XPONENTIAL FITNESS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto and the other financial information included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled "Risk Factors."Xponential Fitness LLC ("XPO LLC "), the principal operating subsidiary ofXponential Fitness, Inc. (the "Company" or "XPO Inc. "), is the largest global franchisor of boutique fitness brands. OnJuly 23, 2021 , the Company completed an initial public offering ("IPO") of 10,000,000 shares of Class A common stock at an initial public offering price of$12.00 per share. Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 56% ownership interest inXPO LLC through its ownership interest inXponential Intermediate Holdings, LLC ("XPO Holdings "). Information for any period prior toJuly 23, 2021 relates toXPO LLC . We operate a diversified platform of ten brands spanning across verticals including Pilates, indoor cycling, barre, stretching, rowing, dancing, boxing, running, functional training and yoga.XPO LLC franchisees offer energetic, accessible, and personalized workout experiences led by highly qualified instructors in studio locations across 48 U.S. states, theDistrict of Columbia andCanada and through master franchise or international expansion agreements in 14 additional countries. The Company's portfolio of brands includes Club Pilates, the largest Pilates brand inthe United States ; CycleBar, the largest indoor cycling brand inthe United States ; StretchLab, a concept offering one-on-one and group stretching services; Row House, the largest franchised indoor rowing brand inthe United States ; AKT, a dance-based cardio workout combining toning, interval and circuit training; YogaSix, the largest franchised yoga brand inthe United States ; Pure Barre, a total body workout that uses the ballet barre to perform small isometric movements, and the largest Barre brand inthe United States ; Stride, a treadmill-based cardio and strength training concept; Rumble, a boxing-inspired full-body workout; and BFT, a functional training and strength-based program. As ofSeptember 30, 2022 , 2,219 studios were open inNorth America , and franchisees were contractually committed to open an additional 1,919 studios under existing franchise agreements. In addition, as ofSeptember 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 endedSeptember 30, 2022 and 2021, we generated revenue outsidethe United States of$9,060 and$1,124 , respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , we did not have material assets located outside ofthe 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 inmid-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 inmid-March 2020 . Our franchised studios have resumed operations as ofSeptember 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. 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. 33 --------------------------------------------------------------------------------
Rumble Acquisition
OnMarch 24, 2021 ,H&W Franchise Holdings LLC (parent entity prior to the IPO) entered into a contribution agreement withRumble Holdings LLC ,Rumble Parent LLC andRumble Fitness LLC to acquire certain rights and intellectual property ofRumble Fitness LLC ("Rumble"), to be used byH&W Franchise Holdings LLC in connection with the franchise business under the "Rumble" trade name. Pursuant to this agreement, Rumble became a direct subsidiary ofRumble Parent LLC , which is owned byRumble Holdings LLC , andH&W Franchise Holdings LLC acquired certain rights and intellectual property ofRumble 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 ofXPO Inc. Class A common stock toRumble Holdings LLC , (ii) issued Class A Units equivalent to 2,024,445 shares ofXPO Inc. Class A common stock toRumble 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 toH&W Intermediate Holdings, LLC , which then immediately contributed the Rumble assets toXPO LLC . As a result of this transaction, Rumble became a holder of 5% or more of the equity interests ofH&W Franchise Holdings LLC . Prior to the vesting and/or forfeiture of certain equity instruments issued toRumble 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
OnOctober 13, 2021 , the Company entered into an Asset Purchase Agreement ("APA") withGRPX 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 inthe United States andCanada , 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 endingDecember 31, 2023 and the aggregate amount of such payments for the two-year period endingDecember 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 endedSeptember 30, 2022 , the Company paid$0 and$1,336 of contingent consideration, respectively. 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™ brands inAustralia ,New Zealand andSingapore . 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. 34 -------------------------------------------------------------------------------- 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 inAustralia held a trial inDecember 2020 , and onFebruary 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 theUnited States District Court for Delaware , and these actions are currently pending. See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information.
Factors Affecting Our Results of Operations
In addition to the impact of the risks described above, 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. Our growth depends upon our success in licensing new studios to new and existing franchisees. We believe our success in attracting new franchisees and attracting existing franchisees to invest in additional studios has resulted from our diverse offering of attractive brands, corporate level support, training provided to franchisees and the opportunity to realize attractive returns on their invested capital. We believe our significant investments in centralized systems and infrastructure help support new and existing franchisees. To continue to attract qualified new franchisees, sell additional studios to existing franchisees and assist franchisees in opening their studios, we plan to continue to invest in our brands to enable them to deliver positive consumer experiences and in our integrated services at the brand level to support franchisees.
•
Timing of studio openings. Our revenue growth depends to a significant extent on the number of studios that are open and operating. Many factors affect whether a new studio will be opened on time, if at all, including the availability and cost of financing, selection and availability of suitable studio locations, delays in hiring personnel as well as any delays in equipment delivery or installation. To the extent franchisees are unable to open new studios on the timeline we anticipate, or at all, we will not realize the revenue growth that we expect. We believe our investments in centralized systems and infrastructure, including real estate site selection, studio build-out and design assistance help enable franchisees to open studios in a timely manner, and we plan to continue to invest in our systems to continue to provide assistance during the opening process.
•
Increasing same store sales. Our long-term revenue prospects are driven in part by franchisees' ability to increase same store sales (discussed below). Several factors affect our same store sales in any given period, including the number of stores that have been in operation for a significant period of time, growth in total memberships and marketing and promotional efforts. We expect to continue to seek to grow same store sales and AUVs by helping franchisees acquire new members, increase studio utilization and drive increased spend from consumers. We also intend to expand ancillary revenue streams, such as our digital platform offerings and retail merchandise.
•
International and domestic expansion. We continue to invest in increasing the number of franchisees outside ofNorth America . We have developed strong relationships and executed committed development contracts with master franchisees to propel our international growth. We plan to continue to invest in these relationships and seek new relationships and opportunities, including through acquisitions and partnerships, in countries that we have targeted for expansion. In theU.S. , we may from time to time consider acquisition of and partnership with certain complimentary assets or businesses that can enhance and expand our brands and operations.
•
Demand and competition for consumer income. Our revenue and future success will
depend in part on the attractiveness of our brands and the services provided by
franchisees relative to other fitness and entertainment options available to
consumers. 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. 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.
35
--------------------------------------------------------------------------------Key Performance Indicators
In addition to our financial statements prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"), we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees, and monitor our business. 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
Three Months Ended Nine Months Ended September
September 30, 30,
2022 2021 2022 2021
($ in thousands)
System-wide sales $ 264,837 $ 192,721 $ 739,163 $ 496,598
Number of new studios openings globally, net 128 80 355 236
Number of studios operating globally
(cumulative total as of period end) 2,485 2,032 2,485 2,032
Number of licenses sold globally (cumulative
total as of period end)(1) 5,193 4,123 5,193 4,123
Number of licenses contractually obligated
to open internationally (cumulative total as
of period end) 920 879 920 879
AUV (LTM as of period end) $ 475 $ 355 $ 475 $ 355
AUV (run rate) $ 489 $ 417 NA NA
Same store sales 17 % 65 % 28 % 36 %
Adjusted EBITDA(2) $ 20,003 $ 6,829 $ 52,092 $ 18,720 (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 endedSeptember 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 North North America International Global America International GlobalOpen Studios : Open studios (beginning of period) 2,123 234 2,357 1,826 126 1,952 New studio openings, net 96 32 128 65 15 80 Open studios (end of period) 2,219 266 2,485 1,891 141 2,032 Franchise Licenses Sold: (1) Franchise licenses sold (total beginning of period) 4,466 469 4,935 3,573 280 3,853 New franchise license sales 209 49 258 236 34 270 Franchise licenses sold (total end of period) 4,675 518 5,193 3,809 314 4,123 Studios Obligated to Open Internationally under MFAs: Gross studios obligated to open under MFAs 1,186 1,020 Less: studios opened under MFAs 266 141 Remaining studios obligated to open under MFAs 920 879 Licenses sold by master franchisees, net (2) 226 171 36
--------------------------------------------------------------------------------
Nine Months Ended September 30,
2022 2021
North North
America International Global America International Global
Open Studios :
Open studios (beginning of
period) 1,954 176 2,130 1,714 82 1,796
New studio openings, net 265 90 355 177 59 236
Open studios (end of period) 2,219 266 2,485 1,891 141 2,032
Franchise Licenses Sold: (1)
Franchise licenses sold (total
beginning of period) 4,062 362 4,424 3,275 194 3,469
New franchise license sales 613 156 769 534 120 654
Franchise licenses sold (total
end of period) 4,675 518 5,193 3,809 314 4,123
Studios Obligated to Open
Internationally under MFAs:
Gross studios obligated to open
under MFAs 1,186 1,020
Less: studios opened under MFAs 266 141
Remaining studios obligated to
open under MFAs 920 879
Licenses sold by master
franchisees, net (2) 226 171
(1) Global franchise licenses sold are presented gross of terminations.
(2) Reflects the number of licenses for studios which have already been sold, but not yet opened, by master franchisees under master franchise agreements, net of terminations.
All metrics above, other than adjusted EBITDA, are presented on an adjusted
basis to reflect historical information of Rumble and BFT prior to the
acquisition by the Company in March and
System-Wide Sales
System-wide sales represent gross sales by all studios inNorth America . System-wide sales includes sales by franchisees that are not revenue realized by us in accordance with GAAP. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, this operating metric relates to our revenue because we receive approximately 7% and 2% of the sales by franchisees as royalty revenue and marketing fund revenue, respectively. We believe that this operating measure aids in understanding how we derive our royalty revenue and marketing fund revenue and is important in evaluating our performance. System-wide sales growth is driven by new studio openings and increases in same store sales. 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.
Number of New Studio Openings
The number of new studio openings reflects the number of studios opened during a particular reporting period, net of studios no longer operating in the system. We consider a new studio to be open once the studio begins offering classes. Opening new studios is an important part of our growth strategy. New studios may not generate material revenue in the early period following an opening and their revenue may not follow historical patterns. Management reviews the number of new studio openings in order to help forecast operating results and to monitor studio opening processes.
Number of Studios Operating
In addition to the number of new studios opened during a period, we track the
number of total studios operating at the end of a reporting period. We view this
metric on a net basis to take account of any studios that may have closed during
the reporting period. While nearly all our franchised studios are licensed to
franchisees, from time to time we operate a limited number of company-owned
transition studios (typically as we take possession of a studio following a
franchisee ceasing to operate it and as we prepare it to be licensed to a new
franchisee). Management reviews the number of studios operating at a given point
in time in order to help forecast system-wide sales, franchise revenue and other
revenue streams.
37
--------------------------------------------------------------------------------Licenses Sold
The number of licenses sold inNorth America and globally reflect the cumulative number of licenses sold by us (or, outside ofNorth America , by our master franchisees), since inception through the date indicated. Licenses contractually obligated to open refer to licenses sold net of opened studios and terminations. Licenses contractually obligated to be sold internationally reflect the number of licenses that master franchisees are contractually obligated to sell to franchisees to open internationally that have not yet opened as of the date indicated. The number of licenses sold is a useful indicator of the number of studios that have opened and that are expected to open in the future, which management reviews in order to monitor and forecast our revenue streams. 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. Management also reviews the number of licenses sold globally and the number of licenses contractually obligated to open internationally in order to help forecast studio growth and system-wide sales.
Average Unit Volume
Average Unit Volume ("AUV") is calculated by dividing sales during the
applicable period for all studios being measured by the number of studios being
measured. AUV (LTM as of period end) consists of the average sales for the
trailing 12 calendar months for all studios in North America that have been open
for at least 13 calendar months as of the measurement date. Quarterly run-rate
AUV consists of average quarterly sales for all studios that are at least six
months old at the beginning of the respective quarter, multiplied by four. AUV
growth is primarily driven by changes in same store sales and is also influenced
by new studio openings. Management reviews AUV to assess studio economics.
Same Store Sales
Same store sales refer to period-over-period sales comparisons for the base of studios. We define the same store sales base to include studios inNorth America that have been open for at least 13 calendar months as of the measurement date. Any transfer of ownership of a studio does not affect this metric. We measure same store sales based solely upon monthly sales as reported by franchisees. This measure highlights the performance of existing studios, while excluding the impact of new studio openings. 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.
38
--------------------------------------------------------------------------------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 afterJuly 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 endedSeptember 30, 2022 and 2021: Three Months Ended
2022 2021 2022 2021
(in thousands)
Net income (loss) $ (13,056 ) $ (8,904 ) $ 3,242 $ (21,655 )
Interest expense, net 2,931 5,512 7,851 21,073
Income taxes (308 ) 103 (158 ) 387
Depreciation and amortization 4,154 2,376 11,225 6,838
EBITDA (6,279 ) (913 ) 22,160 6,643
Equity-based compensation 4,243 3,530 23,920 4,201
Acquisition and transaction expenses (income) 16,290 2,880 (5,793 ) 3,527
Management fees and expenses - 63 - 462
Litigation expenses 1,015 1,089 8,374 3,707
Employee retention credit - - (2,597 ) -
Secondary public offering expenses - - 737 -
TRA remeasurement 1,078 180 1,635 180
Impairment of brand assets 3,656 - 3,656 -
Adjusted EBITDA $ 20,003 $ 6,829 $ 52,092 $ 18,720
39--------------------------------------------------------------------------------
Results of Operations
The following table presents our condensed consolidated results of operations
for the three and nine months ended
Nine Months Ended September
Three Months Ended September 30, 30,
2022 2021 2022 2021
(in thousands)
Revenue, net:
Franchise revenue $ 30,006 $ 19,985 $ 83,128 $ 51,504
Equipment revenue 11,770 6,750 31,930 15,571
Merchandise revenue 6,264 4,879 19,100 13,620
Franchise marketing fund revenue 5,172 3,706 14,544 9,503
Other service revenue 10,551 5,547 24,983 15,509
Total revenue, net 63,763 40,867 173,685 105,707
Operating costs and expenses:
Costs of product revenue 11,840 7,641 34,951 19,259
Costs of franchise and service revenue 4,811 3,169 13,589 8,615
Selling, general and administrative expenses 32,841 24,262 96,082 62,066
Depreciation and amortization 4,154 2,376 11,225 6,838
Marketing fund expense 4,260 3,828 12,696 9,304
Acquisition and transaction expenses (income) 16,290 2,880 (5,793 ) 3,527
Total operating costs and expenses 74,196 44,156 162,750 109,609
Operating income (loss) (10,433 ) (3,289 ) 10,935 (3,902 )
Other (income) expense:
Interest income (402 ) (343 ) (1,209 ) (796 )
Interest expense 3,333 5,855 9,060 21,869
Gain on debt extinguishment - - - (3,707 )
Total other expense 2,931 5,512 7,851 17,366
Income (loss) before income taxes (13,364 ) (8,801 ) 3,084 (21,268 )
Income taxes (308 ) 103 (158 ) 387
Net income (loss) $ (13,056 ) $ (8,904 ) $ 3,242 $ (21,655 )
40-------------------------------------------------------------------------------- The following table presents our condensed consolidated results of operations for the three and nine months endedSeptember 30, 2022 and 2021 as a percentage of revenue: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue, net: Franchise revenue 47 % 49 % 49 % 49 % Equipment revenue 18 % 16 % 18 % 15 % Merchandise revenue 10 % 12 % 11 % 13 % Franchise marketing fund revenue 8 % 9 % 8 % 9 % Other service revenue 17 % 14 % 14 % 14 % Total revenue, net 100 % 100 % 100 % 100 % Operating costs and expenses: Costs of product revenue 19 % 19 % 20 % 18 % Costs of franchise and service revenue 8 % 8 % 8 % 8 % Selling, general and administrative expenses 51 % 59 % 55 % 59 % Depreciation and amortization 7 % 6 % 6 % 6 % Marketing fund expense 7 % 9 % 7 % 9 % Acquisition and transaction expenses (income) 26 % 7 % (3 )% 3 % Total operating costs and expenses 116 % 108 % 94 % 104 % Operating income (loss) (16 )% (8 )% 6 % (4 )% Other (income) expense: Interest income (1 )% (1 )% (1 )% (1 )% Interest expense 5 % 14 % 5 % 21 % Gain on debt extinguishment - % - % - % (4 )% Total other expense 5 % 13 % 5 % 16 % Income (loss) before income taxes (21 )% (21 )% 1 % (20 )% Income taxes - % - % - % - % Net income (loss) (20 )% (22 )% 2 % (20 )%
Three Months Ended
The following is a discussion of our consolidated results of operations for the three months endedSeptember 30, 2022 versus the three months endedSeptember 30, 2021 . Revenue Three Months Ended September 30, Change from Prior Year 2022 2021 $ % ($ in thousands) Franchise revenue$ 30,006 $ 19,985 $ 10,021 50.1 % Equipment revenue 11,770 6,750 5,020 74.4 % Merchandise revenue 6,264 4,879 1,385 28.4 % Franchise marketing fund revenue 5,172 3,706 1,466 39.6 % Other service revenue 10,551 5,547 5,004 90.2 % Total revenue, net$ 63,763 $ 40,867 $ 22,896 56.0 %
Total revenue. Total revenue was
41
--------------------------------------------------------------------------------
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.
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%. 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.
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.
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.
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.
Operating Costs and Expenses
Three Months Ended September 30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Costs of product revenue $ 11,840 $ 7,641 $ 4,199 55.0 %
Costs of franchise and service revenue 4,811 3,169 1,642 51.8 %
Selling, general and administrative expenses 32,841 24,262 8,579 35.4 %
Depreciation and amortization 4,154 2,376 1,778 74.8 %
Marketing fund expense 4,260 3,828 432 11.3 %
Acquisition and transaction expenses (income) 16,290 2,880 13,410 465.6 %
Total operating costs and expenses $ 74,196 $ 44,156 $ 30,040 68.0 %
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 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.
42
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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.
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.
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 . 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, Change from Prior Year
2022 2021 $ %
($ in thousands)
Interest income $ (402 ) $ (343 ) $ (59 ) 17.2 %
Interest expense 3,333 5,855 (2,522 ) (43.1 )%
Total other expense, net $ 2,931 $ 5,512 $ (2,581 ) (46.8 )%
Interest income. Interest income primarily consists of interest on notes
receivable and was insignificant in each of the three-month periods ended
Interest expense. Interest expense was$3.3 million in the three months endedSeptember 30, 2022 , compared to$5.9 million in the three months endedSeptember 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. Income Taxes Three Months Ended September 30, Change from Prior Year 2022 2021 $ % ($ in thousands) Income taxes $ (308 ) $ 103$ (411 )
(399.0 )% Income taxes. Income taxes (benefit) were($0.3) million in the three months endedSeptember 30, 2022 , compared to$0.1 million in the three months endedSeptember 30, 2021 . In 2022, the Company is taxed as a corporation. Prior to the IPO inJuly 2021 , the Company was a pass-through entity for income tax purposes. 43 --------------------------------------------------------------------------------
Nine Months Ended
The following is a discussion of our consolidated results of operations for the nine months endedSeptember 30, 2022 versus the nine months endedSeptember 30, 2021 . Revenue Nine Months Ended September 30, Change from Prior Year 2022 2021 $ % ($ in thousands) Franchise revenue$ 83,128 $ 51,504 $ 31,624 61.4 % Equipment revenue 31,930 15,571 16,359 105.1 % Merchandise revenue 19,100 13,620 5,480 40.2 % Franchise marketing fund revenue 14,544 9,503 5,041 53.0 % Other service revenue 24,983 15,509 9,474 61.1 % Total revenue, net$ 173,685 $ 105,707 $ 67,978 64.3 % Total revenue. Total revenue was$173.7 million in the nine months endedSeptember 30, 2022 , compared to$105.7 million in the nine months endedSeptember 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 endedSeptember 30, 2022 , compared to$51.5 million in the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 sinceSeptember 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 endedSeptember 30, 2022 , compared to$15.6 million in the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 , compared to$13.6 million in the nine months endedSeptember 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 endedSeptember 30, 2022 , compared to$9.5 million in the nine months endedSeptember 30, 2021 , an increase of$5.0 million , or 53.0%. The increase was primarily due to an increase in same store sales, 328 new studio openings inNorth America sinceSeptember 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. Other service revenue. Other service revenue was$25.0 million in the nine months endedSeptember 30, 2022 , compared to$15.5 million in the nine months endedSeptember 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. 44 --------------------------------------------------------------------------------
Operating Costs and Expenses
Nine Months Ended September
30, Change from Prior Year
2022 2021 $ %
($ in thousands)
Costs of product revenue $ 34,951 $ 19,259 $ 15,692 81.5 %
Costs of franchise and service revenue 13,589 8,615 4,974 57.7 %
Selling, general and administrative expenses 96,082 62,066 34,016 54.8 %
Depreciation and amortization 11,225 6,838 4,387 64.2 %
Marketing fund expense 12,696 9,304 3,392 36.5 %
Acquisition and transaction expenses (income) (5,793 ) 3,527
(9,320 ) (264.2 )%
Total operating costs and expenses $ 162,750 $ 109,609 $ 53,141 48.5 %
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 .
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
2022 2021 $ %
($ in thousands)
Interest income $ (1,209 ) $ (796 ) $ (413 ) 51.9 %
Interest expense 9,060 21,869 (12,809 ) (58.6 )%
Gain on debt extinguishment - (3,707 ) 3,707 NA
Total other expense, net $ 7,851 $ 17,366 $ (9,515 ) (54.8 )%
45--------------------------------------------------------------------------------
Interest income. Interest income primarily consists of interest on notes
receivable and was insignificant in each of the nine months ended
Interest expense. Interest expense was$9.1 million in the nine months endedSeptember 30, 2022 , compared to$21.9 million in the nine months endedSeptember 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 withCerberus Business Finance Agency, LLC , which was replaced with a new credit facility inApril 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 endedSeptember 30, 2021 represents the forgiveness of principal and interest on our Paycheck Protection Program loan. Income Taxes Nine Months Ended September 30, Change from Prior Year 2022 2021 $ % ($ in thousands) Income taxes $ (158 ) $ 387$ (545 ) (140.8 )% Income taxes. Income taxes (benefit) were ($0.2 ) in the nine months endedSeptember 30, 2022 , compared to$0.4 million in the nine months endedSeptember 30, 2021 . In 2022, the Company is taxed as a corporation. Prior to the IPO inJuly 2021 , the Company was a pass-through entity for income tax purposes.
Liquidity and Capital Resources
As of
We require cash principally to fund day-to-day operations, finance capital investments, service our outstanding debt and address our working capital needs. Based on our current level of operations and anticipated growth, we believe that our available cash balance and the cash generated from our operations will be adequate to meet our anticipated debt service requirements and obligations under our tax receivable agreement, capital expenditures, payment of tax distributions and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under "Risk Factors", as disclosed in our Form 10-K for the year endedDecember 31, 2021 . There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our credit facility or otherwise to enable us to service our indebtedness, including our credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Credit Facility
OnApril 19, 2021 , we entered into a Financing Agreement withWilmington Trust, National Association , as administrative agent and collateral agent, andMSD XPO Partners, LLC ,MSD PCOF Partners XXXIX, LLC andDESALKIV Cayman C-2, Ltd. (f/k/aDELALV Cayman C-2, Ltd. ) as the lenders (the "Credit Agreement"), which consists of a$212 million senior secured term loan facility (the "Term Loan Facility", and the loans thereunder, each a "Term Loan" and together, the "Term Loans"). Affiliates ofMSD XPO Partners, LLC ,MSD PCOF Partners XXXIX, LLC andDESALKIV Cayman C-2, Ltd. (f/k/aDELALV Cayman C-2, Ltd. ) (collectively, the "Preferred Investors ") also separately purchased 200,000 shares of our 6.50% Series A Convertible Preferred Stock (the "Series A Convertible preferred stock") for$200 million . Our obligations under the Credit Agreement are guaranteed byXponential Intermediate Holdings, LLC and certain of our material subsidiaries, and are secured by substantially all of the assets ofXponential Intermediate Holdings, LLC and certain of our material subsidiaries. Under the Credit Agreement, we are 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 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% atSeptember 30, 2022 ). 46 -------------------------------------------------------------------------------- The Credit Agreement also contains mandatory prepayments of the Term Loan with: (i) 50% ofXponential Intermediate Holdings, LLC 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 million of net proceeds in connection with an initial public offering of at least$200 million , subject to certain exceptions. Unless agreed in advance, all voluntary prepayments and certain mandatory prepayments of the Term Loan made (i) on or prior to the first anniversary of the closing date are subject to a 2.0% premium on the principal amount of such prepayment and (ii) after the first anniversary of the closing date and on or prior to the second anniversary of the closing date are subject to a 0.50% premium on the principal amount of such prepayment. Otherwise, the Term Loans may be paid without premium or penalty, other than customary breakage costs with respect to LIBOR Rate Term Loans. The Credit Agreement contains customary affirmative and negative covenants, including, among other things: (i) to maintain certain total leverage ratios, liquidity levels and EBITDA levels (in each case, as discussed further in the Credit Agreement); (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 our affiliates; (vi) restricting investments; (vii) restricting prepayments of subordinated indebtedness; (viii) restricting certain payments, including certain payments to our affiliates or equity holders and distributions to equity holders; and (ix) restricting the issuance of equity. As ofSeptember 30, 2022 , we were in compliance with these covenants. The Credit Agreement also contains customary events of default, which could result in acceleration of amounts due under the Credit Agreement. 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, onJuly 27, 2021 we executed a first amendment to the Credit Agreement, which amended the amount of the prepayment premium applicable to the prepayment of the Term Loan, and paid off$115.0 million of the principal balance of the Term Loan. OnOctober 8, 2021 , we entered into a second amendment (the "Amendment") to the Credit Agreement. The Amendment provides for, among other things, additional term loans in an aggregate principal amount of$38 million (the "2021 Incremental Term Loan"), the proceeds of which were used to fund the BFT Acquisition and the payment of fees, costs and expenses related to the Amendment. The Amendment also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the 2021 Incremental Term Loan) commencing onDecember 31, 2021 and (ii) amended the amount of the prepayment premium applicable in the event the 2021 Incremental Term Loan is prepaid within two years of the effective date of the Amendment. OnSeptember 30, 2022 , we entered into a third amendment (the "Third Amendment") to the Credit Agreement. 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 inSeptember 2022 and the remaining$2.0 million of the principal amount was received inOctober 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 onDecember 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 atSeptember 30 , 2022.Quarterly principal payments of$0.8 million on the Term Loan as amended are due beginningDecember 31, 2022 . AtSeptember 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," of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 47 --------------------------------------------------------------------------------
Cash Flows
The following table presents summary cash flow information for the nine months
ended
Nine Months Ended September 30,
2022 2021
(in thousands)Net cash provided by (used in) operating activities $ 37,471
$ 3,925 Net cash provided by (used in) investing activities (11,574 ) (3,981 ) Net cash provided by (used in) financing activities (16,322 ) 14,301
Net increase in cash, cash equivalents and
restricted cash $ 9,575$ 14,245
Cash Flows from Operating Activities
In the nine months endedSeptember 30, 2022 , cash provided by operating activities was$37.5 million , compared to cash provided of$3.9 million in the nine months endedSeptember 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
•
increase in prepaid expenses and other current assets of
•
increase in deferred cost of
•
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 .
Cash Flows from Investing Activities
In the nine months endedSeptember 30, 2022 , cash used in investing activities was$11.6 million , compared to$4.0 million in the nine months endedSeptember 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.
Cash Flows from Financing Activities
In the nine months endedSeptember 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 endedSeptember 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
•
increase in tax payments of
•
decrease in borrowings on long-term debt of
•
decrease in distribution to Member of
•
increase in loan to shareholder of
•
lower debt issuance costs of
•
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
48
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , we did not have any off-balance sheet arrangements as defined in the rules and regulations of theSecurities and Exchange Commission (the "SEC").
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 endedDecember 31, 2021 , except for the adoption of Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" which we adopted onJanuary 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.
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