Xponential Fitness(XPOF) - 2022 Q4 - Annual Report

PART I This section details Xponential Fitness's business model, competitive strengths, growth strategies, brand portfolio, franchise operations, studio footprint, and regulatory environment, along with associated risk factors, property details, and legal proceedings Business Xponential Fitness, Inc. is the largest global franchisor of boutique fitness brands, operating a diversified platform of ten brands, driven by its "Xponential Playbook" to optimize studio performance Overview Xponential Fitness operates as the largest global franchisor of boutique fitness brands, leveraging its "Xponential Playbook" to support franchisees and drive studio performance, with a significant global growth pipeline - Xponential Fitness is the largest global franchisor of boutique fitness, operating a diversified platform of ten brands including Club Pilates, CycleBar, StretchLab, and Pure Barre[13] - The company utilizes a proven operational model, the "Xponential Playbook," to support franchisees in areas such as site selection, pre-opening support, training, and technology systems to drive studio performance[15][17] - The business model is designed to generate a weighted average Average Unit Volume (AUV) of approximately $500,000 in the second year of operations with studio-level operating margins of 25-30%[18] - As of December 31, 2022, the company had a strong growth pipeline with franchisees contractually committed to open an additional 1,939 studios in North America and master franchisees obligated to sell licenses for 1,094 international studios[20] Our Competitive Strengths The company's competitive advantages include a diversified portfolio of ten leading boutique fitness brands, significant scale as the largest U.S. franchisor, an asset-light model with recurring revenue, attractive studio-level economics, and a strong pipeline for future organic growth - The company possesses a diversified portfolio of ten leading boutique fitness brands across various verticals, which is a significant competitive advantage in a fragmented market[25] - Xponential is the largest boutique fitness franchisor in the U.S. with over 2,301 studios, leveraging its scale for brand recognition, real estate access, and favorable vendor relationships[27][28] - The company benefits from an asset-light franchise model with multiple predictable and recurring revenue streams, with approximately 71% of revenue considered recurring in 2022[33] - The franchise model offers attractive studio-level economics, with a relatively low initial investment of about $350,000 and a target unlevered cash-on-cash return of approximately 40%[34] - As of December 31, 2022, the company had sold 5,450 franchise licenses globally, indicating a strong and visible pipeline for future organic growth[36] Our Growth Strategies The company's primary growth strategies focus on expanding its franchised studio base in North America, increasing system-wide same-store sales and average unit volume, improving operating margins, and accelerating international expansion through digital platforms and cross-selling initiatives - Primary growth strategies include expanding the franchised studio base in North America, driving system-wide same-store sales and AUV, expanding operating margins, and growing internationally[40][42][44][45] - The company aims to increase same-store sales by acquiring new customers, increasing membership penetration, and driving consumer spending through dynamic pricing, cross-selling, and digital platform engagement[43] - International expansion is a key focus, with 312 studios open internationally as of year-end 2022 and master franchise agreements in place for an additional 1,094 studios to be sold[46] - The company is leveraging its digital platform, Xponential+, and membership option, XPASS, to enhance consumer engagement, cross-sell brands, and generate incremental revenue[47] Our Brands Xponential Fitness manages a diverse portfolio of ten leading boutique fitness brands, each specializing in different workout modalities, contributing to its extensive global studio network and franchise licenses sold Brand Portfolio and Studio Count (as of Dec 31, 2022) | Brand | Description | Global Studios Open | Global Licenses Sold | | :--- | :--- | :--- | :--- | | Club Pilates | Largest Pilates brand in the U.S. | 826 | 1,280 | | Pure Barre | Largest Barre brand in the U.S. | 638 | 760 | | CycleBar | Largest indoor cycling brand in the U.S. | 282 | 553 | | StretchLab | Assisted stretching services | 305 | 817 | | Row House | Largest franchised indoor rowing brand | 96 | 331 | | YogaSix | Largest franchised yoga brand | 170 | 575 | | Rumble | Boxing-inspired full-body workout | 42 | 351 | | AKT | Dance-based cardio and strength training | 34 | 119 | | Stride | Treadmill-based cardio and strength | 18 | 93 | | BFT | Functional and strength-based training | 230 | 571 | Our Franchise Model The company's capital-efficient franchise model leverages local expertise and a comprehensive operational playbook to rapidly expand its global footprint, characterized by multi-unit ownership and predictable recurring revenue streams from long-term agreements - The franchise model leverages local market expertise and the Xponential Playbook to grow the global footprint in a capital-efficient manner, scaling from 2018 to 2022 at a 25% CAGR[75] - As of Dec 31, 2022, 81% of licenses in North America were owned by multi-unit franchisees, and 54% of all franchisees owned more than one license[76] - Franchise agreements have an initial ten-year term, with options to renew, and franchisees pay an initial franchise fee and ongoing monthly royalty fees based on gross sales[81][83] Studios Xponential Fitness maintains a substantial global studio footprint, primarily through franchised locations, while strategically managing a small number of company-owned transition studios intended for refranchising Studio Count by Location (as of Dec 31, 2022) | Location | Number of Studios | | :--- | :--- | | U.S. & D.C. | 2,301 | | Canada | 28 | | International | 312 | | Total | 2,641 | - The company operates a small number of company-owned transition studios (55 as of Dec 31, 2022) for a limited time while facilitating transfers to new or existing franchisees[92] Government Regulation The company operates under a complex framework of government regulations, including federal and state franchise sales laws, labor laws, consumer protection regulations for health clubs, and data privacy laws, requiring strict compliance - The company is subject to the FTC Franchise Rule and various state franchise sales laws, which regulate the offer and sale of franchises and require specific disclosures in a Franchise Disclosure Document (FDD)[130] - Operations are also governed by labor laws (e.g., Fair Labor Standards Act), consumer protection regulations for health clubs, and data privacy laws like GDPR and CCPA[132][134][136] Risk Factors The company faces numerous risks, primarily related to its reliance on the financial success of its franchisees, potential growth strategy failures, and disruptions in financing, alongside challenges in brand reputation, international expansion, competition, macroeconomic downturns, key personnel reliance, and various legal and regulatory compliance issues, including data privacy and franchise laws, further complicated by its organizational structure and substantial indebtedness - Business & Industry Risks: The company's financial results are directly affected by the operational and financial success of its franchisees, where negative economic conditions or failure of franchisees to perform could harm revenue[146][147] - Growth & Expansion Risks: The growth strategy depends on opening new studios, which faces challenges like financing availability, site selection, and competition, while expansion into new and international markets carries increased risks due to unfamiliarity and different economic conditions[148][158][160] - Operational & Legal Risks: The company relies heavily on a single information systems provider (ClubReady) and faces risks related to data security and privacy laws (e.g., CCPA, GDPR), in addition to being subject to extensive franchise regulations and potential litigation[212][217][223] - Financial & Structural Risks: The company has substantial indebtedness with restrictive covenants, and its holding company structure makes it dependent on distributions from its subsidiary (XPO Holdings) to meet obligations, including payments under the Tax Receivable Agreement (TRA)[256][260][275] Properties The company's corporate headquarters are located in a leased 35,000 square foot office in Irvine, California, with additional leased spaces for a digital production studio, training locations, and a warehouse, while also operating 55 company-owned transition studios in leased properties intended for refranchising - Corporate headquarters are in Irvine, CA, under a lease expiring in 2032[320] - The company leases approximately 55,000 square feet of warehouse space in Tustin, CA, and a 6,800 square foot digital production studio[320] - As of December 31, 2022, the company held leases for 55 company-owned transition studios, which it is actively seeking to refranchise[321] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 17, "Contingencies and Litigation," in the Notes to Consolidated Financial Statements - Details on legal proceedings are provided in Note 17 of the financial statements[323] PART II This section covers the market for the company's common equity, management's discussion and analysis of financial condition and results of operations, the consolidated financial statements, and internal controls and procedures Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock is traded on the New York Stock Exchange (NYSE) under the ticker symbol "XPOF," with no current cash dividends paid on its Class A common stock, and any future dividends are at the discretion of the board of directors - Class A common stock trades on the NYSE under the symbol "XPOF"[327] - The company does not currently pay cash dividends on its Class A common stock, and future dividend declarations are at the board's discretion[328] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2022, Xponential Fitness saw significant growth, with total revenue increasing 58.0% to $245.0 million, driven by a 25% increase in same-store sales and the opening of 511 net new studios globally, achieving operating income of $15.1 million and net income of $2.9 million, with Adjusted EBITDA growing substantially to $74.3 million Key Performance Indicators This section presents a summary of key operational and financial metrics, including system-wide sales, global studio count, average unit volume, same-store sales, and Adjusted EBITDA, illustrating the company's performance trends Key Performance Indicators (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | System-wide sales | $1,033.2M | $709.7M | $442.7M | | Global studios operating (eop) | 2,641 | 2,130 | 1,796 | | Global licenses sold (cumulative) | 5,450 | 4,424 | 3,469 | | AUV (run-rate) | $522k | $446k | $287k | | Same store sales | 25% | 41% | (34%) | | Adjusted EBITDA | $74.3M | $27.3M | $9.8M | Results of Operations This section provides a detailed analysis of the company's financial performance, highlighting significant increases in total revenue, a turnaround from operating loss to income, and a substantial improvement in net income for the fiscal year 2022 Consolidated Results of Operations (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue, net | $244,954 | $155,079 | $106,592 | | Total operating costs and expenses | $229,818 | $185,898 | $98,798 | | Operating income (loss) | $15,136 | ($30,819) | $7,794 | | Net income (loss) | $2,875 | ($51,440) | ($13,640) | - Total revenue increased by 58.0% in 2022 compared to 2021, primarily due to a 25% increase in same-store sales and 511 net new global studio openings[361][362] - Operating income was $15.1 million in 2022, a significant improvement from an operating loss of $30.8 million in 2021, driven by higher revenues and a large decrease in acquisition and transaction expenses[358][372] - Net income for 2022 was $2.9 million, compared to a net loss of $51.4 million in 2021, with the improvement driven by strong revenue growth and lower interest expense[358][374] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, specifically Adjusted EBITDA, to the most directly comparable GAAP financial measure, providing additional insights into the company's operational profitability - Adjusted EBITDA is defined as EBITDA adjusted for non-cash and other items such as equity-based compensation, acquisition expenses, management fees, and litigation expenses[397] Adjusted EBITDA Reconciliation (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income (loss) | $2,875 | ($51,440) | ($13,640) | | Interest expense, net | $11,212 | $23,545 | $21,065 | | Income taxes | $526 | $783 | $369 | | Depreciation and amortization | $15,315 | $10,172 | $7,651 | | EBITDA | $29,928 | ($16,940) | $15,445 | | Adjustments | $44,324 | $44,263 | ($5,638) | | Adjusted EBITDA | $74,252 | $27,323 | $9,807 | Liquidity and Capital Resources This section assesses the company's financial position, including its cash and cash equivalents, debt obligations, and cash flow activities, to determine its ability to meet short-term and long-term financial commitments - As of December 31, 2022, the company had $32.0 million of cash and cash equivalents and believes this, along with cash from operations, is adequate to meet needs for the next twelve months[401][402] - The company's primary debt is a senior secured term loan facility with a total principal amount of $137.7 million outstanding as of December 31, 2022[413] Summary Cash Flow (in thousands) | Cash Flow | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $51,670 | $14,451 | | Net cash used in investing activities | ($14,613) | ($50,635) | | Net cash (used in) from financing activities | ($21,007) | $46,205 | Critical Accounting Estimates This section outlines the significant accounting policies and estimates that require management's subjective judgment, such as revenue recognition, business combinations, asset impairment, and equity-based compensation, which materially impact the financial statements - Key critical accounting estimates include revenue recognition, business combinations, impairment of long-lived assets (including goodwill), acquisition-related contingent consideration, and equity-based compensation[431] - For franchise revenue, initial fees are deferred and recognized on a straight-line basis over the franchise term (typically 10 years), while royalties are recognized as franchisee sales occur[434][435][438] - Goodwill is tested for impairment annually or when indicators exist, and in Q3 2022, a goodwill impairment of $3.4 million was recorded for the AKT reporting unit due to a decline in forecasted cash flows[460][461] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements for Xponential Fitness, Inc. for the fiscal year ended December 31, 2022, including the Consolidated Balance Sheets, Statements of Operations, Statements of Changes to Stockholders' Equity, and Statements of Cash Flows, along with the accompanying notes, with an unqualified opinion from Deloitte & Touche LLP Consolidated Balance Sheets This section presents the company's financial position at specific points in time, detailing its assets, liabilities, and stockholders' equity, providing a snapshot of its financial health Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $482,691 | $415,544 | | Cash, cash equivalents and restricted cash | $37,370 | $21,320 | | Goodwill | $165,697 | $169,073 | | Total Liabilities | $382,678 | $349,123 | | Long-term debt, net | $133,039 | $127,983 | | Deferred revenue, net | $109,465 | $95,691 | | Total Stockholders' Deficit | ($208,062) | ($210,469) | Consolidated Statements of Operations This section reports the company's financial performance over a period, summarizing its revenues, expenses, and net income or loss, reflecting its profitability Consolidated Statement of Operations Highlights (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Total revenue, net | $244,954 | $155,079 | | Operating income (loss) | $15,136 | ($30,819) | | Net income (loss) | $2,875 | ($51,440) | | Net loss per share of Class A common stock - Basic & Diluted | ($0.87) | ($2.85) | Consolidated Statements of Cash Flows This section details the cash generated and used by the company over a period, categorized into operating, investing, and financing activities, illustrating its liquidity and solvency Consolidated Cash Flow Highlights (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $51,670 | $14,451 | | Net cash used in investing activities | ($14,613) | ($50,635) | | Net cash (used in) provided by financing activities | ($21,007) | $46,205 | | Net increase in cash, cash equivalents and restricted cash | $16,050 | $10,021 | Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2022, and also assessed the effectiveness of internal control over financial reporting using the COSO 2013 framework, concluding it was effective, with no attestation report from the independent registered public accounting firm as an emerging growth company - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[725] - Based on the COSO 2013 framework, management concluded that internal control over financial reporting was effective as of December 31, 2022[728] PART III This section incorporates by reference detailed information regarding the company's directors, executive officers, corporate governance practices, executive compensation, security ownership, and related party transactions from its proxy statement Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership The information required for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership of certain beneficial owners and management, certain relationships and related transactions, director independence, and principal accounting fees and services, is incorporated by reference from the company's Definitive Proxy Statement for its 2022 Annual Meeting of Stockholders, to be filed within 120 days of the fiscal year-end - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's upcoming Definitive Proxy Statement[735][736][737][738][739] PART IV This section includes a list of all exhibits filed as part of the Annual Report on Form 10-K and notes the omission of financial statement schedules and a Form 10-K summary Exhibits, Financial Statement Schedules This section lists the financial statements, which are included in Item 8, and notes that financial statement schedules are omitted as they are not applicable, also providing an index of all exhibits filed as part of the Annual Report on Form 10-K - This section contains the list of exhibits filed with the Form 10-K[742] Form 10-K Summary No summary is provided for the Form 10-K - Item 16 is not applicable[748]