What changed in this filing

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Item 1. Financial Statements

2023-05-05 compared with 2022-11-10 · 443 added, 839 removed, 833 unchanged (61% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

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

September 30,

(amounts in thousands, except per share amounts)

Current Assets:

3 unchanged sentences

Deferred costs, current portion

Notes receivable from franchisees, net (Note 10)

Notes receivable from franchisees, net

Total current assets

3 unchanged sentences

Deferred costs, net of current portion

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

Liabilities, redeemable convertible preferred stock and deficit

Notes receivable from franchisees, net of current portion

Liabilities, redeemable convertible preferred stock and equity (deficit)

Current Liabilities:

2 unchanged sentences

Deferred revenue, current portion

Notes payable

Current portion of long-term debt

8 unchanged sentences

Commitments and contingencies (Note 16)

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

shares issued and outstanding as of September 30, 2022 and December 31, 2021

Redeemable convertible preferred stock, $ 0.0001 par value, 400 shares authorized, 115 and

200 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Stockholders' equity (deficit):

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

and outstanding as of September 30, 2022 and December 31, 2021

and outstanding as of March 31, 2023 and December 31, 2022

Class A common stock, $ 0.0001 par value, 500,000 shares authorized, 32,899 and

23,898,042 shares issued and outstanding as of September 30, 2022 and December 31, 2021,

27,571 shares issued and outstanding as of March 31, 2023 and December 31, 2022,

Class B common stock, $ 0.0001 par value, 500,000 shares authorized, 16,731 and

22,968,674 shares issued and outstanding as of September 30, 2022 and December 31, 2021,

21,647 shares issued, and 16,656 and 21,572 shares outstanding as of March 31, 2023 and

December 31, 2022, respectively

Additional paid-in capital

1 unchanged sentence

Accumulated deficit

Treasury stock, at cost, 75 shares outstanding as of March 31, 2023 and December 31, 2022

Total stockholders' deficit attributable to Xponential Fitness, Inc.

1 unchanged sentence

Total stockholders' deficit

Total liabilities, redeemable convertible preferred stock and deficit

Total liabilities, redeemable convertible preferred stock and stockholders' deficit

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

Condensed Consolidated S tatements of Operations

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

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in thousands, except 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:

Interest income

Interest expense (Note 10)

Gain on debt extinguishment

Interest expense

Other expense

Total other expense

Income (loss) before income taxes

Income taxes (benefit)

Net income (loss)

net income (loss) attributable to noncontrolling interests

Net income (loss) attributable to Xponential Fitness, Inc.

Net earnings (loss) per share of Class A common stock:

Loss before income taxes

Income tax benefit

net loss attributable to noncontrolling interests

Net loss attributable to Xponential Fitness, Inc.

Net loss per share of Class A common stock:

Weighted average shares of Class A common stock outstanding:

1 unchanged sentence

Xponential Fitness, Inc.

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

(amounts in thousands, except share amounts)

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

(amounts in thousands)

Class A Common Stock

Class B Common Stock

Treasury Stock

Additional Paid-In Capital

Member’s

Receivable from

Noncontrolling interests

Noncontrolling

Equity (Deficit)

1 unchanged sentence

Equity-based compensation

Conversion of Class B shares to Class A shares

Payment of preferred stock dividend

Adjustment of preferred stock to redemption value

Vesting of Class B Shares

Balance at March 31, 2022

Equity based compensation

Conversion of Class B shares to Class A shares

Conversion of Class B shares to

Class A shares

Payment of preferred stock dividend

Adjustment of preferred stock to redemption value

Vesting of Class B Shares

Vesting of restricted stock units

Balance at June 30, 2022

Equity based compensation

Conversion of Class B shares to Class A shares

Adjustment of preferred stock to

redemption value

Vesting of Class B Shares

Vesting of restricted share units, net of shares withheld for taxes

Vesting of restricted share units, net of shares

withheld for taxes

Deemed contribution from redemption of

preferred stock

Liability-classified restricted stock units

Loan to shareholder and accumulated interest

Payment of preferred stock dividend

Adjustment of preferred stock to redemption value

Balance at September 30, 2022

Balance at March 31, 2023

See accompanying notes to condensed consolidated financial statements.

Xponential Fitness, Inc.

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

(amounts in thousands, except share amounts)

Condensed Consolidated Statements of Changes to Stockholders' Equity (Deficit)

(amounts in thousands)

Class A Common Stock

1 unchanged sentence

Additional Paid-In Capital

Member’s

from Member/ Shareholder

from Shareholder

Noncontrolling

Equity (Deficit)

Redeemable noncontrolling interests

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

Vesting of Class B Shares

Balance at March 31, 2022

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:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

Amortization and write off of debt issuance cost

Amortization and write off of discount on long-term debt

Amortization of discount on long-term debt

Change in contingent consideration from acquisitions

Bad debt expense (recovery)

Adjustment for recognition of TRA and deferred tax liability

Amortization of right-of-use assets

Bad debt recovery

Equity-based compensation

Non-cash interest

Gain on debt extinguishment

(Gain) loss on disposal of assets

Impairment of studio assets

Impairment of brand 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

Operating lease liabilities

Deferred costs

2 unchanged sentences

Accrued expenses

Related party payable

Other current liabilities

5 unchanged sentences

Proceeds from sale of assets

Purchase of studios

Purchase of intangible assets

6 unchanged sentences

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 10)

Member contributions

Payments for taxes related to net share settlement of restricted share units

Distributions to Member

Loan to shareholder

Receipts from Member, net (Note 10)

Net cash provided by (used in) financing activities

Increase in cash, cash equivalents and restricted cash

Payments for redemption of preferred stock

Loan to shareholder (Note 10)

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

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

Intangible asset acquired in exchange for deferred revenue

ROU assets obtained in exchange for new operating lease liabilities

Adjustment of convertible preferred stock to redemption value

Liability-classified restricted stock units vested

Deemed contribution from redemption of convertible preferred stock

Accrued tax withholding related to convertible preferred stock dividend

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

(amounts in thousands, except per share amounts)

Note 1 –

5 unchanged sentences

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.

XPO LLC was formed on August 11, 2017 as a Delaware limited liability company for the sole purpose of franchising fitness brands in several verticals within the boutique fitness industry.

1 unchanged sentence

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

As of March 31, 2023 , the Company’s portfolio of ten brands consists of:

“Club Pilates,”

15 unchanged sentences

“Rumble,”

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

a boxing concept that offers boxing-inspired group fitness classes;

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.

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.

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 40 and 43 company-owned transition studios as of September 30, 2022 and 2021, respectively.

In addition to franchised studios, the Company operated 87 and 20 company-owned transition studios as of March 31, 2023 and 2022, respectively.

In connection with the IPO, XPO Inc.

15 unchanged sentences

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

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.

Principles of consolidation –

1 unchanged sentence

All intercompany transactions have been eliminated in consolidation.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

Use of estimates –

4 unchanged sentences

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

The Company generated $ 3,104 and $ 9,060 of revenue outside the United States during the three and nine months ended September 30, 2022 , respectively, and $ 585 and $ 1,124 during the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022 and December 31, 2021 , the Company did not have material assets located outside of the United States.

The Company generated $ 2,980 and $ 3,380 of revenue outside the United States during the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023 and December 31, 2022 , 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.

In July 2022, the Company issued a $ 750 standby letter of credit to a third-party financing company, who provides loans to the Company's franchisees.

In July 2022, the Company issued a $ 750 standby letter of credit to a third-party financing company, who provides loans to the Company's qualified franchisees.

The standby letter of credit is contingent upon the failure of franchisees to perform according to the terms of underlying contracts with the third party.

The Company deposited cash in a restricted account as collateral for the standby letter of credit.

Restricted cash was $ 3,382 and $ 1,427 at September 30, 2022 and December 31, 2021 , respectively.

In addition, the Company, as a guarantor, is required to recognize, at inception of the guaranty, a liability for the fair value of the obligation undertaken in issuing the guarantee.

See Note 16 for further discussion of such obligations guaranteed.

The Company's restricted cash consists of marketing fund restricted cash and guarantee of standby letter of credit.

Restricted cash was $ 5,917 and $ 5,381 at March 31, 2023 and December 31, 2022 , 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, 2022 and December 31, 2021 , the allowance for doubtful accounts was $ 1,297 and $ 2,193 , respectively.

Credit Losses –

Effective January 1, 2023, the Company adopted ASU 2016-13, which required the recognition of expected credit losses for account and notes receivable.

The adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements as the expected credit loss model was not significantly different from the Company's prior policy and methodology for determining the allowance for doubtful accounts.

For additional information refer to section below titled “Recently adopted accounting pronouncements.”

The Company’s accounts and notes receivable are recorded at net realizable value, which includes an appropriate allowance for estimated credit losses.

The estimate of credit losses is based upon historical bad debts, current receivable balances, age of receivable balances, the customer’s financial condition and current economic trends, all of which are subject to change.

Actual uncollected amounts have historically been consistent with the Company’s expectations.

The Company’s payment terms on its receivables from franchisees are generally 30 days .

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

The following table provides a reconciliation of the activity related to the Company’s accounts receivable and notes receivable allowance for credit losses:

Accounts receivable

Notes receivable

Balance at January 1, 2023

Bad debt expense recognized during the year

Write-off of uncollectible amounts

Balance at March 31, 2023

Accrued expenses –

Accrued expenses consisted of the following:

September 30,

Accrued compensation

2 unchanged sentences

Legal accruals

Accrued deemed dividend

Accrued tax withholding related to convertible preferred stock dividend

Other accruals

Total accrued expenses

Deferred offering costs –

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

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, per share and unit amounts)

Comprehensive income –

13 unchanged sentences

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.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

Redeemable convertible preferred stock –

6 unchanged sentences

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.

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 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.

Earnings (loss) per share –

2 unchanged sentences

As such, separate presentation of basic and diluted earnings (loss) per share of Class B common stock under the two-class method has not been presented.

Diluted earnings per share adjusts the basic earnings per share calculation for the potential dilutive impact of common shares such as equity awards using the treasury-stock method.

Diluted earnings per share adjusts the basic e arnings per share calculation for the potential dilutive impact of common shares such as equity awards using the treasury-stock method.

Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

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.

Shares of Class B common stock are considered potentially dilutive shares of Class A common stock;

however, related amounts have been excluded from the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods.

Income taxes –

9 unchanged sentences

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 and nine months ended September 30, 2022 and 2021 .

The Company did no t incur any interest or penalties for the three months ended March 31, 2023 and 2022 .

Reclassifications

Certain amounts have been reclassified to conform to current year presentation.

Recently adopted accounting pronouncements –

Accounting for leases –

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

2016-02, “Leases (Topic 842)”

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, per share and unit amounts)

Credit Losses –

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

In June 2016, the Financial Accounting Standards Board (“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 condensed consolidated financial statements.

This standard provides a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and applies to trade and notes receivables.

The adoption of this accounting standard on January 1, 2023 did not have a material impact on the Company's condensed consolidated financial statements as the expected credit loss model was not significantly different from the prior policy and methodology for determining the allowance for doubtful accounts.

For additional information refer to section above titled “Credit Losses.”

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

Reference Rate Reform –

4 unchanged sentences

ASU 2020-04 was effective upon issuance.

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 condensed consolidated financial statements.

In December 2022, the FASB issued ASU No.

2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.”

ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

ASU 2022-06 was effective upon issuance.

The adoption of this accounting standard did not have a material impact on the Company's condensed consolidated financial statements.

Business Combinations –

6 unchanged sentences

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.

The adoption of this accounting standard, effective January 1, 2023, did not have an impact on the Company's condensed consolidated financial statements.

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.

Note 3 –

Acquisitions and Dispositions

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 transition studios.

The aggregate purchase price for the acquisitions was $ 390 , less $ 60 of net deferred revenue and deferred costs resulting in total purchase consideration of $ 330 .

The following summarizes the aggregate fair values of the assets acquired and liabilities assumed:

Property and equipment

Reacquired franchise rights

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.

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 transition studios for aggregate proceeds of $ 318 and recorded a loss on disposal of the related studio assets of $ 362 .

During the nine months ended September 30, 2022 , the Company refranchised 16 company-owned transition studios 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)

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

During the three months ended March 31, 2023 and 2022 , the Company refranchised three and nine 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 number of transition studios for a limited time while facilitating the transfer of these studios to new or existing franchisees.

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.

1 unchanged sentence

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 and nine months ended September 30, 2022, the Company did not record any impairment charges.

During the three and nine months ended September 30, 2021 , the Company recorded $ 0 and $ 781 of impairment charges, respectively, 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 ).

During the three months ended March 31, 2023 and 2022 , the Company did no t record any impairment charges.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

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.

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.

(amounts in thousands, except per share amounts)

BodyFit Trademark

2 unchanged sentences

The aggregate purchase consideration for the acquisition was $ 10,300 .

The purchase price consisted of $ 5,500 of cash consideration, which was paid in July 2022, and $ 4,800 of noncash consideration, which was recorded as a contract liability.

The purchase price consisted of $ 5,500 of cash consideration and $ 4,800 of noncash consideration, which was recorded as a contract liability.

The noncash consideration relates to signing of a brand fee agreement (as defined in Note 4) where the Seller has access to the Company's franchisees to sell its products to franchisees over the term of the agreement.

The fair value of the trademark was determined using the relief from royalty method and is considered to have a 10-year life.

The fair value of the contract liability was determined using the total fair value of the asset acquired reduced by the amount of cash consideration provided.

The fair value of the contract liability was determined using the total fair value of the asset acquired reduced by the amount of cash consideration provided, which is a Level 3 measurement.

The Trademark Acquisition Agreement is subject to termination due to a third-party right of first refusal.

The likelihood of exercise of the right of first refusal was considered remote as of September 30, 2022.

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

Rumble Parent LLC and Rumble Fitness LLC (the “Selling Parties”) to acquire the franchise rights, brand, intellectual property and the rights to manage and license the “Rumble”

franchise business.

The Parent issued shares of the Parent’s Class A units equivalent to 1,300,032 shares of Class A common stock, which were used to fund the acquisition, and are subject to partial forfeiture if certain events occur.

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, th e Parent agreed to provide up to $ 20,000 in debt financing to the Selling Parties.

See Note 8 for additional information.

The Parent contributed all assets acquired from the Selling Parties to XPO LLC.

The fair value of all the Parent’s Class A units issued to the Selling Parties was determined to be $ 20,483 and is a Level 3 measurement.

The Company estimated the value of the Parent’s shares using Level 3 input factors including the fair value of the acquired entity, negotiated values with the sellers of the acquired entity, recent equity recapitalizations of the Parent, comparable industry transactions, adjusted EBITDA multiples ranging from 15 to 18 and the estimated fair value of the Company’s reporting units.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

The Selling Parties are engaged in the business of operating fitness studios under the “Rumble”

name which offer their customers boxing-inspired group fitness classes under the “Rumble”

trade name, in addition to offering at home on-demand and live workouts on Rumble TV.

The Company will also offer its customers related ancillary products and services related to this concept.

The transaction terms include purchasing exclusive rights to establish and operate franchises under the “Rumble”

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 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.

The fair values assigned to tangible and intangible assets acquired are based on management's estimates and assumptions.

The following table summarizes the fair values of the assets acquired and liabilities assumed:

Franchise agreements

Total purchase price

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.

The fair values, which are Level 3 measurements, of the recognizable intangible assets are comprised of trademarks and franchise agreements.

The fair value of trademarks was estimated by the relief from royalty method and are considered to have a ten -year life.

The fair value of the franchise agreements was based on the excess earnings method and are considered to have a ten -year life.

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

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

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

As a result, the shares issued to Rumble Holdings LLC, are treated as a liability on the Company's balance sheet instead of equity and are therefore subject to a quarterly fair value remeasurement on a mark-to-market basis as a derivative liability.

The contingent consideration liability recorded at the IPO date was $ 23,100 .

See Note 16 for additional information.

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

During the three and nine months ended September 30, 2021 , the Company incurred $ 0 and $ 307 , respectively, 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.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

The likelihood of exercise of the right of first refusal was considered remote as of March 31, 2023.

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, 2022 .

The following table reflects the change in franchise development and brand fee contract liabilities for the three months ended March 31, 2023 .

Other deferred revenue amounts of $ 17,284 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, 2022

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, 2022.

Balance at March 31, 2023

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share 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, 2023.

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.

3 unchanged sentences

The following table reflects the components of deferred revenue:

September 30,

Franchise and area development fees

3 unchanged sentences

Current portion of deferred revenue

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

Contract costs –

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

At September 30, 2022 and December 31, 2021 , there were approximately $ 3,637 and $ 3,071 of current deferred costs and approximately $ 42,921 and $ 41,941 in non-current deferred costs, respectively.

The Company recognized franchise sales commission expense of approximately $ 2,968 and $ 8,318 for the three and nine months ended September 30, 2022 respectively, and $ 1,513 and $ 3,962 for the three and nine months ended September 30, 2021 , respectively.

At March 31, 2023 and December 31, 2022 , there were approximately $ 3,688 and $ 3,589 of current deferred costs and approximately $ 43,386 and $ 43,445 in non-current deferred costs, respectively.

The Company recognized franchise sales commission expense of approximately $ 2,035 and $ 2,553 for the three months ended March 31, 2023 and 2022 , respectively.

Note 5 –

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

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

(“ICI”).

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

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

At September 30, 2022 and December 31, 2021 , the principal balance of the notes receivable was approximately $ 5,599 and $ 7,473 , respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

At March 31, 2023 and December 31, 2022 , the principal balance of the notes receivable was approximately $ 3,132 and $ 3,306 , respectively.

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

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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, 2022 and December 31, 2021 , the Company has reserved approximately $ 566 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 for the three and nine months ended September 30, 2022 was $ 1,054 and $ 2,720 , respectively, and $ 705 and $ 2,159 for the three and nine months ended September 30, 2021 , respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

Depreciation expense for the three months ended March 31, 2023 and 2022 was $ 1,242 and $ 845 , respectively.

Note 7 –

2 unchanged sentences

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

Goodwill at September 30, 2022 decreased to $ 165,697 from $ 169,073 at December 31, 2021 .

The $ 3,376 decrease was due to an impairment charge of $ 3,376 recognized in the third quarter of 2022 included within selling, general and administrative expenses.

This amount represents the accumulated total of impairments recognized to date related to goodwill.

During the quarter ended September 30, 2022, the Company determined it was necessary to re-evaluate goodwill of the AKT reporting unit for impairment due to impacts arising from litigation resulting in decline in forecasted and actual cash flows.

Therefore, the Company performed a quantitative assessment of the fair value of the reporting unit using an income approach with assumptions that are considered Level 3 inputs and concluded that the carrying value of the AKT reporting unit exceeded its fair value, resulting in a goodwill impairment of $ 3,376 .

The fair value of the reporting unit was determined by discounting estimated future cash flows, which were calculated based on revenue and expense long-term growth assumptions ranging from 2.0 % to 5.0 %, at a weighted average cost of capital (discount rate) of 16.0 %.

In addition, the Company determined that the trademark and franchise agreements intangible assets related to the AKT reporting unit were also impaired and recognized an impairment loss of $ 280 in the third quarter of 2022.

The Company has not identified any events or circumstances at March 31, 2023 that would require an interim goodwill impairment test.

The carrying value of goodwill at March 31, 2023 and December 31, 2022 totaled $ 165,697 net of cumulative impairment of $ 3,376 .

Intangible assets consisted of the following:

September 30, 2022

March 31, 2023

December 31, 2022

Franchise agreements

Non-compete agreement

Web design and domain

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Total intangible assets

Amortization expense was $ 3,100 and $ 8,505 , for the three and nine months ended September 30, 2022 , respectively, and $ 1,671 and $ 4,679 for the three and nine months ended September 30, 2021, respectively.

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

Remainder of 2022

Amortization expense was $ 2,955 and $ 2,648 , for the three months ended March 31, 2023 and 2022, respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

(amounts in thousands, except per share amounts)

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

Remainder of 2023

Note 8 –

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”).

The 2020 Facility also included a $ 10,000 revolving credit facility.

The 2020 Facility was collateralized by substantially all of the Company’s assets, including assets of the Company’s subsidiaries.

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.

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.

On March 24, 2021, the 2020 Facility was amended to provide for additional term loans in an amount up to $ 10,600 , which amount was borrowed and the proceeds distributed to the Parent to fund a note payable under a $ 20,000 debt financing obligation in connection with the acquisition of Rumble (see Note 3 for additional information).

Quarterly principal payments of $ 53 on the additional term loans began on June 30, 2021 .

On April 19, 2021, the Company entered into a Financing Agreement with Wilmington Trust, National Association, as administrative agent and collateral agent, and the lenders party thereto (the “Credit Agreement”), which consists of a $ 212,000 senior secured term loan facility (the “Term Loan Facility”, and the loans thereunder, each a “Term Loan”

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(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 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 % ( 9.19 % at September 30, 2022).

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

(i) 50 % of the XPO Holdings’

(i) 50 % of XPO Holdings’

and its subsidiaries’

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and (ix) restricting the issuance of equity.

As of September 30, 2022, the Company was in compliance with these covenants.

As of March 31, 2023, 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.

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

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.

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 quarter ended September 30, 2021.

(amounts in thousands, except per share amounts)

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

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The Third Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $ 7,500 (the “2022 Incremental Term Loan”), the proceeds of which were used for the acquisition of BodyFit trademark and general corporate purposes, including funding working capital and the payment of fees, costs and expenses related to the Third Amendment.

The Company received $ 5,502 in September 2022 and the remaining $ 1,998 in principal amount was received in October 2022.

The Third Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2022 Incremental Term Loan) commencing on December 31, 2022 to $ 759 and (ii) amended the amount of the prepayment premium applicable in the event the 2022 Incremental Term Loan is prepaid within two years of the effective date of the Third 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 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 $ 49 and $ 904 in the nine months ended September 30, 2022 and 2021 , respectively.

Debt issuance cost amortization amounted to approximately $ 30 and $ 94 for the three and nine months ended September 30, 2022 , respectively, and $ 372 and $ 5,722 for the three and nine months ended September 30, 2021, respectively.

Unamortized debt issuance costs as of September 30, 2022 and December 31, 2021 were $ 296 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 September 30, 2022 were as follows:

On January 9, 2023, the Company entered into a fourth amendment (the "Fourth Amendment") to the Credit Agreement.

The Fourth Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $ 130,000 (the "2023 Incremental Term Loan"), the proceeds of which were used to fund the Repurchase Transactions (see Note 11) and the payment of fees, costs and expenses related to the Amendment and the Repurchase Transactions.

The Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2023 Incremental Term Loan) to $ 1,065 commencing on June 30, 2023 and (ii) amended the amount of the prepayment premium applicable in the event the 2023 Incremental Term Loan is prepaid.

In connection with the Fourth Amendment, the Company wrote off a pro rata portion of debt issuance costs related to the Term Loans aggregating $ 265 , which was included in interest expense for the three months ended March 31, 2023.

The Company incurred debt issuance costs of $ 115 and $ 46 in the three months ended March 31, 2023 and 2022 , respectively.

Debt issuance cost amortization amounted to approximately $ 283 and $ 33 for the three months ended March 31, 2023 and 2022, respectively.

Unamortized debt issuance costs as of March 31, 2023 and December 31, 2022 were $ 102 and $ 270 , 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, 2023 were as follows:

Remainder of 2023

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(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 September 30, 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.

The carrying value of the Company’s long-term debt approximated fair value as of March 31, 2023 and December 31, 2022 , 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.

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

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

3 unchanged sentences

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

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

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.

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Supplemental balance sheet information related to leases is summarized as follows:

Supplemental balance sheet information related to leases are summarized as follows:

Operating leases

Balance Sheet Location

September 30, 2022

December 31, 2022

ROU assets, net

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Lease liability

Components of lease expense during the three and nine months ended September 30, 2022, are summarized as follows:

Three Months Ended September 30

Components of lease expense during the three months ended March 31, 2023 and 2022, are summarized as follows:

Three Months Ended March 31

Related-party lease

Third-party leases

Operating lease costs

Variable lease costs

Short-term lease costs

Nine Months Ended September 30

Related-party lease

3 unchanged sentences

Short-term lease costs

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

Supplemental cash flow information related to operating leases during the three and nine months ended September 30, 2022, is summarized as follows:

Three Months Ended September 30

Cash paid for amounts included in the measurement of operating lease liabilities

Nine Months Ended September 30

Supplemental cash flow information related to operating leases during the three months ended March 31, 2023 and 2022, are summarized as follows:

Three Months Ended March 31

Cash paid for amounts included in the measurement of operating lease liabilities

Other information related to leases as of September 30, 2022 is summarized as follows:

Lease liabilities arising from new ROU assets

Other information related to lease are summarized as follows:

March 31, 2023

December 31, 2022

Weighted average remaining lease term (years)

Weighted average discount rate

Maturities of lease liabilities as of September 30, 2022 are summarized as follows:

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

Maturities of lease liabilities as of March 31, 2023 are summarized as follows:

Remainder of 2023

5 unchanged sentences

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

In September 2017, the Parent entered into a management services agreement with TPG Growth III Management, LLC (“TPG”), which was an affiliate of the Parent, to pay TPG an annual fee of $ 750 for management services provided to the Company.

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.

During the three and nine months ended September 30, 2021 , the Company recorded approximately $ 63 and $ 462 of management fees included within selling, general and administrative 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.

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

The aggregate receivable from the Parent at September 30, 2021 was $ 0 .

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

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.

4 unchanged sentences

Under the terms of the settlement, the Company will prospectively reduce the interest rate on the debt financing provided to the Rumble sellers from 11 % per annum to 7.5 % per annum if payment is in cash or 10 % per annum if payment is in payment in kind and extend the maturity date of the debt financing.

In August 2022, the Rumble sellers borrowed an additional $ 3,300 under the debt financing agreement which was recorded as receivable from shareholder within equity.

At September 30, 2022 , the Company recorded $ 319 of interest in kind, which was recorded as an increase to receivable from shareholder within equity.

In 2022, the Rumble sellers borrowed an additional $ 5,050 under the debt financing agreement which was recorded as receivable from shareholder within equity.

In January 2023, the Rumble sellers borrowed an additional $ 3,100 under the debt financing agreement which was recorded as receivable from shareholder within equity.

During the three months ended March 31, 2023 , the Company recorded $ 487 of interest in kind, which was recorded as an increase to receivable from shareholder within equity.

In addition, the Company agreed to fund additional loans to the Rumble sellers under the existing debt financing agreement in an aggregate amount of $ 2,800 at various dates through July 2023.

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

The notes payable were repaid in 2021.

The Company recognized $ 3 and $ 8 of interest income in the three and nine months ended September 30, 2022 , respectively, and $ 3 and $ 9 in the three and nine months ended September 30, 2021 .

The Company did no t record any interest expense for the three and nine months ended September 30, 2022, respectively.

During the three and nine months ended September 30, 2021, the Company recorded $ 0 and $ 5 of interest expense, 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.

The Company recorded expense related to this lease of $ 80 and $ 239 in the three and nine months ended September 30, 2022 , respectively, and $ 78 and $ 233 in the three and nine months ended September 30, 2021, respectively.

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

The Company recorded expense related to this lease of $ 80 in the three months ended March 31, 2022.

In September 2022, the Company's Chief Executive Officer sold the building to an unaffiliated third party.

The Company entered into a building lease agreement with the new owner.

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, package and memberships revenue, and merchandise revenue, were $ 679 and $ 2,018 for the three and nine months ended September 30, 2022 , respectively, and $ 612 and $ 1,210 for the three and nine months ended September 30, 2021, respectively.

Included in accounts receivable as of September 30, 2022 and December 31, 2021, i s $ 6 a nd $ 320 , respectively, for such sales.

At September 30, 2022 and December 31, 2021, notes receivable from franchisees inclu des $ 0 a nd $ 294 and notes receivable from franchisees, net of current portion includes $ 1,921 a nd $ 1,744 , re spectively, related to financing provided to these affiliates.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

In December 2022, the Company entered into an agreement with the former owner of Row House, pursuant to which contingent consideration relating to the 2017 acquisition of Row House was settled in exchange for issuance of 105 Restricted Stock Units ("RSUs") which vest on the fourth anniversary of the grant date.

As a result of the agreement, the Company recorded a reduction to the contingent consideration liability of $ 1,220 with an offsetting increase in additional paid-in capital and reclassified the former owner's outstanding note receivable of $ 1,834 to additional paid-in capital.

In addition, pursuant to the agreement, the Company issued a four-year multi-tranche term loan with an option to borrow up to $ 20 per month in the aggregate principal amount of $ 960 bearing interest of 8.5 % per annum, which was recorded as a liability and offsetting reduction in additional paid-in capital.

The outstanding receivable from shareholder and the multi-tranche term loan are collateralized by 75 shares of Class B common stock held by the former owner, which were reclassified to treasury stock, and by the 105 RSUs.

During the three months ended March 31, 2023 , the former owner of Row House borrowed $ 180 , which was recorded as a reduction to liability.

In March 2023, Spartan Fitness Holdings, LLC (“Spartan Fitness”), which currently owns and operates 60 Club Pilates studios, entered into a unit purchase agreement with Snapdragon Spartan Investco LP (the “Spartan SPV”), a special purpose vehicle controlled and managed by a member of the Company’s board of directors, pursuant to which Spartan SPV agreed to invest in the equity of Spartan Fitness.

In addition, the same member of the Company’s board of directors also invested as a limited partner in the Spartan SPV.

Spartan Fitness intends to use the investment from Spartan SPV to fund expansion of Club Pilates studios, among other concepts.

Spartan Fitness also owns the rights to 38 Club Pilates licenses to open additional new units.

During the three months ended March 31, 2023 , the Company recorded franchise and marketing fund revenue aggregating $ 1,232 from studios owned by Spartan Fitness.

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

Revenues from these affiliates, primarily related to franchise revenue, marketing fund revenue, package and memberships revenue and merchandise revenue, were $ 136 and $ 263 for the three months ended March 31, 2023 and 2022, respectively.

Included in accounts receivable as of March 31, 2023 and December 31, 2022, i s $ 4 a nd $ 4 , respectively, for such sales.

Note 11 –

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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, 2022.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

However, the fair value of such embedded features were immaterial upon issuance and as of March 31, 2023.

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.

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however, any shares of Series A-1 preferred stock issued to the Preferred Investors will convert on a one-to-one basis to shares of Series A preferred stock when permitted under relevant antitrust restrictions.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

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 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 September 30, 2022 , the Company recognized the preferred maximum redemption value of $ 257,096 , which is the maximum redemption value on the earliest redemption date based on fair market value per share of Convertible Preferred (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 Convertible Preferred).

The recording of the preferred maximum redemption value was treated as deemed contribution, which was not included in the calculation of earnings per share, and resulted in a net increase of $ 19,794 to additional paid-in-capital.

On January 9, 2023, pursuant to a preferred stock repurchase agreement (the “Repurchase Agreement”) between the Company and certain holders of the Convertible Preferred, the Company repurchased 85 shares of Convertible Preferred for an aggregate payment of $ 130,766 .

The excess of fair market value of $ 12,679 over the consideration transferred was treated as deemed contribution and resulted in an decrease to accumulated deficit and was included in the calculation of loss per share.

At March 31, 2023 and December 31, 2022 , the Company recognized the preferred maximum redemption value of $ 227,290 and $ 308,075 , respectively, which is the maximum redemption value on the earliest redemption date based on fair market value per share of Convertible Preferred (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 115 and 200 outstanding shares of Convertible Preferred at March 31, 2023 and December 31, 2022 , respectively).

The recording of the preferred maximum redemption value was treated as deemed dividend, which was included in the calculation of loss per share, and resulted in a net decrease of $ 62,660 and $ 50,931 to additional paid-in-capital as of March 31, 2023 and March 31, 2022 , respectively.

Note 12 –

Member’s/Stockholder's Equity (Deficit)

Member’s contributions –

As described in Note 3 and presented in the condensed consolidated statements of changes to stockholders'/member’s equity (deficit), during the three months ended March 31, 2021, the Parent contributed assets related to the Rumble acquisition.

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

Stockholder's Equity (Deficit)

Common stock –

As described in Note 1, in connection with the IPO in July 2021, the Company issued 10,000,000 shares of Class A common stock, at a price of $ 12.00 per share.

Immediately after the IPO, 22,994,042 shares of Class A common stock were outstanding, including 12,994,044 shares issued to historical owners of the Parent.

Also on July 23, 2021, in connection with the completion of the Reorganization Transactions, 23,542,663 shares of Class B common stock were issued to the Continuing Pre-IPO LLC Members.

In August 2021, the Company sold 904,000 shares of Class A common stock to the underwriters pursuant to the underwriter’s option to purchase additional shares.

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.

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.

In February 2023, the Company entered into an underwriting agreement with certain existing stockholders, affiliates of H&W Investco and our Chief Executive Officer (collectively the "Selling Stockholders") and certain underwriters named therein, pursuant to which the Selling Stockholders sold an aggregate of 5,000 shares of Class A common stock in a secondary public offering at a public offering price of $ 24.50 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.

In addition, the Selling Stockholders granted the underwriters a 30-day option to purchase up to an additional 750 shares of the Company's Class A common stock, which was exercised on February 15, 2023.

The shares sold in the offering consisted of (i) 2,276 existing shares of Class A common stock and (ii) 3,474 newly-issued shares of Class A common stock issued in connection with the exchange of LLC units held by the Selling Stockholders.

Simultaneously, 3,474 shares of Class B common stock were surrendered by the Selling Stockholders and canceled.

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.

Additionally, during the three and nine months ended September 30, 2022 , pursuant to the Amended LLC agreement, certain Continuing Pre-IPO LLC Members exchanged their LLC units for 63,435 and 601,993 shares of Class A common stock on a one-for-one basis, respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

Additionally, during the three months ended March 31, 2023 and 2022 , pursuant to the Amended LLC agreement, certain Continuing Pre-IPO LLC Members exchanged their LLC units for 1,451 and 351 shares of Class A common stock on a one-for-one basis, respectively.

Noncontrolling interests –

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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.

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 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.

During 2023 and 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.

The Company used the liquidation value of the preferred shares for such rebalancing.

The following table summarizes the ownership of XPO LLC as of September 30, 2022:

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

The following table summarizes the ownership of XPO LLC as of March 31, 2023:

Ownership percentage

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Stock-based compensation related to profit interest units increases noncontrolling interests.

The performance-based grants were awarded with vesting conditions based on performance targets connected to the value received from change of control of the Parent and were subject to certain forfeiture provisions prior to vesting.

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.

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

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

During the nine months ended September 30, 2022 , the Company recognized $ 12,003 of expense, including $ 8,467 of accelerated compensation expense when these grants vested in March 2022.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

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.

The Company recognized $ 24 and $ 171 of expense during the three and nine months ended September 30, 2022 , respectively, and $ 137 and $ 808 in the three and nine months ended September 30, 2021, respectively.

At September 30, 2022 , the Company had $ 40 of unrecognized compensation expense.

The amendment of these units was 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 March 2022, the units vested when the average trading price condition was met and the Company recognized $ 12,126 of 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 ) and was calculated using a Black-Scholes option-pricing model.

The Company recognized $ 14 and $ 78 of expense during the three months ended March 31, 2023 and 2022, respectively, which was included within selling, general and administrative expenses.

At March 31, 2023 , the Company had $ 8 of unrecognized compensation expense.

The unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 1.05 years for the time-based grants.

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As such, these awards are classified as a liability.

As of September 30, 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 and nine months ended September 30, 2022, the Company recogniz ed $ 623 and $ 1,865 of expense, respectively.

At September 30, 2022 , the Company had $ 5,658 of unrecognized expense relating to these grants.

During the three months ended March 31, 2023 , the performance condition of an award with a total fixed dollar value of $ 2,250 was met and 101 units were earned and issued as shares.

As of March 31, 2023, management believes that the EBITDA targets for the remaining RSU awards will be achieved and is accordingly recognizing expense ratably over the vesting period.

During the three months ended March 31, 2023 and 2022, the Company recogniz ed $ 444 and $ 621 of expense, respectively.

At March 31, 2023 , the Company had $ 3,153 of unrecognized expense relating to these grants.

Equity Classified Restricted stock units –

The following table summarizes activity for RSUs for the three and nine months ended September 30, 2022:

The following table summarizes activity for RSUs for the three months ended March 31, 2023:

Weighted Average

Grant Date Fair

Value per Share

Outstanding at December 31, 2022

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Outstanding at March 31, 2023

Forfeited, expired, or canceled

Outstanding at June 30, 2022

Forfeited, expired, or canceled

Outstanding at September 30, 2022

During the three and nine months ended September 30, 2022, the Company granted 15,022 and 1,537,087 RSUs, respectively, at a weighted average grant-date fair value of $ 17.36 and $ 19.62 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.

Included in the RSUs described above, the Company granted 170,767 performance-based RSUs at a weighted average grant-date closing price of $ 18.25 per share.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share amounts)

Restricted stock units 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 restricted stock units is recognized on a straight-line basis.

During 2022, included in the RSUs described above, the Company granted 171 performance-based RSUs at a weighted average grant-date closing price of $ 18.25 per share.

The performance-based RSUs are recognized as expense on a straight-line basis over the vesting period of three to four years.

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

As of September 30, 2022, the achievement of performance metrics is considered probable.

Total compensation expense recognized for restricted stock units was $ 3,597 and $ 9,881 for the three and nine months ended September 30, 2022 , respectively, and $ 783 for the three and nine months ended September 30, 2021.

During 2022, the performance metrics related to 18 performance-based RSUs fell below the minimum threshold and as a result, the Company cancelled these previously granted performance-based RSUs.

During the three months ended March 31, 2023 , 36 units were earned and issued as shares.

As of March 31, 2023, the achievement of remaining performance metrics is considered probable.

Total compensation expense recognized for restricted stock units was $ 5,598 and $ 2,423 for the three months ended March 31, 2023 and 2022, respectively.

Due to the Company's full valuation allowance on its net deferred tax assets, there is no income tax benefit on the unvested RSUs.

During the three and nine months ended September 30, 2022 , the Company recognized an income tax benefit of $ 388 and $ 434 on vested RSUs, respectively.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

At September 30, 2022 , the Company had $ 32,400 of total unrecognized compensation expense related to non-vested RSUs.

During the three months ended March 31, 2023 and 2022 , the Company recognized an income tax benefit of $ 718 and $ 2,422 on vested RSUs, respectively.

At March 31, 2023 , the Company had $ 30,689 of total unamortized compensation expense related to non-vested restricted stock units.

That cost is expected to be recognized over a weighted-average period of 2.51 years.

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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 and nine months ended September 30, 2022 is 0.03 % and ( 0.02 %), respectively.

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

During the three and nine months ended September 30, 2022, the Company recognized income tax benefit of $ 308 and $ 158 on its share of pre-tax book income (loss), exclusive of the noncontrolling interest of 44 %.

During the three and nine months ended September 30, 2021 , the Company recognized income tax expense of $ 103 and $ 387 on its share of pre-tax book income (loss), exclusive of the noncontrolling interest of 49 %.

As of September 30, 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 September 30, 2022.

The effective tax rate for the three months ended March 31, 2023 and 2022 is 1 % and 12 %, respectively.

During the three months ended March 31, 2023 and 2022, the Company recognized income tax benefit of $ 123 and $ 2,067 on its share of pre-tax book income (loss), exclusive of the noncontrolling interest of 34 %.

As of March 31, 2023, 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, 2023.

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.

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

The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19.

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, 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 September 30, 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.

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

(amounts in thousands, except per share amounts)

Tax Receivable Agreement –

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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 September 30, 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.

As of March 31, 2023, 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 $ 3,076 of the TRA, $ 56,294 of the TRA liability was not recorded as of September 30, 2022 .

Except for $ 1,163 and $ 1,356 of the current and non-current portions of the TRA, respectively, $ 93,429 of the TRA liability was not recorded as of March 31, 2023 .

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.

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Earnings (Loss) Per Share

For the three and nine months ended September 30, 2022 and 2021, basic earnings (loss) per share has been calculated by dividing net income (loss) attributable to Class A common stockholders by the weighted average number of shares of Class A common stock outstanding for the period.

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

Basic earnings (loss) per share has been calculated by dividing net income (loss) attributable to Class A common stockholders by the weighted average number of shares of Class A common stock outstanding for the period.

Diluted earnings per share of Class A common stock has been computed by dividing net income attributable to XPO Inc.

by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

(amounts in thousands, except per share amounts)

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

Diluted earnings (loss) per share attributable to common stockholders adjusts the basic earnings or losses 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 was calculated using the as-if-converted method.

The potentially dilutive impact of restricted stock units was calculated using the treasury stock method.

Because the Company reported net losses for the three months ended September 30, 2022 and the three and nine months ended September 30, 2021, 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 earnings per share for the three and nine months ended September 30, 2022:

September 30,

Net income (loss)

net income (loss) attributable to noncontrolling interests

dividends on preferred shares

deemed contribution (dividend)

Net income (loss) attributable to XPO Inc.

net income (loss) attributable to non-controlling interests

Diluted earnings per share attributable to common stockholders adjusts the basic earnings per share attributable to common stockholders and the weighted average number of shares of Class A common stock outstanding to give effect to potentially dilutive securities.

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

Weighted average shares of Class B common stock were 18,564 and 23,165 for the three months ended March 31, 2023 and 2022, respectively.

The potentially dilutive impact of restricted stock units is calculated using the treasury stock method.

Because the Company reported net losses for the 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 months ended March 31, 2023 and 2022:

net loss attributable to noncontrolling interests

dividends on preferred shares

deemed contributions (dividend)

Net income (loss) attributable to XPO Inc.

Weighted average shares of Class A common stock outstanding - basic

Effect of dilutive securities:

Rumble Class A common stock

Restricted stock units

Convertible preferred stocks

Conversion of Class B common stock to Class A common stock

Weighted average shares of Class A common stock outstanding - diluted

Net earnings (loss) per share attributable to Class A common stock - basic

Net earnings (loss) per share attributable to Class A common stock - diluted

Shares excluded from diluted earnings (loss) per share of Class A common stock:

deemed dividend

deemed contribution from redemption of convertible preferred stock

Net loss attributable to XPO Inc.

- basic and diluted

Weighted average shares of Class A common stock outstanding - basic and diluted

Net loss per share attributable to Class A common stock - basic

Net loss per share attributable to Class A common stock - diluted

Anti-dilutive shares excluded from diluted loss per share of Class A common stock:

Rumble Class A common stock

Restricted stock units

Convertible preferred stocks

Convertible preferred stock

Conversion of Class B common stock to Class A common stock

Profits interests, performance vesting

Treasury share options

Rumble contingent shares

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

(amounts in thousands, except per share amounts)

Note 16 –

1 unchanged sentence

Litigation –

In August 2020, Get Kaisered Inc., Kaiser Fitness LLC and Anna Kaiser (collectively, the “Plaintiffs”) filed a complaint against the Company and the Member alleging, among other claims, breaches by the Company of an asset purchase agreement and a consulting agreement.

The complaint seeks relief including monetary damages and injunctive relief.

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.

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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.

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 pending at March 31, 2023.

In April 2023, the plaintiff dismissed all claims against the seller in the United States.

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 $ 409 and $ 2,931 which is included in accrued expenses in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.

The Company accrued for estimated legal liabilities and has entered into certain settlement agreements to resolve legal disputes and recorded $ 638 and $ 464 which is included in accrued expenses in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively.

Contingent consideration from acquisitions –

In connection with the 2017 acquisition of CycleBar from a then affiliate of the Member, the Company recorded contingent consideration of $ 4,390 for the estimated fair value of the contingent payment.

Payment of additional consideration is contingent on CycleBar reaching two milestones based on a number of operating franchise studios and average monthly revenues by September 2022.

The first milestone payout was $ 5,000 and the second milestone was $ 10,000 .

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

These 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.

In March 2020, the Parent entered into an agreement with the former owners of CycleBar, which (i) reduced the second milestone amount to $ 2,500 , (ii) imposed interest at 10 % per annum on the first and second milestones beginning March 5, 2020 and April 2, 2020, respectively, and (iii) increased the interest rate to 14 % on the first milestone if not paid prior to January 1, 2021.

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.

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, 2022 , the Company recorded an increase of $ 120 and $ 380 to contingent consideration, respectively, which was recorded as acquisition and transaction expenses.

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.

As of September 30, 2022 and December 31, 2021 , contingent consideration totaled approximately $ 1,220 and $ 840 , 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.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

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 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.

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.

Payment of additional consideration was contingent on Stride reaching two milestones for opening franchise studios before the first anniversary of the purchase date.

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

These 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.

The contingent consideration agreement was modified in 2019 and 2020.

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.

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

In December 2022, the Company entered into an agreement with the former owner of Row House (see Note 10), which settled the contingent consideration.

As a result of the agreement, in December 2022, the Company recorded a reduction to the contingent consideration liability of $ 1,220 with an offsetting increase in additional paid-in capital.

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

The Company recorded contingent consideration equal to the fair value of the shares issued in connection with the Rumble acquisition of $ 23,100 and $ 10,600 receivable from shareholder for debt financing provided to the Rumble seller.

The shares issued to the Rumble seller are treated as a liability on the Company's balance sheet as they are subject to vesting conditions or forfeiture if the Rumble seller defaults under the terms of the note receivable.

The shares issued to the Rumble seller are treated as a liability on the Company's balance sheet as they are subject to vesting conditions.

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

During the three and nine months ended September 30, 2022 , the Company recorded an increase of $ 16,170 and a decrease of $ 6,030 to contingent consideration, which was recorded as acquisition and transaction expense (income).

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

At September 30, 2022 and December 31, 2021 , contingent consideration totals $ 42,170 and $ 48,200 , respectively, recorded as contingent consideration from acquisitions in the condensed consolidated balance sheets.

During the three months ended March 31, 2023 and 2022 , the Company recorded an increase of $ 15,975 and $ 9,500 to contingent consideration, which was recorded as acquisition and transaction expense.

In November 2022, the contingency related to 1,300 shares of Class A common stock expired and the $ 27,850 contingent consideration related to those shares was reclassified to additional paid-in capital.

At March 31, 2023 and December 31, 2022 , contingent consideration totals $ 43,665 and $ 27,690 , respectively, recorded as contingent consideration from acquisitions in the condensed consolidated balance sheets.

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.

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

During the three and nine months ended September 30, 2022 , the Company recorded $ 154 and $ 496 of additional contingent consideration, which was recorded as interest expense, respectively.

During the three and nine months ended September 30, 2022 , the Company recorded $ 0 and ($ 141 ) of additional contingent consideration, which was recorded as acquisition and transaction expense (income), respectively.

In addition, during the three and nine months ended September 30, 2022 , the Company paid $ 0 and $ 1,336 of contingent consideration.

At September 30, 2022 and December 31, 2021 , contingent consideration was $ 5,272 and $ 3,678 recorded as accrued expenses, respectively, and $ 3,265 and $ 5,841 recorded as contingent consideration from acquisitions, respectively, in the condensed consolidated balance sheets.

During the three months ended March 31, 2023 and 2022 , the Company recorded $ 49 and $ 178 of additional contingent consideration, which was recorded as interest expense, respectively.

During the three months ended March 31, 2023 and 2022 , the Company recorded ($ 233 ) and ($ 154 ) of additional contingent consideration, which was recorded as acquisition and transaction income, respectively.

In addition, during the three months ended March 31, 2023 and 2022 , the Company paid $ 0 and $ 589 of contingent consideration.

At March 31, 2023 and December 31, 2022 , contingent consideration was $ 2,511 and $ 2,203 recorded as accrued expenses, respectively, and $ 0 and $ 492 recorded as contingent consideration from acquisitions, respectively, in the condensed consolidated balance sheets.

Xponential Fitness, Inc.

Notes to Condensed Consolidated Financial Statements

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

(amounts in thousands, except per share amounts)

In addition, in connection with the October 2021 acquisition of BFT, 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 Master Franchisee rejects an offer to repurchase the franchise rights, then the cancellation fee is not required to be paid.

Letter of credi t –

In July 2022, the Company issued a $ 750 standby letter of credit to a third-party financing company, who provides loans to the Company's qualified franchisees.

The standby letter of credit is contingent upon the failure of franchisees to perform according to the terms of underlying contracts with the third party.

The Company deposited cash in a restricted account as collateral for the standby letter of credit.

The Company has determined the fair value of these guarantees at inception is not material, and as of March 31, 2023 and December 31, 2022, no accrual has been recorded for the Company’s potential obligation under its guaranty arrangement.

Lease guarantee s –The Company has guaranteed lease agreements for certain franchisees.

The Company’s maximum obligation, as a result of its guarantees of leases, is approximately $ 2,811 as of March 31, 2023 and would only require payment upon default by the primary obligor.

The Company has determined the fair value of these guarantees at inception is not material, and as of March 31, 2023 and December 31, 2022 , no accrual has been recorded for the Company’s potential obligation under its guaranty arrangement.

Note 17 –

Subsequent Events

In October 2022, the Rumble sellers borrowed an additional $ 1,750 under the debt financing agreement which was recorded as receivable from shareholder within equity (see Note 10).

In October 2022, the remaining $ 1,998 in principal amount was received under the Third Amendment to the Credit Agreement (see Note 8).

In April 2023, the Rumble sellers borrowed an additional $ 1,300 under the debt financing agreement which was recorded as receivable from shareholder within equity (see Note 10).

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

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Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 66% 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 49 U.S.

states, the District of Columbia and Canada and through master franchise or international expansion agreements in 14 additional countries.

states, the District of Columbia and Canada and through master franchise or international expansion agreements in 14 additional countries as of March 31, 2023.

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

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

As of September 30, 2022, 2,219 studios were open in North America, and franchisees were contractually committed to open an additional 1,919 studios under existing franchise agreements.

In addition, as of September 30, 2022, we had 266 studios open internationally, and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 920 new studios.

During the nine months ended September 30, 2022 and 2021, we generated revenue outside the United States of $9,060 and $1,124, respectively.

As of September 30, 2022 and December 31, 2021, we did not have material assets located outside of the United States.

As of March 31, 2023, 2,411 studios were open in North America, and franchisees were contractually committed to open an additional 1,968 studios under existing franchise agreements.

In addition, as of March 31, 2023, we had 345 studios open internationally, and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,078 new studios, of which master franchisees have sold 235 licenses for studios not yet opened as of March 31, 2023.

During the three months ended March 31, 2023 and 2022, we generated revenue outside the United States of $2,980 and $3,380, respectively.

As of March 31, 2023 and December 31, 2022, we did not have material assets located outside of the United States.

No franchisee accounted for more than 5% of our revenue.

We operate in one segment for financial reporting purposes.

The COVID-19 Pandemic

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.

New studio openings were also delayed during this period.

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 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.

Our franchised studios have resumed operations as of September 30, 2022.

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

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.

Following the significant disruption to the global fitness industry caused by the COVID-19 pandemic in 2020 and through most of 2021, 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.

Rumble Acquisition

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.

As consideration, H&W Franchise Holdings, LLC (i) issued Class A Units equivalent to 1,300,032 shares of XPO Inc.

Class A common stock to Rumble Holdings LLC, (ii) issued Class A Units equivalent to 2,024,445 shares of XPO Inc.

Class A common stock to Rumble Holdings LLC, which are subject to vesting and forfeiture as provided in the contribution agreement and (iii) assumed and discharged any liabilities arising from and after the closing date under the assigned contracts and acquired assets.

H&W Franchise Holdings, LLC then contributed the Rumble assets to H&W Intermediate Holdings, LLC, which then immediately contributed the Rumble assets to XPO LLC.

As a result of this transaction, Rumble became a holder of 5% or more of the equity interests of H&W Franchise Holdings LLC.

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 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 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 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.

During the three and nine months ended September 30, 2022, the Company paid $0 and $1,336 of contingent consideration, respectively.

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 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.

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.

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 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.

Factors Affecting Our Results of Operations

In addition to the impact of the risks described above, we believe that the most significant factors affecting our results of operations include:

In addition to the impact of the risks described under “Risk Factors”

in the Annual Report, we believe that the most significant factors affecting our results of operations include:

Licensing new qualified franchisees, selling additional licenses to existing franchisees and opening studios.

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Our franchisees’

AUVs are dependent upon the performance of studios and may be impacted by reduced capacity as a result of various factors, including the COVID-19 pandemic and shifting consumer demand and behavior for fitness services.

AUVs are dependent upon the performance of studios and may be impacted by reduced capacity as a result of various factors, including shifting consumer demand and behavior for fitness services.

Macroeconomic factors such as inflation and recession, and economic factors affecting a particular geographic territory, may also increase competition for discretionary income, impact the returns generated by franchisees and therefore impact our operating results.

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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, 2022 and 2021:

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, 2023 and 2022:

Three Months Ended March 31,

($ in thousands)

System-wide sales

Number of new studios openings globally, net

Number of new studio openings globally, net

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

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(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 and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,

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 MFAs:

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)

Nine Months Ended September 30,

(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, 2023 and 2022:

Three Months Ended March 31,

North America

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(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.

System-Wide Sales

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System-wide sales growth is driven by new studio openings and increases in same store sales.

Management reviews system-wide sales monthly, which enables us to assess changes in our franchise revenue, overall studio performance, the health of our brands and the strength of our market position relative to competitors.

Management reviews system-wide sales weekly, which enables us to assess changes in our franchise revenue, overall studio performance, the health of our brands and the strength of our market position relative to competitors.

Number of New Studio Openings

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Of the franchisees that opened their first studio in 2019, on average it took approximately 12.2 months from signing the franchise agreement to open.

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 and 2021 due to COVID-related opening restrictions.

Of the franchisees that entered into the system in 2021 or later and opened their first studio in 2022, on average it took approximately 10.5 months from signing the franchise agreement to open a studio.

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.

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Management reviews same store sales to assess the health of the franchised studios.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance.

We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes.

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 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.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.

We believe that the non-GAAP financial measures presented below, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook.

Adjusted EBITDA

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 (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, expense related to the remeasurement of our TRA obligation and expense related to loss on impairment of our brand intangible assets and goodwill 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, 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 and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Net income (loss)

Interest expense, net

Depreciation and amortization

Equity-based compensation

Acquisition and transaction expenses (income)

Management fees and expenses

Litigation expenses

Employee retention credit

Secondary public offering expenses

TRA remeasurement

Impairment of brand assets

Adjusted EBITDA

Results of Operations

The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2022 and 2021:

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, 2023 and 2022:

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

Other expense

Total other expense

Income (loss) before income taxes

Net income (loss)

The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2022 and 2021 as a percentage of revenue:

Three Months Ended September 30,

Nine Months Ended September 30,

Loss before income tax benefit

Income tax benefit

The following table presents our condensed consolidated results of operations for the three months ended March 31, 2023 and 2022 as a percentage of revenue:

Three Months Ended March 31,

Revenue, net:

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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

Other expense

Total other expense

Income (loss) before income taxes

Net income (loss)

Three Months Ended September 30, 2022 versus 2021

The following is a discussion of our consolidated results of operations for the three months ended September 30, 2022 versus the three months ended September 30, 2021.

Three Months Ended September 30,

Loss before income tax benefit

Income tax benefit

Three Months Ended March 31, 2023 versus 2022

The following is a discussion of our consolidated results of operations for the three months ended March 31, 2023 versus the three months ended March 31, 2022.

Three Months Ended March 31,

Change from Prior Year

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Total revenue.

Total revenue was $63.8 million in the three months ended September 30, 2022, compared to $40.9 million in the three months ended September 30, 2021, an increase of $22.9 million, or 56.0%.

The increase in total revenue was primarily due to increase in same store sales and increase in open studios.

Total revenue was $70.7 million in the three months ended March 31, 2023, compared to $50.4 million in the three months ended March 31, 2022, an increase of $20.3 million, or 40.4%.

The increase in total revenue was primarily due to an increase in same store sales and an increase in open studios.

Franchise revenue.

Franchise revenue was $30.0 million in the three months ended September 30, 2022, compared to $20.0 million in the three months ended September 30, 2021, an increase of $10.0 million, or 50.1%.

Franchise revenue consisted of franchise royalty fees of $18.0 million, training fees of $2.1 million, franchise territory fees of $7.0 million and technology fees of $2.9 million in the three months ended September 30, 2022, compared to 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.

The increase in franchise royalty fees, technology fees and training fees was primarily due to a 17% increase in same store sales and to 453 new studio openings globally since September 30, 2021, which also contributed to the increase in franchise territory fees.

Franchise revenue was $33.0 million in the three months ended March 31, 2023, compared to $25.5 million in the three months ended March 31, 2022, an increase of $7.5 million, or 29.3%.

Franchise revenue consisted of franchise royalty fees of $21.6 million, training fees of $2.6 million, franchise territory fees of $5.2 million and technology fees of $3.6 million in the three months ended March 31, 2023, compared to 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.

The increase in franchise royalty fees, technology fees and training fees was primarily due to a 20% increase in same store sales and to 527 new studio openings globally since March 31, 2022.

Franchise territory fees decreased due to a decrease in franchise agreement terminations in the current year.

Equipment revenue.

Equipment revenue was $11.8 million in the three months ended September 30, 2022, compared to $6.8 million in the three months ended September 30, 2021, an increase of $5.0 million, or 74.4%.

Equipment revenue was $13.1 million in the three months ended March 31, 2023, compared to $7.8 million in the three months ended March 31, 2022, an increase of $5.3 million, or 68.3%.

Most equipment revenue is recognized in the period when the equipment is installed.

Global equipment installations in the three months ended September 30, 2022, totaled 136 compared to 76 in the prior year period, with a larger percentage of higher dollar installations in 2021.

Global equipment installations in the three months ended March 31, 2023, totaled 141 compared to 104 in the prior year period, primarily due to the increase of studio openings compared to the prior year period.

The increase in average revenue per install is due to a brand mix, international versus North America mix and a higher proportion of equipment installed with brands with higher equipment prices.

Merchandise revenue.

Merchandise revenue was $6.3 million in the three months ended September 30, 2022, compared to $4.9 million in the three months ended September 30, 2021, an increase of $1.4 million, or 28.4.%.

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 due to the COVID-19 pandemic.

Merchandise revenue was $7.2 million in the three months ended March 31, 2023, compared to $6.1 million in the three months ended March 31, 2022, an increase of $1.1 million, or 17.8.%.

The increase was due primarily to a higher number of operating studios in the current year period.

Franchise marketing fund revenue.

Franchise marketing fund revenue was $5.2 million in the three months ended September 30, 2022, compared to $3.7 million in the three months ended September 30, 2021, an increase of $1.5 million, or 39.6%.

The increase was primarily due to an increase in same store sales, 328 new studio openings in North America since September 30, 2021 and a temporary reduction in the marketing fund percentage collected from 2% to 1% of the sales of franchisees while their studios were closed due to the COVID-19 pandemic in 2021.

Franchise marketing fund revenue was $6.2 million in the three months ended March 31, 2023, compared to $4.4 million in the three months ended March 31, 2022, an increase of $1.8 million, or 40.0%.

The increase was primarily due to an increase in same store sales and 381 new studio openings in North America since March 31, 2022.

Other service revenue.

Other service revenue was $10.6 million in the three months ended September 30, 2022, compared to $5.5 million in the three months ended September 30, 2021, an increase of $5.0 million, or 90.2%.

The increase was primarily due to a $5.1 million increase in other preferred vendor commission revenue and brand fee revenue;

partially offset by a decrease in package and memberships revenue due to fewer company-owned transition studios.

Other service revenue was $11.3 million in the three months ended March 31, 2023, compared to $6.6 million in the three months ended March 31, 2022, an increase of $4.7 million, or 71.4%.

The increase was primarily due to a $2.1 million increase in other preferred vendor commission revenue and brand fee revenue and a $2.8 million increase in package and memberships revenue due to more company-owned transition studios, partially offset by a decrease in on-demand revenue.

Operating Costs and Expenses

Three Months Ended September 30,

Three Months Ended March 31,

Change from Prior Year

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Marketing fund expense

Acquisition and transaction expenses (income)

Acquisition and transaction expenses

Total operating costs and expenses

Costs of product revenue.

Costs of product revenue was $11.8 million in the three months ended September 30, 2022, compared to $7.6 million in the three months ended September 30, 2021, an increase of $4.2 million, or 55.0%, compared to an increase in related revenues of 55.1%.

Costs of product revenue as a percentage of related revenue was 65.7% in the three months ended September 30, 2022 and 2021.

Costs of product revenue was $14.0 million in the three months ended March 31, 2023, compared to $9.6 million in the three months ended March 31, 2022, an increase of $4.4 million, or 46.3%, consistent with the increase in related revenues of 46.1%.

Costs of franchise and service revenue.

Costs of franchise and service revenue was $4.8 million in the three months ended September 30, 2022, compared to $3.2 million in the three months ended September 30, 2021, an increase of $1.6 million, or 51.8%.

The increase was primarily due to a $1.5 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase.

Costs of franchise and service revenue was $4.0 million in the three months ended March 31, 2023, compared to $4.2 million in the three months ended March 31, 2022, a decrease of $0.2 million, or 4.8%.

The decrease was primarily due to a $0.5 million decrease in franchise sales commissions, consistent with the related franchise territory revenue decrease, partially offset by an increase in cost of technology fees.

Selling, general and administrative expenses.

Selling, general and administrative expenses were $32.8 million in the three months ended September 30, 2022, compared to $24.3 million in the three months ended September 30, 2021, an increase of $8.6 million, or 35.4%.

The increase was primarily attributable to an increase in equity-based compensation of $0.7 million, primarily related to new grants;

increase in legal expenses of $2.3 million related to various legal matters;

increase in salaries and wages of $1.8 million related to payroll tax expense in connection with restricted stock units and the acquisition of BFT in October 2021;

increase in impairment charges of $3.7 million related to impairment of intangible assets and goodwill of the AKT reporting unit in September 2022;

and $0.1 million net increase in other variable expenses in 2022.

Selling, general and administrative expenses were $34.9 million in the three months ended March 31, 2023, compared to $33.9 million in the three months ended March 31, 2022, an increase of $1.0 million, or 2.8%.

The increase was primarily attributable to an increase in salaries and wages of $6.6 million related to a larger number of company-owned transition studios and to a one-time $2.6 million employee retention payroll tax credit in the prior year period;

increase in occupancy expenses of $1.4 million primarily related to company-owned transition studios and a net increase in other variable expenses in 2023 of $2.2 million, partially offset by a decrease in equity-based compensation expense of $9.2 million primarily due to vesting of performance-based awards in the prior year period.

Depreciation and amortization.

Depreciation and amortization expense was $4.2 million in the three months ended September 30, 2022, compared to $2.4 million in the three months ended September 30, 2021, an increase of $1.8 million, or 74.8%.

The increase was due primarily to amortization of intangibles related to the BFT acquisition in October 2021 and the BodyFit trademark acquisition in the second quarter of 2022.

Depreciation and amortization expense was $4.2 million in the three months ended March 31, 2023, compared to $3.5 million in the three months ended March 31, 2022, an increase of $0.7 million, or 20.2%.

The increase was due primarily to amortization of intangibles related to the BodyFit trademark acquired in the second quarter of 2022 and to an increase in fixed assets to support our on-demand offerings.

Marketing fund expense.

Marketing fund expense was $4.3 million in the three months ended September 30, 2022, compared to $3.8 million in the three months ended September 30, 2021, an increase of $0.4 million, or 11.3% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expenses (income).

Acquisition and transaction expenses (income) were $16.3 million in the three months ended September 30, 2022, compared to $2.9 million in the three months ended September 30, 2021, a change of $13.4 million.

Marketing fund expense was $5.0 million in the three months ended March 31, 2023, compared to $4.4 million in the three months ended March 31, 2022, an increase of $0.7 million, or 14.9% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expenses.

Acquisition and transaction expenses were $15.7 million in the three months ended March 31, 2023, compared to $9.5 million in the three months ended March 31, 2022, an increase of $6.2 million.

These expenses represent the non-cash change in contingent consideration related to 2017 and 2021 business acquisitions.

Other (Income) Expense, net

Three Months Ended September 30,

Three Months Ended March 31,

Change from Prior Year

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Interest expense

Other expense

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, 2022 and 2021.

Interest income primarily consists of interest on notes receivable and was insignificant in each of the three-month periods ended March 31, 2023 and 2022.

Interest expense .

Interest expense was $3.3 million in the three months ended September 30, 2022, compared to $5.9 million in the three months ended September 30, 2021, a decrease of $2.5 million, or 43.1%.

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 decrease was primarily due to lower average debt balance compared to the prior year and to write off of $2.5 million of deferred loan costs and debt discount and $0.4 million prepayment penalty incurred in the prior year period related to paydown of debt with IPO proceeds.

Three Months Ended September 30,

Interest expense was $8.0 million in the three months ended March 31, 2023, compared to $2.9 million in the three months ended March 31, 2022, an increase of $5.1 million, or 178.8%.

Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs and debt discount.

The increase in interest expense is due to higher average debt balances and higher interest rates in the current year period.

Other expense.

Other expense consists of Tax Receivable Agreement (“TRA”) expense, which was $0.6 million in the three months ended March 31, 2023.

Three Months Ended March 31,

Change from Prior Year

($ in thousands)

Income tax benefit

Income taxes .

Income taxes (benefit) were ($0.3) million in the three months ended September 30, 2022, compared to $0.1 million in the three months ended September 30, 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.

Nine Months Ended September 30, 2022 and 2021

The following is a discussion of our consolidated results of operations for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021.

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 $173.7 million in the nine months ended September 30, 2022, compared to $105.7 million in the nine months ended September 30, 2021, an increase of $68.0 million, or 64.3%.

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 $83.1 million in the nine months ended September 30, 2022, compared to $51.5 million in the nine months ended September 30, 2021, an increase of $31.6 million, or 61.4%.

Franchise revenue consisted of franchise royalty fees of $49.9 million, training fees of $6.0 million, franchise territory fees of $20.6 million and technology fees of $6.6 million in the nine months ended September 30, 2022, compared to 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.

The increase in franchise royalty fees, technology fees and training fees was primarily due to a 28% 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 453 new studio openings globally since September 30, 2021, which also contributed to the increase in franchise territory fees and technology fees.

Equipment revenue.

Equipment revenue was $31.9 million in the nine months ended September 30, 2022, compared to $15.6 million in the nine months ended September 30, 2021, an increase of $16.4 million, or 105.1%.

Most equipment revenue is recognized in the period that the equipment is installed.

Global equipment installations in the nine months ended September 30, 2022, totaled 376 compared to 216 in the prior year period, primarily due to the increase of studio openings compared to prior year period.

Merchandise revenue.

Merchandise revenue was $19.1 million in the nine months ended September 30, 2022, compared to $13.6 million in the nine months ended September 30, 2021, an increase of $5.5 million, or 40.2%.

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 $14.5 million in the nine months ended September 30, 2022, compared to $9.5 million in the nine months ended September 30, 2021, an increase of $5.0 million, or 53.0%.

Other service revenue.

Other service revenue was $25.0 million in the nine months ended September 30, 2022, compared to $15.5 million in the nine months ended September 30, 2021, an increase of $9.5 million, or 61.1%.

The increase was primarily due to a $9.7 million increase in other preferred vendor commission revenue and brand fee revenue;

partially offset by a decrease in package and memberships revenue due to fewer company-owned transition studios.

Operating Costs and Expenses

Nine Months Ended September 30,

Change from Prior Year

Income taxes (benefit) were ($0.1) million in the three months ended March 31, 2023, compared to ($2.1) million in the three months ended March 31, 2022.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance.

We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes.

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.

A reconciliation is provided below for the non-GAAP financial measures to the most directly comparable financial measures stated in accordance with GAAP.

Adjusted EBITDA

These items include equity-based compensation and related employer payroll taxes, acquisition and transaction expenses (including change in contingent consideration), 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), fees for financial transactions, such as secondary public offerings expenses for which we do not receive proceeds (including bonuses paid to executives related to completion of such transactions) 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.

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, 2023 and 2022:

Three Months Ended March 31,

(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 $35.0 million in the nine months ended September 30, 2022, compared to $19.3 million in the nine months ended September 30, 2021, an increase of $15.7 million, or 81.5%, compared to an increase in related revenues of 74.8%.

Costs of product revenue as a percentage of related revenue increased to 68.5% in the nine months ended September 30, 2022, from 66.0% in the nine months ended September 30, 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 $13.6 million in the nine months ended September 30, 2022, compared to $8.6 million in the nine months ended September 30, 2021, an increase of $5.0 million, or 57.7%.

The increase was primarily due to a $4.4 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 $96.1 million in the nine months ended September 30, 2022, compared to $62.1 million in the nine months ended September 30, 2021, an increase of $34.0 million, or 54.8%.

The increase was primarily attributable to an increase in equity-based compensation of $19.7 million, primarily related to modification of performance-based awards in 2021 which vested in 2022 and new grants;

an increase in accounting expenses of $2.4 million, primarily related to outsourcing of certain accounting functions and fees related to recovery of employee retention credit;

increase in legal expenses of $6.8 million related to various legal matters;

increase in insurance expense of $2.7 million;

increase in impairment charges of $2.9 million;

and $0.2 million net increase in other variable expenses in 2022;

partially offset by a net decrease in salaries and wages expense of $0.7 million primarily attributable to employee retention credit recorded in the nine months ended September 30, 2022.

Interest expense, net

Income tax benefit

Depreciation and amortization

Depreciation and amortization expense was $11.2 million in the nine months ended September 30, 2022, compared to $6.8 million in the nine months ended September 30, 2021, an increase of $4.4 million, or 64.2%.

The increase was due primarily to amortization of intangibles related to the BFT acquisition in October 2021 and the BodyFit trademark acquisition in the second quarter of 2022.

Marketing fund expense.

Marketing fund expense was $12.7 million in the nine months ended September 30, 2022, compared to $9.3 million in the nine months ended September 30, 2021, an increase of $3.4 million, or 36.5% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expenses (income).

Acquisition and transaction expenses (income) were ($5.8) million in the nine months ended September 30, 2022, compared to $3.5 million in the nine months ended September 30, 2021, a decrease of $9.3 million.

These expenses represent the non-cash change in contingent consideration related to 2017 and 2021 business acquisitions and $0.3 million of expense in 2021 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 months ended September 30, 2022 and 2021.

Interest expense .

Interest expense was $9.1 million in the nine months ended September 30, 2022, compared to $21.9 million in the nine months ended September 30, 2021, a decrease of $12.8 million, or 58.6%.

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 decrease was due primarily to lower average debt balance compared to the prior year and to write off of $7.5 million of deferred loan costs and debt discount and $2.3 million prepayment penalty incurred in the prior year period 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 paydown of debt with IPO proceeds.

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 Paycheck Protection Program loan.

Nine Months Ended September 30,

Change from Prior Year

($ in thousands)

Income taxes .

Income taxes (benefit) were ($0.2) in the nine months ended September 30, 2022, compared to $0.4 million in the nine months ended September 30, 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.

Equity-based compensation

Employer payroll taxes related to equity-based compensation

Acquisition and transaction expenses

Litigation expenses

Employee retention credit

Financial transaction fees and related expenses

TRA remeasurement

Adjusted EBITDA

Liquidity and Capital Resources

As of September 30, 2022, we had $27.5 million of cash and cash equivalents, excluding $3.4 million of restricted cash for marketing fund purposes.

As of March 31, 2023, we had $22.2 million of cash and cash equivalents, excluding $5.9 million of restricted cash.

We require cash principally to fund day-to-day operations, finance capital investments, service our outstanding debt and address our working capital needs.

12 unchanged sentences

(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.

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% (9.19% at September 30, 2022).

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

17 unchanged sentences

and (ix) restricting the issuance of equity.

As of September 30, 2022, we were in compliance with these covenants.

As of March 31, 2023, 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.

Such events of default include, subject to the grace periods specified therein, our failure to pay principal or interest when due, our failure to satisfy or comply with covenants, a change of control, the imposition of certain judgments and the invalidation of liens we have granted.

The proceeds of the Term Loan were used to repay principal, interest and fees outstanding under our prior financing agreement (including a prepayment penalty of approximately $1.9 million) and for working capital and other corporate purposes.

Immediately following the IPO, on July 23, 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.

5 unchanged sentences

The Third Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $7.5 million (the “2022 Incremental Term Loan”), the proceeds of which were used for the acquisition of BodyFit trademark and general corporate purposes, including funding working capital and the payment of fees, costs and expenses related to the Third Amendment.

We received $5.5 million in September 2022 and the remaining $2.0 million of the principal amount was received in October 2022.

The Third Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2022 Incremental Term Loan) commencing on December 31, 2022 and (ii) amended the amount of the prepayment premium applicable in the event the 2022 Incremental Term Loan is prepaid within two years of the effective date of the Third Amendment.

The total principal amount outstanding on the Term Loan, the 2021 Incremental Term Loan, and the 2022 Incremental Term Loan was $136.5 million at September 30, 2022.Quarterly principal payments of $0.8 million on the Term Loan as amended are due beginning December 31, 2022.

At September 30, 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,”

On January 9, 2023, we entered into a fourth amendment (the "Fourth Amendment") to the Credit Agreement.

The Fourth Amendment provides for, among other things, additional Term Loans in an aggregate principal amount of $130.0 million (the "2023 Incremental Term Loan"), the proceeds of which were used to fund the repurchase of a portion of our outstanding Convertible Preferred (the “Repurchase Transactions”) and the payment of fees, costs and expenses related to the Amendment and the Repurchase Transactions.

The Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2023 Incremental Term Loan) commencing on June 30, 2023 and (ii) amended the amount of the prepayment premium applicable in the event the 2023 Incremental Term Loan is prepaid.

The total principal amount outstanding on the Term Loans was $266.7 million at March 31, 2023.Quarterly principal payments of $1.1 million on the Term Loan as amended are due beginning June 30, 2023.

On January 9, 2023, we entered into a preferred stock repurchase agreement (the "Repurchase Agreement") with certain holders of the Convertible Preferred, pursuant to which we agreed to repurchase 85,340 shares of Convertible Preferred.

On January 13, 2023, the repurchase was completed for an aggregate payment of $130.8 million.

The excess of fair market value of $12.7 million over the consideration transferred was treated as deemed contribution and resulted in an increase to our accumulated deficit.

At March 31, 2023, 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, 2022.

The following table presents summary cash flow information for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,

The following table presents summary cash flow information for the three months ended March 31, 2023 and 2022:

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, 2022, cash provided by operating activities was $37.5 million, compared to cash provided of $3.9 million in the nine months ended September 30, 2021, an increase in cash provided of $33.5 million.

Of the change, $36.3 million was due to net income offset by adjustments for non-cash items.

Additionally, the following changes in operating assets and liabilities contributed to the net increase in operating cash flows:

increase in accounts payable, other current liabilities and other liabilities of $11.9 million due to timing of payments;

increase in prepaid expenses and other current assets of $3.9 million;

increase in deferred cost of $3.6 million due to an increase in sales of additional franchises;

increase in cash outflows relating to (1) decrease in deferred revenue of $8.4 million;

(2) decrease in accrued expenses of $1.0 million;

(3) decrease in accounts receivable of $4.7 million;

and (4) decrease in inventories of $7.9 million.

In the three months ended March 31, 2023, cash provided by operating activities was $11.4 million, compared to cash provided of $2.9 million in the three months ended March 31, 2022, an increase in cash provided of $8.5 million.

Of the increase, $0.2 million was due to lower net loss after adjustments to reconcile net loss to net cash provided by operating activities and $8.3 million primarily due to favorable changes in working capital related to accounts receivable, accounts payable and accrued expense;

partially offset by unfavorable changes in working capital related to deferred revenue in the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Cash Flows from Investing Activities

In the nine months ended September 30, 2022, cash used in investing activities was $11.6 million, compared to $4.0 million in the nine months ended September 30, 2021, an increase in cash used of $7.6 million.

The increase was primarily attributable to an increase in cash used to purchase property and equipment and intangible assets and issue notes receivables;

decrease in cash proceeds from sales of assets;

partially offset by an increase in cash received from collection of notes receivable and decrease in cash used to purchase studios.

In the three months ended March 31, 2023, cash used in investing activities was $2.4 million, compared to $2.2 million in the three months ended March 31, 2022, an increase in cash used of $0.2 million.

The increase was primarily attributable to a decrease of cash used in issuing notes receivables;

partially offset by a decrease in cash received from collection of notes receivable and an increase in cash used to purchase property and equipment and intangible assets.

Cash Flows from Financing Activities

In the nine months ended September 30, 2022, cash used in financing activities was $16.3 million, compared to cash provided by financing activities of $14.3 million in the nine months ended September 30, 2021, an increase in cash used of $30.6 million.

The increase in cash used was primarily attributable to the following changes:

increase in dividend payment of $8.9 million;

increase in tax payments of $1.9 million related to net share settlement of restricted share units;

decrease in borrowings on long-term debt of $212.9 million;

decrease in distribution to Member of $10.6 million;

increase in loan to shareholder of $3.3 million;

lower debt issuance costs of $0.9 million and lower payments on long-term debt and contingent consideration of $318.3 million;

decrease in cash received resulting from the IPO and preferred stock issuance, net of offering costs, of $317.2 million and decrease in receipts from Member of $1.5 million;

payments of $185.7 million in connection with reorganization transactions in 2021.

In the three months ended March 31, 2023, cash used in financing activities was $18.2 million, compared to $6.3 million in the three months ended March 31, 2022, an increase in cash used of $11.9 million.

The increase in cash used was primarily attributable to tax payments of $7.9 million related to vesting of restricted share units and payment of $130.8 million related to repurchase of convertible preferred stock;

partially offset by increase in cash received relating to borrowing on long-term debt of $126.1 million.

Off-Balance Sheet Arrangements

As of September 30, 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”).

As of March 31, 2023, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees.

Our maximum total commitment under these agreements is approximately $2.8 million and would only require payment upon default by the primary obligor.

The estimated fair value of these guarantees at March 31, 2023 was not material, and no accrual has been recorded for our potential obligation under these arrangements.

See Note 16 of Notes to Condensed Consolidated Financial Statements for more information regarding these operating leases and guarantees.

In July 2022, we issued a standby letter of credit to a third-party financing company, who provides loans to our qualified franchisees.

The standby letter of credit is contingent upon the failure of our franchisees to perform according to the terms of underlying contracts with the third party.

We deposited cash in a restricted account as collateral for the standby letter of credit.

The estimated fair value of these guarantees at inception was not material, and as of March 31, 2023 no accrual has been recorded for our potential obligation under this guaranty arrangement.

See Note 16 of Notes to Condensed Consolidated Financial Statements for more information.

Critical Accounting Policies and Estimates

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.

included in our Form 10-K for the year ended December 31, 2022.

Quantitative and Qualitative Disclosures About Market Risk.

1 unchanged sentence

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