Xponential Fitness(US:XPOF)2022-03-05 00:25Impact of COVID-19 - The ongoing COVID-19 pandemic has significantly impacted the company's revenue generation, with franchisees temporarily closing almost all studios system-wide in mid-March 2020[148]. - Franchisees have experienced a decrease in net membership base due to the pandemic, adversely affecting royalty payments and overall financial performance[149]. - The company relies heavily on franchisees for timely royalty payments, and disruptions in their operations may materially affect cash flows and financial condition[149]. - New studio openings have been delayed due to social distancing and construction restrictions, impacting the company's growth strategy[150]. - The company may face increased operational costs due to regulatory restrictions related to the pandemic, such as mask and vaccine mandates[148]. - The uncertainty surrounding the pandemic's future impact on operations and financial performance remains high, with potential adverse effects on franchisees and overall business[154]. - The company may require additional capital to support business growth and objectives, which could be affected by the pandemic's impact on credit markets[152]. Financial Performance and Condition - The company incurred a net loss of $51.4 million, $13.6 million, and $37.1 million for the years ended December 31, 2021, 2020, and 2019, respectively, resulting in a total accumulated deficit of $643.8 million as of December 31, 2021[171]. - The company has total indebtedness of $134.2 million as of December 31, 2021[275]. - The company's substantial indebtedness could limit its ability to pursue growth strategies and may adversely affect financial condition[155]. - The company’s substantial level of indebtedness could limit its ability to pursue growth strategies and increase vulnerability to adverse economic conditions[276]. - The financial condition of XPO Holdings and its subsidiaries could limit their ability to make distributions, adversely affecting the company's liquidity and financial condition[292]. - The company may face adverse outcomes from audits of its income, sales, and other transaction taxes, which could negatively impact its financial condition and results of operations[286]. Franchise Operations and Challenges - As of December 31, 2021, the company had 1,556 franchisees operating 1,954 open studios in North America and nine master franchisees with 176 studios operating internationally[159]. - The company has 1,806 studios in North America contractually obligated to be opened under existing franchise agreements and 956 licenses to be sold internationally via master franchise agreements as of December 31, 2021[166]. - Franchisees face challenges in opening new studios, including availability and cost of financing, suitable studio locations, and competition for studio sites[161]. - Franchise agreements typically have a ten-year term, with no single franchisee accounting for more than 5% of total revenue, highlighting a diversified revenue stream[197]. - Franchisees may incur rising costs related to construction and maintenance, which could adversely affect the attractiveness of the franchise model[174]. - Franchisees may struggle to attract and retain customers, which could adversely affect the company's revenue from royalties and franchise fees[208]. Growth Strategy and Market Conditions - The company’s growth strategy relies on the ability to identify, recruit, and enter into agreements with a sufficient number of qualified franchisees[162]. - The company’s expansion into international markets is in early stages and may be affected by local economic and market conditions[170]. - The number of new studios that actually open may differ materially from the number of studio licenses sold, with historical termination rates of 302 licenses in North America[166]. - Opening new studios in close proximity to existing studios may negatively impact existing studios' revenue and profitability[179]. - The company operates in a highly competitive market with significant competition from other fitness studios, personal trainers, and online fitness services, which may intensify in the future[205][206]. Legal and Regulatory Risks - The company may face litigation risks related to franchisee operations, which could increase costs and negatively impact brand reputation[191]. - Compliance with various laws and regulations is critical, as failure to do so could result in fines, penalties, and a reduction in anticipated royalty or franchise revenue[213]. - The company may face significant risks related to compliance with anti-corruption and anti-money laundering laws, which could result in substantial civil and/or criminal fines[266]. - The company must comply with various health and fitness regulations, and failure to do so could delay studio openings and harm business operations[284]. Management and Governance - The company’s management team has limited experience managing a public company, which may affect its ability to meet regulatory obligations[267]. - The company is a "controlled company," with the Continuing Pre-IPO LLC Members holding a majority of the voting power, which may affect corporate governance[312]. - The company has opted out of certain corporate governance requirements, which may not provide the same protections to stockholders as other companies[312]. - Compliance with public company reporting requirements may strain resources and distract management, potentially impacting business operations[319]. Capital and Financing - The company may require additional capital for growth, which could lead to stockholder dilution if raised through equity or convertible debt securities[257]. - The Convertible Preferred stock requires the company to pay a quarterly cash dividend of 6.5% or increase the liquidation preference at a rate of 7.5% in lieu of cash dividends, impacting the ability to pay dividends on Class A common stock[289]. - The company relies on distributions from XPO Holdings, in which it holds a 62% ownership interest, to cover taxes, expenses, and potential dividends[291]. - Payments under the TRA may exceed actual cash tax savings, potentially impacting liquidity[303]. Operational Risks - The company is highly dependent on key personnel, particularly the CEO, and the loss of such individuals could impair operational management and competitive ability[199]. - The company relies heavily on information systems provided by a single supplier, and any failure in these systems could disrupt operations and damage reputation[222]. - A cybersecurity breach could result in significant liability, costly litigation, and damage to the company's reputation[227]. - The company and its franchisees depend on third-party service providers to protect their systems against security breaches, which could lead to operational delays and reduced efficiency[225]. Consumer Behavior and Market Trends - Shifts in consumer behavior towards in-home fitness solutions may reduce demand for in-person fitness classes, adversely impacting the company's business[156]. - The company's success depends on its ability to anticipate and satisfy changing consumer preferences in health, fitness, and wellness, with potential impacts on revenue if new offerings are not accepted[210]. - Macroeconomic conditions, including inflation and unemployment, could adversely affect discretionary spending and demand for the company's services and products[198]. Miscellaneous Risks - The company faces potential health and safety claims related to customer injuries at studios, which could adversely affect its reputation and financial condition[221]. - The company has identified material weaknesses in internal controls over financial reporting for the years ended December 31, 2020, and 2019, which have since been remediated as of December 31, 2021[327]. - The company has experienced fluctuations in quarterly results and operating metrics, making future performance difficult to predict[249]. - The use of social media poses risks to the company's reputation, as negative commentary can spread quickly and impact consumer perception[255].