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CycleBar - 2020-04-29 - FDD - Xponential Fitness Brand
CycleBar - 2020-04-29 - FDD - Xponential Fitness Brand
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CycleBar
Holdco, LLC
Consolidated Financial Statements as of and for the Years Ended December 31, 2019 and 2018
and Independent Auditors’ Report
CycleBar Holdco, LLC
Table of Contents
i
INDEPENDENT AUDITORS’ REPORT
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with accounting principles generally accepted in the
United States of America; this includes the design, implementation, and maintenance of
internal control relevant to the preparation and fair presentation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the Company’s preparation
and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control. Accordingly, we express
no such opinion. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CycleBar Holdco, LLC as of December 31, 2019
and 2018, and the results of their operations and their cash flows for the years then ended
in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matters
As discussed in Note 1 to the consolidated financial statements, the Company has extensive
transactions and relationships with its Member, Xponential Fitness LLC, and its related
affiliates. Accordingly, the accompanying consolidated financial statements may not be
indicative of the results of operations that would have been achieved if the Company had
operated without such affiliations.
2
CycleBar Holdco, LLC
Consolidated Balance Sheets
December 31,
2019 2018
Assets
Current Assets:
Cash, cash equivalents and restricted cash $ 516,913 $ 670,885
Accounts receivable, net 1,674,562 605,749
Inventories 472,609 537,971
Prepaid expenses and other current assets 34,083 153,310
Deferred costs, current portion 422,604 824,538
Notes receivable, net 937,051 164,026
Related party receivable (Note 6) 5,348 —
Total current assets 4,063,170 2,956,479
Property and equipment, net 27,575 45,419
Goodwill 10,910,858 10,910,858
Intangible assets, net 15,013,291 15,911,002
Deferred costs, net of current portion 1,872,036 1,196,247
Other assets 15,375 15,375
Total assets $ 31,902,305 $ 31,035,380
Liabilities and Member’s Equity
Current Liabilities:
Accounts payable $ 2,516,464 $ 1,365,195
Accrued expenses 5,626,960 5,658,725
Deferred revenue, current portion 1,127,042 2,300,122
Notes payable (Note 6) 82,546 639,077
Other current liabilities 147,763 195,180
Related party payable (Note 6) 2,802,473 2,188,719
Total current liabilities 12,303,248 12,347,018
Deferred revenue, net of current portion 5,186,835 4,892,698
Contingent consideration from acquisition 7,989,948 7,364,007
Other liabilities — 2,185
Total liabilities 25,480,031 24,605,908
Commitments and contingencies (Note 7)
Member’s equity 6,422,274 6,429,472
Total liabilities and member’s equity $ 31,902,305 $ 31,035,380
3
CycleBar Holdco, LLC
Consolidated Statements of Operations
4
CycleBar Holdco, LLC
Consolidated Statements of Changes to Member’s Equity
Total
Member’s Retained Member’s
Contribution Deficit Equity
Balance at January 1, 2018 $ 22,591,346 $ (3,299,067) $ 19,292,279
Adoption of accounting standard (Note 2) — (293,043) (293,043)
Net loss — (12,569,764) (12,569,764)
Balance at December 31, 2018 22,591,346 (16,161,874) 6,429,472
Net loss — (7,198) (7,198)
Balance at December 31, 2019 $ 22,591,346 $ (16,169,072) $ 6,422,274
5
CycleBar Holdco, LLC
Consolidated Statements of Cash Flows
6
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
The Company sells franchises under the “CycleBar” concept in the United States, whereas CycleBar Canada
Franchising, ULC sells franchises in Canada. The CycleBar concept includes premium indoor cycle studios and
offers an established executive model, intensive training, and a scalable business model. As of December 31, 2019,
the Company has sold the rights to develop 386 franchise studios in the United States and Canada, of which 195
were operating.
The Member is responsible for managing and overseeing the day-to-day operations of the Company. The Member
allocates expenses to the Company based on shared services. Net loss and all items of the Company’s income, gain,
loss, deduction, or credit are allocated to the Member. The Company relies on resources from the Member to support
operations and the Member has committed to continue to provide financial support to the Company for the
Company’s franchising operations as necessary.
The Company’s operating agreement designates one class of membership interest, of which the Member owns one
hundred percent of the interest.
Basis of presentation – The Company's consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“US GAAP”).
The Company has numerous transactions with its Member and affiliates. Accordingly, the consolidated financial
statements may not necessarily be indicative of the conditions that would have existed or the results of operations
that would have occurred if the Company had operated without such affiliations. The significant related party
transactions consist of allocations of expenses from the Member, borrowings from, and excess cash transfers to the
Member and other related parties under common control of the Member or the Member’s parent.
The consolidated financial statements have been prepared on a going concern basis. The Company relies on
resources from the Member to support its operations. The Member has committed to continue to provide financial
support to the Company for the Company’s franchising operations as necessary. Based on management’s
projections, the Member may not meet the leverage ratio covenant requirement of its financing facility during the
period twelve months from the issuance date of these consolidated financial statements, which would represent an
event raising substantial doubt regarding the Company’s ability to continue as a going concern. However, the
Member plans to amend its debt financial covenant or obtain an equity contribution sufficient to cure any anticipated
covenant violation. The Member has obtained a commitment from an investor to provide an equity contribution up
to $10 million, which is allowed for in the debt agreement. The Member and the Company believe that these actions
alleviate this matter to allow the Member to provide the financial support to the Company as necessary in order for
the Company to continue as a going concern through twelve months from the issuance date of these consolidated
financial statements.
Principles of consolidation – The consolidated financial statements include the accounts of CycleBar Holdco, LLC
and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Use of estimates – The preparation of the financial statements in conformity with US 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 financial statements. Actual results could differ from these
estimates under different assumptions or conditions.
7
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
Concentration of credit risk – Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash, accounts receivable and notes receivable. The Company maintains its cash with
high-credit quality financial institutions. At December 31, 2019 and 2018, the Company has cash and cash
equivalents that total approximately $619,000 and $529,000, respectively, on deposit with high-credit quality
financial institutions that exceed federally insured limits. The Company has not experienced any loss as a result of
these or previous similar deposits. In addition, the Company closely monitors the extension of credit to its
franchisees while maintaining allowances for potential credit losses.
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 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 customer’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 December 31, 2019 and 2018, the allowance for
doubtful accounts was approximately $134,000.
Inventories – Inventories are comprised of finished goods including equipment and branded merchandise primarily
held for sale to franchisees. Cost is determined using the first-in-first-out method. Management analyzes obsolete,
slow-moving and excess merchandise to determine adjustments that may be required to reduce the carrying value of
such inventory to the lower of cost or net realizable value. Write-down of obsolete or slow-moving and excess
inventory charges are included in costs of product revenue in the consolidated statements of operations.
Property and equipment, net – Property and equipment are carried at cost less accumulated depreciation.
Depreciation is recognized on a straight-line method based on the estimated useful life of the assets.
The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss
is included in the results of operations during the period of sale or disposal. Costs for repairs and maintenance are
expensed as incurred. Repair and maintenance costs for the years ended December 31, 2019 and 2018 were
insignificant.
Goodwill and intangible assets – Intangible assets consist of goodwill and identifiable intangible assets, which
consist of trademarks and franchise agreements.
Goodwill – The Company tests for impairment of goodwill annually or sooner whenever events or circumstances
indicate that goodwill might be impaired. The annual impairment test is performed as of the first day of the
Company’s fourth quarter. The impairment test is a two‐step process, whereby in the first step, the Company
compares the estimated fair value with the carrying amount, including goodwill. The Company generally determines
the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation
approach. If the carrying amount exceeds the fair value, the Company performs the second step of the impairment
test to determine the amount of impairment, if any. Based on the test results, no impairment was recorded for the
years ended December 31, 2019 or 2018.
Trademarks – The Company tests for impairment of trademarks annually or sooner whenever events or
circumstances indicate that trademarks might be impaired. The Company determines the estimated fair value using a
relief from royalty approach and compares the fair value to the carrying amount. If the carrying amount exceeds the
8
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
fair value, the Company impairs the trademarks to their fair value. Based on the test results, no impairment was
recorded for the years ended December 31, 2019 or 2018.
Definite-lived intangible assets – Intangible assets consisting of franchise agreements and non-compete agreements
are amortized using the straight-line method over the estimated remaining economic lives, or eight years and five
years, respectively. Amortization expense related to intangible assets is included in depreciation and amortization
expense. The recoverability of the carrying values of all intangible assets with finite lives is evaluated when events
or changes in circumstances indicate an asset’s value may be impaired. Impairment testing is based on a review of
forecasted undiscounted operating cash flows. If such analysis indicates that the carrying value of these assets is not
recoverable, the carrying value of such assets is reduced to fair value, which is determined based on discounted
future cash flows, through a charge to the statement of operations. No definite-lived intangible asset impairment was
recorded for the years ended December 31, 2019 or 2018.
The Company adopted ASC 606 on January 1, 2019 using the full retrospective transition method. The financial
statements reflect the application of ASC 606 beginning on January 1, 2018. The new pronouncement changed the
way initial fees from franchisees for new franchise agreements are recognized. Under the previous revenue
recognition guidance, initial franchise fees were recognized as revenue when a new studio opened. In accordance
with the new guidance, the initial franchise services are not distinct from the continuing rights and services offered
during the term of the franchise agreement and are therefore considered a single performance obligation together
with the continuing rights and services. As such, initial fees received are recognized over the franchise term and any
unamortized portion is recorded as deferred revenue in the Company’s consolidated balance sheet. Similarly, the
new pronouncement changed the way commissions paid for new franchise openings are recognized. Under previous
guidance, commission expense was recognized when a new studio opens. In accordance with the new guidance, the
commissions paid are recognized over the franchise term and any unamortized portion will be recorded as deferred
costs in the Company’s consolidated balance sheet. ASC 606 did not impact the Company’s revenue recognition for
other types of revenue.
As a result of the adoption of ASC 606 using the full retrospective transition method, the following adjustments
were made to the Company’s previously issued 2018 financial statements:
An adjustment to accumulated deficit of $293,043, with corresponding adjustment to deferred revenue and deferred
costs, was recorded on January 1, 2018 as a result of the adoption.
Revenue recognition –The Company’s contracts with customers consist of franchise agreements with franchisees.
The Company also enters into agreements to sell merchandise and equipment and training. The Company’s revenues
9
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
primarily consist of franchise license revenues, other franchise related revenues including equipment and
merchandise sales and training revenue. In addition, the Company earns other revenue.
Each of the Company’s primary sources of revenue and their respective revenue policies are discussed further
below.
Franchise revenue -
The Company enters into franchise agreements for each franchised studio. The Company’s performance obligation
under the franchise license is granting certain rights to access the Company’s intellectual property; all other services
the Company provides under the franchise agreement are highly interrelated, not distinct within the contract, and
therefore accounted for as a single performance obligation, which is satisfied over the term of each franchise
agreement. Those services include initial development, operational training, preopening support and access to the
Company’s technology throughout the franchise term. Fees generated related to the franchise license include
development fees, royalty fees, marketing fees, technology fees and transfer fees, which are discussed further below.
Variable fees are not estimated at contract inception, and are recognized as revenue when invoiced, which occurs
monthly. The Company has concluded that its agreements do not contain any financing components.
Franchise development fee revenue – The Company’s franchise agreements typically operate under ten-year terms
with the option to renew for up to two additional five-year successor terms. The Company determined the renewal
options are neither qualitatively nor quantitatively material and do not represent a material right. Initial franchise
fees are non-refundable and are typically collected upon signing of the franchise agreement. Initial franchise fees are
recorded as deferred revenue when received and are recognized on a straight-line basis over the franchise life, which
the Company has determined to be ten years, as the Company fulfills its promise to grant the franchisee the rights to
access and benefit from the Company’s intellectual property and to support and maintain the intellectual property.
The Company may enter into an area development agreement with certain franchisees. Area development
agreements are for a territory in which a developer has agreed to develop and operate a certain number of franchise
locations over a stipulated period of time. The related territory is unavailable to any other party and is no longer
marketed to future franchisees by the Company. Depending on the number of studios purchased under franchise
agreements or area development agreements, the initial franchise fee ranges from $60,000 (single studio) to
$350,000 (ten studios) and is paid to the Company when a franchisee signs the area development agreement. Area
development fees are initially recorded as deferred revenue. The development fees are allocated to the number of
studios purchased under the development agreement. The revenue is recognized on a straight-line basis over the
franchise life for each studio under the development agreement.
Franchise royalty fee revenue – Royalty revenue represents royalties earned from each of the franchised studios in
accordance with the franchise disclosure document and the franchise agreement for use of the brands’ names,
processes and procedures. The royalty rate in the franchise agreement is typically 7% of the gross sales of each
location operated by each franchisee. Royalties are billed on a monthly basis. The royalties are entirely related to the
Company’s performance obligation under the franchise agreement and are billed and recognized as franchisee sales
occur.
Technology fees – The Company may provide access to third-party or other proprietary technology solutions to the
franchisees for a fee. The technology solution may include various software licenses for statistical tracking,
scheduling, allowing club members to record their personal workout statistics, music and technology support. The
Company bills and recognizes the technology fee as earned each month as the technology solution service is
performed.
Training revenue – The Company provides coach training services either through direct training of the coaches who
are hired by franchisees or by providing the materials and curriculum directly to the franchisees who utilize the
materials to train their hired coaches. Direct training fees are recognized over time as training is provided. Training
fees for materials and curriculum are recognized at the point in time of delivery of the materials.
Franchise marketing fund revenue– Franchisees are required to pay marketing fees of 2% of their gross sales. The
marketing fees are collected by the Company on a monthly basis and are to be used for the advertising, marketing,
10
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
market research, product development, public relations programs and materials deemed appropriate to benefit
brands. The Company’s promise to provide the marketing services funded through the marketing fund is considered
a component of the Company’s performance obligation to grant the franchise license. The Company bills and
recognizes marketing fund fees as revenue each month as gross sales occur.
Equipment revenue – The Company sells authorized equipment to franchisees to be used in the franchised studios.
Certain franchisees may prepay for equipment, and in that circumstance, the revenue is deferred until delivery.
Equipment revenue is recognized when control of the equipment is transferred to the franchisee, which is at the
point in time delivery and installation of the equipment at the studio is complete.
Merchandise revenue –The Company sells branded and non-branded merchandise to franchisees for retail sales to
customers at studios. For branded merchandise sales, the performance obligation is satisfied at the point in time of
shipment of the ordered branded merchandise to the franchisee. For such branded merchandise sales, the Company
is the principal in the transaction as it controls the merchandise prior to it being delivered to the franchisee. The
Company records branded merchandise revenue and related costs upon shipment on a gross basis. Customers have
the right to return and/or receive credit for defective merchandise. Returns and credit for defective merchandise were
not significant for the years ended December 31, 2019 and 2018.
For certain non-branded merchandise sales, the Company earns a commission to facilitate the transaction between
the franchisee and the supplier. For such non-branded merchandise sales, the Company is the agent in the
transaction, facilitating the transaction between the franchisee and the supplier, as the Company does not obtain
control of the non-branded merchandise during the order fulfillment process. The Company records non-branded
merchandise commissions revenue at the time of shipment.
Other revenue -
The Company earns commission income from certain of its franchisees’ use of certain preferred vendors. In these
arrangements, the Company is the agent as it is not primarily responsible for fulfilling the orders. Commissions are
earned and recognized at the point in time the vendor ships the product to franchisees.
Sales taxes, value added taxes and other taxes that are collected in connection with revenue transactions are withheld
and remitted to the respective taxing authorities. As such, these taxes are excluded from revenue. The Company
elected to account for shipping and handling as activities to fulfill the promise to transfer the good. Therefore,
shipping and handling fees that are billed to franchisees are recognized in revenue and the associated shipping and
handling costs are recognized in cost of goods sold as soon as control of the goods transfers to the franchisee.
Through August 2018, the Company sold vouchers through third parties allowing up to four trial classes at local
clubs operated by franchisees. The Company recognized revenue at the time the vouchers were redeemed, as third
parties provided monthly reports detailing purchases and redemptions with submission of funds.
Credit Losses – The Company’s accounts and notes receivable are recorded at net realizable value, which includes
an appropriate allowance for estimated credit losses. The estimate of credit losses is based upon historical bad debts,
current receivable balances, age of receivable balances, the customer’s financial condition and current economic
trends, all of which are subject to change. Actual uncollected amounts have historically been consistent with the
Company’s expectations. The Company’s payment terms on its receivables from franchisees are generally 30 days.
Contract Balances -
Contract Liabilities – Contract liabilities consist of deferred revenue resulting from franchise fees and development
fees paid by franchisees, which are recognized over time on a straight-line basis over the franchise agreement term.
Also included in the deferred revenue balance are nonrefundable prepayments for merchandise and equipment, as
well as revenues for training for which the associated products or services have not yet been provided to the
11
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
customer. The Company classifies these contract liabilities as either current deferred revenue or non-current deferred
revenue in the consolidated balance sheet based on the anticipated timing of delivery. The following table reflects
the change in contract liabilities for the years ended December 31, 2019 and 2018:
Franchise
Development Equipment and
Fees Other Total
Balance at January 1, 2018 $ 3,756,052 $ 108,474 $ 3,864,526
Revenue recognized that was included in deferred revenue at the
beginning of the year (295,483) (108,474) (403,957)
Increase, excluding amounts recognized as revenue during the
year 1,739,803 1,992,448 3,732,251
Balance at December 31, 2018 5,200,372 1,992,448 7,192,820
Revenue recognized that was included in deferred revenue at the
beginning of the year (1,073,103) (1,992,448) (3,065,551)
Increase, excluding amounts recognized as revenue during the
year 1,609,394 577,214 2,186,608
Balance at December 31, 2019 $ 5,736,663 $ 577,214 $ 6,313,877
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 December 31, 2019. 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 sales and
usage-based royalties, marketing fees and any other variable consideration recognized on an “as invoiced” basis.
Franchise
Development Equipment
Contract liabilities to be recognized in revenue in Fees and Other Total
2020 $ 549,828 $ 577,214 $1,127,042
2021 728,889 - 728,889
2022 741,610 - 741,610
2023 744,165 - 744,165
2024 744,165 - 744,165
Thereafter 2,228,006 - 2,228,006
$5,736,663 $ 577,214 $6,313,877
The following table reflects the components of deferred revenue:
December 31,
2019 2018
Franchise and area development fees $ 5,736,663 $ 5,200,372
Equipment and other 577,214 1,992,448
Total deferred revenue 6,313,877 7,192,820
Non-current portion of deferred revenue 5,186,835 4,892,698
Current portion of deferred revenue $ 1,127,042 $ 2,300,122
Contract Costs – Contract costs consist of deferred commissions resulting from franchise and area development
sales by third-party and affiliate brokers. The total commission charged by the broker 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 consolidated balance sheet. The associated expense is
classified within costs of franchise and service revenue in the consolidated statements of operations. At December
31, 2019 and 2018, there were approximately $160,000 and $75,000 of current deferred costs and approximately
12
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
$1,872,000 and $1,196,000 in non-current deferred costs, respectively. The Company recognized approximately
$318,000 and $48,000 in franchise sales commissions expense for the years ended December 31, 2019 and 2018,
respectively. During the years ended December 31, 2019 and 2018 the Company recorded $748,000 and $893,000,
respectively, of deferred commission costs paid to affiliates of the Member, which are being recognized over the
initial ten-year franchise agreement term.
Shipping and Handling Fees – Shipping and handling fees billed to customers are recorded in merchandise and
equipment revenues. The costs associated with shipping goods to customers are included in costs of product revenue
in the accompanying consolidated statements of operations.
Costs of franchise and service revenue – Costs of franchise and service revenue consists of commissions related to
the signing of franchise agreements, travel and personnel expenses related to the on-site training provided to the
franchisees, and expenses related to the purchase of the technology packages and the related monthly fees. Costs of
franchise and service revenue excludes depreciation and amortization.
Costs of product revenue – Costs of product revenue consists of cost of equipment and merchandise and related
freight charges. Costs of product revenue excludes depreciation and amortization.
Advertising costs – Advertising costs are expensed as incurred. Advertising costs are included in selling, general
and administrative expense. For the years ended December 31, 2019 and 2018, the Company had approximately
$962,000 and $1,316,000, respectively, of advertising costs, including amounts spent in excess of marketing fund
revenue.
Selling, general and administrative expenses – The Company’s selling, general and administrative (“SG&A”)
expenses consist of sales and marketing expenses, employee-related expenses and Member-allocated SG&A
expenses based on shared services primarily consisting of payroll, professional and legal fees, occupancy expenses,
management fees, travel expenses, and convention expenses. Allocations are generally divided evenly across all
franchisors owned by the Member, however in 2018, convention expenses were allocated based on the relative size
of the franchisors owned by the Member. Total allocations of convention expenses were approximately $581,000
and $812,000 for the years ended December 31, 2019 and 2018, respectively. Total allocations of convention
revenues were approximately $250,000 and $207,000 for the years ended December 31, 2019 and 2018,
respectively.
Marketing fund expenses – Marketing fund expenses are recognized as incurred, and any marketing fund
expenditures in excess of marketing fund revenue are reclassified as SG&A expenses in the accompanying
consolidated statements of operations.
Income taxes – As a single member LLC, the Company is considered a disregarded entity and the results of its
operations are filed with the Member’s federal and state income tax returns. As such, the Company itself is typically
not subject to an income tax liability as the taxable income or loss of the Company is passed through to the Member.
Therefore, no liability for federal income taxes has been included in the consolidated financial statements. The
Company accounts for uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740.
ASC Topic 740 prescribes a recognition threshold and measurement process for accounting for uncertain tax
positions and also provides guidance on various related matters such as derecognition, interest, penalties, and
required disclosures. The Company does not have any uncertain tax positions. However, the Company is required to
pay an annual gross receipts fee and tax for its operations in California.
Comprehensive income – The Company does not have any components of other comprehensive income recorded
within its consolidated financial statements and, therefore does not separately present a statement of comprehensive
income in its consolidated financial statements.
13
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
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 its consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842)”, which defers the effective date of ASU No. 2016-02
to fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December
15, 2021.
Goodwill – In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350).”
This ASU simplifies the subsequent measurement of goodwill. FASB eliminated the Step 2 analysis from the
goodwill impairment test which is meant to reduce the cost and complexity of evaluating goodwill for impairment.
The Company has yet to determine if this ASU will be material to its consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842)”, which defers the effective date of ASU No. 2017-04
to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
Fair value measurements – ASC 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 are categorized
within Level 1 of the fair value hierarchy due to the short-term nature of these balances and approximate their fair
value due to their short maturities.
14
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
Depreciation expense for each of the years ended December 31, 2019 and 2018 was approximately $18,000.
Intangible assets with an indefinite life at December 31, 2019 and 2018 consisted of the following:
Goodwill $10,910,858
Trademarks 9,900,000
Total $20,810,858
15
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
Amortization expense for the years ended December 31, 2019 and 2018 was approximately $900,000 and $881,000,
respectively.
December 31,
2019 2018
Related party receivable:
Xponential Fitness Brands International, LLC $ 5,348 $ —
Related party payables:
Member $ 2,447,867 $ 1,901,458
Club Pilates Franchise, LLC 332,423 250,801
PB Franchising, LLC 20,833 —
Yoga Six Franchise, LLC 1,350 —
J3T Logistics, LLC — 27,236
St. Gregory Holdco, LLC — 9,224
Total related party payables $ 2,802,473 $ 2,188,719
The Chief Executive Officer of the Company is the sole owner of ICI. ICI provides unsecured loans to the
Company, which loans the funds to the franchisees to purchase a franchise territory or to setup a studio. The
Company records notes payable and notes receivable for the funds that are transferred from ICI to the franchisee.
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 December 31,
2019 and 2018, the Company had recorded approximately $83,000 and $75,000 of notes receivable and $83,000 and
16
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
$639,000 of notes payable, respectively. The Company recognized approximately $11,000 and $2,000 of interest
income and $23,000 and $16,000 of interest expense, respectively, for the years ended December 31, 2019 and
2018, respectively. ICI also provides loans directly to franchisees. During the years ended December 31, 2019 and
2018, the Company made interest payments on these loans to ICI on behalf of the franchisees of approximately
$56,000 and $0, respectively, which is included in SG&A expense in the accompanying statements of operations.
Contingent consideration - In connection with the 2017 acquisition, the Company recorded contingent consideration
of $4,390,000 for the estimated fair value of the contingent payment. Payment of additional consideration is
contingent on the Company reaching two milestones based on a number of operating franchise studios and average
monthly revenues by September 2022. The first milestone payout is $5,000,000 and the second milestone is
$10,000,000. The contingent consideration is measured at estimated fair value using a 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 Company recorded approximately $922,000 and
$7,678,000 of additional contingent liability, of which approximately $754,000 and $151,000 was recorded as
interest expense and $168,000 and $7,527,000 as change in fair value of contingent consideration from acquisition,
respectively, for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the
contingent consideration was approximately $5,000,000 and $4,704,000, respectively, recorded as accrued expenses,
and $7,990,000 and $7,364,000, respectively, recorded as contingent consideration from acquisition on the
accompanying consolidated balance sheets.
In March 2020, the Member’s Parent entered into an agreement with the former owners of the Company, which (i)
decreased the second milestone amount to $2,500,000, (ii) imposes interest at 10% per annum on the first and
second milestones beginning March 5, 2020 and April 2, 2020, respectively, and (iii) increases 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 will record
a reduction to the contingent consideration liability with an offsetting increase in Member’s equity.
On March 11, 2020, the World Health Organization declared a novel strain of coronavirus disease (“COVID-19”) a
pandemic. In response to the pandemic, several states have required non-essential businesses to temporarily shut
down. As of April 27, 2020, substantially all of the franchisee’s studios have temporarily closed. The Company is
providing video on demand and livestream options to its franchisees and their members at no charge during the
temporary closures. The date at which the studios can reopen has not been specified by the applicable states. As of
17
CycleBar Holdco, LLC
Notes to Consolidated Financial Statements
April 27, 2020, franchisees continue to collect membership fees from their active members and the Company has
continued to collect the related royalties from the franchisees. Certain franchisee members have elected to freeze
their memberships until the studios reopen or cancel their memberships, which could result in decreased revenue for
franchisees and the Company.
The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future
developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult
to predict. Management is monitoring the potential effects of the health care related and economic conditions of
COVID-19 on the Company including any decrease or slowdown in sales and openings of franchise studios,
additional temporary closures of existing franchisee studios and financial distress for franchisees which could result
in lower franchise fee and royalty revenues, decreased equipment and merchandise sales and declines in related cash
flows. If the impact results in longer term closures of studios or lower cash flows, the Company may recognize
material asset impairments or charges for uncollectible accounts or notes receivable in future periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to
provide financial aid to families and businesses impacted by the COVID-19 pandemic. The Company plans to
participate in the CARES Act and any other programs for which it is eligible. The Member continues to provide all
administrative and similar support functions to the Company, has available credit facilities and existing cash and has
committed to fund the Company’s operations as may be necessary through at least April 30, 2021. Management
currently estimates that the Company’s cash flows, and support from the Member if required, would provide
sufficient cash flows for at least twelve months after the issuance date of the Company’s consolidated financial
statements.
18
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GUARANTEE OF PERFORMANCE
For value received, CycleBar Holdco, LLC, a Delaware limited liability company (the "Guarantor"), located
at 17877 Von Karman Ave., Suite 100,Irvine, California 92614, absolutely and unconditionally guarantees
to assume the duties and obligations of CycleBar Franchising, LLC, also located at 17877 Von Karman
Ave., Suite 100, Irvine, California 92614 (the "Franchisor"), under its franchise registration in each state
where the franchise is registered, and under its Franchise Agreement identified in its 2018 Franchise
Disclosure Document, as it may be amended, and as that Franchise Agreement may be entered into with
franchisees and amended, modified or extended from time to time. This guarantee continues until all such
obligations of the Franchisor under its franchise registrations and the Franchise Agreement are satisfied or
until the liability of Franchisor to its franchisees under the Franchise Agreement has been completely
discharged, whichever first occurs. The Guarantor is not discharged from liability if a claim by a franchisee
against the Franchisor remains outstanding. Notice of acceptance is waived. The Guarantor does not waive
receipt of notice of default on the part of the Franchisor. This guarantee is binding on the Guarantor and its
successors and assigns.
The Guarantor signs this guarantee at Irvine, California, on this 29th day of April, 2020.
Guarantor:
CycleBar Holdco, LLC
By:
Ryan Junk, President
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EXHIBIT E
TO THE
FRANCHISE DISCLOSURE DOCUMENT
Topic page #
Welcome to CycleBar 12
The CycleBar Story
Mission and Vision 13
CycleBar the Brand 14
CycleStar® Instructors 17
What is a CycleStar® Instructor? 18
The Mission and Vision of our C-Star Platform
What sets our CycleStar® Instructors apart?
Value Proposition 19
The Stage (CycleTheatre®)
Compensation
Branding
Initial Market Analysis 20
Recruitment Strategy
Auditions 21
Bootcamp 22
Final Training 23
Primary Agenda Items for Final Day of Training 24
Class Descriptions/Class Types 26
Certification 29
HR 30
Development Program 31
Master CycleStar® Instructor Program 33
CycleBar Support 35
Forms: 36
CycleStar® Instructor Profile Questionnaire 37
Employment Application 38
Audition Form 41
In-Class Evaluation Form 42
Overall Performance Evaluation Form 43
Quality Control/CycleBar Brand Standards 44
Review and Use of Trademarks and Copyrights 45
Brand Usage 46
CycleBeats® 48
What are CycleBeats®? 49
2018 CycleBar Franchising, LLC
2018 Franchise Disclosure Document - Exhibits
Topic page #
The Mission and Vision of our C-Beats Platform
Why are CycleBeats® Important?
CycleBeats® Technology
The Process 50
Consumer Facing Delivery
CycleBeats® Brand Standards 51
CBF Support 52
CycleStats® 54
What are CycleStats® 55
The Mission and Vision of our C-Stats Platform
Why are CycleStats® important?
CycleStats® Technology 56
The Process
Consumer Facing Delivery 57
CBF Support
CycleTheatre® 58
What is the CycleTheatre®? 59
Why did we design the CT like this?
The Mission and Vision of our C-Stats Platform
Consumer Facing Delivery 60
Market Analysis 62
The Market Analysis Worksheet 63
Breaking a Territory Down
Sphere of Influence Assets
Building a C-Star Database
Community Partner Opportunities 64
Building a Community Partner Database 65
Indoor Cycling Research & Strategy
Build and Analyze 66
Fitness Density
Existing Facility Analysis
CBF Support 67
Real Estate Site Selection 68
The CBF Real Estate Strategy 69
The Real Estate Process
Real Estate Marketing Kit 70
Specifications 72
Renderings
Territory Analysis
Demographics 73
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