What changed in this filing

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Item 1. Financial Statements

2022-05-13 compared with 2021-11-12 · 627 added, 704 removed, 766 unchanged (63% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

(amounts in thousands, except per share amounts)

September 30,

(amounts in thousands, except share and per share amounts)

Current Assets:

6 unchanged sentences

Property and equipment, net

Right-of-use assets

Intangible assets, net

1 unchanged sentence

Notes receivable from franchisees, net of current portion (Note 10)

Liabilities and Equity (Deficit)

Liabilities, redeemable convertible preferred stock and deficit

Current Liabilities:

Accounts payable

Accrued expenses (Note 9)

Accrued expenses

Deferred revenue, current portion

Notes payable (Note 9)

Notes payable

Current portion of long-term debt

4 unchanged sentences

Long-term debt, net of current portion, discount and issuance costs

Lease liability

Other liabilities

2 unchanged sentences

Redeemable convertible preferred stock, $ 0.0001 par value, 400,000 shares authorized, 200,000

shares issued and outstanding as of September 30, 2021, no shares authorized, issued and

outstanding as of December 31, 2020

Redeemable noncontrolling interest

Member’s/Stockholders' equity (deficit):

Undesignated preferred stock, $ 0.0001 par value, 4,600,000 shares authorized, none issued and

outstanding as of September 30, 2021, no shares authorized, issued and outstanding as of

December 31, 2020

Class A common stock, $ 0.0001 par value, 500,000,000 shares authorized, 23,898,042 shares

issued and outstanding as of September 30, 2021, no shares authorized, issued and

outstanding as of December 31, 2020

Class B common stock, $ 0.0001 par value, 500,000,000 shares authorized, 22,963,246 shares

issued and outstanding as of September 30, 2021, no shares authorized, issued and

outstanding as of December 31, 2020

shares issued and outstanding as of March 31, 2022 and December 31, 2021

Stockholders' equity (deficit):

Undesignated preferred stock, $ 0.0001 par value, 4,600,000 shares authorized, none issued

and outstanding as of March 31, 2022 and December 31, 2021

Class A common stock, $ 0.0001 par value, 500,000,000 shares authorized, 24,249,205 and

23,898,042 shares issued and outstanding as of March 31, 2022 and December 31, 2021,

Class B common stock, $ 0.0001 par value, 500,000,000 shares authorized, 24,564,155 and

22,968,674 shares issued and outstanding as of March 31, 2022 and December 31, 2021,

Additional paid-in capital

Member’s contribution

Receivable from Member/shareholder (Note 9)

Receivable from shareholder (Note 10)

Accumulated deficit

Total stockholders'/member’s equity (deficit)

Total liabilities and equity (deficit)

Total stockholders' deficit attributable to Xponential Fitness, Inc.

Noncontrolling interests

Total stockholders' deficit

Total liabilities, redeemable convertible preferred stock and deficit

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

Condensed Consolidated S tatements of Operations

(amounts in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in thousands, except share and per share amounts)

Three Months Ended March 31,

Revenue, net:

11 unchanged sentences

Marketing fund expense

Acquisition and transaction expenses (income)

Acquisition and transaction expenses

Total operating costs and expenses

Operating income (loss)

Operating loss

Other (income) expense:

1 unchanged sentence

Interest expense (Note 10)

Gain on debt extinguishment

Total other expense

Loss before income taxes

Net loss attributable to redeemable noncontrolling interests

Net loss attributable to noncontrolling interests

Net loss attributable to Xponential Fitness, Inc.

Earnings (loss) per share of Class A common stock:

Net loss per share of Class A common stock:

Weighted average shares of Class A common stock outstanding:

2 unchanged sentences

Condensed Consolidated Statement s of Changes to Stockholders'/Member’s Equity (Deficit)

(amounts in thousands)

(amounts in thousands, except share amounts)

Class A Common Stock

3 unchanged sentences

Receivable from

Member / Shareholder

Noncontrolling interests

Equity (Deficit)

Redeemable noncontrolling interest

Balance at December 31, 2021

Equity-based compensation

Parent contribution of Rumble assets

Distributions to Member

Payment received from Member, net

Balance at March 31, 2021

Equity-based compensation

Balance at June 30, 2021

Equity-based compensation prior to

Reorganization Transactions

Payment received from Member, net

Net loss prior to Reorganization Transactions

Effect of Reorganization Transactions

Issuance of Class A common stock at the

IPO, net of underwriting and offering costs

Purchase of shares from LCAT shareholders

Issuance of Class A common stock for underwriters'

option to purchase additional shares

Redemption of Class B shares

Vesting of Class B shares

Conversion of Class B shares to Class A shares

Payment of preferred stock dividend

Adjustment of preferred stock to redemption value

Equity-based compensation after

Reorganization Transactions

Payment of preferred stock dividends

Adjustment for recognition of tax receivable

agreement and deferred tax liabilities

Net loss subsequent to Reorganization

Adjustment of redeemable noncontrolling interest

Balance at September 30, 2021

See accompanying notes to condensed consolidated financial statements.

Xponential Fitness, Inc.

Condensed Consolidated Statements of Changes to Stockholders'/Member’s Equity

(amounts in thousands)

Vesting of Class B Shares

Balance at March 31, 2022

Class A Common Stock

2 unchanged sentences

Member’s

Redeemable noncontrolling interest

Noncontrolling interests

Balance at December 31, 2020

Equity-based compensation

Payment received from Member, net

Member contributions

Parent contribution of Rumble assets

Distributions to Member

Payment received from Member, net

Balance at March 31, 2021

Equity-based compensation

Balance at June 30, 2020

Equity-based compensation

Member contributions

Balance at September 30, 2020

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(amounts in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

1 unchanged sentence

Depreciation and amortization

Amortization and write off of debt issuance cost

Amortization and write off of discount on long-term debt

Amortization of debt issuance cost

Amortization of discount on long-term debt

Change in contingent consideration from acquisitions

Bad debt expense

Adjustment for recognition of TRA and deferred tax liability

Bad debt expense (recovery)

Equity-based compensation

Non-cash interest

Gain on debt extinguishment

Loss from disposal of assets

Impairment of long-lived assets

Gain on disposal of assets

Changes in assets and liabilities:

1 unchanged sentence

Prepaid expenses and other current assets

Operating lease right-of-use assets and operating lease liabilities

Deferred costs

2 unchanged sentences

Accrued expenses

Related party payable

Notes payable

Other current liabilities

11 unchanged sentences

Cash flows from financing activities:

Borrowings from line of credit

Payments on line of credit

Borrowings from long-term debt

1 unchanged sentence

Debt issuance costs

Proceeds from the issuance of Class A common stock, net of underwriting costs

Payments of costs related to IPO

Payments to purchase 750,000 LLC units/Class B Shares

Proceeds from issuance of redeemable convertible preferred stock, net of offering costs

Payment to purchase all of the shares of LCAT from LCAT shareholders

Payment of H&W Cash Merger Consideration

Payments to acquire the Preferred Units and LLC Units

Exchange of LLC units for Class B shares

Payment of preferred stock dividend and deemed dividend

Payment of contingent consideration

Payments on loans from related party (Note 9)

Member contributions

Distributions to Member

Receipts from Member, net (Note 10)

Net cash provided by financing activities

Increase in cash, cash equivalents and restricted cash

Net cash used in financing activities

Decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

4 unchanged sentences

(amounts in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental cash flow information:

1 unchanged sentence

Income taxes paid

Operating cash flows used in operating leases

Noncash investing and financing activity:

Capital expenditures accrued

Contingent consideration converted to Member contribution

Parent contribution of Rumble assets

Original contingent consideration related to Rumble

Rumble note receivable from shareholder

Adjustment of preferred stock to redemption value

Adjustment of redeemable noncontrolling interest

Deferred offering costs reclassified into equity

Accrued deemed dividend

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

(amounts in thousands, except share, per share and unit amounts)

Note 1 –

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(the "Company" or “XPO Inc.”), was formed as a Delaware corporation on January 14, 2020.

On July 23, 2021, the Company completed an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock at an initial public offering price of $ 12.00 per share.

Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a controlling ownership interest in Xponential Fitness LLC (“XPO LLC”) through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).

On July 23, 2021, the Company completed an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock and entered into a series of transactions to implement an internal reorganization.

Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being an ownership interest in Xponential Fitness LLC (“XPO LLC”) through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).

Information for any period prior to July 23, 2021 relates to XPO LLC.

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Prior to the formation of XPO Holdings, the Company was a wholly owned subsidiary of H&W Franchise Intermediate Holdings, LLC (the “Member”).

As of September 30, 2021, the Company’s portfolio of nine brands includes:

As of March 31, 2022 , the Company’s portfolio of ten brands consists of:

“Club Pilates,”

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a premier indoor cycling franchise;

“Stretch Lab,”

“StretchLab,”

a fitness concept offering one-on-one assisted stretching services;

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a rowing concept that provides an effective and efficient workout centered around the sport of rowing;

“Yoga Six,”

“YogaSix,”

a yoga concept that concentrates on connecting to one’s body in a way that is energizing;

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a running concept that offers treadmill-based high-intensity interval training and strength-training;

and “Rumble,”

“Rumble,”

a boxing concept that offers boxing-inspired group fitness classes, which was acquired on March 24, 2021;

and “BFT,”

a high-intensity interval training concept that combines functional, high-energy strength, cardio and conditioning-based classes, designed to achieve the unique health goals of its members, which was acquired on October 13, 2021.

The Company, through its brands, licenses its proprietary systems to franchisees who in turn operate studios to promote training and instruction programs to their club members within each vertical.

In addition to franchised studios, the Company operated 43 and 25 company-owned studios as of September 30, 2021 and 2020, respectively.

In addition to franchised studios, the Company operated 20 and 49 company-owned transition studios as of March 31, 2022 and 2021, respectively.

In connection with the IPO, XPO Inc.

entered into the following series of transactions to implement an internal reorganization, (the “Reorganization Transactions”).

entered into a series of transactions to implement an internal reorganization, (the “Reorganization Transactions”).

The pre-IPO members of XPO Holdings (the “Pre-IPO LLC Members”) who retained their equity ownership in the form of limited liability company units (the “LLC Units”), immediately following the consummation of the Reorganization Transactions are referred to as “Continuing Pre-IPO LLC Members.”

Because XPO Inc.

manages and operates the business and controls the strategic decisions and day-to-day operations of XPO LLC through its ownership of XPO Holdings and because it also has a substantial financial interest in XPO LLC through its ownership of XPO Holdings, it consolidates the financial results of XPO LLC and XPO Holdings, and a portion of its net income is allocated to the noncontrolling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of XPO Holdings’

manages and operates the business and controls the strategic decisions and day-to-day operations of XPO LLC through its ownership of XPO Holdings and because it also has a substantial financial interest in XPO LLC through its ownership of XPO Holdings, it consolidates the financial results of XPO LLC and XPO Holdings, and a portion of its net income/(loss) is allocated to the noncontrolling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of XPO Holdings’

net income or loss.

XPO Inc.’s amended and restated certificate of incorporation authorizes the issuance of two classes of common stock, Class A common stock and Class B common stock (collectively, “common stock”) and preferred stock and the certificates of designation adopted in connection with the IPO designated 200,000 shares of preferred stock as 6.50 % Series A-1 Convertible Preferred Stock (the “Series A-1 preferred stock”) and 200,000 shares of Preferred Stock as 6.50 % Series A Convertible Preferred Stock (the “Series A Convertible preferred stock”

and, together with the Series A-1 preferred stock, the “Convertible Preferred”).

Each share of common stock entitles its holder to one vote per share on all matters submitted to a vote of stockholders.

Prior to completion of the IPO, XPO Inc.

acquired, directly and indirectly, limited liability company units of XPO Holdings (the “LLC Units”) through (i) the contribution of LLC Units by H&W Investco, LP and Lag Fit, Inc.

in exchange for Class A common stock (the “IPO Contribution”) and (ii) the “Mergers,”

in which Rumble Holdings LLC and H&W Investco Blocker II, LP (the “Blocker Companies”) were contributed by their owners (the “Blocker Shareholders”) to XPO Inc.

in exchange for Class A common stock, and, in the case of H&W Investco Blocker II, LP a cash payment (the “H&W Cash Merger Consideration”), after which the Blocker Companies immediately merged with and into XPO Inc.

Prior to the completion of the IPO, XPO Inc.

issued and sold 200,000 shares of Convertible Preferred to certain affiliates of MSD Partners, L.P., a fund within the D.E.

Shaw group and a fund managed by Redwood Capital Management, LLC (the “Preferred Investors”) for aggregate cash proceeds of $ 200,000 , before deduction of offering costs.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

Each Continuing Pre-IPO LLC Member (other than LCAT Franchise Fitness Holdings, Inc.

(“LCAT”) was issued a number of shares of Class B common stock equal to the number of vested LLC Units held by such Continuing Pre-IPO LLC Member.

Under the Limited Liability Company Agreement of XPO Holdings (the “Amended LLC Agreement”), holders of LLC Units (other than XPO Inc.) have the right, from and after the completion of the IPO (subject to the terms of the Amended LLC Agreement), to require XPO Holdings to redeem all or a portion of their LLC Units for, at XPO Inc.’s election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume-weighted average market price of one share of Class A common stock for each LLC Unit redeemed (subject to customary adjustments) or the net proceeds from a substantially contemporaneous offering of Class A common stock in accordance with the terms of the Amended LLC Agreement.

Additionally, in the event of a redemption request from a holder of LLC Units, XPO Inc.

may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption.

Shares of Class B common stock will be cancelled on a one-for-one basis if XPO Inc., following a redemption request from a holder of LLC Units, redeems or exchanges LLC Units of such holder pursuant to the terms of the Amended LLC Agreement.

used the net proceeds from the IPO, together with the net proceeds received from the sale of Convertible Preferred to (i) acquire newly issued preferred units of XPO Holdings (the “Preferred Units”) and LLC Units, (ii) purchase all of the shares of LCAT from LCAT shareholders and (iii) pay the H&W Cash Merger Consideration.

The Company evaluated the fair value of shares being purchased from LCAT and determined that the payment exceeded the fair value by $ 6,500 , which was recorded as a deemed dividend and will be paid in quarterly installments through June 2022 (see Note 2 accrued expenses).

After the acquisition of LCAT from LCAT shareholders, LCAT merged with and into XPO Inc., after which XPO Inc.

owns directly the LLC Units previously held by LCAT.

entered into a tax receivable agreement (“TRA”) that obligates it to make payments to the Continuing Pre-IPO LLC Members, the Blocker Shareholders and any future party to the TRA (the “TRA parties”) in the aggregate generally equal to 85 % of the applicable cash savings realized as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’

allocable share of existing tax basis), (ii) increases in XPO Inc.’s allocable share of existing tax basis and tax basis adjustments that may result from (x) the IPO Contribution, the redemption of Class A-5 Units of H&W Franchise Holdings, LLC (the “Class A-5 Units”) in connection with the IPO (the “Class A-5 Unit Redemption”), and the purchase of LLC Units from Continuing Pre-IPO LLC Members in the IPO, (y) future taxable redemptions and exchanges of LLC Units by Continuing Pre-IPO LLC Members, and (z) certain payments made under the TRA, and (iii) deductions in respect of interest under the TRA.

will retain the benefit of the remaining 15 % of these tax savings.

XPO Holdings used the proceeds from the issuance of LLC Units and Preferred Units (i) to repay approximately $ 116,059 of outstanding borrowings under the Term Loan (see Note 8), including prepayment penalties and interest, (ii) to pay fees and expenses of approximately $ 6,700 in connection with the IPO and the Reorganization Transactions, (iii) to pay approximately $ 20,500 in the Class A-5 Unit Redemption for the Class A-5 Units redeemed from certain of the Continuing Pre-IPO Members and (iv) the remainder for working capital.

The corporate structure following the completion of the IPO, as described above, is commonly referred to as an “Up-C”

structure, which is used by partnerships and limited liability companies when they undertake an initial public offering of their business.

The Up-C structure will allow Continuing Pre-IPO LLC Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through”

entity, for income tax purposes following the IPO.

Immediately following the closing of the IPO, XPO LLC is the predecessor of the Company for financial reporting purposes.

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As a result, the condensed consolidated financial statements of the Company recognize the assets and liabilities received in the Reorganization Transactions at their historical carrying amounts, as reflected in the historical consolidated financial statements of XPO LLC.

The Company will consolidate XPO LLC on its condensed consolidated financial statements and record a noncontrolling interest related to the Class B units held by the Class B stockholders on its condensed consolidated balance sheet and statement of operations.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

The Company consolidates XPO LLC on its condensed consolidated financial statements and records a noncontrolling interest related to the Class B units held by the Class B stockholders on its condensed consolidated balance sheet and statement of operations.

Basis of presentation –

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

In the opinion of management, the Company has made all adjustments necessary to present fairly the condensed consolidated statements of operations, balance sheets, changes in stockholders'/member’s equity, and cash flows for the periods presented.

Such adjustments are of a normal, recurring nature.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2020 consolidated financial statements disclosed in the final prospectus filed with the Securities and Exchange Commission (the “SEC”) on July 26, 2021 in connection with the IPO.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”).

Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

On March 24, 2021, the Company acquired the rights to franchise the Rumble concept and has included the results of operations of Rumble in its condensed consolidated statement of operations from that date forward.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

On October 13, 2021 and March 24, 2021, the Company acquired the rights to franchise the BFT and Rumble concepts, respectively, and has included the results of operations of BFT and Rumble in its condensed consolidated statement of operations from the acquisition dates forward.

See Note 3 for additional information.

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Summary of Significant Accounting Policies

Segment information –T he Company operates in one reportable and operating segment.

During the three and nine months ended September 30, 2021 and 2020, the Company did not generate material international revenues and as of September 30, 2021 and December 31, 2020 , the Company did not have material assets located outside of the United States.

Segment and geographic information –T he Company operates in one reportable and operating segment.

During the three months ended March 31, 2022 and 2021 , the Company generated revenue outside the United States of $ 3,380 and $ 315 , respectively.

As of March 31, 2022 and December 31, 2021 , the Company did not have material assets located outside of the United States.

Cash, cash equivalents and restricted cash –

1 unchanged sentence

The Company has marketing fund restricted cash, which can only be used for activities that promote the Company’s brands.

Restricted cash was $ 1,139 and $ 999 at September 30, 2021 and December 31, 2020 , respectively.

Restricted cash was $ 1,596 and $ 1,427 at March 31, 2022 and December 31, 2021 , respectively.

Accounts receivable and allowance for doubtful accounts –

5 unchanged sentences

Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

At September 30, 2021 and December 31, 2020 , the allowance for doubtful accounts was $ 2,691 and $ 2,405 , respectively.

Deferred offering costs –

Deferred offering costs, primarily consisted of legal, accounting and other fees relating to the Company’s initial public offering.

As of December 31, 2020, the Company had capitalized $ 4,429 of deferred offering costs within prepaid expenses and other current assets in the condensed consolidated balance sheet.

Upon consummation of the IPO in July 2021, total deferred offering costs of $ 7,650 were reclassified as additional paid-in capital within stockholders' equity and recorded against the proceeds of the IPO.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

At March 31, 2022 and December 31, 2021 , the allowance for doubtful accounts was $ 1,413 and $ 2,193 , respectively.

Accrued expenses –

Accrued expenses consisted of the following:

September 30,

Accrued compensation

1 unchanged sentence

Sales tax accruals

Accrued offering costs

Legal accruals

Accrued deemed dividend

3 unchanged sentences

The Company does not have any components of other comprehensive income recorded within the consolidated financial statements and therefore does not separately present a consolidated statement of comprehensive income in the condensed consolidated financial statements.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

Fair value measurements –

ASC Topic 820, Fair Value Measurements and Disclosures , applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures , applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.

ASC 820 establishes a valuation hierarchy for disclosures of the inputs to valuations used to measure fair value.

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The Company’s financial instruments include cash, restricted cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable.

The carrying amounts of these financial instruments approximates fair value due to their short maturities.

The carrying amounts of these financial instruments approximates fair value due to their short maturities, proximity of issuance to the balance sheet date or variable interest rate.

Redeemable convertible preferred stock –

T he Convertible Preferred becomes redeemable at the option of the holder as of a specific date unless an event that is not probable of occurring happens before that date.

T he redeemable convertible preferred stock (the “Convertible Preferred”) becomes redeemable at the option of the holder as of a specific date unless an event that is not probable of occurring happens before that date.

Therefore, the Company determined that it is probable that the Convertible Preferred will become redeemable based on the passage of time.

The Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period.

Redeemable noncontrolling interests –

Redeemable noncontrolling interests represent the economic interests of XPO LLC held by Class B common stockholders.

Income or loss is attributed to the redeemable noncontrolling interests based on the weighted average LLC interests outstanding during the period.

The redeemable noncontrolling interests' ownership percentage can fluctuate over time as the Class B common stockholders elect to exchange their shares of Class B common stock for Class A common stock.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

Noncontrolling interests –

Noncontrolling interests represent the economic interests of XPO LLC held by Class B common stockholders.

Income or loss is attributed to the noncontrolling interests based on the weighted average LLC interests outstanding during the period.

The noncontrolling interests' ownership percentage can fluctuate over time as the Class B common stockholders elect to exchange their shares of Class B common stock for Class A common stock.

Earnings (loss) per share –

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Earnings per share data is not provided in the condensed consolidated financial statements for periods prior to the IPO as XPO LLC was a single-member limited liability company with only one unit.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

Income taxes –

The Company is the managing member of XPO Holdings and, as a result, consolidates the financial results of XPO Holdings in the unaudited condensed consolidated financial statements.

XPO Holdings is a pass-through entity for U.S.

federal and most applicable state and local income tax purposes following a corporate reorganization effected in connection with the IPO.

As an entity classified as a partnership for tax purposes, XPO Holdings is not subject to U.S.

federal and certain state and local income taxes.

Any taxable income or loss generated by XPO Holdings is passed through to and included in the taxable income or loss of its members, including the Company.

The Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated from XPO Holdings, based on our 51.0 % economic interest in XPO Holdings.

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities (“DTAs”

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If the Company determines that it would be able to realize DTAs in the future in excess of the net recorded amount, an adjustment to the DTA valuation allowance would be made, which would reduce the provision for income taxes.

The Company records uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 740 on the basis of a two-step process in which the Company (1) determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company records uncertain tax positions in accordance with ASC Topic 740 on the basis of a two-step process in which the Company (1) determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company does not have any uncertain tax positions.

Tax Receivable Agreement –

The Company expects to obtain an increase in its share of tax basis in the net assets of XPO Holdings when Class B units are exchanged by the holders of Class B units for shares of Class A common stock of the Company and upon certain qualifying transactions.

Each change in outstanding shares of Class A common stock of the Company results in a corresponding change in the Company's ownership of Class A units of XPO Holdings.

The Company intends to treat any exchanges of Class B units as direct purchases of LLC interests for U.S.

federal income tax purposes.

These increases in tax basis may reduce the amounts that XPO Inc.

would otherwise pay in the future to various taxing authorities.

They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

In connection with the IPO, the Company entered into a TRA with the TRA Parties.

In the event that such parties exchange any or all of their Class B units for Class A common stock, the TRA requires the Company to make payments to such holders for 85 % of the tax benefits realized, or in some cases deemed to be realized, by the Company by such exchange as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’

allocable share of existing tax basis), (ii) increases in the Company's allocable share of existing tax basis and tax basis adjustments that

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

may result from (x) the IPO Contribution and the Class A-5 Unit Redemption, (y) future taxable redemptions and exchanges of LLC Units by Continuing Pre-IPO LLC Members and (z) certain payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”).

The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits.

The Company expects to benefit from the remaining 15 % of any tax benefits that it may actually realize.

The TRA Payments are not conditioned upon any continued ownership interest in XPO Holdings or the Company.

To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid.

The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates each year and the tax rate then applicable.

The Company calculates the liability under the TRA using a complex TRA model, which includes an assumption related to the fair market value of assets.

The payment obligations under the TRA are obligations of XPO Inc.

and not of XPO Holdings.

Payments are generally due under the TRA within a specified period of time following the filing of the Company’s tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return.

The TRA provides that if (i) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur, (ii) there is a material breach of any material obligations under the TRA;

or (iii) the Company elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any Class B units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination.

The Company recognizes potential interest and penalties, if any, related to income tax matters in income tax expense.

The Company did no t incur any interest or penalties for the three months ended March 31, 2022 and 2021 .

Recently adopted accounting pronouncements –

Accounting for income taxes –

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No.

2019-02, “Income Taxes (Topic 740):

Simplifying the Account for Income Taxes.”

The FASB issued this update as part of its simplification initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness.

The main provisions include the removal of the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items, the exception to the general methodology for calculating in an interim period when the year-to-date loss exceeds anticipated loss for the year, and requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.

ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020, for public business entities (“PBE”).

The Company has adopted ASU 2019-12 for the quarter ended September 30, 2021, its first quarter as a PBE.

However, there was no cumulative effect to be recognized upon adoption.

Debt –

In August 2020, the FASB issued ASU 2020-06, “Debt –

Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –

Contracts in Entity’s Own Equity (Subtopic 815-40).”

ASU 2020-06 simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity’s own equity and modifies the guidance on diluted earnings per share calculations as a result of these changes.

ASU 2020-06 will take effect for public entities for annual reporting periods beginning after December 15, 2021, and interim periods with those fiscal years.

As permitted by the standard, the Company has elected to early adopt this standard in January of 2021 with no impact upon adoption.

Recently issued accounting pronouncements –

Accounting for leases –

In February 2016, the FASB issued ASU No.

On January 1, 2022, the Company adopted ASU No.

2016-02, “Leases (Topic 842)”

This new topic, which supersedes “Leases (Topic 840),”

applies to all entities that enter into a contract that is or contains a lease, with some specified scope exemptions.

This new standard requires lessees to evaluate whether a lease is a finance lease using criteria similar to those a lessee uses under current accounting guidance to determine whether it has a capital lease.

Leases that do not meet the criteria for classification as finance leases by a lessee are to be classified as operating leases.

Under the new standard, for each lease classified as an operating lease, lessees are required to recognize on the balance sheet:

(i) a right-of-use (“ROU”) asset representing the right to use the underlying asset for the lease term;

and (ii) a lease liability for the

utilizing the effective date method for the initial application.

Under Topic 842, the Company elected the package of practical expedients to not reassess (1) the classification of existing leases, (2) whether any expired or existing contracts are or contain leases and (3) initial direct costs for any existing leases.

The Company did not elect the practical expedient pertaining to land easements, as it is not applicable to its leases.

Additionally, the Company did not elect to use the practical expedient that permits a reassessment of lease terms for existing leases using hindsight.

The Company's lease agreements generally contain lease and non-lease components.

Non-lease components primarily include payments for common area maintenance.

The Company applied the practical expedient as an accounting policy for classes of underlying assets that have fixed payments for non-lease components, to not separate non-lease components from lease components and instead to account for them together as a single lease component, which increases the amount of lease assets and corresponding liabilities.

Payments under lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease assets and liabilities.

As a result of the adoption of Topic 842, the condensed consolidated financial statements for 2022 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy.

This standard requires all lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, for all leases with a term greater than 12 months.

The adoption of the new lease standard had a significant impact on the Company's condensed consolidated balance sheets due to the recognition of $ 17,597 of right-of-use assets for operating leases and a corresponding lease obligation of $ 21,826 on January 1, 2022.

The adoption of Topic 842 did not have a material impact on the Company's lease classification or on its statements of operations and liquidit y.

See Note 9, for information regarding the Company's adoption of Topic 842 and the Company's undiscounted future lease payments and the timing of those payments.

Recently issued accounting pronouncements –

The Company qualifies as an “emerging growth company”

under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies.

As an emerging growth company, the JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies.

The Company has elected to use this extended transition period.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

obligation to make lease payments over the lease term.

Lessees can make an accounting policy election, by class of underlying asset, to not recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise.

This standard also requires an entity to disclose key information (both qualitative and quantitative) about the entity’s leasing arrangements.

Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply.

Management is currently evaluating the impact of this new guidance on the consolidated financial statements.

In June 2020, the FASB issued ASU No.

2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842),”

which defers the effective date of Leases (Topic 842) to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

(amounts in thousands, except share, per share and unit amounts)

Credit Losses –

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).”

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No.

2016-13, “Financial Instruments—Credit Losses (Topic 326).”

The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables.

The new guidance will be effective for the Company’s annual and interim periods beginning after December 15, 2022.

The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.

The Company is currently evaluating the impact of the adoption of the standard on the condensed consolidated financial statements.

Reference Rate Reform –

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848):

In March 2020, the FASB issued ASU No.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”

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The Company may elect to apply the guidance prospectively through December 31, 2022.

The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.

The Company is currently evaluating the impact of the adoption of the standard on the condensed consolidated financial statements.

Business Combinations –

In October 2021, the FASB issued ASU No.

2021-08, “Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.”

ASU 2021-08 primarily addresses the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination.

The amendment improves comparability by specifying for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities.

This results in better comparability for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years with early adoption permitted.

The Company is currently evaluating the impact of the adoption of the standard on the condensed consolidated financial statements.

Note 3 –

1 unchanged sentence

The Company completed the following acquisitions which contain Level 3 fair value measurements related to the recognition of goodwill and intangibles.

During the nine months ended September 30, 2021 , the Company entered into agreements with franchisees under which the Company repurchased five studios to operate as company-owned studios.

During the three months ended March 31, 2021 , the Company entered into an agreement with a franchisee under which the Company repurchased two studios to operate as company-owned transition studios.

The aggregate purchase price for the acquisitions was $ 245 , less $ 10 of net deferred revenue and deferred costs resulting in total purchase consideration of $ 235 .

3 unchanged sentences

Total purchase price

The fair value of reacquired franchise rights was based on the excess earnings method and are considered to have an approximate five to eight-year life.

The fair value of reacquired franchise rights was based on the excess earnings method and are considered to have an approximate eight-year life.

Inputs used in the methodologies primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved.

The acquisition was not material to the results of operations of the Company.

During the nine months ended September 30, 2021 , the Company refranchised 28 company-owned studios for aggregate proceeds of $ 318 and recorded a loss on disposal of the related assets of $ 362 .

The Company is actively seeking to refranchise the remaining company-owned studios.

If the Company is not able to refranchise the studios by December 31, 2021, it may choose to close the studios to the extent they are not profitable at that time.

During the three months ended March 31, 2022 and 2021 , the Company refranchised nine and four company-owned transition studios, respectively, and received no proceeds and recorded no gain or loss on disposal of the studio assets.

The Company is actively seeking to refranchise the remaining company-owned transition studios, although it expects to hold a small number of strategic transition studios for a limited time while facilitating the transfer of these studios to new or existing franchisees.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

When the Company believes that a studio will be refranchised for a price less than its carrying value, but does not believe the studio has met the criteria to be classified as held for sale, the Company reviews the studio for impairment.

The Company evaluates the recoverability of the studio assets by comparing estimated sales proceeds plus holding period cash flows, if any, to the carrying value of the studio.

For studio assets that are not deemed to be recoverable, the Company recognizes impairment for any excess of

For studio assets that are not deemed to be recoverable, the Company recognizes impairment for any excess of carrying value over the fair value of the studios, which is based on the expected net sales proceeds.

During the three months ended March 31, 2022 and 2021 , the Company did no t record any impairment charge, which is a level 3 measurement.

On October 13, 2021 , the Company entered into an Asset Purchase Agreement (“APA”) with GRPX Live Pty Ltd., an Australian corporation, and its affiliates (the “Seller”) whereby the Company acquired certain assets relating to the concept and brand known as BFT.

Assets acquired include franchise rights, brand, intellectual property and the rights to manage and license the franchise business (the “Franchise System”).

The Company also assumed certain contingent liabilities associated with the purchased assets and provided certain indemnifications to the Seller.

This acquisition is expected to enhance the Company’s franchise offerings and provide a platf orm for future growth, which the Company believes is complementary to its portfolio of franchises.

Consideration for the transaction included cash of $ 60,000 AUD ($ 44,322 USD based on the currency exchange rate as of the pur chase date).

In addition, the Company agreed to pay contingent consideration to the Seller consisting of quarterly cash payments based on the sales of the Franchise System and equipment packages in the U.S.

and Canada, as well as a percentage of royalties collected by the Company, provided that aggregate minimum payments of $ 5,000 AUD (approximately $ 3,694 USD based on the currency exchange rate as of the purchase date) are required to be paid to the Seller for the two-year period ending December 31, 2023 and the aggregate amount of such payments for the two-year period ending December 31, 2023 is subject to a maximum of $ 14,000 AUD (approximately $ 10,342 USD based on the currency exchange rate as of the purchase date).

Based on the purchase price allocation, the Company determined that the fair value of the estimated contingent consideration liability as of the acquisition date is $ 9,388 and is recorded in accrued expenses and contingent consideration from acquisitions in the condensed consolidated balance sheets.

See Note 16 for additional information.

In addition, the Company entered into a Master Franchise Agreement (“MFA”) with an affiliate of the Seller (the “Master Franchisee”), pursuant to which the Company granted the Master Franchisee the master franchise rights for the BFT TM brands in Australia, New Zealand and Singapore.

In exchange, the Company will receive certain fees and royalties, including a percentage of the revenue generated by the Master Franchisee under the MFA.

The MFA contains an option for the Company to repurchase the master franchise rights granted under the MFA in either 2023 or 2024 at a purchase price based on the Master Franchisee’s EBITDA.

If the Company (or a designee of the Company) does not exercise the option pursuant to the terms of the MFA, then the Company might be required to pay a cancellation fee to the Master Franchisee which might be material to the Company.

If the Master Franchisee rejects an offer to repurchase the franchise rights, then the cancellation fee is not required to be paid.

At the acquisition date, there were certain claims and lawsuits against the Seller for which the Company has agreed to indemnify the Seller.

The claims and lawsuits relate to alleged patent and trademark infringements.

Plaintiff alleges that plaintiff has suffered, and is likely to continue to suffer, loss and damage due to breach of the patents by the Seller and is seeking damages or in the alternative an account of profits.

The Seller has filed a cross-claim alleging that the defendant’s two Australian patents are, and always have been, invalid and that they should be revoked.

The Court held a trial in December 2020, and on February 14, 2022, the Court issued a decision holding that the Plaintiff’s claims of infringement were invalid and that even if they were valid, the Seller did not infringe upon these patents and trademarks.

In addition, the Plaintiff has brought related claims for patent infringement against the Seller in the United States District Court for Delaware, and these actions are currently pending.

As a part of the purchase accounting, the Company has not recorded any liability for the potential cancelation fee (which was evaluated in accordance with ASC 805, Business Combinations ) and potential legal indemnification liability (which was evaluated in accordance with ASC 450, Contingencies ).

The Company continues to evaluate additional information in relation to these matters, including information that existed as of the acquisition date.

The transaction was accounted for as a business combination using the acquisition method of accounting, which requires the assets acquired and the liabilities assumed to be recorded at their respective fair value as of the date of the transaction.

The excess of the purchase price over the estimated fair value of the net assets and liabilities was allocated to goodwill.

The Company determined the estimated fair values after review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and estimates made by management.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

carrying value over the fair value of the studios, which is based on the expected net sales proceeds.

During the nine months ended September 30, 2021 , the Company recorded impairment charges of $ 781 , which is a level 3 measurement and is included in selling, general and administrative expenses.

(amounts in thousands, except share, per share and unit amounts)

The allocation of the purchase price presented below was based on management's estimate of the fair values of the acquired assets and assumed liabilities using valuation techniques including income, cost and market approaches.

These valuation techniques incorporate the use of expected future revenues, cash flows and growth rates as well as estimated discount rates commensurate with the risk involved.

Trademark was valued using the relief from royalty method and is considered to have a 10 -year life.

Franchise agreements were valued using the excess earnings method and are considered to have an approximate 8.5 -year life.

Internal use software was valued using the cost method and is considered to have a three-year life.

The goodwill of $ 21,210 arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and BFT.

The acquisition was not material to the results of operations of the Company.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:

Franchise agreements

Internal use software

Total purchase price

Goodwill and intangible assets recognized from this acquisition are expected to be tax deductible.

On March 24, 2021, the Parent entered into a contribution agreement with Rumble Holdings LLC;

3 unchanged sentences

Additional units equivalent to 2,024,445 shares of Class A common stock were issued to the Selling Parties, which units will vest if share prices ranging from $ 50.62 to $ 75.56 are met, or if the Company or the Parent has a change of control.

In connection with the contribution agreement, the Parent agreed to provide up to $ 20,000 in debt financing to the Selling Parties.

In connection with the contribution agreement, th e Parent agreed to provide up to $ 20,000 in debt financing to the Selling Parties.

See Note 8 for additional information.

8 unchanged sentences

trade name and use certain related assets for the purpose of establishing a franchise system.

This acquisition is expected to enhance the Company’s franchise offerings and provide a platform for future growth, which the Company believes is complimentary to its portfolio of franchises.

This acquisition is expected to enhance the Company’s franchise offerings and provide a platform for future growth, which the Company believes is complementary to its portfolio of franchises.

The transaction was accounted for as a business combination using the acquisition method of accounting, which requires the assets acquired to be recorded at their respective fair value as of the date of the transaction.

4 unchanged sentences

Total purchase price

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

The consideration resulted in goodwill of $ 8,183 , which consists largely of the synergies and economies of scale expected from combining the assets of Rumble with the Company’s franchise servicing operations.

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Goodwill and intangible assets recognized from this acquisition are not expected to be tax deductible.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

During the three and nine months ended September 30, 2021 , the Company incurred $ 0 and $ 307 , respectively, of transaction costs directly related to the acquisitions, which is included in acquisition and transaction expenses in the condensed consolidated statements of operations.

During the three months ended March 31, 2021 , the Company incurred $ 229 of transaction costs directly related to the Rumble acquisit ion, which is included in acquisition and transaction expenses in the condensed consolidated statements of operations.

Note 4 –

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The Company classifies these contract liabilities as either current deferred revenue or non-current deferred revenue in the condensed consolidated balance sheets based on the anticipated timing of delivery.

The following table reflects the change in franchise development and brand fee contract liabilities for the nine months ended September 30, 2021 .

The following table reflects the change in franchise development and brand fee contract liabilities for the three months ended March 31, 2022 .

Other deferred revenue amounts of $ 14,564 are excluded from the table as the original expected duration of the contracts is one year or less .

6 unchanged sentences

during the year

Balance at September 30, 2021

The following table illustrates estimated revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of September 30, 2021.

Balance at March 31, 2022

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

The following table illustrates estimated revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of March 31, 2022.

The expected future recognition period for deferred franchise development fees related to unopened studios is based on management’s best estimate of the beginning of the franchise license term for those studios.

2 unchanged sentences

Remainder of 2022

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

The following table reflects the components of deferred revenue:

September 30,

Franchise and area development fees

10 unchanged sentences

The associated expense is classified within costs of franchise and service revenue in the condensed consolidated statements of operations.

At September 30, 2021 and December 31, 2020 , there were approximately $ 3,097 and $ 2,553 of current deferred costs and approximately $ 39,537 and $ 35,417 in non-current deferred costs, respectively.

The Company recognized franchise sales commission expense of approximately $ 1,513 and $ 3,962 , for the three and nine months ended September 30, 2021 , respectively, and $ 1,201 and $ 3,300 for the three and nine months ended September 30, 2020 , respectively.

At March 31, 2022 and December 31, 2021 , there were approximately $ 3,221 and $ 3,071 of current deferred costs and approximately $ 42,355 and $ 41,941 in non-current deferred costs, respectively.

The Company recognized approximately $ 2,553 and $ 1,009 in franchise sales commission expense for the three months ended March 31, 2022 and 2021 , respectively.

Note 5 –

Notes Receivable

The Company has provided unsecured advances or extended financing related to the purchase of the Company’s equipment or franchise fees to various franchisees.

The Company previously provided unsecured advances or extended financing related to the purchase of the Company’s equipment or franchise fees to various franchisees.

These arrangements have terms of up to 18 months with interest typically based on LIBOR plus 700 basis points with an initial interest free period.

The Company also provides loans to various franchisees through its relationship with Intensive Capital Inc.

The Company also provided loans to various franchisees through its relationship with Intensive Capital Inc.

(“ICI”) (see Note 10 for additional information).

1 unchanged sentence

Activity related to these arrangements is presented within operating activities in the condensed consolidated statements of cash flows.

The Company has also provided unsecured loans for the establishment of new or transferred franchise studios to various franchisees.

These loans have terms of up to ten years and bear interest at fixed rates ranging from 7.75 % to 15 %, or variable rates based on LIBOR plus a specified margin .

The Company has also provided loans for the establishment of new or transferred franchise studios to various franchisees.

These loans have terms of up to ten years and bear interest at a stated fixed rate ranging from 0 % to 15 %, or variable rates based on LIBOR plus a specified margin .

The Company accrues interest as an addition to the principal balance as the interest is earned.

Activity related to these loans is presented within investing activities in the condensed consolidated statements of cash flows.

At September 30, 2021 and December 31, 2020 , the principal balance of the notes receivable was approximately $ 6,121 and $ 5,773 , respectively.

On a periodic basis, the Company evaluates its notes receivable balance and establishes an allowance for doubtful accounts, based on a number of factors, including evidence of the franchisee’s ability to comply with the terms of the notes, economic conditions and historical collections.

Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

At September 30, 2021 and December 31, 2020 , the Company has reserved approximately $ 1,889 and $ 1,909 as uncollectible notes receivable, respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

(amounts in thousands, except share, per share and unit amounts)

At March 31, 2022 and December 31, 2021 , the principal balance of the notes receivable was approximately $ 7,953 and $ 7,473 , respectively.

The Company evaluates loans for collectability upon issuance of the loan and records interest only if the loan is deemed collectable.

To the extent a loan becomes past due, the Company ceases the recording of interest in the period that a reserve on the loan is established.

Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

At March 31, 2022 and December 31, 2021 , the Company has reserved approximately $ 2,327 and $ 2,139 as uncollectible notes receivable, respectively.

Note 6 –

1 unchanged sentence

Property and equipment consisted of the following:

September 30,

Furniture and equipment

4 unchanged sentences

Total property and equipment

Depreciation expense was $ 705 and $ 2,159 , for the three and nine months ended September 30, 2021 , respectively, and $ 662 and $ 1,900 for the three and nine months ended September 30, 2020 , respectively.

Depreciation expense for the three months ended March 31, 2022 and 2021 was $ 845 and $ 716 , respectively.

Note 7 –

Goodwill and Intangible Assets

Goodwill represents the excess of cost over the fair value of identifiable net assets acquired related to the original purchase of the various franchise businesses and acquisition of company-owned studios.

Goodwill is not amortized but is tested annually for impairment or more frequently if indicators of potential impairment exist.

During the nine months ended September 30, 2021 , there was an increase of $ 8,183 in previously reported goodwill due to the acquisition of Rumble as discussed in Note 3.

Goodwill totaled $ 147,863 and $ 139,680 at September 30, 2021 and December 31, 2020, respectively.

The Company has not identified any events or circumstances at March 31, 2022 that would require an interim goodwill impairment test.

The carrying value of goodwill at March 31, 2022 and December 31, 2021 totaled $ 169,073 .

Intangible assets consisted of the following:

September 30, 2021

March 31, 2022

December 31, 2021

Franchise agreements

Reacquired franchise rights

Customer relationships

Non-compete agreement

4 unchanged sentences

Total intangible assets

Amortization expense was $ 1,671 and $ 4,679 , for the three and nine months ended September 30, 2021 , respectively, and $ 1,294 and $ 3,753 for the three and nine months ended September 30, 2020, respectively.

Amortization expense was $ 2,648 and $ 1,339 , for the three months ended March 31, 2022 and 2021, respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

(amounts in thousands, except share, per share and unit amounts)

The anticipated future amortization expense of intangible assets is as follows:

1 unchanged sentence

Note 8 –

On September 29, 2017, H&W Franchise Holdings, LLC (“Parent”) obtained a five -year $ 55,000 term loan from a lender, along with a consortium of banks and other lenders (the “Prior Facility”).

The rights and obligations were then assigned to and assumed by the Company and St.

Gregory Holdco, LLC (“STG”), a subsidiary of the Parent immediately following the consummation of a related party recapitalization transaction.

The Prior Facility also included a $ 3,000 revolving credit line for general corporate purposes.

On June 28, 2018 and October 25, 2018, the Prior Facility was amended to increase the aggregate available borrowings to $ 145,000 , including a $ 10,000 revolving credit line, and to extend the maturity date to October 25, 2023 .

In December 2019, the Company entered into an amendment and waiver to the Prior Facility, pursuant to which, the Company agreed to pay monthly fees of $ 500 beginning on February 1, 2020, increasing by $ 500 on the first of each subsequent month until the amounts outstanding under the Prior Facility were repaid in full.

In addition, the interest rate margin above LIBOR was to increase by 1 % beginning on February 1, 2020, increasing by 1 % on the first of each subsequent month until the amounts outstanding under the Prior Facility were repaid in full.

Further, installment payments on the term loan were due in an amount equal to 1 % of the aggregate amount of term loans beginning on February 1, 2020.

In addition, penalties of up to $ 1,500 were to be incurred if certain information was not provided on the respective due dates through February 2020.

In February 2020, the Company entered into a further amendment to the Prior Facility that required a $ 30,000 principal payment, which was paid in February 2020 with the proceeds from an equity contribution (see Note 11).

The amendment also reverted to the prior quarterly installment payment schedule and amended the monthly fees beginning March 1, 2020 to $ 1,000 , increasing to $ 2,000 on August 1, 2020.

The required information was provided by the due date related to $ 1,000 of penalties imposed by the December 2019 amendment.

In February 2020, the Company paid $ 500 in penalties.

On February 28, 2020, the Company obtained a five-year $ 185,000 term loan from a lender, along with a consortium of other lenders (the “2020 Facility”).

2 unchanged sentences

The 2020 Facility had an interest rate based on a reference rate or LIBOR, plus an applicable margin.

The proceeds of the term loan were used to repay borrowings, interest and fees outstanding under the Prior Facility, and a $ 1,000 prepayment penalty on the Prior Facility.

In addition, $ 18,833 of the proceeds were distributed to the Member in March 2020.

The proceeds of the term loan were used to repay borrowings, interest and fees outstanding under the prior facility.

Principal payments of $ 925 were due quarterly beginning on June 30, 2020, and excess payments were required if the Company’s cash flows exceeded certain thresholds.

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and, together, the “Term Loans”).

The Company’s obligations under the Credit Agreement are guaranteed by the Member and certain of the Company’s material subsidiaries and are secured by substantially all of the assets of the Member and certain of the Company’s material subsidiaries.

The Company’s obligations under the Credit Agreement are guaranteed by XPO Holdings and certain of the Company’s material subsidiaries and are secured by substantially all of the assets of XPO Holdings and certain of the Company’s material subsidiaries.

Under the Credit Agreement, the Company is required to make:

(i) monthly payments of interest on the Term Loans and (ii) quarterly principal payments equal to 0.25 % of the original principal amount of the Term Loans.

Borrowings under the Term Loan

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

Facility bear interest at a per annum rate of, at the Company’s option, either (a) the specified LIBOR rate plus a margin of 6.50 % or (b) the Reference Rate (as defined in the Credit Agreement) plus a margin of 5.50 % ( 7.50 % at September 30, 2021).

Borrowings under the Term Loan Facility bear interest at a per annum rate of, at the Company’s option, either (a) the specified LIBOR rate plus a margin of 6.50 % or (b) the Reference Rate (as defined in the Credit Agreement) plus a margin of 5.50 % ( 7.50 % at March 31, 2022).

The Credit Agreement also contains mandatory prepayments of the Term Loans with:

(i) 50 % of the Member’s and its subsidiaries’

(i) 50 % of the XPO Holdings’

and its subsidiaries’

Excess Cash Flow (as defined in the Credit Agreement), subject to certain exceptions;

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Otherwise, the Term Loans may be paid without premium or penalty, other than customary breakage costs with respect to LIBOR Rate Term Loans.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

The Credit Agreement contains customary affirmative and negative covenants, including, among other things:

8 unchanged sentences

and (ix) restricting the issuance of equity.

As of September 30, 2021, the Company was in compliance with these covenants.

As of March 31, 2022, the Company was in compliance with these covenants.

The Credit Agreement also contains customary events of default, which could result in acceleration of amounts due under the Credit Agreement.

1 unchanged sentence

The Company received net proceeds of $ 207,760 after deducting original issue discount equal to 2.0 % of the gross amount of the borrowings under the Credit Agreement.

The proceeds of the Term Loan were used to repay principal, interest and fees outstanding under the 2020 Facility aggregating $ 195,633 (including a prepayment penalty of approximately $ 1,929 , which is included in interest expense for the nine months ended September 30, 2021 ) and for working capital and other corporate purposes.

The proceeds of the Term Loan were used to repay principal, interest and fees outstanding under the 2020 Facility aggregating $ 195,633 (including a prepayment penalty of approximately $ 1,929 , which is included in interest expense for the quarter ended June 30, 2021) and for working capital and other corporate purposes.

Principal payments of the Term Loan of $ 530 are due quarterly.

In July 2021, the Company repaid $ 115,000 of the principal balance of the Term Loans from proceeds of the IPO and Convertible Preferred.

In connection with the repayment, the Company incurred a prepayment penalty of $ 413 and wrote off a pro rata portion of debt issuance costs and debt discount aggregating $ 2,454 , which is included in interest expense for the three and nine months ended September 30, 2021.

On October 8, 2021, the Company entered into an amendment (the “

Amendment ”

) to the Credit Agreement.

The Amendment provides for, among other things, additional term loans in an aggregate principal amount of $ 38,000 (the “2021 Incremental Term Loan”), the proceeds of which were used to fund the BFT acquisition, and the payment of fees, costs and expenses related to the Amendment.

The Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2021 Incremental Term Loan) commencing on December 31, 2021 and (ii) amended the amount of the prepayment premium applicable in the event the 2021 Incremental Term Loan is prepaid within two years of the effective date of the Amendment.

In April 2020, the Company received a loan in the amount of $ 3,665 , pursuant to the Paycheck Protection Program (the “PPP”) administered by the U.S.

Small Business Administration.

The PPP is part of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which provides for forgiveness of up to the full principal amount and accrued interest of qualifying loans guaranteed under the PPP.

The PPP is part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides for forgiveness of up to the full principal amount and accrued interest of qualifying loans guaranteed under the PPP.

The loan was scheduled to mature April 17, 2022 , bore interest at 1 % per annum and required no payments during the first 16 months from the date of the loan .

In June 2021, the Company was notified that the PPP loan was forgiven.

The Company recorded the forgiveness, including accrued interest, as a gain on debt extinguishment in the condensed consolidated statement of operations for $ 3,707 for the nine months ended September 30, 2021.

The Company incurred debt issuance costs of $ 904 and $ 5,158 in the nine months ended September 30, 2021 and 2020 , respectively.

Debt issuance cost amortization amounted to approximately $ 372 and $ 5,722 for the three and nine months ended September 30, 2021 , respectively, and $ 289 and $ 2,790 in the three and nine months ended September 30, 2020, respectively.

Unamortized debt issuance costs as of September 30, 2021 and December 31, 2020 were $ 275 and $ 5,094 , respectively, and are presented as a reduction to long-term debt in the condensed consolidated balance sheets.

The Company recorded the forgiveness, including accrued interest, as a gain on debt extinguishment in the condensed consolidated statement of operations for $ 3,707 for the quarter ended June 30, 2021.

The Company incurred debt issuance costs of $ 46 and $ 212 in the three months ended March 31, 2022 and 2021 , respectively.

Debt issuance cost amortization amounted to approximately $ 33 and $ 311 for the three months ended March 31, 2022 and 2021, respectively.

Unamortized debt issuance costs as of March 31, 2022 and December 31, 2021 were $ 354 and $ 341 , respectively, and are presented as a reduction to long-term debt in the condensed consolidated balance sheets.

Principal payments on outstanding balances of long-term debt as of March 31, 2022 were as follows:

Remainder of 2022

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

Principal payments on outstanding balances of long-term debt as of September 30, 2021 were as follows:

(amounts in thousands, except share, per share and unit amounts)

The carrying value of the Company’s long-term debt approximated fair value as of March 31, 2022 and December 31, 2021 , due to the variable interest rate, which is a Level 2 input, or proximity of debt issuance date to the balance sheet date.

Note 9 –

The Company leases office space, company-owned transition studios, warehouse, training centers and video recording studio.

Certain real estate leases include one or more options to renew.

The exercise of lease renewal options is at the Company's sole discretion.

When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation, respectively.

The depreciable life of assets and leasehold improvements are limited by the expected lease term.

The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.

When readily determinable, the Company uses the rate implicit in the lease contract in determining the present value of lease payments.

If the implicit rate is not provided, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including the lease term.

The operating lease ROU asset also includes any lease payments made and excludes lease incentives.

The Company lease terms may include options to extend or terminate the lease.

Currently, it is not reasonably certain that the Company will exercise those options and therefore, the Company utilized the initial, noncancelable, lease term to calculate the lease assets and corresponding liabilities for all leases.

The Company has certain insignificant short-term leases with an initial term of twelve months or less that are not recorded in the condensed consolidated balance sheets.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, for which variable non-lease components are accounted for separately.

Supplemental balance sheet information related to leases is as follows:

Operating leases

Balance Sheet Location

ROU assets, net

Right-of-use assets

Lease liabilities, short-term

Other current liabilities

Lease liabilities, long-term

Lease liability

The components of lease expense during the three months ended March 31, 2022, are as follows:

Related-party lease

Third-party leases

Operating lease costs

Variable lease costs

Short-term lease costs

Other information related to leases for the three months ended March 31, 2022, was as follows:

Cash paid for amounts included in the measurement

of operating lease liabilities:

Operating cash flows used in operating leases

Weighted average remaining lease term (years)

Weighted average discount rate

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

Maturities of lease liabilitie s as of March 31, 2022, were as follows:

Related-party lease

Third-party leases

Remainder of 2022

The carrying value of the Company’s long-term debt approximated fair value as of September 30, 2021 and December 31, 2020 due to the variable interest rate, which is a Level 2 input, or proximity of debt issuance date to the balance sheet date.

Total future lease payments

imputed interest

Note 10 –

Related Party Transactions

The Company has numerous transactions with the Member and the Parent and its affiliates.

The Company has numerous transactions with the pre-IPO Member and pre-IPO Parent and its affiliates.

The significant related party transactions consist of borrowings from and payments to the Member and other related parties under common control of the Parent.

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In June 2018, TPG assigned the management services agreement to H&W Investco Management LLC (“H&W Investco”), which is beneficially owned by a member of the Company’s board of directors.

The Company recorded approximately $ 63 and $ 462 , during the three and nine months ended September 30, 2021 , respectively, and $ 201 and $ 614 during the three and nine months ended September 30, 2020, respectively, of management fees included within SG&A expenses for services received from H&W Investco, including reimbursement for reasonable out-of-pocket expenses.

During the three months ended March 31, 2022 and 2021 , the Company recorded approximately $ 0 and $ 192 , respectively, of management fees included within SG&A expenses for services received from H&W Investco, including reimbursement for reasonable out-of-pocket expenses.

The management services agreement was terminated following the IPO in July 2021.

As of December 31, 2019, the Company recorded a reduction to Member’s equity of $ 31,735 , representing the net amount of funds advanced to the Member, as the Company determined that the Member had no plan to repay these amounts in the foreseeable future.

The receivable from the Parent was repaid in February 2020.

During the three months ended March 31, 2020, the Company provided net funds to STG aggregating $ 1,456 and recorded a corresponding reduction to member’s equity for this same amount.

During the nine months ended September 30, 2021, the Parent repaid the balance of the receivable.

The aggregate receivable from the Parent at September 30, 2021 and December 31, 2020 was $ 0 and $ 1,456 , respectively.

In February 2020, the Member contributed $ 49,443 to the Company in satisfaction of the $ 31,735 receivable at December 31, 2019 with the remainder recorded as a contribution.

The proceeds were used to make a $ 30,000 principal payment on the Company’s outstanding term loan under the Prior Facility (see Note 8), with the remainder available for unrestricted use by the Company.

Also, in February 2020, the Company returned $ 19,443 of the contribution to the Member, which was recorded as a distribution.

Also, in the three months ended March 31, 2020, $ 53,760 of the proceeds from the borrowings under the 2020 Facility were forwarded to the Parent and recorded as a distribution.

During 2020, the Company provided net funds to an affiliate of the Parent aggregating $ 1,456 , which was recorded as a reduction to member's equity.

During the three months ended March 31, 2021 , the Parent repaid $ 2 of the receivable.

The aggregate receivable from the Parent at March 31, 2021 was $ 1,454 .

In March 2021, the Company recorded a distribution to the Parent of $ 10,600 , which the Parent used to fund a note payable under a debt financing obligation in connection with the acquisition of Rumble.

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recorded $ 10,600 receivable from shareholder, as the Rumble seller is a shareholder of XPO Inc., for the debt financing provided to the Rumble seller.

The Company’s Chief Executive Officer is the sole owner of ICI, which previously provided unsecured loans to the Company, which loans the funds to franchisees to purchase a franchise territory or to setup a studio.

The Company records notes payable to ICI and notes receivable from the franchisees resulting from these transactions.

The notes from ICI to the Company accrue interest at the time the loan is made, which is recorded as interest expense.

The Company’s Chief Executive Officer is the sole owner of ICI, which previously provided unsecured loans to the Company, which loaned the funds to franchisees to purchase a franchise territory or to setup a studio.

The Company recorded notes payable to ICI and notes receivable from the franchisees resulting from these transactions.

The notes from ICI to the Company accrued interest at the time the loan was made, which was recorded as interest expense.

The notes receivable begin to accrue interest 45 days after the issuance to the franchisee.

At September 30, 2021 and December 31, 2020 , the Company had recorded $ 98 and $ 94 of notes receivable and $ 0 and $ 86 of notes payable, respectively.

The Company recognized $ 3 and $ 9 of interest income in the three and nine months ended September 30, 2021, respectively and $ 3 and $ 10 in the three and nine months ended September 30, 2020 , respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

recognized interest expense of $ 0 and $ 5 in the three and nine months ended September 30, 2021, respectively, and $ 2 and $ 9 in the three and nine months ended September 30, 2020, respectively.

At March 31, 2022 and December 31, 2021, the Company had recorded $ 98 and $ 96 of not es receivable, respectively.

The notes payable were repaid in 2021.

The Company recognized $ 3 of interest income in the three months ended March 31, 2022 and 2021, and $ 0 and $ 3 of interest expense for the three months ended March 31, 2022 and 2021, respectively.

In September 2019, the Company entered into a five-year building lease agreement, expiring August 31, 2024 , with Von Karman Production LLC, which is owned by the Company’s Chief Executive Officer.

Pursuant to the lease, the Company is obligated to pay monthly rent of $ 25 for the initial twelve months of the lease term with subsequent 3 % annual rent increa ses.

During the three and nine months ended September 30, 2021 and 2020, the Company recorded expense related to this lease of $ 78 and $ 233 , respectively.

During the three months ended March 31, 2022 and 2021 , the Company recorded expense related to this lease of $ 80 .

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

The Company earns revenues and has accounts receivable and notes receivables from franchisees who are also shareholders of or officers of the Company.

Revenues from these affiliates, primarily related to franchise revenue, marketing fund revenue and merchandise revenue, were $ 612 and $ 1,210 for the three and nine months ended September 30, 2021 , respectively, and $ 133 and $ 506 for the three and nine months ended September 30, 2020, respectively.

Included in accounts receivable as of September 30, 2021 and December 31, 2020 is $ 208 and $ 9 , respectively, for such sales.

At September 30, 2021 and December 31, 2020 , notes receivable from franchisees includes $ 0 and $ 135 and notes receivable from franchisees, net of current portion includes $ 1,744 and $ 2,093 , respectively, related to financing provided to these affiliates.

Revenues from these affiliates, primarily related to franchise revenue, marketing fund revenue and merchandise revenue, were $ 263 and $ 294 for the three months ended March 31, 2022 and 2021, respectively.

Included in accounts receivable as of March 31, 2022 and December 31, 2021, i s $ 316 a nd $ 320 , respectively, for such sales.

At March 31, 2022 and December 31, 2021, notes receivable from franchisees inclu des $ 601 a nd $ 294 and notes receivable from franchisees, net of current portion includes $ 1,744 a nd $ 1,744 , re spectively, related to financing provided to these affiliates.

Note 11 –

Convertible Preferred Stock

Redeemable Convertible Preferred Stock

On July 23, 2021, the Company issued and sold in a private placement 200,000 newly issued shares of Series A-1 Convertible Preferred Stock, par value $ 0.0001 per share (the “Convertible Preferred”), for aggregate cash proceeds of $ 200,000 , before deduction for offering costs.

3 unchanged sentences

At issuance, the Company assessed the Convertible Preferred for any embedded derivatives.

The Company determined that the Convertible Preferred represented an equity host under FASB ASC Topic 815, Derivatives and Hedging (ASC 815).

The Company determined that the Convertible Preferred represented an equity host under ASC Topic 815, Derivatives and Hedging .

The Company’s analysis was based on a consideration of all stated and implied substantive terms and features of the hybrid financial instrument and weighing those terms and features on the basis of the relevant facts and circumstances.

Certain embedded features in the Convertible Preferred require bifurcation.

However, the fair value of such embedded features are immaterial upon issuance and as of September 30, 2021.

However, the fair value of such embedded features are immaterial upon issuance and as of March 31, 2022.

The Convertible Preferred ranks senior to the Company’s common stock with respect to the payment of dividends and distribution of assets upon liquidation, dissolution and winding up.

It is entitled to receive any dividends or distributions paid in respect of the common stock on an as-converted basis and has no stated maturity and will remain outstanding indefinitely unless converted into common stock or repurchased by the Company.

Series A preferred stock will vote on as-converted basis with the Class A and Class B common stock and will have certain rights to appoint additional directors, including up to a majority of the Company’s Board of Directors, under certain limited circumstances relating to an event of default or the Company’s failure to repay amounts due to the Convertible Preferred holders upon a redemption.

Series A preferred stock will vote on an as-converted basis with the Class A and Class B common stock and will have certain rights to appoint additional directors, including up to a majority of the Company’s board of directors, under certain limited circumstances relating to an event of default or the Company’s failure to repay amounts due to the Convertible Preferred holders upon a redemption.

Shares of Series A-1 preferred stock are non-voting;

1 unchanged sentence

At any time after July 23, 2029, upon a sale of the Company, or at any time after the occurrence and continuance of an event of default, holders of the Convertible Preferred have the right to require the Company to redeem all, but not less than all, of the Preferred shares then outstanding at a redemption price in cash equal to the greater of (i) the fair market value per share of Preferred Stock (based on the average volume-weighted average price per share of Class A common stock for the 10 consecutive trading day period ending on, and including, the trading day immediately preceding the redemption notice, and (ii) the fixed liquidation preference, plus accrued and unpaid dividends.

The Convertible Preferred is recorded as mezzanine equity (temporary equity) on the consolidated balance sheets because it is not mandatorily redeemable but does contain a redemption feature at the option of the Preferred holders that is considered not solely within the Company’s control.

The Convertible Preferred is recorded as mezzanine equity (temporary equity) on the condensed consolidated balance sheets because it is not mandatorily redeemable but does contain a redemption feature at the option of the Preferred holders that is considered not solely within the Company’s control.

At March 31, 2022 , the Company recognized the Preferred maximum redemption value of $ 327,821 , which is the maximum redemption value on the earliest redemption date based on fair market value per share of Preferred Stock (based on the average volume-weighted average price per share of Class A common stock for the 10 consecutive trading day period ending on, and including, the trading day immediately preceding the redemption notice ) a nd 200,000 outstanding shares of Preferred.

The recording of the Preferred maximum redemption value was treated as a deemed dividend, which was not included in the calculation of loss per share, and resulted in a $ 50,931 charge to accumulated deficit.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

At September 30, 2021, the Company recognized the Preferred maximum redemption value of $ 200,000 , which is the maximum redemption value on the earliest redemption date based on a redemption value of $ 1,000 per share and 200,000 outstanding shares of Preferred.

The recording of the Preferred maximum redemption value was treated as a deemed dividend, which was not included in the calculation of loss per share, and resulted in a $ 1,604 charge to additional paid-in capital.

(amounts in thousands, except share, per share and unit amounts)

Note 12 –

3 unchanged sentences

The fair value of assets contributed was $ 20,483 .

As described in Note 9, in February 2020, the Member contributed $ 49,443 to the Company, of which $ 32,157 was in satisfaction of the receivable from the Member and the remainder was a member’s contribution.

Of this $ 49,443 , $ 30,000 was used to paydown the principal on outstanding term loans under the Prior Facility (see Note 8) with the remainder available for unrestricted use by the Company.

Also, in February 2020, the Company returned $ 19,443 of the contribution to the Member, which was recorded as a distribution.

Also, in 2020, $ 53,760 of the proceeds from the borrowings under the 2020 Facility were paid to the Parent and recorded as a distribution.

Common stock –

4 unchanged sentences

After underwriter discounts and commissions, the Company received net proceeds of approximately $ 10,116 on August 24, 2021, which were used (i) $ 9,000 to purchase 750,000 LLC Units from the Company’s Chief Executive Officer and (ii) $ 1,116 for working capital.

Redeemable noncontrolling interests –

During the three months ended March 31, 2022 , pursuant to the Amended LLC agreement, certain Continuing Pre-IPO LLC Members exchanged their LLC units for 351,163 shares of Class A common stock on a one-for-one basis.

Noncontrolling interests –

Following the IPO, XPO Inc.

is the sole managing member of XPO LLC and, as a result, consolidates the financial results of XPO LLC.

The Company reports redeemable noncontrolling interests representing the economic interests in XPO LLC held by the Continuing Pre-IPO LLC Members.

Under the Amended LLC agreement, the Continuing Pre-IPO LLC Members can exchange their LLC Units for shares of Class A common stock on a one-for-one basis (simultaneously cancelling an equal number of shares of Class B common stock of the exchanging member), or at the option of the Company for cash.

The Company's decision of whether to exchange LLC Units for Class A common stock or cash is currently made at the discretion of the Continuing Pre-IPO LLC Members through their control of our Board of Directors.

Accordingly, the redeemable noncontrolling interest is reported as temporary equity at the greater of the redemption value of the units or the carrying value as of the balance sheet date, with a corresponding adjustment to additional paid-in capital.

Future redemptions or exchanges of LLC Units by the Continuing Pre-IPO LLC Members will result in a change in ownership and reduce the amount recorded as redeemable noncontrolling interest and increase additional paid-in capital.

The following table summarizes the ownership of XPO LLC as of September 30, 2021:

The Company reported noncontrolling interests representing the economic interests in XPO LLC held by the Continuing Pre-IPO LLC Members.

Under the Amended LLC agreement, the Continuing Pre-IPO LLC Members are able to exchange their LLC Units for shares of Class A common stock on a one-for-one basis (simultaneously cancelling an equal number of shares of Class B common stock of the exchanging member), or at the option of the Company for cash.

Prior to the second amendment of the LLC agreement, the Company's decision of whether to exchange LLC Units for Class A common stock or cash was made at the discretion of the Continuing Pre-IPO LLC Members through their control of the Company's board of directors.

Accordingly, the redeemable noncontrolling interest was reported as temporary equity at the greater of the redemption value of the units or the carrying value as of the balance sheet date, with a corresponding adjustment to additional paid-in capital.

In December 2021, the Company and the Continuing Pre-IPO LLC Members amended the LLC agreement where the redemption option in cash was removed, except to the extent the cash proceeds to be used to make the redemption in cash are immediately available and were directly raised from a secondary offering of the Company's equity securities.

The redeemable noncontrolling interest was adjusted to its fair value as of such date and recorded in equity as noncontrolling interest.

Future redemptions or exchanges of LLC Units by the Continuing Pre-IPO LLC Members will result in a change in ownership and reduce the amount recorded as noncontrolling interest and increase additional paid-in capital.

During the three months ended March 31, 2022, the Company experienced a change in noncontrolling interests ownership due to the conversion of Class B to Class A shares and as such, has rebalanced the related noncontrolling interests balance.

The Company calculated the rebalancing based on the net assets of XPO LLC, after considering the preferred shareholders' claim on the net assets of XPO LLC as of March 31, 2022.

The Company used the liquidation value of the preferred shares as of March 31, 2022 for such rebalancing.

The following table summarizes the ownership of XPO LLC as of March 31, 2022:

Ownership percentage

Redeemable noncontrolling interests

Noncontrolling interests

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

Note 13 –

Equity Compensation

Profit interest units –

Under the Pre-IPO Plan, the Parent granted time-based and performance-based profit interest units to certain key employees of the Company and its subsidiaries.

Subsequent to the IPO, the profit interest units converted to Class B shares.

In June 2021, the Parent amended previously issued profit interest units with performance-based vesting conditions that were based on performance targets connected to the value received from change of control of the Parent.

The vesting condition, as amended, is based on the average trading price of XPO Inc.

common stock exceeding the IPO threshold price, as defined in the

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

common stock exceeding the IPO threshold price, as defined in the agreement.

The amendment of these units is treated as a modification with the compensation cost of the amended units of $ 18,127 recognized over the new estimated service period through November 2022.

In July and September 2021, the Company granted 821,308 shares underlying restricted stock units, at a weighted average grant-date fair value of $ 11.98 per share.

Restricted stock units are valued at the Company’s closing stock price on the date of grant, and generally vest over a one - to three-year period.

Compensation expense for restricted stock units is recognized on a straight-line basis.

Total compensation expense, recognized for restricted stock units, was $ 783 for the three months and nine months ended September 30, 2021.

At September 30, 2021, the Company had $ 9,059 of total unamortized compensation expense related to non-vested restricted stock units.

In March 2022, the units vested when the average trading price condition was met.

During the three months ended March 31, 2022 , the Company recognized $ 12,126 of expense, including $ 8,467 of accelerated compensation expense when these grants vested in March 2022.

The fair value of the time-based grants was recognized as compensation expense over the vesting period (generally four years), with an increase to Member’s contribution / Additional Paid-in Capital in Member’s / Stockholders' equity.

The fair value of the time-based grants was calculated using a Black-Scholes option-pricing model.

During the three months ended March 31, 2022 and 2021 , the Company recognized $ 78 and $ 222 of expense, respectively.

During the three months ended March 31, 2022 , the Company had $ 133 of unrecognized compensation expense.

The unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 0.93 years for the time-based grants.

Restricted stock units –

In November 2021, the Company granted restricted stock unit (“RSU”) awards with performance conditions of meeting certain EBITDA targets through the year ending December 31, 2024.

The awards were granted with fixed dollar valuation and the number of shares granted depends on the trading price at the closing date of the period in which the EBITDA target is met.

As such, these awards are classified as a liability.

As of March 31, 2022, management believes that the EBITDA targets will be achieved and is accordingly recognizing expense ratably over the vesting period.

Management performs a regular assessment to determine the likelihood of meeting the targets and adjusts the expense recognized if necessary.

During the three months ended March 31, 2022, the Company recogniz ed $ 621 of expense and had $ 6,901 of unrecognized expense relating to these grants.

The following table summarizes activity for RSUs for the three months ended March 31, 2022:

Outstanding at December 31, 2021

Forfeited, expired, or canceled

Outstanding at March 31, 2022

During the three months ended March 31, 2022 , the Company granted 1,274,422 shares underlying RSUs, at a weighted average grant-date fair value of $ 20.04 per share.

RSUs are valued at the Company’s closing stock price on the date of grant, and generally vest over a one - to four-year period.

Compensation expense for RSUs is recognized on a straight-line basis.

During the three months ended March 31, 2022 , the company recognized $ 2,423 of expense and had $ 35,792 of total unamortized compensation expense related to non-vested RSUs.

That cost is expected to be recognized over a weighted-average period of 3.07 years.

In June 2021, phantom stock units previously issued by Club Pilates were canceled.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

Note 14 –

Income Taxes and Tax Receivable Agreement

The Company is the managing member of XPO Holdings and, as a result, consolidates the financial results of XPO Holdings in the condensed consolidated financial statements.

XPO Holdings is a pass-through entity for U.S.

federal and most applicable state and local income tax purposes following a corporate reorganization effected in connection with the IPO.

As an entity classified as a partnership for tax purposes, XPO Holdings is not subject to U.S.

federal and certain state and local income taxes.

Any taxable income or loss generated by XPO Holdings is passed through to and included in the taxable income or loss of its members, including the Company.

The Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated from XPO Holdings, based on its 49.7 % economic interest in XPO Holdings.

The provision for income taxes differs from the amount of income tax computed by applying the applicable U.S.

1 unchanged sentence

pass-through structure for U.S.

income tax purposes, state taxes, guaranteed payments, non-deductible expenses, and the valuation allowance against the deferred tax asset.

The effective tax rate for the three and nine months ended September 30, 2021 is ( 1.17 %) and ( 1.82 %), respectively.

The Company recognized an income tax expense of $ 103 and $ 387 on its share of pre-tax book income (loss), exclusive of the redeemable noncontrolling interest of 49.0 %.

As of September 30, 2021, management determined based on applicable accounting standards and the weight of all available evidence, it was not more likely than not (“MLTN”) that the Company will generate sufficient taxable income to realize its deferred tax assets including the difference in tax basis in excess of the financial reporting value for its investment in XPO Holdings.

Consequently, the Company has established a full valuation allowance against its deferred tax assets as of September 30, 2021.

income tax purposes, state taxes, preferred stock dividends, non-deductible expenses, change in fair value of contingent consideration and the valuation allowance against the deferred tax asset.

The effective tax rate for the three months ended March 31, 2022 is ( 12.0 % ).

The Company recognized an income tax benefit of $ 2,067 on its share of pre-tax book income (loss), exclusive of the noncontrolling interest of 50.3 %.

As of March 31, 2022, management determined based on applicable accounting standards and the weight of all available evidence, it was not more likely than not (“MLTN”) that the Company will generate sufficient taxable income to realize its deferred tax assets including the difference in tax basis in excess of the financial reporting value for its investment in XPO Holdings.

Consequently, the Company has established a full valuation allowance against its deferred tax assets as of March 31, 2022.

In the event that management subsequently determines that it is MLTN that the Company will realize its deferred tax assets in the future over the recorded amount, a decrease to the valuation allowance will be made, which will reduce the provision for income taxes.

As of Septemb er 30, 2021, the total TRA liability is approximately $ 180 .

On March 27, 2020, the United States enacted the CARES Act.

1 unchanged sentence

The CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions are amending certain provisions of the previously enacted Tax Cuts and Jobs Act related to depreciable property and net operating losses, deferral of payroll taxes, and the PPP.

At September 30, 2021, the Company has not booked any income tax provision/(benefit) for the impact for the CARES Act due to its recent incorporation and the pass- through treatment of XPO Holdings.

The Company has deferred payroll taxes of approximately $ 700 of which 50 % will be due on or before December 31, 2021, and the remainder due on or before December 31, 2022.

At March 31, 2022 , the Company has not booked any income tax provision/(benefit) for the impact for the CARES Act due to the pass-through treatment of XPO Holdings.

The Company has deferred payroll taxes of approximately $ 325 as of March 31, 2022 and December 31, 2021, which will be due on or before December 31, 2022.

The Company is subject to taxation and files income tax returns in the United States federal jurisdiction, many state and foreign jurisdictions.

1 unchanged sentence

The Company’s tax returns remain open for examination in the U.S for years 2018 through 2021.

Our foreign subsidiaries are generally subject to examination three years following the year in which the tax obligation originated.

The Company's foreign subsidiaries are generally subject to examination three years following the year in which the tax obligation originated.

The years subject to audit may be extended if the entity substantially understates corporate income tax.

Note 14 –

Earnings (Loss) Per Share

For the three and nine months ended September 30, 2021, basic net loss per share has been calculated by dividing net loss attributable to Class A common stockholders for the period subsequent to the Reorganization Transactions, by the weighted average number of shares of Class A common stock outstanding for the same period.

Shares of Class A common stock are weighted for the portion of the period in which the shares were outstanding.

Diluted net loss per share has been calculated in a manner consistent with that of basic net loss per share while considering all potentially dilutive shares of Class A common stock outstanding during the periods.

The Company does not expect a significant change in unrecognized tax benefits during the next 12 months.

Tax Receivable Agreement –

In connection with the IPO, the Company entered into a Tax Receivable Agreement (“TRA”) pursuant to which the Company is generally required to pay to the other parties thereto in the aggregate 85% of the amount of cash savings, if any, in U.S.

federal, state and local income tax or franchise tax that the Company actually realizes as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’

allocable share of existing tax basis), (ii) increases in the Company's allocable share of existing tax basis and tax basis adjustments that resulted or may result from (x) the IPO Contribution and the Class A-5 Unit Redemption, (y) future taxable redemptions and exchanges of LLC Units by Continuing Pre-IPO LLC Members and (z) certain payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”).

The Company expects to benefit from the remaining 15 % of any tax benefits that it may actually realize.

The TRA Payments are not conditioned upon any continued ownership interest in XPO Holdings or the Company.

To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

(amounts in thousands, except share, per share and unit amounts)

The Company calculates the liability under the TRA using a complex TRA model, which includes an assumption related to the fair market value of assets.

The payment obligations under the TRA are obligations of XPO Inc.

and not of XPO Holdings.

The TRA provides that if (i) there is a material breach of any material obligations under the TRA;

or (ii) the Company elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any LLC Units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination.

The TRA also provides that, upon certain mergers, asset sales or other forms of business combination, or certain other changes of control, the TRA will not terminate but the Company’s or the Company’s successor’s obligations with respect to tax benefits would be based on certain assumptions, including that the Company or the Company’s successor would have sufficient taxable income to fully utilize the increased tax deductions and tax basis and other benefits covered by the TRA.

As of March 31, 2022, the Company has concluded, based on applicable accounting standards, that it was more likely than not that its deferred tax assets subject to the TRA would not be realized;

therefore, the Company has not recorded a liability related to the tax savings it may realize from utilization of such deferred tax assets.

Except for $ 1,753 of the TRA, $ 40,277 of the TRA liability was not recorded as of March 31, 2022 .

If utilization of the deferred tax asset subject to the TRA becomes more likely than not in the future, the Company will record a liability related to the TRA which will be recognized as expense within its consolidated statements of operations.

Note 15 –

Earnings (Loss) Per Share

For the three months ended March 31, 2022, basic net loss per share has been calculated by dividing net loss attributable to Class A common stockholders by the weighted average number of shares of Class A common stock outstanding for the period.

Because a portion of XPO Holdings is owned by parties other than the Company, those parties participate in earnings and losses at the XPO Holdings level.

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income or loss that is attributable to the Company and accordingly reflected in income or loss available to common stockholders in the Company’s calculation of basic earnings or loss per share.

Due to the attribution of only a portion of the preferred stock dividends issued by XPO Holdings to the Company in first determining basic earnings or loss per share at the subsidiary level, the amounts presented as net loss attributable to redeemable noncontrolling interests and net loss attributable to XPO Inc.

presented below will not agree to the amounts presented on the consolidated statement of operations.

Due to the attribution of only a portion of the preferred stock dividends issued by XPO Holdings to the Company in first determining basic earnings or loss per share at the subsidiary level, the amounts presented as net loss attributable to noncontrolling interests and net loss attributable to XPO Inc.

presented below will not agree to the amounts presented on the condensed consolidated statement of operations.

Diluted loss per share attributable to common stockholders adjusts the basic loss per share attributable to common stockholders and the weighted average number of shares of common stock outstanding for the potential dilutive impact of potential common stock.

The potential dilutive impact of redeemable convertible preferred stock and Class B common stock is evaluated using the as-if-converted method.

Because the Company reported net losses for all periods presented, all potentially dilutive common stock equivalents are antidilutive and have been excluded from the calculation of diluted net loss per share.

The following table presents the calculation of basic and diluted loss per share for the three and nine months ended September 30, 2021:

September 30, 2021

net loss attributable to redeemable noncontrolling interests

Because the Company reported net losses for the period presented, all potentially dilutive common stock equivalents are antidilutive and have been excluded from the calculation of diluted net loss per share.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

The following table presents the calculation of basic and diluted loss per share for the three months ended March 31, 2022:

Three Months Ended March 31, 2022

net loss attributable to noncontrolling interests

dividends on preferred shares

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Profit interest units, time vesting

Profit interest units, performance vesting

Total shares excluded from loss per share of Class A common stock - diluted

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

Note 16 –

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The complaint seeks relief including monetary damages and injunctive relief.

The Company intends to defend itself and a range of losses, if any, is not estimable.

As a result, the Company has not recorded any liability for this matter in the consolidated balance sheets.

On February 8, 2022, the Company entered into a settlement agreement with the Plaintiffs, pursuant to which the parties agreed to resolve all disputes and dismiss all actions.

In addition, the Company agreed to pay Plaintiffs an amount in cash as part of the settlement.

The Company has included in accrued expenses in the condensed consolidated balance sheet as of December 31, 2021 an amount which approximates the settlement amount when combined with pre-existing obligations.

The settlement amount was paid in full in March 2022.

In connection with the October 2021 acquisition of BFT, the Company agreed to indemnify the Seller for certain claims and lawsuits against the Seller that existed at the acquisition date.

The claims and lawsuits relate to alleged patent and trademark infringements.

The Seller has filed a cross-claim alleging that the defendant’s two Australian patents are, and always have been, invalid and that they should be revoked.

In addition, the Plaintiff has brought related claims for patent infringement against the Seller in the United States District Court for Delaware, and these actions are currently pending.

The Company is subject to normal and routine litigation brought by former or current employees, customers, franchisees, vendors, landlords or others.

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however, it is possible that the Company’s business, results of operations, liquidity or financial condition could be materially affected in a particular future reporting period by the unfavorable resolution of one or more matters or contingencies during such period.

The Company accrued for estimated legal liabilities and has entered into certain settlement agreements to resolve legal disputes and recorded $ 161 and $ 679 , which is included in accrued expenses on the condensed consolidated balance sheet as of September 30, 2021 and December 31, 2020, respectively.

The Company accrued for estimated legal liabilities and has entered into certain settlement agreements to resolve legal disputes and recorded $ 457 and $ 2,931 which is included in accrued expenses in the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share, per share and unit amounts)

Contingent consideration from acquisitions –

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As a result, in March 2020, the Company recorded a reduction to the contingent consideration liability of $ 5,598 with an offsetting increase in Member’s equity.

The Company recorded approximately $ 242 and $ 744 of additional contingent consideration as interest expense for the three and nine months ended September 30, 2021 , respectively, and $ 188 and $ 519 for the three and nine months ended September 30, 2020.

At September 30, 2021 and December 31, 2020 , the contingent consideration was $ 0 and $ 8,100 recorded as contingent consideration from acquisitions, respectively, on the condensed consolidated balance sheets.

During the three months ended September 30, 2021, the Company paid the contingent consideration in full.

The Company recorded approximately $ 0 and $ 237 of additional contingent consideration as interest expense for the three months ended March 31, 2022 and 2021, respectively.

During the year ended December 31, 2021, the Company paid the contingent consideration in full.

In connection with the 2017 acquisition of Row House, the Company agreed to pay to the sellers 20 % of operational or change of control distributions, subject to distribution thresholds, until the date on which a change in control or liquidation of Row House occurs.

During the three and nine months ended September 30, 2021 , the Company recorded an increase of $ 80 and $ 420 to contingent consideration, respectively, which was recorded as acquisition and transaction expenses (income).

During the three and nine months ended September 30, 2020 , the Company recorded a reduction of ($ 2,646 ) and ($ 6,321 ) to contingent consideration, of which $ 54 and $ 159 was recorded as interest expense and ($ 2,700 ) and ($ 6,480 ) as acquisition and transaction expenses (income), respectively.

As of September 30, 2021 and December 31, 2020 , contingent consideration totaled approximately $ 720 and $ 300 , respectively.

During the three months ended March 31, 2022 and 2021 , the Company recorded an increase of $ 200 and $ 120 to contingent consideration, respectively, which was recorded as acquisition and transaction expenses.

As of March 31, 2022 and December 31, 2021 , contingent consideration totaled approximately $ 1,040 and $ 720 , respectively.

The Company determines the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach, which is a Level 3 measurement.

Inputs used in the methodology primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved.

In connection with the 2017 acquisition of Stretch Lab, the Company agreed to pay to the seller 20 % of operational or change of control distributions, until the date on which a change of control or a liquidation of Stretch Lab occurs.

In connection with the 2017 acquisition of StretchLab, the Company agreed to pay to the seller 20 % of operational or change of control distributions, until the date on which a change of control or a liquidation of StretchLab occurs.

The Company determined the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach, which is a Level 3 measurement.

Inputs used in the methodology primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved.

In September 2019, the Company entered into a settlement agreement with the Stretch Lab sellers to resolve disputes related to the acquisition and related agreements and to settle all amounts due under the contingent consideration.

Under the terms of the settlement agreement, the Company will make payments to the sellers aggregating $ 6,500 , which was recorded at the settlement date using a discount rate of 8.345 %.

At September 30, 2021 and December 31, 2020 , the liability was $ 0 and $ 1,979 recorded as accrued expenses, respectively, on the condensed consolidated balance sheets.

In September 2019, the Company entered into a settlement agreement with the StretchLab sellers to resolve disputes related to the acquisition and related agreements and to settle all amounts due under the contingent consideration.

Under the terms of the settlement agreement, the Company made payments to the sellers aggregating $ 6,500 , which was recorded at the settlement date using a discount rate of 8.345 %.

The Company made an initial payment of $ 1,000 in September 2019, and the first quarterly payment of $ 688 in December 2019.

Quarterly payments of $ 688 continued through September 2021, when the final payment was made.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

In connection with the 2018 acquisition of AKT, the Company agreed to pay the seller 20 % of operational or change of control distributions, subject to distribution thresholds until the date on which a change of control or a liquidation of AKT occurs.

During the three and nine months ended September 30, 2020 , the Company recorded a reduction to contingent consideration of ($ 2,430 ) and ($ 4,460 ), respectively, which was recorded as acquisition and transaction expenses (income).

As of September 30, 2021 and December 31, 2020 , contingent consideration totals $ 0 in the condensed consolidated balance sheets.

The Company determines the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach, which is a Level 3 measurement.

Inputs used in the methodology primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved.

In connection with the 2018 acquisition of Yoga Six, the Company is obligated to make additional payments for purchase consideration if certain events occur.

Payment of additional consideration is contingent on Yoga Six reaching a milestone of opening a number of franchise studios before the fourth anniversary of the purchase date.

The contingent consideration is measured at estimated fair value using a probability weighted discounted cash flow analysis.

The inputs include the probability of achievement, the projected payment date and the discount rate of 8.5 % used to present value the projected cash flows.

At September 30, 2021 and December 31, 2020 , the contingent consideration payable was $ 148 and $ 1,000 , respectively, and is included in accrued expenses in the consolidated balance sheets.

In connection with the 2018 acquisition of Stride, the Company initially recorded contingent consideration of $ 1,869 for the estimated fair value of the contingent payments.

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The contingent consideration agreement was modified in 2019 and 2020.

Payments of additional consideration, as amended, are now contingent on Stride reaching milestones for opening two franchise studios and membership enrollments for such studios at various dates through 2021.

At September 30, 2021 and December 31, 2020 , the contingent consideration of $ 0 and $ 250 , respectively, was recorded as accrued expenses in the condensed consolidated balance sheets.

During the three months ended September 30, 2021, the Company paid the contingent consideration in full.

Payments of additional consideration, as amended, were contingent on Stride reaching milestones for opening two franchise studios and membership enrollments for such studios at various dates through 2021.

During the year ended December 31, 2021, the Company paid the contingent consideration in full.

In connection with the Reorganization Transactions, the Parent merged with and into the Member.

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The fair value of the contingent consideration is measured at estimated fair value using a Monte Carlo simulation analysis.

During the three months ended September 30, 2021 the Company recorded an increase of $ 2,800 to contingent consideration, which was recorded as acquisition and transaction expenses (income).

At September 30, 2021 , contingent consideration totals $ 25,900 , recorded as contingent consideration from acquisitions on the condensed consolidated balance sheets.

Note 16 –

Subsequent Events

Assets acquired include franchise rights, brand, intellectual property and the rights to manage and license the franchise business (the “Franchise System”).

The Company also assumed certain liabilities associated with the purchased assets and provided certain indemnifications to the Seller.

This acquisition is expected to enhance the Company’s franchise offerings and provide a platform for future growth, which the Company believes is complimentary to its portfolio of franchises.

Consideration for the transaction included cash of $ 44,322 (based on the currency exchange rate as of the purchase date).

In addition, the Company agreed to pay certain sale bonus payments to the Seller consisting of quarterly cash payments based on the sales of the Franchise System and equipment packages in the U.S.

and Canada, as well as a percentage of royalties collected by the Company, provided that aggregate minimum payments of approximately $ 3,694 (based on the currency exchange rate as of the purchase date) are required to be paid to the Seller for the two year period ending December 31, 2023 and the aggregate amount of such payments is subject to a maximum of $ 10,342 (based on the currency exchange rate as of the purchase date).

During the three months ended March 31, 2022 , the Company recorded an increase of $ 9,500 to contingent consideration, which was recorded as acquisition and transaction expenses.

At March 31, 2022 and December 31, 2021 , contingent consideration totals $ 57,700 and $ 48,200 , respectively, recorded as contingent consideration from acquisitions in the condensed consolidated balance sheets.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except share and unit amounts)

and BFT TM brands in Australia, New Zealand and Singapore.

In exchange, the Company will receive certain fees and royalties, including a percentage of the revenue generated by the Master Franchisee under the MFA.

The MFA contains an option for the Company to repurchase the master franchise rights granted under the MFA at a purchase price based on the Master Franchisee’s EBITDA.

If the Company (or a designee of the Company) does not exercise the option, then the Company might be required to pay a cancellation fee to the Master Franchisee which might be material to the Company.

If the Master Franchisee rejects an offer to repurchase the franchise rights, then the cancellation fee is not required to be paid.

At the acquisition date, there were certain claims and lawsuits against the Seller for which the Company has agreed to indemnify the Seller.

The Company is evaluating the potential losses, if any, related to this indemnification, and will record an estimate of the loss, if any, in purchase accounting.

The Company is unable to provide the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date as it has not yet completed its analysis.

On October 8, 2021, the Company entered into a second amendment (the "Amendment") to the Credit Agreement.

The Amendment provides for, among other things, additional term loans in an aggregate principal amount of $ 38,000 (the “2021 Incremental Term Loan”), the proceeds of which were used to fund the BFT Acquisition and the payment of fees, costs and expenses related to the Amendment.

(amounts in thousands, except share, per share and unit amounts)

In connection with the October 2021 acquisition of BFT, the Company agreed to pay contingent consideration to the Seller consisting of quarterly cash payments based on the sales of the Franchise System and equipment packages in the U.S.

At the acquisition date, the Company determined that the fair value of the estimated contingent consideration liability was $ 9,388 .

During the three months ended March 31, 2022 , the Company recorded $ 178 and ($ 154 ) of additional contingent consideration, which was recorded as interest expense and acquisition and transaction expense, respectively.

At March 31, 2022 and December 31, 2021 , contingent consideration was $ 3,724 and $ 3,678 , respectively, recorded as accrued expenses and $ 5,228 and $ 5,841 , respectively, recorded as contingent consideration from acquisitions in the condensed consolidated balance sheets.

Note 17 –

Subsequent Events

On April 6, 2022, the Company entered into an underwriting agreement with certain existing stockholders, affiliates of H&W Investco (the “Selling Stockholders”) and certain underwriters named therein, pursuant to which the Selling Stockholders sold 4,500,000 shares of Class A common stock at a price of $ 20.00 per share.

All of the shares sold in this offering were offered by the Selling Stockholders.

In addition, the Selling Stockholders granted the underwriters a 30-day option to purchase up to an additional 675,000 shares of the Company's Class A common stock, which was exercised on April 7, 2022.

The shares sold in the offering consisted of (i) 2,479,342 existing shares of Class A common stock and (ii) 2,695,658 newly-issued shares of Class A common stock issued in connection with the exchange of LLC units held by the Selling Stockholders.

The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Selling Stockholders.

Simultaneously, 2,695,658 Class B shares were surrendered by the Selling Stockholders and canceled.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Xponential Fitness LLC (“XPO LLC”), the principal operating subsidiary of Xponential Fitness, Inc.

(the "Company" or “XPO Inc.”), is a curator of leading boutique fitness brands across multiple verticals.

Our mission is to make highly specialized workouts in motivating, community-based environments accessible to everyone.

Our diversified portfolio of brands spans a variety of popular fitness and wellness verticals, including Pilates, barre, cycling, rowing, yoga, running, stretch, dance and boxing.

Collectively, our brands offer consumers engaging experiences that appeal to a broad range of ages, fitness levels and demographics.

As of September 30, 2021, 1,889 studios were open, and franchisees were contractually committed to open an additional 1,654 studios in North America under existing franchise agreements on an adjusted basis to reflect historical information of the brands we have acquired.

In addition, as of September 30, 2021, we had 18 studios open internationally, and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 735 new studios in nine countries.

In 2020 and the nine months ended September 30, 2021, we had no material revenue outside of the United States and no franchisee accounted for more than 5% of our revenue.

(the "Company" or “XPO Inc.”), is the largest global franchisor of boutique fitness brands.

On July 23, 2021, the Company completed an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock at an initial public offering price of $12.00 per share.

Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 49.7% ownership interest in XPO LLC through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).

Information for any period prior to July 23, 2021 relates to XPO LLC.

We operate a diversified platform of ten brands spanning across verticals including Pilates, indoor cycling, barre, stretching, rowing, dancing, boxing, running, functional training and yoga.

XPO LLC franchisees offer energetic, accessible, and personalized workout experiences led by highly qualified instructors in studio locations across 48 U.S.

states, the District of Columbia and Canada and through master franchise agreements or international expansion in 12 additional countries.

The Company's portfolio of brands includes Club Pilates, the largest Pilates brand in the United States;

CycleBar, the largest indoor cycling brand in the United States;

StretchLab, a concept offering one-on-one and group stretching services;

Row House, the largest franchised indoor rowing brand in the United States;

AKT, a dance-based cardio workout combining toning, interval and circuit training;

YogaSix, the largest franchised yoga brand in the United States;

Pure Barre, a total body workout that uses the ballet barre to perform small isometric movements, and the largest Barre brand in the United States;

Stride, a treadmill-based cardio an d strength training concept;

Rumble, a boxing-inspired full-body workout;

and BFT, a functional training and strength-based program.

As of March 31, 2022, 2,030 studios were open, and franchisees were contractually committed to open an additional 1,870 studios in North America under existing franchise agreements.

In addition, as of March 31, 2022, we had 199 studios open internationally, and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 950 new studios in 12 additional countries.

During the three months ended March 31, 2022 and 2021, we generated revenue outside the United States of $3,380 and $315, respectively.

As of March 31, 2022 and December 31, 2021, we did not have material assets located outside of the United States.

N o franchisee accounted for more than 5% of our revenue.

We operate in one segment for financial reporting purposes.

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The COVID-19 pandemic continues to impact global economic activities and poses the risk that prevents or restricts us and our employees, franchisees, members and suppliers from conducting business activities, as federal, state, local and foreign governments mandated stay-at-home orders and closures of businesses, encouraged social distancing measures and implemented travel restrictions and prohibitions on non-essential activities and business.

The COVID-19 pandemic adversely impacted our ability to generate revenue.

In 2020 and through most of 2021, the COVID-19 pandemic adversely impacted our ability to generate revenue.

A substantial portion of our revenue is derived from royalty fees, which were affected by the decline in system-wide sales as almost all of our franchised studios were temporarily closed beginning in mid-March 2020.

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We also experienced a reduction in sales of new studio licenses and in installation of equipment in new studios.

Additionally, we temporarily reduced our marketing fund fees from 2% to 1% of the sales of franchisees whose studios were closed due to the COVID-19 pandemic and related government mandates as part of our COVID-19 support response.

In response to the COVID-19 outbreak, franchisees temporarily closed almost all studios system-wide in mid-March 2020, although our franchised studios have resumed operations as of September 30, 2021.

Additionally, we temporarily reduced our marketing fund fees from 2% to 1% of the sales of franchisees while studios were closed due to the COVID-19 pandemic and related government mandates and restrictions as part of our COVID-19 support response.

In response to the COVID-19 pandemic, franchisees temporarily closed almost all studios system-wide in mid-March 2020, although our franchised studios have resumed operations as of March 31, 2022.

As the COVID-19 pandemic continued to impact areas in which our studios operate, certain of our studios have had to re-close or significantly reduce capacity, and additional studios may have to re-close or further reduce capacity, pursuant to local guidelines.

We also experienced lower license sales and delays in new studios openings due to the COVID-19 pandemic.

However, we have continued opening studios throughout the COVID-19 pandemic and franchisees have opened 378 studios from March 31, 2020 through September 30, 2021.

However, we have continued opening studios throughout the COVID-19 pandemic and franchisees have opened 654 studios globally from April 2020 through March 31, 2022, including studios opened by Rumble and BFT, which were acquired by us in March 2021 and October 2021, respectively.

Our proven operational model allowed us to provide robust support to franchisees during the COVID-19 pandemic and has led to no units permanently closed under our ownership.

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Members who did not pay membership dues while “on hold”

kept their agreements and maintained the ability to reactivate when studios reopened, mitigating high member cancellation rates.

kept their agreements and preserved the ability to reactivate when studios reopened, mitigating high member cancellation rates.

While studios were closed, we continued to generate revenue from franchise license and royalty payments as customers engaged with our digital platform services and purchased merchandise.

We took significant action to support franchisees’

We took several actions to support franchisees’

efforts to ensure they had access to resources that guided them on generating revenues and reducing operating costs, including a temporary reduction in marketing fund percentage collected.

The adverse effects of the COVID-19 pandemic have gradually begun to decline in the first three quarters of 2021, although, infection rates continue to fluctuate in various regions and new strains and variants of the virus, including the delta variant, remain a risk.

In the second and third quarter of 2021 in particular, as vaccination rates have increased substantially in the United States and restrictions on indoor fitness classes in most states have either been reduced or eliminated, franchisees’

The adverse effects of the COVID-19 pandemic began to decline during 2021, and through the first quarter of 2022, although, infection rates continue to fluctuate in various regions and new strains and variants of the virus, including the delta and omicron variants, remain a risk.

During the second quarter of 2021 through the first quarter of 2022 in particular, as vaccination rates have increased substantially in the United States and restrictions on indoor fitness classes in most states have either been reduced or eliminated, franchisees’

membership visits have increased.

As of September 30, 2021, our franchisees recovered to approximately 111% of actively paying members, relative to January 31, 2020 membership levels and membership visits were at 94% relative to January 31, 2020 (excludes Rumble).

As of September 30, 2021, run-rate Average Unit Volume (“AUV”) recovered to approximately 90% of January 31, 2020 levels.

As a result of the COVID-19 pandemic, we also took ownership of a number of studios.

We are currently operating these studios while we actively seek to refranchise them, as operating company-owned studios is not a component of our business model.

However, we may not be able to do so and we expect that if we have not been able to do so by December 31, 2021 we may choose to close most or all such studios to the extent they are not profitable at that time and would incur charges in connection therewith for asset impairment and lease termination, employee severance and related matters, which could adversely affect our business, results of operations, cash flows and financial condition.

As of March 31, 2022, the membership levels and membership visits for the quarter ended March 31, 2022 were at 133% and 138%, respectively, relative to the quarter ended December 31, 2019 (excluding BFT) prior to the onset of the pandemic.

For the quarter ended March 31, 2022, run-rate Average Unit Volume ("AUVs") recovered to approximately 94% relative to the quarter ended December 31, 2019 (including Rumble and BFT).

Following the significant disruption to the global fitness industry caused by the COVID-19 pandemic, we took ownership of a greater number of studios than we would expect to hold in the normal course of our business.

We are in the process of reselling the licenses for these studios to new or existing franchisees ("company-owned transition studios") as operating studios is not a component of our business model.

However, we may not be able to do so and we may choose to close some or all such studios to the extent they are not profitable for an extended period of time and could incur charges in connection therewith for asset impairment and lease termination, employee severance and related matters, which could adversely affect our business, results of operations, cash flows and financial condition.

See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information.

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the spread of new variants of COVID-19;

the continued and renewed imposition of protective public safety measures;

the continued and renewed imposition of protective public safety measures by local, state, federal and international authorities;

the disruption to global supply chain;

rising inflation rates;

the impact of the pandemic on the fitness industry and responses from our franchisees to the pandemic.

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, we expect the pandemic to continue to adversely affect franchisees, at least through 2021, as well as our overall business, results of operations, cash flows and financial condition.

Although we have implemented measures to mitigate the impact of the COVID-19 pandemic on our business, we expect the pandemic to continue to adversely affect franchisees, as well as our overall business, results of operations, cash flows and financial condition.

Rumble Acquisition

On March 24, 2021, H&W Franchise Holdings LLC entered into a contribution agreement with Rumble Holdings LLC, Rumble Parent LLC and Rumble Fitness LLC to acquire certain rights and intellectual property of Rumble Fitness LLC (“Rumble”), to be used by H&W Franchise Holdings LLC in connection with the franchise business under the “Rumble”

On March 24, 2021, H&W Franchise Holdings LLC (parent entity prior to the IPO) entered into a contribution agreement with Rumble Holdings LLC, Rumble Parent LLC and Rumble Fitness LLC to acquire certain rights and intellectual property of Rumble Fitness LLC (“Rumble”), to be used by H&W Franchise Holdings LLC in connection with the franchise business under the “Rumble”

Pursuant to this agreement, Rumble became a direct subsidiary of Rumble Parent LLC, which is owned by Rumble Holdings LLC, and H&W Franchise Holdings LLC acquired certain rights and intellectual property of Rumble Holdings LLC, which beneficially held all of the issued and outstanding membership interests of Rumble.

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Prior to the vesting and/or forfeiture of certain equity instruments issued to Rumble Holdings LLC, the instruments will be treated as a liability on our balance sheet instead of equity and will therefore be subject to a subsequent quarterly fair value remeasurement on a mark-to-market basis as a derivative liability.

As a result, fluctuations in these quarterly liability valuations will impact our financial results following the initial public offering (“IPO”) in accordance with movements in our stock price, and the related valuation of the derivative liability that we will be required to make on a quarterly basis.

As a result, fluctuations in these quarterly liability valuations will impact our financial results following the IPO in accordance with movements in our stock price, and the related valuation of the derivative liability that we will be required to make on a quarterly basis.

See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information.

BFT Acquisition

On October 13, 2021, the Company entered into an Asset Purchase Agreement (“APA”) with GRPX Live Pty Ltd., an Australian corporation, and its affiliates (the “Seller”) whereby the Company acquired certain assets relating to the concept and brand known as Body Fit Training or BFT.

On October 13, 2021, the Company entered into an Asset Purchase Agreement (“APA”) with GRPX Live Pty Ltd., an Australian corporation, and its affiliates (the “Seller”) whereby the Company acquired certain assets relating to the concept and brand known as BFT.

Assets acquired include franchise rights, brand, intellectual property and the rights to manage and license the franchise business (the “Franchise System”).

The Company also assumed certain liabilities associated with the purchased assets and provided certain indemnifications to the Seller.

This acquisition is expected to enhance the Company’s franchise offerings and provide a platform for future growth, which the Company believes is complimentary to its portfolio of franchises.

Consideration for the transaction included cash of $44.3 million (based on the currency exchange rate as of the purchase date).

In addition, the Company agreed to pay certain sale bonus payments to the Seller consisting of quarterly cash payments based on the sales of the Franchise System and equipment packages in the U.S.

and Canada, as well as a percentage of royalties collected by the Company, provided that aggregate minimum payments of approximately $3.7 million (based on the currency exchange rate as of the purchase date) are required to be paid to the Seller for the two year period ending December 31, 2023 and the aggregate amount of such payments is subject to a maximum of $10.3 million (based on the currency exchange rate as of the purchase date).

In addition, the Company entered into a Master Franchise Agreement (“MFA”) with an affiliate of the Seller (the “Master Franchisee”), pursuant to which the Company granted the Master Franchisee the master franchise rights for the Body Fit Training TM and BFT TM brands in Australia, New Zealand and Singapore.

The Company also assumed certain contingent liabilities associated with the purchased assets and provided certain indemnifications to the Seller.

This acquisition is expected to enhance the Company’s franchise offerings and provide a platform for future growth, which the Company believes is complementary to its portfolio of franchises.

Consideration for the transaction included cash of $60.0 million AUD ($44.3 million USD based on the currency exchange rate as of the purchase date).

In addition, the Company agreed to pay contingent consideration to the Seller consisting of quarterly cash payments based on the sales of the Franchise System and equipment packages in the United States and Canada, as well as a percentage of royalties collected by the Company, provided that aggregate minimum payments of $5.0 million AUD (approximately $3.7 million USD based on the currency exchange rate as of the purchase date) are required to be paid to the Seller for the two-year period ending December 31, 2023 and the aggregate amount of such payments for the two-year period ending December 31, 2023 is subject to a maximum of $14.0 million AUD (approximately $10.3 million USD based on the currency exchange rate as of the purchase date).

Based on the purchase price allocation, the Company has determined that the fair value of the estimated contingent consideration liability as of the acquisition date is $9.4 million and is recorded in accrued expenses and contingent consideration from acquisitions in the condensed consolidated balance sheets.

In exchange, the Company will receive certain fees and royalties, including a percentage of the revenue generated by the Master Franchisee under the MFA.

The MFA contains an option for the Company to repurchase the master franchise rights granted under the MFA at a purchase price based on the Master Franchisee’s EBITDA.

If the Company (or a designee of the Company) does not exercise the option, then the Company might be required to pay a

cancellation fee to the Master Franchisee which might be material to the Company.

The MFA contains an option for the Company to repurchase the master franchise rights granted under the MFA in either 2023 or 2024 at a purchase price based on the Master Franchisee’s EBITDA.

If the Master Franchisee rejects an offer to repurchase the franchise rights, then the cancellation fee is not required to be paid.

At the acquisition date, there were certain claims and lawsuits against the Seller for which the Company has agreed to indemnify the Seller.

The Company is evaluating the potential losses, if any, related to this indemnification, and will record an estimate of the loss, if any, in purchase accounting.

The Company is unable to provide the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date as it has not yet completed its analysis.

The claims and lawsuits relate to alleged patent and trademark infringements.

The Seller has filed a cross-claim alleging that the defendant’s two Australian patents are, and always have been, invalid and that they should be revoked.

The court in Australia held a trial in December 2020, and on February 14, 2022, the court issued a decision holding that the Plaintiff’s claims of infringement were invalid and that even if they were valid, the Seller did not infringe upon these patents and trademarks.

In addition, the Plaintiff has brought related claims for patent infringement against the Seller in the United States District Court for Delaware, and these actions are currently pending.

See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information.

Factors Affecting Our Results of Operations

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We have developed strong relationships and executed committed development contracts with master franchisees to propel our international growth.

We plan to continue to invest in these relationships and seek new relationships and opportunities in countries that we have targeted for expansion.

We plan to continue to invest in these relationships and seek new relationships and opportunities, including through acquisitions and partnerships, in countries that we have targeted for expansion.

Consumer demand and competition for discretionary income .

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While we believe that these metrics are useful in evaluating our business, other companies may not use similar metrics or may not calculate similarly titled metrics in a consistent manner.

The following table sets forth our key performance indicators for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table sets forth our key performance indicators for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

($ in thousands)

System-wide sales

Number of new studio openings in North America

Number of studios operating in North America

(cumulative total as of period end)

Number of licenses sold in North America (cumulative

Number of new studios openings globally, net

Number of studios operating globally (cumulative total as of period end)

Number of licenses sold globally (cumulative total as of period end) (1)

Number of licenses contractually obligated to open internationally (cumulative

total as of period end)

Number of licenses contractually obligated to be sold

internationally (cumulative total as of period end)

AUV (LTM as of period end)

AUV (run rate)

Same store sales

Adjusted EBITDA (2)

*The definition of “Adjusted EBITDA”

and a detailed reconciliation of Adjusted EBITDA is set forth below under the section entitled “Non-GAAP Financial Measures”.

All metrics above, other than adjusted EBITDA, are presented on an adjusted basis to include historical information of Rumble prior to the acquisition by the Company in March 2021.

(1) Global franchise licenses sold are presented gross of terminations.

(2) The definition of adjusted EBITDA and a detailed reconciliation of adjusted EBITDA are set forth below under the section entitled “Non-GAAP Financial Measures”.

The following table presents additional information related to our studio and license key performance indicators for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

North America

International

North America

International

Open Studios:

Open studios (beginning of period)

New studio openings, net

Open studios (end of period)

Franchise Licenses Sold:

Franchise licenses sold (total beginning of period)

New franchise license sales

Franchise licenses sold (total end of period)

Studios Obligated to Open Internationally under

Gross studios obligated to open under MFAs

studios opened under MFAs

Remaining studios obligated to open under MFAs

Licenses sold by master franchisees, net (2)

(1) Global franchise licenses sold are presented gross of terminations.

(2) Reflects the number of licenses for studios which have already been sold, but not yet opened, by master franchisees under master franchise agreements, net of terminations.

All metrics above, other than adjusted EBITDA, are presented on an adjusted basis to reflect historical information of Rumble and BFT prior to the acquisition by the Company in March and October 2021, respectively.

All references to these metrics in this Form 10-Q use this same basis of reporting.

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System-wide sales includes sales by franchisees that are not revenue realized by us in accordance with GAAP.

While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, this operating metric relates to our revenue because we receive approximately 7% and 2% of the sales by franchisees as royalty revenue and marketing fee revenue, respectively.

We believe that this operating measure aids in understanding how we derive our royalty revenue and marketing fee revenue and is important in evaluating our performance.

We believe that this operating measure aids in understanding how we derive our royalty revenue and marketing fund revenue and is important in evaluating our performance.

System-wide sales growth is driven by new studio openings and increases in same store sales.

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Number of New Studio Openings

The number of new studio openings reflects the number of studios opened in North America during a particular reporting period.

The number of new studio openings reflects the number of studios opened during a particular reporting period, net of studios no longer operating in the system.

We consider a new studio to be open once the studio begins offering classes.

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Number of Studios Operating

In addition to the number of new studios opened during a period, we track the number of total studios operating in North America at the end of a reporting period.

In addition to the number of new studios opened during a period, we track the number of total studios operating at the end of a reporting period.

We view this metric on a net basis to take account of any studios that may have closed during the reporting period.

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Licenses contractually obligated to open refer to licenses sold net of opened studios and terminations.

Licenses contractually obligated to be sold internationally reflect the number

of licenses that master franchisees are contractually obligated to sell to franchisees outside of North America under master franchise agreements.

Licenses contractually obligated to be sold internationally reflect the number of licenses that master franchisees are contractually obligated to sell to franchisees to open internationally that have not yet opened as of the date indicated.

The number of licenses sold is a useful indicator of the number of studios that have opened and that are expected to open in the future, which management reviews in order to monitor and forecast our revenue streams.

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Of the franchisees that opened their first studio in 2020, on average it took approximately 14.6 months from signing the franchise agreement to open.

The length of time increased during 2020 due to COVID-related opening restrictions.

Management also reviews the number of licenses sold in North America and the number of licenses contractually obligated to be sold internationally in order to help forecast studio growth and system-wide sales.

The length of time increased during 2020 and 2021 due to COVID-related opening restrictions.

Management also reviews the number of licenses sold globally and the number of licenses contractually obligated to open internationally in order to help forecast studio growth and system-wide sales.

Average Unit Volume

AUV consists of the average sales for the trailing 12 calendar months for all studios in North America that have been open for at least 13 calendar months as of the measurement date.

AUV is calculated by dividing sales during the applicable period for all studios being measured by the number of studios being measured.

Average Unit Volume (“AUV”) is calculated by dividing sales during the applicable period for all studios being measured by the number of studios being measured.

LTM AUV consists of the average sales for the trailing 12 calendar months for all studios in North America that have been open for at least 13 calendar months as of the measurement date.

Quarterly run-rate AUV consists of average quarterly sales for all studios that are at least six months old at the beginning of the respective quarter, multiplied by four.

AUV growth is primarily driven by changes in same store sales and is also influenced by new studio openings.

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We believe that non-GAAP financial information, when taken collectively, is helpful to investors because it provides consistency and comparability with past financial performance.

In addition, our management uses non-GAAP measures to compare our performance relative to forecasts and to benchmark our performance externally against competitors.

However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as tools for comparison.

In addition, other companies, including companies in our industry, may calculate and present similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as tools for comparison.

A reconciliation is provided below for the non-GAAP financial measures to the most directly comparable financial measures stated in accordance with GAAP.

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We define adjusted EBITDA as EBITDA (net income/loss before interest, taxes, depreciation and amortization), adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance.

These items include equity-based compensation, acquisition and transaction expenses (income) (including change in contingent consideration), management fees and expenses (that was discontinued after July 2021), integration and related expenses, litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business) and expense related to the remeasurement of our TRA obligation that we do not believe reflect our underlying business performance and affect comparability.

These items include equity-based compensation, acquisition and transaction expenses (including change in contingent consideration), management fees and expenses (that were discontinued after July 2021), litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business), employee retention credit (a tax credit for retaining employees throughout the COVID-19 pandemic), secondary public offering expenses for which we do not receive proceeds and expense related to the remeasurement of our TRA obligation that we do not believe reflect our underlying business performance and affect comparability.

EBITDA and adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

We believe that adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that we do not believe reflect our underlying business performance.

that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period.

The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

We believe that adjusted EBITDA, viewed in addition to, and not in lieu of, our reported GAAP results, provides useful information to investors regarding our performance and overall results of operations because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period.

The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

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Equity-based compensation

Acquisition and transaction expenses (income)

Acquisition and transaction expenses

Management fees and expenses

Integration and related expenses

Litigation expenses

Employee retention credit

Secondary public offering expenses

TRA remeasurement

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Results of Operations

The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table presents our condensed consolidated results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

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Marketing fund expense

Acquisition and transaction expenses (income)

Acquisition and transaction expenses

Total operating costs and expenses

Operating income (loss)

Operating loss

Other (income) expense:

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Interest expense

Gain on debt extinguishment

Total other expense

Loss before income taxes

The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2021 and 2020 as a percentage of revenue:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table presents our condensed consolidated results of operations for the three months ended March 31, 2022 and 2021 as a percentage of revenue:

Three Months Ended March 31,

Revenue, net:

11 unchanged sentences

Marketing fund expense

Acquisition and transaction expenses (income)

Acquisition and transaction expenses

Total operating costs and expenses

Operating income (loss)

Operating loss

Other (income) expense:

1 unchanged sentence

Interest expense

Gain on debt extinguishment

Total other expense

Loss before income taxes

Three Months Ended September 30, 2021 versus 2020

The following is a discussion of our consolidated results of operations for the three months ended September 30, 2021 versus the three months ended September 30, 2020.

Three Months Ended September 30,

Three Months Ended March 31, 2022 versus 2021

The following is a discussion of our consolidated results of operations for the three months ended March 31, 2022 versus the three months ended March 31, 2021.

Three Months Ended March 31,

Change from Prior Year

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Total revenue.

Total revenue was $40.9 million in the three months ended September 30, 2021, compared to $25.6 million in the three months ended September 30, 2020, an increase of $15.3 million, or 59.8%.

The increase in total revenue was primarily due to reopening of studios that were temporarily closed in 2020 due to the COVID-19 pandemic and opening of new studios in 2021.

Total revenue was $50.4 million in the three months ended March 31, 2022, compared to $29.1 million in the three months ended March 31, 2021, an increase of $21.3 million, or 73.3%.

The increase in total revenue was primarily due to reopening of studios that were temporarily closed or were operating under capacity restrictions in 2021 due to the COVID-19 pandemic and opening of new studios in 2022.

Franchise revenue.

Franchise revenue was $20.0 million in the three months ended September 30, 2021, compared to $11.9 million in the three months ended September 30, 2020, an increase of $8.1 million, or 67.7%.

Franchise revenue consisted of franchise royalty fees of $12.6 million, training fees of $2.0 million, franchise territory fees of $3.6 million and technology fees of $1.9 million in the three months ended September 30, 2021, compared to franchise royalty fees of $6.5 million, training fees of $1.5 million, franchise territory fees of $2.8 million and technology fees of $1.2 million in the three months ended September 30, 2020.

The increase in franchise royalty fees, technology fees and training fees was primarily due to a 65% increase in same store sales due in

large part to temporary studio closures as a result of the COVID-19 pandemic in the prior year period, and to 227 new studio openings in North America since September 30, 2020, which also contributed to the increase in franchise territory fees.

Franchise revenue was $25.5 million in the three months ended March 31, 2022, compared to $13.8 million in the three months ended March 31, 2021, an increase of $11.7 million, or 85.4%.

Franchise revenue consisted of franchise royalty fees of $14.9 million, training fees of $1.8 million, franchise territory fees of $7.0 million and technology fees of $1.8 million in the three months ended March 31, 2022, compared to franchise royalty fees of $8.5 million, training fees of $1.4 million, franchise territory fees of $2.6 million and technology fees of $1.2 million in the three months ended March 31, 2021.

The increase in franchise royalty fees, technology fees and training fees was primarily due to a 47% increase in same store sales due in large part to temporary studio closures as a result of the COVID-19 pandemic in the prior year period, and to 263 new studio openings in North America since March 31, 2021, which also contributed to the increase in franchise territory fees.

Equipment revenue.

Equipment revenue was $6.8 million in the three months ended September 30, 2021, compared to $4.8 million in the three months ended September 30, 2020, an increase of $1.9 million, or 39.3%.

Equipment revenue was $7.8 million in the three months ended March 31, 2022, compared to $4.1 million in the three months ended March 31, 2021, an increase of $3.7 million, or 91.3%.

Most equipment revenue is recognized in the period that the equipment is installed.

Equipment installations in the three months ended September 30, 2021 totaled 59 compared to 61 in the prior year period, with a larger percentage of higher dollar installations in 2021.

Equipment installations in the three months ended March 31, 2022, totaled 104 compared to 74 in the prior year period, with a larger percentage of higher dollar installations in 2022.

Merchandise revenue.

Merchandise revenue was $4.9 million in the three months ended September 30, 2021, compared to $3.6 million in the three months ended September 30, 2020, an increase of $1.3 million, or 35.3%.

The increase was due primarily to a higher number of operating studios in the current year period and temporary closures of studios in the prior year period.

Merchandise revenue was $6.1 million in the three months ended March 31, 2022, compared to $4.2 million in the three months ended March 31, 2021, an increase of $1.9 million, or 43.7%.

The increase was due primarily to a higher number of operating studios in the current year period and temporary closures of studios in the prior year period due to the COVID-19 pandemic.

Franchise marketing fund revenue.

Franchise marketing fund revenue was $3.7 million in the three months ended September 30, 2021, compared to $1.8 million in the three months ended September 30, 2020, an increase of $1.9 million, or 107.0%.

The increase was primarily due to an increase in same store sales, 227 new studio openings in North America since September 30, 2020 and a temporary reduction in the marketing fund percentage collected from 2% to 1% of the sales of franchisees whose studios were closed due to the COVID-19 pandemic in 2020.

Franchise marketing fund revenue was $4.4 million in the three months ended March 31, 2022, compared to $2.5 million in the three months ended March 31, 2021, an increase of $1.9 million, or 78.6%.

The increase was primarily due to an increase in same store sales, 263 new studio openings in North America since March 31, 2021 and a temporary reduction in the marketing fund percentage collected from 2% to 1% of the sales of franchisees whose studios were closed due to the COVID-19 pandemic in 2021.

Other service revenue.

Other service revenue was $5.5 million in the three months ended September 30, 2021, compared to $3.4 million in the three months ended September 30, 2020, an increase of $2.1 million, or 62.6%.

The increase was primarily due to a $1.6 million increase in revenue from company-owned studios and a $1.1 million increase in other preferred vendor commission revenue, partially offset by a $0.6 million decrease in our digital platform revenue.

Other service revenue was $6.6 million in the three months ended March 31, 2022, compared to $4.5 million in the three months ended March 31, 2021, an increase of $2.1 million, or 45.0%.

The increase was primarily due to a $1.8 million increase in other preferred vendor commission revenue and brand fee revenue.

Operating Costs and Expenses

Three Months Ended September 30,

Three Months Ended March 31,

Change from Prior Year

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Costs of product revenue.

Costs of product revenue was $7.6 million in the three months ended September 30, 2021, compared to $5.4 million in the three months ended September 30, 2020, an increase of $2.2 million, or 41.3%.

The increase in costs is consistent with the 37.6% increase in related revenues.

Costs of product revenue as a percentage of related revenue increased to 65.7% in the three months ended September 30, 2021 from 64.0% in the three months ended September 30, 2020.

Costs of product revenue was $9.6 million in the three months ended March 31, 2022, compared to $5.3 million in the three months ended March 31, 2021, an increase of $4.3 million, or 79.5%, compared to an increase in related revenues of 67.1%.

Costs of product revenue as a percentage of related revenue increased to 69.2% in the three months ended March 31, 2022, from 64.4% in the three months ended March 31, 2021.

The increase was due to a shift in equipment revenue mix in 2022.

Costs of franchise and service revenue.

Costs of franchise and service revenue was $3.2 million in the three months ended September 30, 2021, compared to $2.4 million in the three months ended September 30, 2020, an increase of $0.8 million, or 33.8%.

The increase was primarily due to an increase in costs related to technology fee revenue, consistent with the related revenue increase.

Costs of franchise and service revenue was $4.2 million in the three months ended March 31, 2022, compared to $2.3 million in the three months ended March 31, 2021, an increase of $1.9 million, or 82.6%.

The increase was primarily due to a $1.5 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase.

Selling, general and administrative expenses.

Selling, general and administrative expenses were $24.3 million in the three months ended September 30, 2021, compared to $16.6 million in the three months ended September 30, 2020, an increase of $7.6 million, or 45.9%.

The increase was primarily attributable to an increase in salaries and wages and occupancy expenses of $1.9 million and $1.2 million, respectively, primarily related to the increase in number of company-owned studios;

$3.1 million increase in equity-based compensation, primarily related to modification of awards in 2021 and new grants;

increases in bad debt expense and insurance expense of $1.2 million and $1.0 million, respectively;

and net increases in other variable expenses of $0.9 million;

partially offset by a reduction in legal expense of $1.5 million.

Selling, general and administrative expenses were $33.9 million in the three months ended March 31, 2022, compared to $16.6 million in the three months ended March 31, 2021, an increase of $17.3 million, or 104.3%.

The increase was primarily attributable to an increase in equity-based compensation of $15.0 million, primarily related to modification of performance-based awards in 2021 which vested in 2022 and new grants;

an increase in accounting expenses of $1.3 million, primarily related to outsourcing of certain accounting functions and fees related to recovery of employee retention credit;

increase in legal expenses of $1.5 million related to various legal matters;

increase in insurance expense of $1.3 million;

and $0.3 million net increase in other variable expenses in 2022;

partially offset by a decrease in salaries and wages expense of $2.1 million attributable to employee retention credit recorded in the three months ended March 31, 2022.

Depreciation and amortization.

Depreciation and amortization expense was $2.4 million in the three months ended September 30, 2021, compared to $2.0 million in the three months ended September 30, 2020, an increase of $0.4 million, or 21.5%.

The increase was due primarily to amortization of intangibles related to the Rumble acquisition in March 2021.

Depreciation and amortization expense was $3.5 million in the three months ended March 31, 2022, compared to $2.1 million in the three months ended March 31, 2021, an increase of $1.4 million, or 69.9%.

The increase was due primarily to amortization of intangibles related to the BFT and Rumble acquisitions in October 2021 and March 2021, respectively.

Marketing fund expense.

Marketing fund expense was $3.8 million in the three months ended September 30, 2021 compared to $1.6 million in the three months ended September 30, 2020, an increase of $2.2 million, or 136.2% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expenses (income).

Acquisition and transaction expenses (income) were $2.9 million in the three months ended September 30, 2021, compared to ($5.1) million in the three months ended September 30, 2020, a change of $8.0 million, or 156.1%.

These expenses (income) represent the non-cash change in contingent consideration related to 2017 and 2018 business acquisitions and $2.8 million of expense in 2021 related to the change in contingent consideration related to the Rumble acquisition.

Marketing fund expense was $4.4 million in the three months ended March 31, 2022, compared to $2.6 million in the three months ended March 31, 2021, an increase of $1.7 million, or 66.5% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expenses.

Acquisition and transaction expenses were $9.5 million in the three months ended March 31, 2022, compared to $0.4 million in the three months ended March 31, 2021, a change of $9.2 million, or 2,626.9%.

These expenses represent the non-cash change in contingent consideration related to 2017 and 2021 business acquisitions and $0.2 million of expense in 2021 related to the Rumble acquisition.

Other (Income) Expense, net

Three Months Ended September 30,

Three Months Ended March 31,

Change from Prior Year

2 unchanged sentences

Interest expense

Gain on debt extinguishment

Total other expense, net

Interest income.

Interest income primarily consists of interest on notes receivable and was insignificant in each of the three-month periods ended September 30, 2021 and 2020.

Interest income primarily consists of interest on notes receivable and was insignificant in each of the three-month periods ended March 31, 2022 and 2021.

Interest expense .

Interest expense was $5.9 million in the three months ended September 30, 2021, compared to $4.6 million in the three months ended September 30, 2020, an increase of $1.3 million, or 28.5%.

Interest expense was $2.9 million in the three months ended March 31, 2022, compared to $4.4 million in the three months ended March 31, 2021, a decrease of $1.6 million, or 35.3%.

Interest expense consists of interest on notes payable and long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs and debt discount.

The increase was due primarily to write off of $2.5 million of deferred loan costs and debt discount and $0.4 million prepayment penalty incurred in the three months ended September 30, 2021, related to pay down of debt with IPO proceeds, partially offset by lower average debt balance compared to the prior year.

Three Months Ended September 30,

Change from Prior Year

($ in thousands)

Income taxes .

Income taxes were insignificant in each of the three-month periods ended September 30, 2021 and 2020.

Nine Months Ended September 30, 2021 versus 2020

The following is a discussion of our consolidated results of operations for the nine months ended September 30, 2021 versus the nine months ended September 30, 2020.

Nine Months Ended September 30,

Change from Prior Year

($ in thousands)

Franchise revenue

Equipment revenue

Merchandise revenue

Franchise marketing fund revenue

Other service revenue

Total revenue, net

Total revenue.

Total revenue was $105.7 million in the nine months ended September 30, 2021, compared to $78.8 million in the nine months ended September 30, 2020, an increase of $26.9 million, or 34.1%.

The increase in total revenue was primarily due to an increase in franchise revenue, franchise marketing fund revenue and other service revenue attributable to reopening of studios that were temporarily closed in 2020 due to the COVID-19 pandemic and opening of new studios in 2021, partially offset by a decrease in equipment revenue.

Franchise revenue.

Franchise revenue was $51.5 million in the nine months ended September 30, 2021, compared to $35.8 million in the nine months ended September 30, 2020, an increase of $15.8 million, or 44.1%.

Franchise revenue consisted of franchise royalty fees of $32.2 million, training fees of $5.1 million, franchise territory fees of $9.6 million and technology fees of $4.7 million in the nine months ended September 30, 2021, compared to franchise royalty fees of $20.6 million, training fees of $4.6 million, franchise territory fees of $7.7 million and technology fees of $2.9 million in the nine months ended September 30, 2020.

The increase in franchise royalty fees was primarily due to a 36% increase in same store sales due in large part to temporary studio closures as a result of the COVID-19 pandemic in the prior year period, and to 227 new studio openings in North America since September 30, 2020, which also contributed to the increase in franchise territory fees and technology fees.

Equipment revenue.

Equipment revenue was $15.6 million in the nine months ended September 30, 2021, compared to $16.7 million in the three months ended September 30, 2020, a decrease of $1.2 million, or 7.0%.

Most equipment revenue is recognized in the period that the equipment is installed.

Equipment installations in the first three quarters of 2021 totaled 159 compared to 197 in the first three quarters of 2020 with a larger percentage of higher dollar installations in 2021.

Merchandise revenue.

Merchandise revenue was $13.6 million in the nine months ended September 30, 2021, compared to $12.2 million in the nine months ended September 30, 2020, an increase of $1.4 million, or 11.4%.

The increase was due primarily to a higher number of operating studios in the current year period and temporary closures of studios in the prior year period.

Franchise marketing fund revenue.

Franchise marketing fund revenue was $9.5 million in the nine months ended September 30, 2021, compared to $5.2 million in the nine months ended September 30, 2020, an increase of $4.3 million, or 81.9%.

The increase was primarily due to an increase in same store sales, 227 new studio openings in North America since September 30, 2020 and to a temporary reduction in the marketing fund percentage collected from 2% to 1% of the sales of franchisees whose studios were closed due to the COVID-19 pandemic in 2020.

Other service revenue.

Other service revenue was $15.5 million in the nine months ended September 30, 2021, compared to $8.9 million in the nine months ended September 30, 2020, an increase of $6.6 million, or 74.6%.

The increase was primarily due to a $4.8 million increase in revenue from company-owned studios and a $2.8 million increase in other preferred vendor commission revenue, partially offset by a $1.0 million decrease in our digital platform revenue.

Operating Costs and Expenses

Nine Months Ended September 30,

Change from Prior Year

($ in thousands)

Costs of product revenue

Costs of franchise and service revenue

Selling, general and administrative expenses

Depreciation and amortization

Marketing fund expense

Acquisition and transaction expenses (income)

Total operating costs and expenses

Costs of product revenue.

Costs of product revenue was $19.3 million in the nine months ended September 30, 2021, compared to $20.3 million in the nine months ended September 30, 2020, a decrease of $1.0 million, or 5.1%, compared to an increase in related revenues of 0.8%.

Costs of product revenue as a percentage of related revenue decreased to 66.0% in the nine months ended September 30, 2021 from 70.0% in the nine months ended September 30, 2020.

The decrease was due to a shift in equipment revenue mix in 2021 partially offset by a higher percentage of non-branded merchandise revenue in 2021 for which the company earns a commission with no corresponding cost of revenue.

Costs of franchise and service revenue.

Costs of franchise and service revenue was $8.6 million in the nine months ended September 30, 2021, compared to $6.5 million in the nine months ended September 30, 2020, an increase of $2.1 million, or 32.6%.

The increase was primarily due to an increase in costs related to technology fee revenue, consistent with the related revenue increase.

Selling, general and administrative expenses.

Selling, general and administrative expenses were $62.1 million in the nine months ended September 30, 2021, compared to $43.9 million in the nine months ended September 30, 2020, an increase of $18.1 million, or 41.3%.

The increase was primarily attributable to an increase in salaries and wages and occupancy expenses of $7.8 million and $3.6 million, respectively, primarily related to the increase in number of company-owned studios;

$2.9 million increase in equity-based compensation, primarily related to modification of awards in 2021 and new grants;

increases in marketing and promotion expense and insurance expense of $1.6 million and $1.2 million, respectively;

and net increases of $3.5 million in other variable expenses in 2021, partially offset by a reduction in bad debt expense of $2.4 million.

Depreciation and amortization.

Depreciation and amortization expense was $6.8 million in the nine months ended September 30, 2021, compared to $5.7 million in the nine months ended September 30, 2020, an increase of $1.2 million, or 21.0%.

The increase was due primarily to an increase in assets related to company-owned studios and intangibles related to the Rumble acquisition in March 2021.

Marketing fund expense.

Marketing fund expense was $9.3 million in the nine months ended September 30, 2021, compared to $5.0 million in the nine months ended September 30, 2020 and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expenses (income).

Acquisition and transaction expenses (income) were $3.5 million in the nine months ended September 30, 2021, compared to ($10.9) million in the nine months ended September 30, 2020, a change of $14.5 million, or 132.2%.

These expenses (income) represent the non-cash change in contingent consideration related to 2017 and 2018 business acquisitions, $0.3 million of expense in 2021 related to the acquisition of Rumble and $2.8 million of expense in 2021 related to the change in contingent consideration related to the Rumble acquisition..

Other (Income) Expense, net

Nine Months Ended September 30,

Change from Prior Year

($ in thousands)

Interest income

Interest expense

Gain on debt extinguishment

Total other expense, net

Interest income.

Interest income primarily consists of interest on notes receivable and was insignificant in each of the nine-month periods ended September 30, 2021 and 2020.

Interest expense .

Interest expense was $21.9 million in the nine months ended September 30, 2021, compared to $16.9 million in the nine months ended September 30, 2020, an increase of $5.0 million, or 29.3%.

Interest expense consists of interest on notes payable and long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs.

The increase was due primarily to write off of $7.5 million of deferred loan costs and debt discount and $2.3 million prepayment penalty incurred in the nine months ended September 30, 2021, related to our credit agreement with Cerberus Business Finance Agency, LLC, which was replaced with a new credit facility in April 2021, and $115 million pay down of debt with IPO proceeds, compared to $1.5 million of prepayment and other penalties incurred in the nine months ended September 30, 2020 and a write off of $1.8 million of deferred loan costs related to our credit agreement with Monroe Capital Management Advisors, LLC, which was replaced with a new credit facility in March 2020.

Gain on debt extinguishment.

Gain on debt extinguishment of $3.7 million in the nine months ended September 30, 2021 represents the forgiveness of principal and interest on our PPP Loan.

Nine Months Ended September 30,

The decrease was due primarily to lower average debt balance compared to the prior year.

Three Months Ended March 31,

Change from Prior Year

1 unchanged sentence

Income taxes .

Income taxes were insignificant in each of the nine-month periods ended September 30, 2021 and 2020.

Income taxes were ($2.1) million in the three months ended March 31, 2022, compared to $0.2 million in the three months ended March 31, 2021.

In 2022, the Company is taxed as a corporation.

Prior to the IPO in July 2021, the Company was a pass-through entity for income tax purposes.

Liquidity and Capital Resources

As of September 30, 2021, we had $24.4 million of cash and cash equivalents, excluding $1.1 million of restricted cash for marketing fund purposes.

As of March 31, 2022, we had $14.2 million of cash and cash equivalents, excluding $1.6 million of restricted cash for marketing fund purposes.

We require cash principally to fund day-to-day operations, finance capital investments, service our outstanding debt and address our working capital needs.

Based on our current level of operations and anticipated growth, we believe that our available cash balance and the cash generated from our operations will be adequate to meet our anticipated debt service requirements and obligations under our tax receivable agreement, capital expenditures, payment of tax distributions and working capital needs for at least the next twelve months.

Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors.”

Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors”, as disclosed in our Form 10-K for the year ended December 31, 2021.

There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our credit facility or otherwise to enable us to service our indebtedness, including our credit facility, or to make anticipated capital expenditures.

Our future operating performance and our ability to service, extend or refinance the credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Initial Public Offering

On July 27, 2021, XPO Inc.

completed an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock at a price to the public of $12.00 per share.

After underwriter discounts and commissions, we received net proceeds from the IPO of approximately $111.9 million, before deduction of offering expenses.

Also on July 27, 2021, we issued and sold 200,000 shares of Convertible Preferred for aggregate cash proceeds of $200 million, before deduction of offering costs.

Holders of Convertible Preferred shares are entitled to quarterly coupon payments at the rate of 6.50% of the fixed liquidation preference per share, initially $1,000 per share.

In the event the quarterly preferential coupon is not paid in cash, the fixed liquidation preference automatically increases at the PIK rate of 7.50%.

The Convertible Preferred has an initial conversion price equal to $14.40 per share and is mandatorily convertible under certain circumstances and redeemable at the option of the holder beginning on the date that is eight years from the IPO or upon change of control.

The issuance of Convertible Preferred shares and Class A common stock by us and the related net proceeds were recorded in the consolidated financial statements on July 27, 2021, the closing date of the IPO.

In August 2021, the underwriters exercised the option to purchase additional shares, pursuant to which XPO Inc.

issued and sold 904,000 shares of Class A common stock at a price to the public of $12.00 per share.

After underwriter discounts and commissions, we received net proceeds of approximately $10.1 million on August 24, 2021.

We used (i) $9.0 million to purchase 750,000 LLC Units from our Chief Executive Officer and (ii) $1.1 million for working capital.

Credit Facility

On April 19, 2021, we entered into a Financing Agreement with Wilmington Trust, National Association, as administrative agent and collateral agent, and MSD XPO Partners, LLC, MSD PCOF Partners XXXIX, LLC and DESALKIV Cayman C-2, Ltd.

(f/k/a DELALV Cayman C-2, Ltd.) as the lenders (the “Credit Agreement”), which consists of a $212 million senior secured term loan facility (the “Term Loan Facility”, and the loans thereunder, the “Term Loan”).

and together, the “Term Loans”).

Affiliates of MSD XPO Partners, LLC, MSD PCOF Partners XXXIX, LLC and DESALKIV Cayman C-2, Ltd.

2 unchanged sentences

Under the Credit Agreement, we are required to make:

(i) monthly payments of interest on the Term Loan and (ii) quarterly principal payments equal to 0.25% of the original principal amount of the Term Loan.

Borrowings under the Term Loan Facility bear interest at a per annum rate of, at our option, either (a) the LIBOR Rate (as defined in the Credit Agreement) plus a margin of 6.50% or (b) the Reference Rate (as defined in the Credit Agreement) plus a margin of 5.50% (7.5% at September 30, 2021).

(i) monthly payments of interest on the Term Loans and (ii) quarterly principal payments equal to 0.25% of the original principal amount of the Term Loan.

The Credit Agreement also contains mandatory prepayments of the Term Loan with:

5 unchanged sentences

and (v) up to $60 million of net proceeds in connection with an initial public offering of at least $200 million, subject to certain exceptions.

All voluntary prepayments and certain mandatory prepayments of the Term Loan made (i) on or prior to the first anniversary of the closing date are subject to a 2.00% premium on the principal amount of such prepayment and (ii) after the first anniversary of the

closing date and on or prior to the second anniversary of the closing date are subject to a 0.50% premium on the principal amount of such prepayment.

Otherwise, the Term Loan may be paid without premium or penalty, other than customary breakage costs with respect to LIBOR Rate Term Loans.

Unless agreed in advance, all voluntary prepayments and certain mandatory prepayments of the Term Loan made (i) on or prior to the first anniversary of the closing date are subject to a 2.0% premium on the principal amount of such prepayment and (ii) after the first anniversary of the closing date and on or prior to the second anniversary of the closing date are subject to a 0.50% premium on the principal amount of such prepayment.

Otherwise, the Term Loans may be paid without premium or penalty, other than customary breakage costs with respect to LIBOR Rate Term Loans.

The Credit Agreement contains customary affirmative and negative covenants, including, among other things:

8 unchanged sentences

and (ix) restricting the issuance of equity.

As of September 30, 2021, we were in compliance with these covenants.

As of March 31, 2022, we were in compliance with these covenants.

The Credit Agreement also contains customary events of default, which could result in acceleration of amounts due under the Credit Agreement.

3 unchanged sentences

Immediately following the IPO, on July 27, 2021 we executed a first amendment to the Credit Agreement, which amended the amount of the prepayment premium applicable to the prepayment of the Term Loan, and paid off $115.0 million of the principal balance of the Term Loan.

Outstanding borrowings on the Term Loan were $95.9 million at September 30, 2021.

On October 8, 2021, we entered into a second amendment (the "Amendment") to the Credit Agreement.

On October 8, 2021, we entered into a second amendment (the “

Amendment ”

) to the Credit Agreement.

The Amendment provides for, among other things, additional term loans in an aggregate principal amount of $38 million (the “2021 Incremental Term Loan”), the proceeds of which were used to fund the BFT Acquisition and the payment of fees, costs and expenses related to the Amendment.

In April 2020, we entered into a promissory note with Citizens Business Bank under the Paycheck Protection Program of the CARES Act pursuant to which Citizens Business Bank agreed to make a loan to us in the amount of approximately $3.7 million (the “PPP Loan”).

The PPP Loan matures in April 2022, bears interest at a rate of 1.0% per annum and requires no payments during the first 16 months from the date of the loan.

On June 10, 2021, we were notified that the U.S.

Small Business Administration (the “SBA”) had forgiven the PPP Loan in full.

Contractual Obligations

As a result of pay down of the Term Loan from IPO proceeds and subsequent borrowings to fund the BFT Acquisition, our commitments for payment of debt principal have decreased from $211.5 at June 30, 2021 to $134.9 million at October 31, 2021.

The following table presents summary cash flow information for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

Outstanding borrowings on the Term Loan and the 2021 Incremental Term Loan were $132.5 m illion at March 31, 2022.

At March 31, 2022, there had been no material changes in our cash requirements from known contractual and other obligations as disclosed in Part II, Item 7, “

Management's Discussion and Analysis of Financial Condition and Results of Operations, ”

of our Annual Report on Form 10-K for the year ended December 31, 2021.

The following table presents summary cash flow information for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

(in thousands)

2 unchanged sentences

Net cash provided by (used in) financing activities

Net increase in cash, cash equivalents and

Net decrease in cash, cash equivalents and

restricted cash

Cash Flows from Operating Activities

In the nine months ended September 30, 2021, cash provided by operating activities was $3.9 million, compared to cash used of $3.9 million in the nine months ended September 30, 2020, an increase in cash provided of $7.8 million.

In the three months ended March 31, 2022, cash provided by operating activities was $2.9 million, compared to cash used of $0.2 million in the three months ended March 31, 2021, an increase in cash provided of $3.1 million.

Of the change, $14.3 million was due to a higher net loss offset by adjustments for non-cash items.

1 unchanged sentence

increase in cash inflows relating to deferred revenue of $0.9 million due to an increase in sales of additional franchises;

increase in cash outflows relating to (1) accounts payable, accrued expenses and other liabilities of $4.2 million due to timing of payments;

(2) current assets, excluding deferred costs, of $8.7 million due primarily to an increase in accounts receivable and prepaid expenses, partially offset by decreases in inventories and other current assets;

and (3) deferred costs of $3.7 million due to an increase in sales of additional franchises.

increase in cash outflows relating to (1) accounts payable and accrued expenses of $5.1 million due to timing of payments;

(2) increase in accounts receivable and prepaid expense of $3.3 million;

(3) increase in inventories of $2.7 million;

and (4) payment of notes payable of $1.0 million.

Cash Flows from Investing Activities

In the nine months ended September 30, 2021, cash used in investing activities was $4.0 million, compared to $3.4 million in the nine months ended September 30, 2020, a decrease of $0.6 million.

The decrease was primarily attributable to an increase in cash used to purchase property and equipment and issue notes receivables, partially offset by an increase in cash received from collection of notes receivable, increase in cash proceeds from sales of assets and decrease in cash used to purchase studios.

In the three months ended March 31, 2022, cash used in investing activities was $2.2 million, compared to $1.6 million in the three months ended March 31, 2021, an increase in cash used of $0.6 million.

The increase was primarily attributable to an increase in cash used to purchase property and equipment and issue notes receivables, partially offset by an increase in cash received from collection of notes receivable, increase in cash proceeds from sales of assets and decrease in cash used to purchase studios.

Cash Flows from Financing Activities

In the nine months ended September 30, 2021, cash provided by financing activities was $14.3 million, compared to $8.9 million in the nine months ended September 30, 2020, an increase in cash provided of $5.4 million.

The increase was primarily attributable to cash received resulting from the IPO and preferred stock issuance, net of offering costs, of $317.2 million and change in member contributions, distributions to member and receipts from member of $7.0 million, partially offset by $185.7 million payments made in connection with reorganization transactions as described in Note 11, increase in payments made to decrease net borrowings on our line of credit and long-term debt, partially offset by reduction in debt issuance costs of $119.6 million, an increase in dividend payment of $4.1 million and an increase in contingent consideration payment of $9.4 million.

In the three months ended March 31, 2022, cash used by financing activities was $6.3 million, compared to $2.1 million in the three months ended March 31, 2021, an increase in cash used of $4.2 million.

The increase in cash used was primarily attributable to dividend payment of $4.9 million, partially offset by a decrease in borrowings on long-term debt of $10.6 million, decrease in distribution to Member of $10.6 million, lower debt issuance costs of $0.2 million and lower payments on long-term debt and contingent consideration of $0.6 million.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission (the “SEC”).

As of March 31, 2022, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission (the “SEC”).

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies as disclosed in the final prospectus filed in connection with the IPO on July 26, 2021.

There have been no significant changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,”

included in our Form 10-K for the year ended December 31, 2021, except for the adoption of Accounting Standards Update (“ASU”) No.

2016-02, “Leases (Topic 842)”

which we adopted on January 1, 2022.

For further discussion on the adoption of this new accounting standard please see Note 2 “Summary of Significant Accounting Policies”

of Notes to Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements