**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | ** ** | **QUARTERLY REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                         |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                     |
| ** ** | ** ** | **for the quarterly period ended December 31,  2004.**                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION  13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                        |
| ** ** | ** ** | ** **                                                                                                                                                                     |
| ** ** | ** ** | **for the transition period from              to             .** |

 

**Commission File No. 1-13919**

 

**Xponential, Inc.**

(Exact name of small business issuer as specified in its charter)

 
| **Delaware**                                                           | ** ** | **75-2520896**                       |
|------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)        | ** ** | (I.R.S. Employer Identification No.) |
|                                                                   |
| **6400 Atlantic Boulevard, Suite 190, Norcross,  Georgia  30080** |
| (Address of principal executive offices)                               |
|                                                                   |
| **(678) 720-0660**                                                     |
| (Issuer’s telephone number)                                       |

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days Yes ý No o

 

Checkwhether the registrant filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after distribution of securitiesunder a plan confirmed by a court. Yes ý No o

 

TheCompany has 2,360,828 shares of Common Stock, par value $0.01 per share,outstanding as of January 18, 2005.

 

TransitionalSmall Business Disclosure Format (Check one): Yes o No ý

 

 

----

 

**XPONENTIAL, INC.**

 

**INDEX**

 
| **PART I   -  FINANCIAL INFORMATION** |                                                                                       |
|-------------------------------------------------|--------------------------------------------------------------------------------------------|
|                                            |                                                                                       |
| **Item 1**                                      | Consolidated Financial Statements                                                          |   |
|                                            |                                                                                       |   |
|                                            | Consolidated Balance Sheets as of December 31 and June 30, 2004                            |   |
|                                            |                                                                                       |   |
|                                            | Consolidated Statements of Income for the  Six Months Ended December 31, 2004 and 2003     |   |
|                                            |                                                                                       |   |
|                                            | Consolidated Statements of Income for the  Three Months Ended December 31, 2004 and 2003   |   |
|                                            |                                                                                       |   |
|                                            | Consolidated Statements of Cash Flows for  the Six Months Ended December 31, 2004 and 2003 |   |
|                                            |                                                                                       |   |
|                                            | Notes to Consolidated Financial Statements                                                 |   |
|                                            |                                                                                       |   |
| **Item 2**                                      | Management’s Discussion and Analysis or Plan of Operation                             |   |
|                                            |                                                                                       |   |
| **Item 3**                                      | Controls and Procedures                                                                    |   |
|                                            |                                                                                       |   |
| **PART II - OTHER INFORMATION**                 | ** **                                                                                 |
|                                            |                                                                                       |   |
| **Item 2**                                      | Unregistered Sales of Equity Securities and  Use of Proceeds                               |   |
|                                            |                                                                                       |   |
| **Item 6**                                      | Exhibits                                                                                   |   |

 

2

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**ITEM1.****  CONSOLIDATED FINANCIAL STATEMENTS**

 

**XPONENTIAL, INC. AND SUBSIDIARIES**

 

Consolidated Balance Sheets

(In thousands, except share and per sharedata)

 
| ** **                                                                                                                                                                                                     | ** ** | **December 31, 2004** | ** ** | **June 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **(Unaudited)**       | ** ** | ** **        | ** ** |
| Assets                                                                                                                                                                                                         |       |                  |       |              |       |
| Current assets:                                                                                                                                                                                                |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                     | 507        |              | $          | 206 |   |
| Accounts receivable                                                                                                                                                                                            |       | 58                    |       | 73                |       |
| Pawn service charges receivable                                                                                                                                                                                |       | 471                   |       | 489               |       |
| Pawn loans                                                                                                                                                                                                     |       | 4,279                 |       | 4,449             |       |
| Inventories, net                                                                                                                                                                                               |       | 3,518                 |       | 2,968             |       |
| Investments                                                                                                                                                                                                    |       | 993                   |       | 3,017             |       |
| Prepaid expenses and other current assets                                                                                                                                                                      |       | 254                   |       | 275               |       |
| Total current assets                                                                                                                                                                                           |       | 10,080                |       | 11,477            |       |
|                                                                                                                                                                                                           |       |                  |       |              |       |
| Property and equipment, net                                                                                                                                                                                    |       | 846                   |       | 869               |       |
| Intangible assets, net of amortization of  $62 and $42 at December 31, 2004 and June 30, 2004, respectively                                                                                                    |       | 16                    |       | 35                |       |
| Investments-restricted                                                                                                                                                                                         |       | 1,000                 |       | —            |       |
| Investment in American IronHorse Motorcycle  Company, Inc.                                                                                                                                                     |       | 4,486                 |       | 3,018             |       |
| Other assets                                                                                                                                                                                                   |       | 207                   |       | 155               |       |
| Total assets                                                                                                                                                                                                   |       | $                     | 16,635     |              | $          | 15,554 |   |
|                                                                                                                                                                                                           |       |                  |       |              |       |
| Liabilities  and Stockholders’ Equity                                                                                                                                                                     |       |                  |       |              |       |
| Current liabilities:                                                                                                                                                                                           |       |                  |       |              |       |
| Accounts payable and accrued liabilities                                                                                                                                                                       |       | $                     | 689        |              | $          | 696 |   |
| Current installments of notes payable and  redeemable preferred stock                                                                                                                                          |       | 857                   |       | 121               |       |
| Total current liabilities                                                                                                                                                                                      |       | 1,546                 |       | 817               |       |
|                                                                                                                                                                                                           |       |                  |       |              |       |
| Long term liabilities                                                                                                                                                                                          |       |                  |       |              |       |
| Notes payable – net of current portion                                                                                                                                                                    |       | 3,554                 |       | 3,050             |       |
| Redeemable preferred stock – Series A; par  value $0.01; 5% cumulative dividend, liquidation preference $5.00 per share;  1,071,636 shares issued and outstanding at December 31, 2004 and June 30,  2004 |       | 4,858                 |       | 5,358             |       |
| Total long term liabilities                                                                                                                                                                                    |       | 8,412                 |       | 8,408             |       |
|                                                                                                                                                                                                           |       |                  |       |              |       |
| Total liabilities                                                                                                                                                                                              |       | 9,958                 |       | 9,225             |       |
|                                                                                                                                                                                                           |       |                  |       |              |       |
| Stockholders’ equity:                                                                                                                                                                                     |       |                  |       |              |       |
| Preferred stock – $0.01 par value,  2,500,000 authorized:                                                                                                                                                 |       |                  |       |              |       |
| Preferred stock – Series B; 5% cumulative  dividend, liquidation preference $5.00 per share ($2,500,210); 500,042 issued  and outstanding at December 31, 2004 and June 30, 2004                          |       | 5                     |       | 5                 |       |
| Common stock $0.01 par value; authorized  10,000,000 shares, issued 2,360,828 as of December 31, 2004 and 2,344,206 as  of June 30, 2004                                                                       |       | 24                    |       | 24                |       |
| Additional paid-in capital                                                                                                                                                                                     |       | 5,550                 |       | 5,319             |       |
| Retained earnings                                                                                                                                                                                              |       | 939                   |       | 740               |       |
| Accumulated other comprehensive income                                                                                                                                                                         |       | 199                   |       | 281               |       |
| Less treasury stock, at cost; 25,000 common  shares at December 31, 2004 and June 30, 2004, respectively                                                                                                       |       | (40                   | )          | (40               | )          |
| Total stockholders’ equity                                                                                                                                                                                |       | 6,677                 |       | 6,329             |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                |       | $                     | 16,635     |              | $          | 15,554 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**XPONENTIAL,****INC. AND SUBSIDIARIES**

 

Consolidated Statements of Income

(Unaudited)

 

(In thousands, except per share data)

 
| ** **                                                                                                              | ** ** | **Six Months Ended  December 31, 2004** | ** ** | **Six Months Ended  December 31, 2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Revenues:**                                                                                                           | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| Merchandise sales                                                                                                       |       | $                                       | 6,494      |                                    | $          | 7,301 |   |
| Pawn service charges and related fee income                                                                             |       | 3,142                                   |       | 3,382                                   |       |
| Management advisory and related fee income                                                                              |       | 85                                      |       | 185                                     |       |
| Total revenues                                                                                                          |       | 9,721                                   |       | 10,868                                  |       |
|                                                                                                                    |       |                                    |       |                                    |       |
| Expenses:                                                                                                               |       |                                    |       |                                    |       |
| Cost of sales                                                                                                           |       | 4,749                                   |       | 5,983                                   |       |
| Store operating expenses                                                                                                |       | 2,860                                   |       | 3,101                                   |       |
| Corporate administrative expenses                                                                                       |       | 1,434                                   |       | 1,445                                   |       |
| Depreciation and amortization                                                                                           |       | 216                                     |       | 229                                     |       |
| Total expenses                                                                                                          |       | 9,259                                   |       | 10,758                                  |       |
| Operating income                                                                                                        |       | 462                                     |       | 110                                     |       |
| Interest and dividend income                                                                                            |       | 85                                      |       | 255                                     |       |
| Interest expense including preferred  dividends (Series A) of $134 for the six months ended December 31, 2004 and  2003 |       | (320                                    | )          | (325                                    | )          |
| Gain on sale of investments                                                                                             |       | 239                                     |       | 1,946                                   |       |
| Net income before taxes                                                                                                 |       | 466                                     |       | 1,986                                   |       |
| Income tax provision                                                                                                    |       | (204                                    | )          | (739                                    | )          |
| Net income                                                                                                              |       | 262                                     |       | 1,247                                   |       |
| Preferred stock dividend requirement  (Series B)                                                                        |       | (63                                     | )          | (63                                     | )          |
| Net income allocable to common stockholders                                                                             |       | $                                       | 199        |                                    | $          | 1,184 |   |
|                                                                                                                    |       |                                    |       |                                    |       |
| Income per common share (note 4):                                                                                       |       |                                    |       |                                    |       |
|                                                                                                                    |       |                                    |       |                                    |       |
| Basic                                                                                                                   |       | $                                       | 0.08       |                                    | $          | 0.56 |   |
|                                                                                                                    |       |                                    |       |                                    |       |
| Diluted                                                                                                                 |       | $                                       | 0.06       |                                    | $          | 0.32 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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** **

**XPONENTIAL,INC. AND SUBSIDIARIES**

 

Consolidated Statements of Income

(Unaudited)

 
| ** **                                                                                                               | ** ** | **Three Months Ended  December 31, 2004** | ** ** | **Three Months Ended  December 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| **Revenues:**                                                                                                            | ** ** | ** **                                | ** ** | ** **                                | ** ** |
| Merchandise sales                                                                                                        |       | $                                         | 3,462      |                                      | $          | 3,980 |   |
| Pawn service charges and related fee income                                                                              |       | 1,571                                     |       | 1,728                                     |       |
| Management advisory and related fee income                                                                               |       | 43                                        |       | 176                                       |       |
| Total revenues                                                                                                           |       | 5,076                                     |       | 5,884                                     |       |
|                                                                                                                     |       |                                      |       |                                      |       |
| Expenses:                                                                                                                |       |                                      |       |                                      |       |
| Cost of sales                                                                                                            |       | 2,419                                     |       | 3,301                                     |       |
| Store operating expenses                                                                                                 |       | 1,439                                     |       | 1,583                                     |       |
| Corporate administrative expenses                                                                                        |       | 752                                       |       | 807                                       |       |
| Depreciation and amortization                                                                                            |       | 107                                       |       | 118                                       |       |
| Total expenses                                                                                                           |       | 4,717                                     |       | 5,809                                     |       |
| Operating income                                                                                                         |       | 359                                       |       | 75                                        |       |
| Interest and dividend income                                                                                             |       | 44                                        |       | 155                                       |       |
| Interest expense including preferred  dividends (Series A) of $67 for the three months ended December 31, 2004 and  2003 |       | (170                                      | )          | (164                                      | )          |
| Gain on sale of investments                                                                                              |       | 28                                        |       | 315                                       |       |
| Net income before taxes                                                                                                  |       | 261                                       |       | 381                                       |       |
| Income tax provision                                                                                                     |       | (111                                      | )          | (153                                      | )          |
| Net income                                                                                                               |       | 150                                       |       | 228                                       |       |
| Preferred stock dividend requirement  (Series B)                                                                         |       | (32                                       | )          | (31                                       | )          |
| Net income allocable to common stockholders                                                                              |       | $                                         | 118        |                                      | $          | 197 |   |
|                                                                                                                     |       |                                      |       |                                      |       |
| Income per common share (note 4):                                                                                        |       |                                      |       |                                      |       |
| Basic                                                                                                                    |       | $                                         | 0.05       |                                      | $          | 0.09 |   |
|                                                                                                                     |       |                                      |       |                                      |       |
| Diluted                                                                                                                  |       | $                                         | 0.04       |                                      | $          | 0.06 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

Consolidated Statements of Cash Flows

(Unaudited)

 

(In thousands)

 
| ** **                                                                     | ** ** | **For the  Six Months Ended  December 31, 2004** | ** ** | **For the  Six Months Ended  December 31, 2003** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                     | ** ** | ** **                                       | ** ** | ** **                                       | ** ** |
| Cash flows from operating activities:                                          |       |                                             |       |                                             |       |
| Net income                                                                     |       | $                                                | 262        |                                             | $          | 1,247 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                                             |       |                                             |       |
| Depreciation and amortization                                                  |       | 216                                              |       | 229                                              |       |
| Gain on sale of investments                                                    |       | (239                                             | )          | (1,946                                           | )          |
| Deferred income tax expense related to  bankruptcy                             |       | 204                                              |       | 721                                              |       |
| Changes in operating assets and  liabilities:                                  |       |                                             |       |                                             |       |
| Accounts receivable                                                            |       | 15                                               |       | (162                                             | )          |
| Pawn service charges receivable                                                |       | 18                                               |       | (105                                             | )          |
| Inventories, net                                                               |       | (550                                             | )          | (165                                             | )          |
| Prepaid expenses and other current assets                                      |       | 21                                               |       | (168                                             | )          |
| Accounts payable and accrued liabilities                                       |       | (7                                               | )          | (136                                             | )          |
| Net cash used in operating activities                                          |       | (60                                              | )          | (485                                             | )          |
| Cash flows from investing activities:                                          |       |                                             |       |                                             |       |
|                                                                           |       |                                             |       |                                             |       |
| Pawn loans made, net                                                           |       | 170                                              |       | (964                                             | )          |
| Proceeds from sale of investments                                              |       | 1,595                                            |       | 7,809                                            |       |
| Purchase of investments                                                        |       | (1,882                                           | )          | (5,205                                           | )          |
| Purchases of property and equipment                                            |       | (174                                             | )          | —                                           |       |
| Other assets                                                                   |       | (52                                              | )          | (317                                             | )          |
| Net cash provided by (used in) investing  activities                           |       | (343                                             | )          | 1,323                                            |       |
| Cash flows from financing activities:                                          |       |                                             |       |                                             |       |
| Borrowings on notes payable                                                    |       | 4,894                                            |       | 6,050                                            |       |
| Principal payments on notes payable                                            |       | (4,154                                           | )          | (6,272                                           | )          |
| Sale of common stock                                                           |       | 27                                               |       | 282                                              |       |
| Purchase of treasury stock                                                     |       | —                                           |       | (40                                              | )          |
| Dividends paid                                                                 |       | (63                                              | )          | (63                                              | )          |
| Net cash provided by (used in) financing  activities                           |       | 704                                              |       | (43                                              | )          |
| Net increase in cash and cash equivalents                                      |       | 301                                              |       | 795                                              |       |
| Cash and cash equivalents at beginning of  period                              |       | 206                                              |       | 220                                              |       |
| Cash and cash equivalents at end of period                                     |       | $                                                | 507        |                                             | $          | 1,015 |   |
| Supplemental disclosures of cash flow  information - Cash paid for interest    |       | $                                                | 286        |                                             | $          | 288 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

6

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)    Basis of Presentation

 

The consolidated financial statements includethe accounts of Xponential, Inc. and its wholly-owned subsidiaries, XponentialAdvisors, Inc. and PawnMart, Inc.  Allsignificant intercompany transactions have been eliminated.

 

Xponential, Inc., formerly PawnMart, Inc.(the “Company”), was incorporated in Delaware on January 13, 1994.  Effective February 28, 2003, the Companychanged its name to “Xponential, Inc.” The Company’s wholly-owned subsidiaryPawnMart, Inc. (“PawnMart”) is a specialty finance and retail enterpriseprincipally engaged in establishing and operating stores (“pawn shops”) whichadvance money secured by the pledge of tangible personal property and buy andsell pre-owned merchandise.  As ofDecember 31, 2004, PawnMart owned and operated 26 stores located in Georgia andNorth Carolina.

 

The financial statements as of December 31,2004 and 2003 and for the three and six month periods then ended are unauditedbut, in management’s opinion, include all adjustments necessary for a fairpresentation of the results for such interim periods.

 

Operating results for the three and six monthperiods are not necessarily indicative of the results that may be expected forthe full fiscal year.

 

The financial statements should be read inconjunction with the financial statements for the fiscal year ended June 30,2004 included in the Company’s Form 10-KSB which have been previously filedwith the Securities and Exchange Commission.

 

(2)                     Notes Payable

 

*Revolving Credit Facility-*

 

PawnMart obtained a new revolving creditfacility on June 17, 2004 from FCC, LLC, d/b/a First Capital, Kennesaw, Georgia(the “Lender”), in an amount up to $4,500,000 (which replaced in its entiretythe $4,000,000 Comerica line of credit), which bears interest at the prevailingprime rate plus 2.00% (6.75% at December 31, 2004), and matures on June 17,2007 (the “Credit Facility”).  The CreditFacility is an asset-based loan with advances thereunder based on PawnMart’seligible accounts receivable and inventory, subject to reserves andadjustments, including a specific $1,000,000 reserve against the borrowingbase.  The Credit Facility iscollateralized by substantially all of the unencumbered assets of PawnMart andis guaranteed by the Company.  In October2004 the loan was modified to eliminate the $1,000,000 reserve by the Company’spledging of additional collateral in the form of marketable securities to theLender in the amount of $1,000,000.  TheCompany is required to maintain certain financial ratios and comply withcertain covenants, including a prohibition against paying cash dividends on itscommon stock unless specifically approved by the Lender.  At December 31, 2004, $2,852,000 wasoutstanding under the Credit Facility and had an additional $80,000 availableto borrow pursuant to the available borrowing base. The Company was incompliance with the financial ratios and other covenants under the CreditFacility at December 31, 2004.

 

*Slammer Partners, Ltd-*

 

On July 25, 2004 the Company purchased100,000 shares of common stock of American IronHorse Motorcycle Company, Inc.from Slammer Partners, Ltd. for $600,000, which is financed by the seller. Thepromissory note bears interest at 5% per annum, requires monthly payments ofprincipal and interest of $21,372 for 36 months beginning August 25, 2004 andis included as a liability at December 31, 2004 of $505,000.

 

7

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*8% Limited Recourse Secured ConvertibleSubordinated Notes-*

 

The Company had sold $225,000 of its 8%limited recourse secured convertible subordinated notes as of December 31,2004.  The notes mature in 2014 and areconvertible at a rate of 100 shares of the Company’s common shares for each$1,000 of principal amount of the notes. Interest is payable monthly and the principal of the notes is due atmaturity.  The notes are collateralizedby the common shares of the Company’s subsidiary, PawnMart.  The Company has guaranteed the interestpayments for the initial five year term of the notes.

 

(3)                      Stock Option Plan andIncentive Plan

 

Effective January 1, 2003 the Company adopted thefair value method defined in SFAS No. 123, “Accounting for Stock-BasedCompensation,” in accounting for the Company’s stock option plans.  Previously the Company applied AccountingPrinciples Board’s Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issuedto Employees,” and related Interpretations. SFAS No. 123 indicates that the fair value method is the preferablemethod of accounting, and the Company has elected to apply it for all optionsgranted for the Company.  Under APB No.25, compensation costs related to stock options issued pursuant to compensatoryplans are measured based on the difference between the quoted market price ofthe stock at the measurement date (ordinarily the date of grant) and theexercise price and should be charged to expense over the periods during whichthe grantee performs the related services.

 

The Company adopted its 2003 Stock OptionPlan (“Stock Option Plan”) and its 2003 Stock Incentive Plan (the “IncentivePlan”) effective January 1, 2003.  Underthe Stock Option Plan, stock options have been awarded to directors, officersand employees.  These stock options vesteither immediately or over a period of two years and expire ten yearsthereafter.  A total of 675,000 shares ofcommon stock are reserved for grant under the Stock Option Plan.  The Company has granted options covering atotal of 505,000 common shares under the Stock Option Plan, of which 349,000shares were immediately exercisable. Options covering a total of 251,000 shares have been exercised, optionscovering a total of 32,000 shares have been forfeited, leaving options coveringa total of 222,000 shares outstanding at December 31, 2004, with 182,000immediately exercisable.  The remainingoptions vest on June 30, 2005.  TheCompany recognized $400 and $1,200 of compensation expense for options grantedduring the three month periods ended December 31, 2004 and 2003, respectivelyand $800 and $2,400 of compensation expense for the six month periods endedDecember 31, 2004 and 2003, respectively.

 

The following table summarizes the stockoption activity of the Company:

 
| ** **                       | ** ** | **Weighted Average**   | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **Number of  Options** | ** ** | **Exercise  Price** | ** ** |
| Outstanding at June 30, 2003     |       | 455,000                |       | $ | 1.00 |   |
| Granted                          |       | 30,000                 |       | 1.60 |   |
| Exercised                        |       | 249,000                |       | $ | 1.02 |   |
| Forfeited                        |       | 30,000                 |       | 1.00 |   |
| Outstanding at June 30, 2004     |       | 206,000                |       | $ | 1.09 |   |
| Granted                          |       | 20,000                 |       | 1.56 |   |
| Exercised                        |       | 2,000                  |       | 1.00 |   |
| Forfeited                        |       | 2,000                  |       | 1.00 |   |
| Outstanding at December 31, 2004 |       | 222,000                |       | $ | 1.16 |   |
|                             |       |                   |       |   |   |
| Exercisable at December 31, 2004 |       | 182,000                |       | $ | 1.14 |   |

 

8

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The Incentive Plan provides an opportunity toemployees of the Company to purchase common shares directly from the Companythrough payroll deductions.  As ofDecember 31, 2004, the Company has issued 54,880 shares of restricted common sharesunder the Incentive Plan.  The stockgrants vest over a two year period.  TheCompany recognized compensation expense of $22,664 and $15,864 during the threemonth periods ending December 31, 2004 and 2003, respectively, and $31,845 and$22,864 during the six month periods ending December 31, 2004 and 2003,respectively related to the stock grants.

 

(4)                      Weighted Average Shares andNet Income Per Common Share

 

Net income per common share is calculated as required by FASB Statement ofFinancial Accounting Standards No. 128, “Earnings Per Share” (“Statement No.128”).  Statement No. 128 requires dualpresentation of basic and diluted earnings per share and a reconciliationbetween the two amounts.  Basic earningsper share excludes dilution, and diluted earnings per share reflects thepotential dilution that would occur if securities for the purchase of CommonStock were exercised.  In loss periods,dilutive common equivalent shares are excluded as the effect would beantidilutive.

 

The reconciliation of basic and dilutedweighted average common shares and the reconciliation for the basic and dilutedearnings per common share for the three months ended December 31, 2004 and 2003is as follows:

 
| **For the Three Months Ended  December 31, 2004** | ** ** | **Net Income  Allocable to  Common  Shareholders** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------|------------|
|                                              |       |                                               |       |       |       |          |       |
| Basic earnings per common share                   |       | $                                                  | 118,000    |       | 2,360,828  |          | $          | 0.05 |   |
| Assumed conversion of Series B preferred stock    |       | 32,000                                             |       | 1,720,130  |       |          |       |
| Dilutive effect of stock options                  |       | —                                             |       | 59,756     |       |          |       |
| Diluted earnings per common share                 |       | $                                                  | 150,000    |       | 4,140,714  |          | $          | 0.04 |   |

 
| **For the Three Months Ended  December 31, 2003** | ** ** | **Net Income  Allocable to  Common  Shareholders** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------|------------|
| ** **                                        | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **    | ** ** |
| Basic earnings per common share                   |       | $                                                  | 197,000    |       | 2,160,939  |          | $          | 0.09 |   |
| Assumed conversion of Series B preferred stock    |       | 31,000                                             |       | 1,720,130  |       |          |       |
| Diluted earnings per common share                 |       | $                                                  | 228,000    |       | 3,881,069  |          | $          | 0.06 |   |
|                                                   |            |                                                    |            |            |            |               |            |  |  |  |

 

9

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| **For the Six Months Ended  December 31, 2004** | ** ** | **Net Income  Allocable to  Common  Shareholders** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------|------------|
|                                            |       |                                               |       |       |       |          |       |   |   |
| Basic earnings per common share                 |       | $                                                  | 199,000    |       | 2,348,983  |          | $          | 0.08 |   |
| Assumed conversion of Series B preferred  stock |       | 63,000                                             |       | 1,720,130  |       |          |       |
| Dilutive effect of stock options                |       | —                                             |       | 29,878     |       |          |       |
| Diluted earnings per common share               |       | $                                                  | 262,000    |       | 4,098,991  |          | $          | 0.06 |   |

 
| **For the Six Months Ended  December 31, 2003** | ** ** | **Net Income  Allocable to  Common  Shareholders** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------|------------|
| ** **                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **    | ** ** |
| Basic earnings per common share                 |       | $                                                  | 1,184,000  |       | 2,120,444  |          | $          | 0.56 |   |
| Assumed conversion of Series B preferred  stock |       | 63,000                                             |       | 1,720,130  |       |          |       |
| Diluted earnings per common share               |       | $                                                  | 1,247,000  |       | 3,840,574  |          | $          | 0.32 |   |
|                                                 |            |                                                    |            |            |            |               |            |  |  |  |  |

 

The Company had stock options outstanding forthe purchase of 222,000 and 236,000 common shares as of Decem­ber 31, 2004and 2003, respectively.  The Company’scommon stock began trading in on the Nasdaq OTC Bulletin Board in September2004.  In October 2004,  certain of the Company’s stock options becamedilutive as the market value of the Company’s common shares exceeded the strikeprice for the outstanding options. For the three and six month periods endedDecember 31, 2004, 50,000 of the outstanding options to purchase common shareshave been excluded from the computation because those options are antidilutive.  For the three and six month periods endedDecember 31, 2003, all outstanding options to purchase common shares have beenexcluded from the computation because those options are antidilutive.

 

(5)       Investmentsin Marketable Securities

 

Marketable equity securities have beencategorized as available-for-sale and carried at fair value.  Unrealized gains and losses foravailable-for-sale securities are included as a component of shareholders’equity net of tax until realized. Realized gains and losses on the sale of securities are based on thespecific identification method.  TheCompany continually reviews its investments to determine whether a decline infair value below the cost basis is other than temporary.  If the decline in the fair value is judged tobe other than temporary, the cost basis of the security is written down to fairvalue and the amount of the write-down is included in the consolidatedstatement of operations.

 

As of December 31, 2004 the Company owned thefollowing marketable securities:

 
| **(in thousands)** | ** ** | **Cost** | ** ** | **Unrealized  Gain/(Loss)** | ** ** | **Market Value** | ** ** |
|--------------------|------------|----------|------------|-----------------------------|------------|------------------|------------|
|               |       |     |       |                        |       |             |       |
| Stocks             |       | $        | 7          |                        | (7         | )                | —     |   |
| Bonds              |       | 1,787    |       | 206                         |       | 1,993            |       |
|               |       |     |       |                        |       |             |       |
| Total              |       | $        | 1,794      |                        | 199        |             | 1,993      |   |

 

10

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In October 2004, the Company pledged$1,000,000 of its marketable securites as additional collateral for the Company’sCredit Facility.  The $1,000,000 inmarketable securities is reported as a long term asset on the Company’s balancesheet.

 

As of June 30, 2004, the Company owned thefollowing marketable securities:

 
| **(in thousands)** | ** ** | **Cost** | ** ** | **Unrealized  Gain/(Loss)** | ** ** | **Market Value** | ** ** |
|--------------------|------------|----------|------------|-----------------------------|------------|------------------|------------|
|               |       |     |       |                        |       |             |       |
| Stocks             |       | $        | 7          |                        | $          | (6               | )          | $ | 1 |   |
| Bonds              |       | 2,729    |       | 287                         |       | 3,016            |       |
|               |       |     |       |                        |       |             |       |
| Total              |       | $        | 2,736      |                        | $          | 281              |       | $ | 3,017 |   |

 

(6)       ComprehensiveIncome

 

Comprehensive income is as follows:

 
| **(in thousands)**                                         | ** ** | **For the Three Month  Period Ended  December 31, 2004** | ** ** | **For the Three Month  Period Ended  December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                                       |       |                                                     |       |                                                     |       |
| Net income                                                 |       | $                                                        | 150        |                                                     | $          | 228 |   |
| Unrealized gain from available for sale  securities        |       | 134                                                      |       | 74                                                       |       |
| Reclassification of realized gains included  in net income |       | 15                                                       |       | (22                                                      | )          |
|                                                       |       |                                                     |       |                                                     |       |
| Comprehensive income (loss)                                |       | $                                                        | 299        |                                                     | $          | 280 |   |

 
| **(in thousands)**                                         | ** ** | **For the Six Month  Period Ended  December 31, 2004** | ** ** | **For the Six Month  Period Ended  December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                       |       |                                                   |       |                                                   |       |
| Net income                                                 |       | $                                                      | 262        |                                                   | $          | 1,247 |   |
| Unrealized gain(loss) from available for  sale securities  |       | (82                                                    | )          | (1,423                                                 | )          |
| Reclassification of realized gains included  in net income |       | (102                                                   | )          | (1,165                                                 | )          |
|                                                       |       |                                                   |       |                                                   |       |
| Comprehensive income (loss)                                |       | $                                                      | 78         |                                                   | $          | (1,341 | ) |

 

(7)       Investmentin American IronHorse Motorcycle Company, Inc.

 

The Company has invested $4,486,000 inAmerican IronHorse Motorcycle Company, Inc. (“American IronHorse”) as ofDecember 31, 2004.  The Company owns13.97% of the common stock of American IronHorse and accounts for thisinvestment as a non-current asset on the cost method.**** $600,000 of theinvestment is financed by a third party seller with a promissory note at 5%interest per annum requiring monthly payments of principal and interest of$21,372 for 36 months which began August 25, 2004 and is included as a liabilityat December 31, 2004 of $505,000.  It ispossible the Company may increase its investment in American IronHorse, whichcould result in the requirement to use the equity method of accounting.

 

11

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Following is summary unaudited financialinformation for American IronHorse as of September 30, 2004 and December 31,2003:

 
| **(in thousands)**        | ** ** | **As of  September 30, 2004** | ** ** | **As of  December 31, 2003** | ** ** |
|---------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **(Unaudited)**               | ** ** | **(Unaudited)**              | ** ** |
|                      |       |                          |       |                         |       |
| Current assets            |       | $                             | 27,635     |                         | $          | 23,892 |   |
| Current liabilities       |       | 17,490                        |       | 19,901                       |       |
| ** **                | ** ** | ** **                    | ** ** | ** **                   | ** ** |
| Total assets              |       | $                             | 32,318     |                         | $          | 29,042 |   |
| Total liabilities         |       | 21,047                        |       | 24,589                       |       |
| Stockholders’ equity |       | $                             | 11,271     |                         | $          | 4,453 |   |

 
| **(in thousands)** | ** ** | **For the Nine  Months Ended  September 30, 2004** | ** ** | **For the  Year Ended  December 31, 2003** | ** ** |
|--------------------|------------|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **(Unaudited)**                                    | ** ** | **(Unaudited)**                            | ** ** |
|               |       |                                               |       |                                       |       |
| Total revenue      |       | $                                                  | 58,050     |                                       | $          | 65,019 |   |
| Net income (loss)  |       | $                                                  | 544        |                                       | $          | (7,770 | ) |

 

(8)       Intangibleassets

 

Intangible assets having an indefinite useful lifeare tested for impairment annually at June 30, or more frequently ifevents or changes in circumstances indicate that the assets might be impaired.Based on the results of the test, management determined there was no impairmentas of June 30, 2004, as the respective fair value of the Company’s reportingunits exceeds their respective carrying amounts. The Company amortizesintangible assets with an expected useful life based on their expected periodsof benefit.

 

(9)                      Operating Segment Information

 

The Company has two reportable business segments;one in the pawn lending industry and one for its investment, management andadvisory services.  PawnMart, Inc.operates 26 pawn shops in Georgia and North Carolina.  Xponential Advisors, Inc. provides managementand advisory services to American IronHorse and directs the investment of theCompany’s available funds in marketable securities and other investmentopportunities.

 

Operating segment data for the three months endedDecember 31, 2004 and 2003 is set forth below (in thousands):

 

12

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| **Three Months Ended December 31,  2004**   | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 3,462      |                                               | $          | —           |       | $ | 3,462 |   |
| Pawn service charges and related fee income |       | 1,571             |       | —                                             |       | 1,571            |       |
| Management advisory and related fee income  |       | —            |       | 43                                                 |       | 43               |       |
| **Total Revenue**                           |       | 5,033             |       | 43                                                 |       | 5,076            |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 2,419             |       | —                                             |       | 2,419            |       |
| Store operating expenses                    |       | 1,439             |       | —                                             |       | 1,439            |       |
| Corporate administrative expenses           |       | 511               |       | 241                                                |       | 752              |       |
| Depreciation and amortization               |       | 106               |       | 1                                                  |       | 107              |       |
| **Operating income (loss)**                 |       | 558               |       | (199                                               | )          | 359              |       |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | 1                 |       | 43                                                 |       | 44               |       |
| Interest expense                            |       | (86               | )          | (84                                                | )          | (170             | )          |
| Gain on sale of investments                 |       | —            |       | 28                                                 |       | 28               |       |
| **Net income before taxes**                 |       | $                 | 473        |                                               | $          | (212             | )          | $ | 261 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 9,735      |                                               | $          | 6,900            |       | $ | 16,635 |   |

 
| **Three Months Ended December 31,  2003**   | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 3,980      |                                               | $          | —           |       | $ | 3,980 |   |
| Pawn service charges and related fee income |       | 1,728             |       | —                                             |       | 1,728            |       |
| Management advisory and related fee income  |       | —            |       | 176                                                |       | 176              |       |
| **Total Revenue**                           |       | 5,708             |       | 176                                                |       | 5,884            |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 3,301             |       | —                                             |       | 3,301            |       |
| Store operating expenses                    |       | 1,583             |       | —                                             |       | 1,583            |       |
| Corporate administrative expenses           |       | 513               |       | 294                                                |       | 807              |       |
| Depreciation and amortization               |       | 118               |       |                                               |       | 118              |       |
| **Operating income (loss)**                 |       | 193               |       | (118                                               | )          | 75               |       |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | 2                 |       | 153                                                |       | 155              |       |
| Interest expense                            |       | (90               | )          | (74                                                | )          | (164             | )          |
| Gain on sale of investments                 |       | —            |       | 315                                                |       | 315              |       |
| **Net income before taxes**                 |       | $                 | 105        |                                               | $          | 276              |       | $ | 381 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 10,006     |                                               | $          | 7,275            |       | $ | 17,281 |   |

 

13

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Operating segment data for the six months ended December 31, 2004 and2003 is set forth below (in thousands):

 
| **Six Months Ended December 31,  2004**     | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 6,494      |                                               | $          | —           |       | $ | 6,494 |   |
| Pawn service charges and related fee income |       | 3,142             |       | —                                             |       | 3,142            |       |
| Management advisory and related fee income  |       | —            |       | 85                                                 |       | 85               |       |
| **Total Revenue**                           |       | 9,636             |       | 85                                                 |       | 9,721            |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 4,749             |       | —                                             |       | 4,749            |       |
| Store operating expenses                    |       | 2,860             |       | —                                             |       | 2,860            |       |
| Corporate administrative expenses           |       | 934               |       | 500                                                |       | 1,434            |       |
| Depreciation and amortization               |       | 216               |       | —                                             |       | 216              |       |
| **Operating income (loss)**                 |       | 877               |       | (415                                               | )          | 462              |       |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | 2                 |       | 83                                                 |       | 85               |       |
| Interest expense                            |       | (158              | )          | (162                                               | )          | (320             | )          |
| Gain on sale of investments                 |       | —            |       | 239                                                |       | 239              |       |
| **Net income before taxes**                 |       | $                 | 721        |                                               | $          | (255             | )          | $ | 466 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 9,735      |                                               | $          | 6,900            |       | $ | 16,635 |   |

 

14

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| **Six Months Ended December 31,  2003**     | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 7,301      |                                               | $          | —           |       | $ | 7,301 |   |
| Pawn service charges and related fee income |       | 3,382             |       | —                                             |       | 3,382            |       |
| Management advisory and related fee income  |       | —            |       | 185                                                |       | 185              |       |
| **Total Revenue**                           |       | 10,683            |       | 185                                                |       | 10,868           |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 5,983             |       | —                                             |       | 5,983            |       |
| Store operating expenses                    |       | 3,101             |       | —                                             |       | 3,101            |       |
| Corporate administrative expenses           |       | 937               |       | 508                                                |       | 1,445            |       |
| Depreciation and amortization               |       | 226               |       | 3                                                  |       | 229              |       |
| **Operating income (loss)**                 |       | 436               |       | (326                                               | )          | 110              |       |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | 2                 |       | 253                                                |       | 255              |       |
| Interest expense                            |       | (175              | )          | (150                                               | )          | (325             | )          |
| Gain on sale of investments                 |       |              |       | 1,946                                              |       | 1,946            |       |
| **Net income before taxes**                 |       | $                 | 263        |                                               | $          | 1,723            |       | $ | 1,986 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 10,006     |                                               | $          | 7,275            |       | $ | 17,281 |   |

 

15

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**ITEM 2****.**  **MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION**

 

### *Statements appearing in the following discussion that arenot historical facts are forward-looking statements (“forward-lookingstatements”) within the meaning of Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,which are intended to be covered by the safe harbors created by thosesections.  Such forward-lookingstatements are necessarily estimates reflecting the best judgment of theCompany’s management based upon current information and involve known andunknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors,include, but are not limited to, those set forth and those appearing from timeto time in filings made by the Company with the Securities and Exchange Commission.  These risks, uncertainties and other factorsshould not be construed as exhaustive and the Company does not undertake, andspecifically disclaims any obligation, to update any forward-looking statementsto reflect occurrences or unanticipated events or circumstances after the dateof such statements.*

###  

*In addition, the following discussion andanalysis should be read in conjunction with the Company’s financial statementsand notes thereto and other financial data included in the Company’s Form10-KSB for the fiscal year ended June 30, 2004.*

 

GENERAL

 

Xponential,Inc. (the “Company”) is diversified holding company.  Its wholly owned subsidiary, PawnMart, Inc. (“PawnMart”),is a specialty finance and retail business principally engaged in establishingand operating pawn shops which advance money secured by the pledge of tangiblepersonal property and sell pre-owned merchandise to value-consciousconsumers.  PawnMart generates incomethrough collection of a monthly service charge from advancing money toindividuals based primarily upon the estimated resale value of pledged personalproperty such as jewelry, consumer electronics, tools, musical instruments,automobiles and other miscellaneous items and through profit realized on theretail sale of the unredeemed or other purchased pre-owned merchandise.

 

TheCompany also has invested in American IronHorse Motorcycle Company, Inc. (“AmericanIronHorse”), a Texas corporation that manufactures specialty motorcycles.  At December 31, 2004 the Company and itswholly-owned subsidiary, Xponential Advisors, Inc., collectively owned 740,348shares (exclusive of warrants to purchase 100,000 shares of common stock ofAmerican IronHorse), or 13.97% of the outstanding common stock of AmericanIronHorse (which would be reduced to 10.77% assuming conversion and exercise ofall outstanding convertible securities).

 

AtDecember 31, 2004 directors and officers of the Company, directly and throughaffiliates, collectively owned an additional 1,018,373 shares (exclusive ofwarrants to purchase 208,707 shares and options to purchase 29,166 shares ofcommon stock of American IronHorse), or 19.22%, of the outstanding common stockof American IronHorse (which would be reduced to 16.11% assuming conversion andexercise of all outstanding convertible securities).  These include shares and convertiblesecurities owned by Jeffrey Cummer, Carroll Dawson, Dwayne Moyers, InvestorsStrategic Partners I, Ltd., and Sanders Morris Harris Group Inc.  Mr. Moyers is also the chairman of the boardof directors of American IronHorse.

 

TheCompany also provides management advisory services in conjunction withfinancing and investments provided to other companies.  In connection with financing provided toAmerican IronHorse, Xponential Advisors, Inc. is paid a management fee oftwenty-five (25) shares of common stock of American IronHorse for each hourworked by Robert W. Schleizer up to a maximum of 24 hours per week.

 

TheCompany’s total revenues are derived primarily from service charges on loansand the proceeds from the sales of merchandise inventory.  The Company’s pawn loans are generally madeon the pledge of tangible personal property for one month, with an automaticextension periods based on statutory requirements.  All pawn loans are collateralized by tangiblepersonal property placed in the possession of the Company, except forautomobile title loans.  During the termof an automobile title loan, the borrower is allowed to maintain possession ofthe collateral.  Pawn service charges arerecognized when loans are repaid or renewed. If a loan is not repaid, the principal amount advanced on the loan,exclusive of any uncollected pawn service charges, becomes the carrying valueof the forfeited collateral (inventory), which is recovered through subsequentsales.

 

16

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Selected elements of the Company’s unaudited statements of operationsare shown below for the three months ended December 31, 2004 and December 31,2003 as a percentage of total revenues. The following table, as well as the discussion following, should be readin conjunction with the Company’s financial statements and notes thereto andother financial data included in the Company’s Form 10-KSB for the fiscal yearended June 30, 2004.

 
| ** **                                       | ** ** | **For the****Three Months Ended  December 31, 2004** | ** ** | **For the  Three Months Ended  December 31, 2003** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
|                                             |       |                                                 |       |                                               |       |
| Merchandise sales                                |       | 68.2                                                 | %          | 67.2                                               | %          |
| Pawn service charges and related fee income      |       | 30.9                                                 |       | 31.4                                               |       |
| Management advisory fees and related fee  income |       | 0.9                                                  |       | 2.4                                                |       |
| Total revenues                                   |       | 100.0                                                |       | 100.0                                              |       |
| Cost of sales                                    |       | 47.7                                                 |       | 56.1                                               |       |
| Store operating expenses                         |       | 28.3                                                 |       | 26.9                                               |       |
| Corporate administrative expenses                |       | 14.8                                                 |       | 13.7                                               |       |
| Depreciation and amortization                    |       | 2.1                                                  |       | 2.0                                                |       |
| Operating income                                 |       | 7.1                                                  |       | 1.3                                                |       |
| Interest and dividend income                     |       | 0.9                                                  |       | 2.6                                                |       |
| Interest expense                                 |       | (3.3                                                 | )          | (2.8                                               | )          |
| Gain on sale of marketable securities            |       | 0.5                                                  |       | 5.4                                                |       |
| Net income before income taxes                   |       | 5.2                                                  |       | 6.5                                                |       |
| Income tax provision                             |       | (2.2                                                 | )          | (2.6                                               | )          |
| Net income before income taxes                   |       | 3.0                                                  | %          | 3.9                                                | %          |

 

RESULTSOF OPERATIONS

 

*Three Months Ended December 31, 2004 Compared to ThreeMonths Ended December 31, 2003*

 

Totalrevenues decreased 13.7% to $5,076,000 during the three months ended December31, 2004 (the “Three Month 2005 Period”) as compared to $5,884,000 during thethree months ended December 31, 2003 (the “Three Month 2004 Period”).  The overall decrease was attributableprimarily to decreases in pawn service charges on car loans and decreasedmerchandise sales.  Stores that remainedopen for the full twelve months or more as of December 31, 2004 (the “ComparableStores”) experienced a net decrease in revenues of $306,000, or 6.1%.

 

Merchandise sales decreased $518,000 or 13.0% to $3,462,000 during theThree Month 2005 Period from $3,980,000 during the Three Month 2004 Periodprimarily due to decreased car and jewelry scrap sales.  Sales in Comparable Stores for the ThreeMonth 2005 Period decreased $156,000, or 4.7%.

 

Pawn service charges decreased $157,000 or 9.1% to $1,571,000 duringthe Three Month 2005 Period from $1,728,000 during the Three Month 2004 Period primarilydue to decreased pawn service charges on car loans, which decreased to $372,000during the Three Month 2005 Period compared to $597,000 during the Three Month2004 Period due to a change in advance rates on car title loans.  Pawn service charges from Comparable Storesdecreased $150,000 or 9.0% for the Three Month 2005 Period as compared to theThree Month 2004 Period.

 

Management advisory income decreased to $43,000 during the Three Month2005 Period from $176,000 during the Three Month 2004 Period due to reducedfinancing fees.

 

Costof sales decreased $882,000 to $2,419,000 or 26.7% during the Three Month 2005Period from $3,301,000 during the Three Month 2004 Period primarily due toreduced jewelry scrap and car sales. Cost of sales as a percent of total revenue decreased to  47.7% during the Three Month 2005 Period ascompared to 56.1%  for the Three Month2004 Period primarily due to improved gross profit on merchandise sales andreduced losses on car title loan repossessions and write offs.

 

Storeoperating expenses decreased $144,000 or 9.1% to $1,439,000 for the Three Month2005 Period from $1,583,000 during the Three Month 2004 Period primarily due todecreased personnel expenses for car title and compliance personnel.  On a Comparable Store basis, store operatingexpenses were  29.2% of total revenuesduring the Three Month 2005 Period compared to 29.1% of total revenues duringthe Three Month 2004 Period.

 

17

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Corporate administrative expenses decreased 6.8% to $752,000 during theThree Month 2005 Period from $807,000 during the Three Month 2004 Periodprimarily due reduced personnel costs which are offset by costs related tolegal and professional fees related to registering of the Company’s commonstock for trading on the OTC Bulletin Board. Corporate administrative expenses increased to 14.8% of total revenuesduring the Three Month 2005 Period as compared to 13.7% during the Three Month2004 Period.

 

Interest expense increased $6,000 to $170,000 during the Three Month2005 Period as compared $164,000 during the Three Month 2004 Period primarily due to increased interest expenserelated to notes payable for the purchase of American IronHorse common stock.

 

Interest and dividend income for the Three Month 2005 Period decreased71.6% due primarily to the investment of $4,486,000 in common stock of AmericanIronHorse with funds that had been previously invested in marketable securitiesthat provided interest and dividend income to the Company in the Three Month2004 Period.

 

The Company also recognized a gain of $28,000 on the sale of securitiesduring the Three Month 2005 Period compared to a gain of $315,000 in the ThreeMonth 2004 Period.

 

The Company recognized income tax expense of $111,000 and $153,000during the Three Month 2005 Period and Three Month 2004 Period, respectively,as a result of the utilization of net operating loss carryforwards notpreviously recognized upon the emergence from bankruptcy and is offset with acorresponding increase to paid in capital and, therefore, has no effect on theCompany’s cash flows.

 

*Six Months Ended December 31, 2004 Compared to Six MonthsEnded December 31, 2003*

 

Totalrevenues decreased 10.6% to $9,721,000 during the six months ended December 31,2004 (the “Six Month 2005 Period”) as compared to $10,868,000 during the sixmonths ended December 31, 2003 (the “Six Month 2004 Period”).  The overall decrease was attributableprimarily to decreases in pawn service charges on car loans and decreased merchandisesales.  Stores that remained open for thefull twelve months or more as of December 31, 2004 (the “Comparable Stores”)experienced a net decrease in revenues of $314,000, or 3.4 %.

 

Merchandise sales decreased 11.0% to $6,494,000 during the Six Month2005 Period from $7,301,000 during the Six Month 2004 Period primarily due todecreased car and jewelry scrap sales. Sales in Comparable Stores for the Six Month 2005 Period decreased$95,000, or 1.6 %.

 

Pawn service charges decreased $240,000 or 7.1% to $3,142,000 duringthe Six Month 2005 Period from $3,382,000 during the Six Month 2004 Periodprimarily due to decreased pawn service charges on car loans which decreased to$768,000 during the Six Month 2005 Period compared to $1,066,000 during the SixMonth 2004 Period due to a change in advance rates on car title loans.  Pawn service charges from Comparable Storesdecreased $219,000 or 6.7% for the Six Month 2005 Period as compared to the SixMonth 2004 Period.

 

Management advisory income decreased to $85,000 during the Six Month2005 Period from $185,000 during the Six Month 2004 Period due to reducedfinancing fees.

 

Costof sales decreased $1,234,000 to $4,749,000 or 20.6% during the Six Month 2005Period from $5,983,000 during the Six Month 2004 Period primarily due toreduced jewelry scrap and car sales. Cost of sales as a percent of total revenue decreased to 48.9% duringthe Six Month 2005 Period as compared to 55.1% for the Six Month 2004 Period primarily due to increased gross profit onmerchandise sales and reduced losses on car title loan repossessions and writeoffs.

 

Storeoperating expenses decreased to $2,860,000 for the Six Month 2005 Period from$3,101,000 during the Six Month 2004 Period primarily due to decreasedpersonnel expenses for  car title andcompliance personnel.  On a ComparableStore basis, store operating expenses were 30.5% of total revenues during theSix Month 2005 Period compared to 31.1% of total revenues during the Six Month2004 Period.

 

Corporate administrative expenses decreased 0.8% to $1,434,000 duringthe Six Month 2005 Period from $1,445,000 during the Six Month 2004 Periodprimarily due to costs related to personnel savings which were offset byincreased costs related to legal and professional fees related to registeringof the Company’s common stock for

 

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trading on the OTC BulletinBoard.  Corporate administrative expensesincreased to 14.7% of total revenues during the Six Month 2005 Period ascompared to 13.3% during the Six Month 2004 Period.

 

Interest expense decreased $5,000 to $320,000 during the Six Month 2005Period as compared to $325,000 during the Six Month 2004 Period primarily dueto reduced line of credit fees.

 

Interest and dividend income for the Six Month 2005 Period decreased66.7% due primarily to the investment of $4,486,000 in common stock of AmericanIronHorse with funds that had been previously invested in marketable securitiesthat provided interest and dividend income to the Company in the Six Month 2004Period.

 

The Company recognized a gain of $239,000 on the sale of securitiesduring the Six Month 2005 Period compared to a gain of $1,946,000 in the SixMonth 2004 Period.

 

The Company recognized income tax expense of $204,000 and $739,000during the Six Month 2005 Period and Six Month 2004 Period, respectively, as aresult of the utilization of net operating loss carryforwards not previouslyrecognized upon the emergence from bankruptcy and is offset with acorresponding increase to paid in capital and, therefore, has no effect on theCompany’s cash flows.

 

LIQUIDITYAND CAPITAL RESOURCES

 

TheCompany’s operations and growth have been financed with working capital, bankborrowings and funds generated from operations.

 

TheCompany’s current credit facility with a finance company in the amount of$4,500,000 matures on June 17, 2007 and bears interest at the prevailing primerate plus 2.0% (the “Credit Facility”). Under the terms of the Credit Facility, the Company is required topledge $1,000,000 of marketable securities to the finance company and tomaintain certain financial ratios and comply with certain technicalcovenants.  The Company was in compliancewith the requirements and covenants as of December 31, 2004.  During the Six Month 2005 Period the Companypaid fees associated with the Credit Facility totaling $18,000.

 

Asof December 31, 2004 the Company’s sources of liquidity were $507,000 in cashand cash equivalents, $993,000 in marketable securities, $58,000 in tradeaccounts receivable, $471,000 in pawn service charges receivable, $4,279,000 inpawn loan receivables, $3,518,000 in inventories and $80,000 available forborrowing under the Credit Facility.

 

TheCompany’s profitability and liquidity is affected by the amount of loansoutstanding, which is controlled in part by the Company’s lendingdecisions.  The Company is able toinfluence the frequency of forfeiture of collateral by increasing or decreasingthe amount loaned in relation to the sales value of the pledged property.  Tighter credit decisions generally result insmaller loans in relation to the estimated sales value of the pledged propertyand can thereby decrease the Company’s aggregate loan balance and,consequently, decrease pawn service charges. Additionally, lower loans in relation to the pledged property’sestimated sales value tend to slightly increase loan redemptions and improvethe Company’s liquidity.  Conversely,providing higher loans in relation to the estimated sales value of the pledgedproperty can result in an increase in the Company’s pawn service chargeincome.  Higher average loan balances canalso result in a slight increase in loan forfeitures, which increases thequantity of goods on hand and, unless the Company increases inventory turnover,reduces the Company’s liquidity.

 

TheCompany believes it has sufficient working capital to fund its currentoperations for Fiscal 2005 and to expand through the acquisition of new storesand other businesses.  The Company’sability to expand through the acquisition of new stores and other businesseswill be dependent on its ability to have sufficient availability under itsCredit Facility.

 

TheSeries A Preferred Stock must be redeemed for cash at $5.00 per share by theCompany beginning April 30, 2005 in amounts of at least $500,000 per year.  Each April 30 thereafter through 2009 anadditional 100,000 shares must be redeemed for cash at $5.00 per share.  On April 30, 2010 any unredeemed shares mustbe redeemed for cash at $5.00 per share plus any accrued and unpaid dividends.

 

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**ITEM 3****.**          **CONTROLS AND PROCEDURES**

 

Under the supervision of, and with theparticipation of management, including the Chief Executive Officer and ChiefFinancial Officer, the Company has evaluated its disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of theperiod covered by this report as required by Rules 13a-15(b) and 15d-15(b)of the Exchange Act. Based on this evaluation, the Company has concluded thatits disclosure controls and procedures were operating effectively as designed.As required, the Company will continue to evaluate the effectiveness of thesecontrols and procedures on a quarterly basis.

 

There were no changes in the Company’sinternal controls over financial reporting (as defined in Rules 13a-15(f)and 15d-15(f) of the Exchange Act) during its most recently completed fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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** **

**PART II**

 

**ITEM 2.**          **UNREGISTERED****SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

In October and November 2004 the Company issued an aggregate of$225,000 in original principal amount of 8% Limited Recourse SecuredConvertible Subordinated Notes due 2014 to three individual investors (the “ConvertibleNotes”), as follows:

 
| **Original  Issuance Date** | ** ** | **Principal  amount** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| 10/08/04                    |       | $                     | 100,000    |   |
| 11/04/04                    |       | $                     | 25,000     |   |
| 11/17/04                    |       | $                     | 100,000    |   |

 

The foregoing Convertible Notes were sold pursuant to an ongoingprivate offering of up to $20,000,000 in original principal amount ofConvertible Notes by the Company (the “Offering”).  The Convertible Notes are being offered onlyto “accredited investors” as defined in Rule 501(a) of Regulation D promulgatedunder the Securities Act of 1933, as amended (the “Securities Act of 1933”).

 

The Convertible Notes are being offered on a best efforts basis byMassie Capital, Ltd. (the “Selling Agent”), a licensed member of the NationalAssociation of Securities Dealers, Inc. The Company will pay a commission of 9% of the selling price of theConvertible Notes to the Selling Agent. In addition to the cash commission, the Company will issue to theSelling Agent for each $10,000 in principal amount of Convertible Notes sold,100 warrants (“Selling Agent’s Warrants”), each exercisable to purchase oneshare of the Company’s Common Stock at $11.00 per share.  The Selling Agent’s Warrants will expireseven years from the date of issuance. The Selling Agent may distribute a portion of the cash commission andSelling Agent’s Warrants to soliciting broker-dealers who participate in theOffering.

 

The Convertible Notes are convertible at the option of the holders intoshares of Common Stock of the Company, at a conversion rate of 100 shares ofCommon Stock per $1,000 principal amount of Convertible Notes, subject toadjustment upon certain events.  TheConvertible Notes are convertible at any time prior to the close of business onDecember 31, 2014, unless previously redeemed, at the conversion rate set forthabove.  Holders of Convertible Notescalled for redemption will be entitled to convert the Convertible Notes up toand including, but not after, the business day immediately before the datefixed for redemption.

 

The foregoing issuances were made in reliance on Rule 506 of RegulationD promulgated under the Securities Act of 1933.

 

**ITEM 6.**          **EXHIBITS**

 
| **Number** | ** ** | **Description**                                                                                                                                       |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                  |
| 10.1       |       | Amendment Number Two to Xponential, Inc. Capital Incentive Program *                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                            |
| 31.1       |       | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)  or 15d-14(a) under the Securities Exchange Act of 1934, as amended *             |
|       |       |                                                                                                                                                  |
| 31.2       |       | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)  or 15d-14(a) under the Securities Exchange Act of 1934, as amended *             |
|       |       |                                                                                                                                                  |
| 32.1       |       | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 * |
|       |       |                                                                                                                                                  |
| 32.2       |       | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 * |

 

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*              Filed herewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|              |   | XPONENTIAL, INC. (Registrant)         |
|-------------------|--------|---------------------------------------|
|              |   |                                  |
| February14,  2005 | By:    | /s/  Robert W. Schleizer              |   |
|              |   | Robert W. Schleizer, Executive Vice   |
|              |   | President and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                     |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                          |
| 10.1       |       | Amendment  Number Two to Xponential, Inc. Capital Incentive Program                                                                                 |
|       |       |                                                                                                                                                |
| 31.1       |       | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the  Securities Exchange Act of 1934, as amended            |
|       |       |                                                                                                                                                |
| 31.2       |       | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the  Securities Exchange Act of 1934, as amended            |
|       |       |                                                                                                                                                |
| 32.1       |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|       |       |                                                                                                                                                |
| 32.2       |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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