash totaled $37.4 million at December 31, 2022, including $5.4 million of restricted cash; unrestricted cash and cash equivalents were $32.0 million. Total debt principal was $137.7 million, with interest generally based on a variable rate; the reported borrowing rate was 10.59% at year-end. The company was in compliance with its credit agreement covenants.
Operating cash flow was $51.7 million. Investing cash flow used $14.6 million, primarily for property and equipment, intangible assets and franchisee notes. Financing cash flow used $21.0 million, including debt repayments, preferred dividends, contingent consideration and a $5.1 million loan to a shareholder.
Material commitments included $47.0 million of operating lease payments, $137.7 million of scheduled debt principal, $29.8 million of scheduled debt interest and $2.8 million of estimated contingent consideration. Management stated that available cash and expected operating cash flow should meet anticipated needs for at least the next twelve months, while noting that future performance and refinancing capacity are uncertain.
Material changes versus the prior comparable period
- Revenue increased 58.0%, while system-wide sales increased 45.6% and global studios increased from 2,130 to 2,641.
- The company moved from a consolidated net loss of $51.4 million to net income of $2.9 million, and operating results moved from a $30.8 million loss to $15.1 million of operating income.
- Adjusted EBITDA increased to $74.3 million from $27.3 million, although the measure excludes substantial equity compensation, litigation, impairment and other items.
- Operating cash flow increased by $37.2 million to $51.7 million.
- Interest expense declined to $13.0 million from $24.7 million, primarily because of lower average debt and prior-year debt refinancing and write-off costs.
- SG&A increased 36.2% to $129.1 million, driven in part by $19.3 million of additional equity-based compensation, higher legal, insurance, accounting and studio-related costs.
- Goodwill declined by $3.4 million following an AKT impairment. Additional AKT trademark and franchise-agreement impairments totaled $0.3 million.
- Under ASC 842, the company recognized $30.1 million of operating lease right-of-use assets and $34.4 million of lease liabilities at December 31, 2022.
Outlook, unusual items and key risks
The filing does not provide formal revenue, earnings or studio-opening guidance. Management’s stated strategy is to convert the existing license pipeline, increase same-store sales and AUV, expand digitally and internationally, improve operating leverage, and continue using an asset-light franchise model.
Important unusual or potentially material items include the company’s 55 company-owned transition studios, the unresolved ClubReady contract and arbitration disputes, pending patent litigation associated with the BFT acquisition, franchisee lease guarantees of approximately $1.4 million, and a $0.75 million standby letter of credit supporting franchisee financing.
- Growth depends on franchisees obtaining financing, securing sites, opening committed studios and maintaining profitable operations; licenses sold may not convert into open studios.
- Inflation, higher interest rates, construction costs, labor costs and weaker discretionary spending could reduce franchisee returns and royalty revenue.
- The company has substantial variable-rate debt, restrictive covenants and dependence on distributions from subsidiaries as a holding company.
- Convertible preferred stock is senior to common stock, carries a 6.5% cash coupon or 7.5% PIK rate, and can create redemption, dilution and governance risks.
- The company relies heavily on ClubReady and other third-party systems for studio management, payments and customer data, creating operational, cybersecurity and privacy risks.
- Brand reputation, customer retention, health and safety claims, franchisee conduct, litigation and regulatory compliance could materially affect results.
- Goodwill and intangible assets are significant relative to the balance sheet and may require further impairment charges.
Subsequent to year-end, the company borrowed $130.0 million under a credit agreement amendment and used the proceeds to repurchase 85,340 shares of Convertible Preferred for approximately $131.0 million. Quarterly principal payments increased to approximately $1.1 million beginning June 30, 2023. The filing also reports a February 2023 secondary offering by selling stockholders in which the company received no proceeds.
Investor verification checklist
- Reconcile reported revenue and adjusted EBITDA to GAAP results, including equity compensation, litigation, impairment and acquisition-related adjustments.
- Assess whether the 1,939 North American commitments and 1,094 international obligations convert to operating studios at expected timing and economics.
- Review post-year-end leverage after the $130.0 million incremental borrowing and preferred-stock repurchase.
- Evaluate exposure to variable interest rates, debt covenants, mandatory repayments and refinancing requirements.
- Monitor AKT impairment trends and the carrying values of goodwill and other intangible assets.
- Review the ClubReady disputes, BFT-related patent litigation and other legal contingencies.
- Verify franchisee health, financing availability, same-store sales trends, studio closures and the performance of company-owned transition studios.
- Consider the effects of the 2023 preferred-stock repurchase, tax receivable agreement obligations and potential dilution from Class B exchanges, preferred conversion and equity awards.