Xponential Fitness, Inc. 10-Q

Item 1. Financial Statements. Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Condensed Consolidated Balance Sheets (Unaudited) (amounts in thousands) June 30, December 31, 2021 2020 Assets Current Assets: Cash, cash equivalents and restricted cash $ 20,203 $ 11,299 Accounts receivable, net (Note 9) 7,890 5,196 Inventories 5,284 6,161 Prepaid expenses and other current assets 8,696 5,480 Deferred costs, current portion 3,392 3,281 Notes receivable from franchisees, net (Note 9) 1,130 1,288 Related party receivable (Note 9) 314 — Total current assets 46,909 32,705 Property and equipment, net 12,587 13,694 Goodwill 147,863 139,680 Intangible assets, net 107,896 98,124 Deferred costs, net of current portion 37,021 35,445 Notes receivable from franchisees, net of current portion (Note 9) 2,046 2,576 Other assets 588 614 Total assets $ 354,910 $ 322,838 Liabilities and Member’s Equity Current Liabilities: Accounts payable $ 14,283 $ 18,339 Accrued expenses (Note 9) 13,957 13,764 Deferred revenue, current portion 18,590 14,247 Notes payable (Note 9) 932 970 Current portion of long-term debt 2,120 5,795 Other current liabilities 1,933 1,804 Total current liabilities 51,815 54,919 Deferred revenue, net of current portion 82,137 74,361 Contingent consideration from acquisitions (Note 10) 9,240 8,399 Long-term debt, net of current portion, discount and issuance costs 204,733 176,002 Other liabilities 4,431 4,408 Total liabilities 352,356 318,089 Commitments and contingencies (Note 10) Member’s equity: Member’s contribution 124,251 113,697 Receivable from Member (Note 9) ( 1,454 ) ( 1,456 ) Accumulated deficit ( 120,243 ) ( 107,492 ) Total member’s equity 2,554 4,749 Total liabilities and member’s equity $ 354,910 $ 322,838 See accompanying notes to condensed consolidated financial statements. 1 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Condensed Consolidated Statements of Operations (Unaudited) (amounts in thousands) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue, net: Franchise revenue $ 17,764 $ 8,984 $ 31,519 $ 23,831 Equipment revenue 4,755 5,159 8,821 11,894 Merchandise revenue 4,509 3,552 8,741 8,616 Franchise marketing fund revenue 3,314 737 5,797 3,434 Other service revenue 5,433 3,030 9,962 5,474 Total revenue, net 35,775 21,462 64,840 53,249 Operating costs and expenses: Costs of product revenue 6,274 6,781 11,618 14,879 Costs of franchise and service revenue 3,127 2,048 5,446 4,130 Selling, general and administrative expenses (Note 9) 21,202 15,437 37,804 27,310 Depreciation and amortization 2,407 1,883 4,462 3,697 Marketing fund expense 2,860 821 5,476 3,406 Acquisition and transaction expenses (income) 297 ( 5,035 ) 647 ( 5,809 ) Total operating costs and expenses 36,167 21,935 65,453 47,613 Operating income (loss) ( 392 ) ( 473 ) ( 613 ) 5,636 Other (income) expense: Interest income ( 358 ) ( 87 ) ( 453 ) ( 177 ) Interest expense (Note 9) 11,591 4,366 16,014 12,352 Gain on debt extinguishment ( 3,707 ) — ( 3,707 ) — Total other expense 7,526 4,279 11,854 12,175 Loss before income taxes ( 7,918 ) ( 4,752 ) ( 12,467 ) ( 6,539 ) Income taxes 83 — 284 162 Net loss $ ( 8,001 ) $ ( 4,752 ) $ ( 12,751 ) $ ( 6,701 ) See accompanying notes to condensed consolidated financial statements. 2 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Condensed Consolidated Statements of Changes to Member’s Equity (Unaudited) (amounts in thousands) Member’s Contribution Receivable from Member Accumulated Deficit Total Member’s Equity Balance at December 31, 2020 $ 113,697 $ ( 1,456 ) $ ( 107,492 ) $ 4,749 Equity based compensation 671 — — 671 Parent contribution of Rumble assets 20,483 — — 20,483 Distributions to Member ( 10,600 ) — — ( 10,600 ) Payment received from Member, net — 2 — 2 Net loss — — ( 12,751 ) ( 12,751 ) Balance at June 30, 2021 $ 124,251 $ ( 1,454 ) $ ( 120,243 ) $ 2,554 Member’s Contribution Receivable from Member Accumulated Deficit Total Member’s Equity Balance at December 31, 2019 $ 152,265 $ ( 31,735 ) $ ( 93,852 ) $ 26,678 Equity based compensation 865 — — 865 Member contributions 22,884 — — 22,884 Distributions to Member ( 73,203 ) — — ( 73,203 ) Payment received from Member, net — 30,279 — 30,279 Net loss — — ( 6,701 ) ( 6,701 ) Balance at June 30, 2020 $ 102,811 $ ( 1,456 ) $ ( 100,553 ) $ 802 Member’s Contribution Receivable from Member Accumulated Deficit Total Member’s Equity Balance at March 31, 2021 $ 123,802 $ ( 1,454 ) $ ( 112,242 ) $ 10,106 Equity based compensation 449 — — 449 Net loss — — ( 8,001 ) ( 8,001 ) Balance at June 30, 2021 $ 124,251 $ ( 1,454 ) $ ( 120,243 ) $ 2,554 Member’s Contribution Receivable from Member Accumulated Deficit Total Member’s Equity Balance at March 31, 2020 $ 102,364 $ ( 1,456 ) $ ( 95,801 ) $ 5,107 Equity based compensation 447 — — 447 Net loss — — ( 4,752 ) ( 4,752 ) Balance at June 30, 2020 $ 102,811 $ ( 1,456 ) $ ( 100,553 ) $ 802 See accompanying notes to condensed consolidated financial statements. 3 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Condensed Consolidated Statements of Cash Flows (Unaudited) (amounts in thousands) Six Months Ended June 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 12,751 ) $ ( 6,701 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 4,462 3,697 Amortization of debt issuance cost 5,350 2,501 Amortization of discount on long-term debt 271 — Change in contingent consideration from acquisitions 340 ( 5,809 ) Bad debt expense 10 3,547 Equity based compensation 671 865 Non-cash interest 512 644 Gain on debt extinguishment ( 3,707 ) — Loss from disposal of assets 179 44 Impairment of long-lived assets 781 — Changes in assets and liabilities: Accounts receivable ( 2,619 ) 1,407 Inventories 876 ( 125 ) Prepaid expenses and other current assets ( 3,217 ) ( 1,676 ) Deferred costs ( 1,809 ) ( 2,006 ) Notes receivable, net 177 53 Accounts payable ( 3,241 ) ( 3,458 ) Accrued expenses 2,059 ( 687 ) Related party payable ( 315 ) ( 8 ) Other current liabilities 129 ( 841 ) Deferred revenue 12,302 3,190 Other assets 26 ( 43 ) Other liabilities 24 42 Net cash provided by (used in) operating activities 510 ( 5,364 ) Cash flows from investing activities: Purchases of property and equipment ( 2,023 ) ( 764 ) Purchase of studios ( 390 ) ( 627 ) Proceeds from sale of assets 318 50 Purchase of intangible assets ( 568 ) ( 554 ) Notes receivable issued — ( 326 ) Notes receivable payment received 550 — Net cash used in investing activities ( 2,113 ) ( 2,221 ) Cash flows from financing activities: Borrowings from line of credit — 10,000 Payments on line of credit — ( 8,000 ) Borrowings from long-term debt 218,360 188,665 Payments on long-term debt ( 194,330 ) ( 147,369 ) Debt issuance costs ( 904 ) ( 5,036 ) Payment of contingent consideration ( 1,935 ) ( 1,375 ) Payments on loans from related party (Note 9) ( 86 ) ( 110 ) Member contributions — 17,286 Distributions to Member ( 10,600 ) ( 73,203 ) Receipts from (advances to) Member, net (Note 9) 2 30,279 Net cash provided by financing activities 10,507 11,137 Increase in cash, cash equivalents and restricted cash 8,904 3,552 Cash, cash equivalents and restricted cash, beginning of period 11,299 9,339 Cash, cash equivalents and restricted cash, end of period $ 20,203 $ 12,891 See accompanying notes to condensed consolidated financial statements. 4 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Condensed Consolidated Statements of Cash Flows (Unaudited) (amounts in thousands) Six Months Ended June 30, 2021 2020 Supplemental cash flow information: Interest paid $ 10,672 $ — Income taxes paid 258 — Noncash investing and financing activity: Capital expenditures accrued $ 201 $ 521 Contingent consideration converted to Member contribution — 5,598 Parent contribution of Rumble assets 20,483 — See accompanying notes to condensed consolidated financial statements. 5 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) Note 1 – Nature of Business and Operations Xponential Fitness, Inc. (“XPO, Inc.”), was formed as a Delaware corporation on January 14, 2020. On July 23, 2021, XPO, Inc. completed an initial public offering (“IPO”) of 10,000,000 shares of Class A common stock at an initial public offering price of $ 12.00 per share. Pursuant to a reorganization into a holding company structure, XPO, Inc. is a holding company with its principal asset being a controlling ownership interest in Xponential Fitness LLC (the “Company”) through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”). The operations of the Company represent the predecessor to XPO, Inc. prior to the IPO. In connection with the IPO, XPO, Inc. entered into the following series of transactions to implement an internal reorganization, (the “Reorganization Transactions.”) The pre-IPO members of XPO Holdings (the “Pre-IPO LLC Members”) who retained their equity ownership in the form of limited liability company units (the “LLC Units”), immediately following the consummation of the Reorganization Transactions are referred to as “Continuing Pre-IPO LLC Members.” • Because XPO, Inc. will manage and operate the business and control the strategic decisions and day-to-day operations of the Company through its ownership of XPO Holdings and because it will also have a substantial financial interest in the Company through its ownership of XPO Holdings, it will consolidate the financial results of the Company and XPO Holdings, and a portion of its net income will be allocated to the non-controlling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of XPO Holdings’ net income or loss. • XPO, Inc.’s amended and restated certificate of incorporation authorizes the issuance of two classes of common stock, Class A common stock and Class B common stock (collectively, “common stock”) and preferred stock and the certificates of designation adopted in connection with the IPO designated 200,000 shares of preferred stock as 6.50 % Series A-1 Convertible Preferred Stock (the “Series A-1 preferred stock”) and 200,000 shares of Preferred Stock as 6.50 % Series A Convertible Preferred Stock (the “Series A Convertible preferred stock and, together with the Series A-1 preferred stock, the “Convertible Preferred”). Each share of common stock entitles its holder to one vote per share on all matters submitted to a vote of stockholders. • Prior to completion of the IPO, XPO, Inc. acquired, directly and indirectly, limited liability company units of XPO Holdings (the “LLC Units”) through (i) the contribution of LLC Units by H&W Investco, LP and Lag Fit, Inc. in exchange for Class A common stock (the “IPO Contribution”) and (ii) the “Mergers,” in which Rumble Holdings LLC and H&W Investco Blocker II, LP (the “Blocker Companies”) were contributed by their owners (the “Blocker Shareholders”) to XPO, Inc. in exchange for Class A common stock, and, in the case of H&W Investco Blocker II, LP a cash payment (the “H&W Cash Merger Consideration”), after which the Blocker Companies immediately merged with and into XPO, Inc. • Prior to the completion of the IPO, XPO, Inc. issued and sold 200,000 shares of Convertible Preferred to certain affiliates of MSD Partners, L.P., a fund within the D.E. Shaw group and a fund managed by Redwood Capital Management, LLC (the “Preferred Investors”) for aggregate cash proceeds of $ 200,000 , before deduction of offering costs. • Each Continuing Pre-IPO LLC Member (other than LCAT Franchise Fitness Holdings, Inc. (“LCAT”) was issued a number of shares of Class B common stock equal to the number of vested LLC Units held by such Continuing Pre-IPO LLC Member. • Under the Limited Liability Company Agreement of XPO Holdings (the “Amended LLC Agreement”), holders of LLC Units (other than XPO, Inc.) have the right, from and after the completion of the IPO (subject to the terms of the Amended LLC Agreement), to require XPO Holdings to redeem all or a portion of their LLC Units for, at XPO, Inc.’s election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume-weighted average market price of one share of Class A common stock for each LLC Unit redeemed (subject to customary adjustments) or the net proceeds from a substantially contemporaneous offering of Class A common stock in accordance with the terms of the Amended LLC Agreement. Additionally, in the event of a redemption request from a holder of LLC Units, XPO, Inc. may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption. Shares of Class B common stock will be cancelled on a one-for-one basis if XPO, Inc., following a redemption request from a holder of LLC Units, redeems or exchanges LLC Units of such holder pursuant to the terms of the Amended LLC Agreement. 6 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) • XPO, Inc. used the net proceeds from the IPO, together with the $ 200,000 in proceeds received from the sale of Convertible Preferred to (i) acquire newly issued preferred units of XPO Holdings (the “Preferred Units”) and LLC Units, (ii) purchase all of the shares of LCAT from LCAT shareholders and (iii) pay the H&W Cash Merger Consideration. • After the acquisition of LCAT from LCAT shareholders, LCAT merged with and into XPO, Inc., after which XPO, Inc. owns directly the LLC Units previously held by LCAT. • XPO, Inc. entered into a tax receivable agreement (“TRA”) that obligates it to make payments to the Continuing Pre-IPO LLC Members, the Blocker Shareholders and any future party to the TRA (the “TRA parties”) in the aggregate generally equal to 85 % of the applicable cash savings realized as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (ii) increases in XPO, Inc.’s allocable share of existing tax basis and tax basis adjustments that may result from (x) the IPO Contribution, the redemption of Class A-5 Units of H&W Franchise Holdings, LLC (the “Class A-5 Units”) in connection with the IPO (the “Class A-5 Unit Redemption”), and the purchase of LLC Units from Continuing Pre-IPO LLC Members in the IPO, (y) future taxable redemptions and exchanges of LLC Units by Continuing Pre-IPO LLC Members, and (z) certain payments made under the TRA, and (iii) deductions in respect of interest under the TRA. XPO, Inc. will retain the benefit of the remaining 15 % of these tax savings. • XPO Holdings used the proceeds from the issuance of LLC Units and Preferred Units to (i) to repay approximately $ 116,059 of outstanding borrowings under the Term Loan (see Note 8), including prepayment penalties and interest, (ii) to pay fees and expenses of approximately $ 6,700 in connection with the IPO and the Reorganization Transactions, (iii) to pay approximately $ 20,500 in the Class A-5 Unit Redemption for the Class A-5 Units redeemed from certain of the Continuing Pre-IPO Members and (iv) the remainder for working capital. The corporate structure following the completion of the IPO, as described above, is commonly referred to as an “Up-C” structure, which is used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow Continuing Pre-IPO LLC Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the IPO. The Company 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. The Company is a wholly owned subsidiary of XPO Holdings (the “Member”), which was formed on February 24, 2020, and prior to the IPO, ultimately, H&W Franchise Holdings, LLC (the “Parent”). Prior to the formation of the Member, the Company was a wholly owned subsidiary of H&W Franchise Intermediate Holdings, LLC. Currently, the Company’s portfolio of nine brands includes: “Club Pilates,” a Pilates facility franchisor; “CycleBar,” a premier indoor cycling franchise; “Stretch Lab,” a fitness concept offering one-on-one assisted stretching services; “Row House,” a rowing concept that provides an effective and efficient workout centered around the sport of rowing; “Yoga Six,” a yoga concept that concentrates on connecting to one’s body in a way that is energizing; “AKT” and “Pure Barre,” which are dance-based concepts that provide a combination of personal training and movement based techniques; “Stride,” a running concept that offers treadmill-based high-intensity interval training and strength-training; and “Rumble,” a boxing concept that offers boxing-inspired group fitness classes, which was acquired on March 24, 2021. The Company, through its brands, licenses its proprietary systems to franchisees who in turn operate studios to promote training and instruction programs to their club members within each vertical. In addition to franchised studios, the Company operated 52 and 16 company-owned studios as of June 30, 2021 and 2020, respectively. Basis of presentation – The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, the Company has made all adjustments necessary to present fairly the condensed consolidated statements of operations, balance sheets, changes in member’s equity, and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2020 consolidated financial statements disclosed in the final prospectus filed with the Securities and Exchange Commission (the “SEC”) on July 26, 2021 in connection with the IPO. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year. 7 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) On March 24, 2021, the Company acquired the rights to franchise the Rumble concept and has included the results of operations of Rumble in its condensed consolidated statement of operations from that date forward. See Note 3 for additional information. Principles of consolidation – The Company’s consolidated financial statements include the accounts of its wholly owned subsidiaries Club Pilates Franchise, LLC; CycleBar Holdco, LLC; Stretch Lab Franchise, LLC; Row House Franchise, LLC; Yoga Six Franchise, LLC; AKT Franchise, LLC; PB Franchising, LLC; Stride Franchise, LLC; Rumble Franchise, LLC and Xponential Fitness Brands International, LLC. All intercompany transactions have been eliminated in consolidation. Use of estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. Actual results could differ from these estimates under different assumptions or conditions. Note 2 – Summary of Significant Accounting Policies Segment information –T he Company operates in one operating segment. During the three and six months ended June 30, 2021 and 2020, the Company did not generate material international revenues and as of June 30, 2021 and December 31, 2020, the Company did not have material assets located outside of the United States. Cash, cash equivalents and restricted cash – The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company has marketing fund restricted cash, which can only be used for activities that promote the Company’s brands. Restricted cash was $ 1,321 and $ 999 at June 30, 2021 and December 31, 2020 , respectively. Accounts receivable and allowance for doubtful accounts – Accounts receivable primarily consist of amounts due from franchisees and vendors. These receivables primarily relate to royalties, advertising contributions, equipment and product sales, training, vendor commissions and other miscellaneous charges. Receivables are unsecured; however, the franchise agreements provide the Company the right to withdraw funds from the franchisee’s bank account or to terminate the franchise for nonpayment. On a periodic basis, the Company evaluates its accounts receivable balance and establishes an allowance for doubtful accounts based on a number of factors, including evidence of the franchisee’s ability to comply with credit terms, economic conditions and historical receivables. 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 June 30, 2021 and December 31, 2020, the allowance for doubtful accounts was $ 2,658 and $ 2,405 , respectively. Deferred offering costs – Deferred offering costs, primarily consisting of legal, accounting and other fees relating to the Company’s initial public offering, are capitalized. These costs will be offset against the initial public offering proceeds upon the completion of the offering. In the event the offering is terminated, all deferred costs will be expensed. As of June 30, 2021 and December 31, 2020, the Company had capitalized $ 6,704 and $ 4,429 , respectively, of deferred offering costs, which are recorded in prepaid expenses and other current assets in the condensed consolidated balance sheets. Accrued expenses – Accrued expenses consisted of the following: June 30, December 31, 2021 2020 Accrued compensation $ 3,139 $ 2,351 Contingent consideration from acquisitions, current portion 1,363 3,229 Sales tax accruals 5,307 4,931 Accrued offering costs 3,402 2,151 Other accruals 746 1,102 Total accrued expenses $ 13,957 $ 13,764 8 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) Comprehensive income – The Company does not have any components of other comprehensive income recorded within the consolidated financial statements and therefore does not separately present a consolidated statement of comprehensive income in the condensed consolidated financial statements. Fair value measurements – ASC Topic 820, Fair Value Measurements and Disclosures , applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 establishes a valuation hierarchy for disclosures of the inputs to valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date. Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Level 3 – Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data. The Company’s financial instruments include cash, restricted cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable. The carrying amounts of these financial instruments approximates fair value due to their short maturities. Recently issued accounting pronouncements – Accounting for leases – In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases (Topic 842).” This new topic, which supersedes “Leases (Topic 840),” applies to all entities that enter into a contract that is or contains a lease, with some specified scope exemptions. This new standard requires lessees to evaluate whether a lease is a finance lease using criteria similar to those a lessee uses under current accounting guidance to determine whether it has a capital lease. Leases that do not meet the criteria for classification as finance leases by a lessee are to be classified as operating leases. Under the new standard, for each lease classified as an operating lease, lessees are required to recognize on the balance sheet: (i) a right-of-use (“ROU”) asset representing the right to use the underlying asset for the lease term; and (ii) a lease liability for the obligation to make lease payments over the lease term. Lessees can make an accounting policy election, by class of underlying asset, to not recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. This standard also requires an entity to disclose key information (both qualitative and quantitative) about the entity’s leasing arrangements. Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. Management is currently evaluating the impact of this new guidance on the consolidated financial statements. In June 2020, the FASB issued ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842),” which defers the effective date of Leases (Topic 842) to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Credit Losses – In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses and will apply to trade receivables. The new guidance will be effective for the Company’s annual and interim periods beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements. 9 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) Reference Rate Reform – In March 2020, the FASB issued ASU 2020-04, “ Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the expected transition away from reference rates that are expected to be discontinued, such as LIBOR. 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 consolidated financial statements. Debt – In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity’s own equity and modifies the guidance on diluted earnings per share calculations as a result of these changes. ASU 2020-06 will take effect for public entities for annual reporting periods beginning after December 15, 2021, and interim periods with those fiscal years. As permitted by the standard, the Company has elected to early adopt this standard in January of 2021 with no impact upon adoption. 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. Studios During the six months ended June 30, 2021, the Company entered into agreements with franchisees under which the Company repurchased five studios to operate as company-owned studios. The aggregate purchase price for the acquisition 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 $ 136 Reacquired franchise rights 194 Total purchase price $ 330 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 six months ended June 30, 2021, the Company refranchised 19 company-owned studios for aggregate proceeds of $ 318 and recorded a loss on disposal of the related assets of $ 179 . The Company is actively seeking to refranchise the remaining company-owned studios. If the Company is not able to refranchise the studios by December 31, 2021, it may choose to close the studios to the extent they are not profitable at that time. When the Company believes that a studio will be refranchised for a price less than its carrying value, but do not believe the studio has met the criteria to be classified as held for sale, the Company reviews the studio for impairment. The Company evaluates the recoverability of the studio assets by comparing estimated sales proceeds plus holding period cash flows, if any, to the carrying value of the studio. For studio assets that are not deemed to be recoverable, the Company recognizes impairment for any excess of carrying value over the fair value of the studios, which is based on the expected net sales proceeds. During the six months ended June 30, 2021, the Company recorded impairment charges of $ 781 , which is a level 3 measurement and is included in selling, general and administrative expenses. Rumble 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 39,540.5 shares of the Parent’s Class A units, which were used to fund the acquisition, and are subject to forfeiture if certain events occur. An additional 61,573.5 units were issued to the Selling Parties, which 10 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) units vest if certain share prices are met, or if the Company or the Parent has a change of control. In connection with the contribution agreement, the Parent agreed to provide up to $ 20,000 in debt financing to the Selling Parties. See Note 8 for additional information. The Parent contributed all assets acquired from the Selling Parties to the Company. 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. 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 complimentary 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 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 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: Goodwill $ 8,183 Franchise agreements 10,900 Trademark 1,400 Total purchase price $ 20,483 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. Goodwill and intangible assets recognized from this acquisition are not expected to be tax deductible. During the three and six months ended June 30, 2021, the Company incurred $ 77 and $ 307 , respectively, of transaction costs directly related to the acquisitions, which is included in acquisition and transaction expenses in the condensed consolidated statements of operations. Note 4 – Contract Liabilities and Costs from Contracts with Customers Contract liabilities – Contract liabilities consist of deferred revenue resulting from franchise fees, development fees and master franchise fees paid by franchisees, which are recognized over time on a straight-line basis over the franchise agreement term. The Company also receives upfront payments from vendors under agreements that give the vendors access to franchisees’ members to provide certain services to the members (“brand fees”). Revenue from the upfront payments is recognized on a straight-line basis over the agreement term and is reported in other service revenue. Also included in the deferred revenue balance are non-refundable prepayments for merchandise and equipment, as well as revenues for training, service revenue and on-demand fees for which the associated products or services have not yet been provided to the customer. 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 six months ended June 30, 2021. Other deferred revenue amounts of $ 10,113 are excluded from the table as the original expected duration of the contracts is one year or less . 11 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) Franchise development fees Brand fees Total Balance at December 31, 2020 $ 76,371 $ 5,385 $ 81,756 Revenue recognized that was included in deferred revenue at the beginning of the year ( 4,813 ) ( 948 ) ( 5,761 ) Deferred revenue recorded as settlement in purchase accounting ( 459 ) — ( 459 ) Increase, excluding amounts recognized as revenue during the year 13,771 1,307 15,078 Balance at June 30, 2021 $ 84,870 $ 5,744 $ 90,614 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 June 30, 2021. 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. The Company elected to not disclose short term contracts, sales and usage-based royalties, marketing fees and any other variable consideration recognized on an “as invoiced” basis. Contract liabilities to be recognized in revenue in Franchise development fees Brand fees Total Remainder of 2021 $ 2,928 $ 1,186 $ 4,114 2022 7,255 2,372 9,627 2023 8,598 2,068 10,666 2024 9,184 118 9,302 2025 9,280 — 9,280 Thereafter 47,625 — 47,625 $ 84,870 $ 5,744 $ 90,614 The following table reflects the components of deferred revenue: June 30, December 31, 2021 2020 Franchise and area development fees $ 84,870 $ 76,371 Brand fees 5,744 5,385 Equipment and other 10,113 6,852 Total deferred revenue 100,727 88,608 Non-current portion of deferred revenue 82,137 74,361 Current portion of deferred revenue $ 18,590 $ 14,247 Contract costs – Contract costs consist of deferred commissions resulting from franchise and area development sales by third-party and affiliate brokers and sales personnel. The total commission is deferred at the point of a franchise sale. The commissions are evenly split among the number of studios purchased under the development agreement and begin to be amortized when a subsequent franchise agreement is executed. The commissions are recognized on a straight-line basis over the initial ten-year franchise agreement term to align with the recognition of the franchise agreement or area development fees. The Company classifies these deferred contract costs as either current deferred costs or non-current deferred costs in the condensed consolidated balance sheet. The associated expense is classified within costs of franchise and service revenue in the condensed consolidated statements of operations. At June 30, 2021 and December 31, 2020, there were approximately $ 2,893 and $ 2,553 of current deferred costs and approximately $ 37,003 and $ 35,417 in non-current deferred costs, respectively. The Company recognized franchise sales commission expense of 12 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) approximately $ 1,440 and $ 2,449 , for the three and six months ended June 30, 2021, respectively, and $ 1,186 and $ 2,099 for the three and s ix months ended June 31, 202 0 , respectively. Note 5 – Notes Receivable The Company has provided unsecured advances or extended financing related to the purchase of the Company’s equipment or franchise fees to various franchisees. These arrangements have terms of up to 18 months with interest typically based on LIBOR plus 700 basis points with an initial interest free period. The Company also provides loans to various franchisees through its relationship with Intensive Capital Inc. (“ICI”) (see Note 9 for additional information). The Company accrues the interest as an addition to the principal balance as the interest is earned. Activity related to these arrangements is presented within operating activities in the condensed consolidated statements of cash flows. The Company has also provided unsecured loans for the establishment of new or transferred franchise studios to various franchisees. These loans have terms of up to ten years and bear interest at fixed rates ranging from 7.75 % to 15 %, or variable rates based on LIBOR plus a specified margin . The Company accrues interest as an addition to the principal balance as the interest is earned. Activity related to these loans is presented within investing activities in the condensed consolidated statements of cash flows. At June 30, 2021 and December 31, 2020, the principal balance of the notes receivable was approximately $ 5,092 and $ 5,773 , respectively. On a periodic basis, the Company evaluates its notes receivable balance and establishes an allowance for doubtful accounts, based on a number of factors, including evidence of the franchisee’s ability to comply with the terms of the notes, economic conditions and historical collections. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At June 30, 2021 and December 31, 2020, the Company has reserved approximately $ 1,916 and $ 1,909 as uncollectible notes receivable, respectively. Note 6 – Property and equipment Property and equipment consisted of the following: June 30, December 31, 2021 2020 Furniture and equipment $ 2,994 $ 3,586 Computers and software 7,701 6,451 Vehicles 12 12 Leasehold improvements 6,164 6,478 Construction in progress 976 1,201 Less: accumulated depreciation ( 5,260 ) ( 4,034 ) Total property and equipment $ 12,587 $ 13,694 Depreciation expense was $ 738 and $ 1,454 , for the three and six months ended June 30, 2021, respectively, and $ 624 and $ 1,239 , for the three and six months ended June 30, 2020, respectively. Note 7 – Goodwill and Intangible Assets Goodwill represents the excess of cost over the fair value of identifiable net assets acquired related to the original purchase of the various franchise businesses and acquisition of company-owned studios. Goodwill is not amortized but is tested annually for impairment or more frequently if indicators of potential impairment exist. During the six months ended June 30, 2021, there was an increase of $ 8,183 in previously reported goodwill due to the acquisition of Rumble as discussed in Note 3. Goodwill totaled $ 147,863 and $ 139,680 at June 30, 2021 and December 31, 2020, respectively. 13 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) Intangible assets consisted of the following: June 30, 2021 December 31, 2020 Amortization period (years) Gross amount Accumulated amortization Net amount Gross amount Accumulated amortization Net amount Trademarks 4 – 10 $ 2,820 $ ( 478 ) $ 2,342 $ 1,420 $ ( 373 ) $ 1,047 Franchise agreements 7.5 – 10 45,400 ( 13,893 ) 31,507 34,500 ( 11,498 ) 23,002 Reacquired franchise rights 5 – 8 30 — 30 158 ( 15 ) 143 Customer relationships 1 — — — 33 ( 26 ) 7 Non-compete agreement 5 1,400 ( 1,142 ) 258 1,400 ( 1,002 ) 398 Web design and domain 3 – 10 130 ( 57 ) 73 130 ( 44 ) 86 Deferred video production costs 3 1,718 ( 639 ) 1,079 1,150 ( 316 ) 834 Total definite-lived intangible assets 51,498 ( 16,209 ) 35,289 38,791 ( 13,274 ) 25,517 Indefinite-lived intangible assets: Trademarks N/A 72,607 — 72,607 72,607 — 72,607 Total intangible assets $ 124,105 $ ( 16,209 ) $ 107,896 $ 111,398 $ ( 13,274 ) $ 98,124 Amortization expense was $ 1,669 and $ 3,008 , for the three and six months ended June 30, 2021, respectively, and $ 1,259 and $ 2,458 for the three and six months ended June 30, 2020, respectively. The anticipated future amortization expense of intangible assets is as follows: Remainder of 2021 $ 3,275 2022 6,192 2023 5,905 2024 5,670 2025 5,547 Thereafter 8,700 Total $ 35,289 Note 8 – Debt On September 29, 2017, H&W Franchise Holdings, LLC (“Parent”) obtained a five-year $ 55,000 term loan from a lender, along with a consortium of banks and other lenders (the “Prior Facility”). The rights and obligations were then assigned to and assumed by the Company and St. Gregory Holdco, LLC (“STG”), a subsidiary of the Parent immediately following the consummation of a related party recapitalization transaction. The Prior Facility also included a $ 3,000 revolving credit line for general corporate purposes. On June 28, 2018 and October 25, 2018, the Prior Facility was amended to increase the aggregate available borrowings to $ 145,000 , including a $ 10,000 revolving credit line, and to extend the maturity date to October 25, 2023 . In December 2019, the Company entered into an amendment and waiver to the Prior Facility, pursuant to which, the Company agreed to pay monthly fees of $ 500 beginning on February 1, 2020, increasing by $ 500 on the first of each subsequent month until the amounts outstanding under the Prior Facility were repaid in full. In addition, the interest rate margin above LIBOR was to increase by 1 % beginning on February 1, 2020, increasing by 1 % on the first of each subsequent month until the amounts outstanding under the Prior Facility were repaid in full. Further, installment payments on the Term A Loan were due in an amount equal to 1 % of the aggregate amount of Term A Loans beginning on February 1, 2020. In addition, penalties of up to $ 1,500 were to be incurred if certain information was not provided on the respective due dates through February 2020. In February 2020, the Company entered into a further amendment to the Prior Facility that required a $ 30,000 principal payment, which was paid in February 2020 with the proceeds from an equity contribution (see Note 11). The amendment also reverted to the prior quarterly installment payment schedule and amended the monthly fees beginning March 1, 2020 to $ 1,000 , increasing to 14 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) $ 2,000 on August 1, 2020. The required information was provided by the due date related to $ 1,000 of penalties imposed by the December 2019 amendment. In February 2020, the Company paid $ 500 in penalties. On February 28, 2020, the Company obtained a five-year $ 185,000 term loan from a lender, along with a consortium of other lenders (the “2020 Facility”). 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, and a $ 1,000 prepayment penalty on the Prior Facility. In addition, $ 18,833 of the proceeds were distributed to the Member in March 2020. 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 were scheduled to begin 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” and, together, the “Term Loans”). The Company’s obligations under the Credit Agreement are guaranteed by the Member and certain of the Company’s material subsidiaries and are secured by substantially all of the assets of the Member and certain of the Company’s material subsidiaries. Under the Credit Agreement, the Company is required to make: (i) monthly payments of interest on the Term Loans and (ii) quarterly principal payments equal to 0.25 % of the original principal amount of the Term Loans. Borrowings under the Term Loan Facility bear interest at a per annum rate of, at the Company’s option, either (a) the specified LIBOR rate plus a margin of 6.50 % or (b) the Reference Rate (as defined in the Credit Agreement) plus a margin of 5.50 % ( 7.5 % at June 30, 2021). The Credit Agreement also contains mandatory prepayments of the Term Loans with: (i) 50 % of the Member’s and its subsidiaries’ Excess Cash Flow (as defined in the Credit Agreement), subject to certain exceptions; (ii) 100 % of the net proceeds of certain asset sales and insurance/condemnation events, subject to reinvestment rights and certain other exceptions; (iii) 100 % of the net proceeds of certain extraordinary receipts, subject to reinvestment rights and certain other exceptions; (iv) 100 % of the net proceeds of any incurrence of debt, excluding certain permitted debt issuances; and (v) up to $ 60,000 of net proceeds in connection with an initial public offering of at least $ 200,000 , subject to certain exceptions. Unless agreed in advance, a ll voluntary prepayments and certain mandatory prepayments of the Term Loan made (i) on or prior to the first anniversary of the closing date are subject to a 2.0 % premium on the principal amount of such prepayment and (ii) after the first anniversary of the closing date and on or prior to the second anniversary of the closing date are subject to a 0.50 % premium on the principal amount of such prepayment. Otherwise, the Term Loans may be paid without premium or penalty, other than customary breakage costs with respect to LIBOR Rate Term Loans. The Credit Agreement contains customary affirmative and negative covenants, including, among other things: (i) to maintain certain total leverage ratios, liquidity levels and EBITDA levels; (ii) to use the proceeds of borrowings only for certain specified purposes; (iii) to refrain from entering into certain agreements outside of the ordinary course of business, including with respect to consolidation or mergers; (iv) restricting further indebtedness or liens; (v) restricting certain transactions with affiliates; (vi) restricting investments; (vii) restricting prepayments of subordinated indebtedness; (viii) restricting certain payments, including certain payments to affiliates or equity holders and distributions to equity holders; and (ix) restricting the issuance of equity. As of June 30, 2021, 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. Such events of default include, subject to the grace periods specified therein, failure to pay principal or interest when due, failure to satisfy or comply with covenants, a change of control, the imposition of certain judgments and the invalidation of liens the Company has granted. 15 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except 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 three months ended June 30, 2021) and for working capital and other corporate purposes. Principal payments of the Term Loan of $ 530 are due quarterly . 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, which provides for forgiveness of up to the full principal amount and accrued interest of qualifying loans guaranteed under the PPP. The loan matures April 17, 2022 , bears interest at 1 % per annum and requires 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 three and six months ended June 30, 2021. The Company incurred debt issuance costs of $ 904 and $ 5,036 in the six months ended June 30, 2021 and 2020, respectively. Debt issuance cost amortization amounted to approximately $ 5,039 and $ 5,350 for the three and six months ended June 30, 2021, respectively, and $ 245 and $ 2,501 in the three and six months ended June 30, 2020, respectively. Unamortized debt issuance costs as of June 30, 2021 and December 31, 2020 were $ 648 and $ 5,094 , 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 June 30, 2021 were as follows: Amount Remainder of 2021 $ 1,060 2022 2,120 2023 2,120 2024 2,120 2025 204,050 Total $ 211,470 The carrying value of the Company’s long-term debt approximated fair value as of June 30, 2021 and December 31, 2020 due to the variable interest rate, which is a Level 2 input, or proximity of debt issuance date to the balance sheet date. In July 2021, the Company repaid $ 115,000 of the principal balance of the Term Loans from proceeds of the IPO and Convertible Preferred. See Note 13 for additional information. Note 9 – Related Party Transactions The Company has numerous transactions with the Member and the Parent and its affiliates. The significant related party transactions consist of borrowings from and payments to the Member and other related parties under common control of the Parent. 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. The Company recorded approximately $ 207 and $ 399 , during the three and six months ended June 30, 2021 respectively, and $ 194 and $ 414 during the three and six months ended June 30, 2020, respectively, of management fees included within SG&A expenses for services received from H&W Investco, including reimbursement for reasonable out-of-pocket expenses. The management services agreement was terminated following the IPO in July 2021. As of December 31, 2019, the Company recorded a reduction to Member’s equity of $ 31,735 , representing the net amount of funds advanced to the Member, as the Company determined that the Member had no plan to repay these amounts in the foreseeable future. The receivable from the Parent was repaid in February 2020. During the three months ended March 31, 2020, the Company 16 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) provided net funds to STG aggregating $ 1,456 and recorded a corresponding reduction to member’s equity for this same amount. During the six months ended June 30 , 2021, the Parent repaid $ 2 of the receivable. The aggregate receivable from the Parent at June 30, 2021 and December 31, 2020 was $ 1,454 and $ 1,456 , respectively. In February 2020, the Member contributed $ 49,443 to the Company in satisfaction of the $ 31,735 receivable at December 31, 2019 with the remainder recorded as a contribution. The proceeds were used to make a $ 30,000 principal payment on the Company’s outstanding term loan under the Prior Facility (see Note 8), with the remainder available for unrestricted use by the Company. Also, in February 2020, the Company returned $ 19,443 of the contribution to the Member, which was recorded as a distribution. Also, in the three months ended March 31, 2020, $ 53,760 of the proceeds from the borrowings under the 2020 Facility were forwarded to the Parent and recorded as a distribution. 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. The Company earns interest at the rate of 11 % per annum on the receivable from the Parent. At June 30, 2021, $ 314 was receivable from the Parent for interest accrued in the six months ended June 30, 2021. The Company’s Chief Executive Officer is the sole owner of ICI, which previously provided unsecured loans to the Company, which loans the funds to franchisees to purchase a franchise territory or to setup a studio. The Company records notes payable to ICI and notes receivable from the franchisees resulting from these transactions. The notes from ICI to the Company accrue interest at the time the loan is made, which is recorded as interest expense. The notes receivable begin to accrue interest 45 days after the issuance to the franchisee. At June 30, 2021 and December 31, 2020, the Company had recorded $ 96 and $ 94 of notes receivable and $ 0 and $ 86 of notes payable, respectively. The Company recognized $ 3 and $ 6 of interest income in the three and six months ended June 30, 2021, respectively and $ 3 and $ 7 in the three and six months ended June 30, 2020, respectively. The Company recognized interest expense of $ 2 and $ 5 in the three and six months ended June 30, 2021, respectively, and $ 3 and $ 7 in the three and six months ended June 30, 2020, respectively. In September 2019, the Company entered into a building lease agreement 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 an initial lease term of five years expiring on August 31, 2024 . During the three and six months ended June 30, 2021 and 2020, the Company recorded expense related to this lease of $ 80 and $ 159 , respectively. The Company earns revenues and has accounts receivable and notes receivables from franchisees who are also shareholders of the Parent or officers of the Company. Revenues from these affiliates, primarily related to franchise revenue, marketing fund revenue and merchandise revenue, were $ 401 and $ 598 for the three and six months ended June 30, 2021, respectively, and $ 93 and $ 373 for the three and six months ended June 31, 2020, respectively. Included in accounts receivable as of June 30, 2021 and December 31, 2020 is $ 138 and $ 9 , respectively, for such sales. At June 30, 2021 and December 31, 2020, notes receivable from franchisees includes $ 0 and $ 135 and notes receivable from franchisees, net of current portion includes $ 1,744 and $ 2,093 , respectively, related to financing provided to these affiliates. Note 10 – Contingencies and Litigation 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. The Company intends to defend itself and a range of losses, if any, is not estimable. As a result, the Company has not recorded any liability for this matter in the consolidated balance sheets. The Company is subject to normal and routine litigation brought by former or current employees, customers, franchisees, vendors, landlords or others. The Company intends to defend itself in any such matters. The Company believes that the ultimate determination of liability in connection with legal claims pending against it, if any, will not have a material adverse effect on its business, annual results of operations, liquidity or financial position; 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 17 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) entered into certain settlement agreements to resolve legal disputes and recorded $ 186 and $ 679 , which is included in accrued expenses on the condensed consolidated balance sheet as of June 30, 2021 and December 31, 202 0 , 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 $ 264 and $ 502 of additional contingent consideration as interest expense for the three and six months ended June 30, 2021, respectively, and $ 188 and $ 331 for the three and six months ended June 30, 2020, respectively. At June 30, 2021 and December 31, 2020, the contingent consideration was $ 8,600 and $ 8,100 recorded as contingent consideration from acquisitions, respectively, on the condensed consolidated balance sheets. In August 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 six months ended June 30 2021, the Company recorded an increase of $ 220 and $ 340 to contingent consideration, respectively, which was recorded as acquisition and transaction expenses (income). During the three and six months ended June 30 2020, the Company recorded a reduction of ($ 3,367 ) and ($ 3,675 ) to contingent consideration, of which $ 53 and $ 105 was recorded as interest expense and ($ 3,420 ) and ($ 3,780 ) as acquisition and transaction expenses (income), respectively. As of June 30, 2021 and December 31, 2020, contingent consideration totaled approximately $ 640 and $ 300 , respectively. The Company determines the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach, which is a Level 3 measurement. Inputs used in the methodology primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved. In connection with the 2017 acquisition of Stretch Lab, the Company agreed to pay to the seller 20 % of operational or change of control distributions, until the date on which a change of control or a liquidation of Stretch Lab occurs. The Company determined the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach, which is a Level 3 measurement. Inputs used in the methodology primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved. In September 2019, the Company entered into a settlement agreement with the Stretch Lab sellers to resolve disputes related to the acquisition and related agreements and to settle all amounts due under the contingent consideration. Under the terms of the settlement agreement, the Company will make payments to the sellers aggregating $ 6,500 , which was recorded at the settlement date using a discount rate of 8.345 %. At June 30, 2021 and December 31, 2020, the liability was $ 673 and $ 1,979 recorded as accrued expenses, respectively, on the condensed consolidated balance sheets. 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 will continue through September 2021. In connection with the 2018 acquisition of AKT, the Company agreed to pay the seller 20 % of operational or change of control distributions, subject to distribution thresholds until the date on which a change of control or a liquidation of AKT occurs. During the three and six months ended June 30, 2020, the Company recorded a reduction to contingent consideration of ($ 1,615 ) and ($ 2,029 ), respectively, which was recorded as acquisition and transaction expenses (income). As of June 30, 2021 and December 31, 2020, contingent consideration totals $ 0 in the condensed consolidated balance sheets. The Company determines the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach, which is a Level 3 measurement. Inputs used in the methodology primarily included sales forecasts, projected future cash flows and discount rate commensurate with the risk involved. 18 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) In connection with the 2018 acquisition of Yoga Six, the Company is obligated to make additional payments for purchase consideration if certain events occur. Payment of additional consideration is contingent on Yoga Six reaching a milestone of opening a number of franchise studios before the fourth anniversary of the purchase date. The contingent consideration is measured at estimated fair value using a probability weighted discounted cash flow analysis. The inputs include the probability of achievement, the projected payment date and the discount rate of 8.5 % used to present value the projected cash flows. At June 30, 2021 and December 31, 2020, the contingent consideration payable was $ 440 and $ 1,000 , respectively, and is included in accrued expenses in the consolidated balance sheets. In connection with the 2018 acquisition of Stride, the Company initially recorded contingent consideration of $ 1,869 for the estimated fair value of the contingent payments. 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, are now contingent on Stride reaching milestones for opening two franchise studios and membership enrollments for such studios at various dates through 2021. At June 30, 2021 and December 31, 2020, the contingent consideration of $ 250 was recorded as accrued expenses in the condensed consolidated balance sheets. Note 11 – Member’s Equity Member’s equity interest – As of June 30, 2021 and December 31, 2020, the Company had one class of membership interest which was held by the Member. Earnings per share data is not provided in the condensed consolidated financial statements as the Company is a single-member limited liability company with only one unit. Member’s contributions – As described in Note 3 and presented in the condensed consolidated statements of changes to Member’s equity, 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 . As described in Note 9, in February 2020, the Member contributed $ 49,443 to the Company, of which $ 32,157 was in satisfaction of the receivable from the Member and the remainder was a member’s contribution. Of this $ 49,443 , $ 30,000 was used to paydown the principal on outstanding term loans under the Prior Facility (see Note 8) with the remainder available for unrestricted use by the Company. Also, in February 2020, the Company returned $ 19,443 of the contribution to the Member, which was recorded as a distribution. Also, in 2020, $ 53,760 of the proceeds from the borrowings under the 2020 Facility were paid to the Parent and recorded as a distribution. Note 12 – Equity Compensation In June 2021, the Parent amended previously issued profit interest units with performance-based vesting conditions that were based on performance targets connected to the value received from change of control of the Parent. The vesting condition, as amended, is based on the average trading price of XPO, Inc. common stock exceeding the IPO threshold price, as defined in the agreement. The performance-based units are not probable of vesting until the completion of the IPO. 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 June 2021, phantom stock units previously issued by Club Pilates were canceled. Note 13- Subsequent Events On July 23, 2021, XPO, Inc. issued and sold 200,000 shares of Convertible Preferred for aggregate cash proceeds of $ 200,000 , before deduction of offering costs. Holders of Convertible Preferred shares are entitled to quarterly coupon payments at the rate of 6.50 % of the fixed liquidation preference per share, initially $ 1,000 per share. In the event the quarterly preferential coupon is not paid in cash, the fixed liquidation preference automatically increases at the PIK rate of 7.50 %. The Convertible Preferred has an initial conversion price equal to $ 14.40 per share and is mandatorily convertible under certain circumstances and redeemable at the option of the holder beginning on the date that is eight years from the IPO or upon change of control. 19 Xponential Fitness LLC (a wholly owned subsidiary of H&W Franchise Holdings, LLC) Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in thousands, except share and unit amounts) In connection with the IPO, XPO, Inc. issued 10,000,000 shares of Class A common stock, at a price of $ 12.00 per share. After the IPO, 22,994,044 shares of Class A common stock are 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 . Proceeds from the IPO and issuance of Convertible Preferred were used to (i) purchase all of the shares of LCAT from LCAT shareholders, (ii) pay the H&W Cash Merger Consideration (iii) repay approximately $ 116,059 of outstanding borrowings under the Term Loan, including prepayment penalties and interest, (iv) pay fees and expenses of approximately $ 6,700 in connection with the IPO and the Reorganization Transactions, (v) pay approximately $ 20,500 in the Class A-5 Unit Redemption for the Class A-5 Units redeemed from certain of the Continuing Pre-IPO Members and (vi) the remainder for working capital. The Company evaluated the fair value of shares being purchased from LCAT and determined that the payment exceeded the fair value by $ 6,500 , which will be recorded as a deemed dividend and paid in quarterly installments through June 2022. In August 2021, XPO, Inc. 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, XPO, Inc. received net proceeds of approximately $ 10,116 on August 24, 2021, which are expected to be used (i) $ 9,000 to purchase 750,000 LLC Units from the Company’s Chief Executive Officer and (ii) $ 1,116 for working capital. In connection with the Reorganization Transactions, the Parent merged with and into the Member. XPO, Inc. will record 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 fair value of the contingent consideration is preliminary based on management’s estimates and assumptions and may be subject to change. XPO, Inc. entered into a TRA that obligates it to make payments to the TRA parties in the aggregate generally equal to 85 % of the applicable cash savings realized as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (ii) increases in XPO, Inc.’s allocable share of existing tax basis and tax basis adjustments that may result from (x) the IPO Contribution, the Class A-5 Unit Redemption, and the purchase of LLC Units from Continuing Pre-IPO LLC Members in the IPO, (y) future taxable redemptions and exchanges of LLC Units by Continuing Pre-IPO LLC Members, and (z) certain payments made under the TRA, and (iii) deductions in respect of interest under the TRA. XPO, Inc. will retain the benefit of the remaining 15 % of these tax savings. The estimated total TRA liability is approximately $ 31,500 , of which $ 3,900 has been recorded on the balance sheet following the IPO. This amount represents 85 % of the cash tax savings expected to be paid to the Pre-IPO LLC members based on the TRA. The remaining unrecorded TRA liability is approximately $ 27,600 . If utilization of the deferred tax assets subject to the TRA becomes more likely than not in the future, XPO, Inc. will recognize incremental increases to the TRA liability and corresponding expense within its consolidated statements of operations. In August 2021, the Company paid off the contingent consideration related to the CycleBar acquisition totaling $ 8,737 as of the payment date. 20