**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**ý****        ****QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**for the quarterly period endedMarch 31, 2005.**

 

**o****        ****TRANSITIONREPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**for the transition period from         to         .**

 

**CommissionFile No. 1-13919**

 

**Xponential, Inc.**

(Exact name of smallbusiness issuer as specified in its charter)

 
| **Delaware**** **                                           | ** ** | **75-2520896**** **              |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**6400Atlantic Boulevard, Suite 190, Norcross, Georgia  30080**

(Address of principalexecutive offices)

 

**(678)720-0660**

(Issuer’s telephonenumber)

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days Yes ý No o

 

Check whether the registrant filed alldocuments and reports required to be filed by Section 12, 13 or 15(d) ofthe Exchange Act after distribution of securities under a plan confirmed by acourt. Yes ý No o

 

The Company has 2,380,804 shares ofCommon Stock, par value $0.01 per share, outstanding as of May 5, 2005.

 

Transitional Small Business DisclosureFormat (Check one):  Yes o No ý

 

 

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**XPONENTIAL, INC.**

 

**INDEX**

 
| PART I -  FINANCIAL INFORMATION  | ** **                                                                                    |
|---------------------------------------|-----------------------------------------------------------------------------------------------|
|                                  |                                                                                          |   |
| **Item 1**                            | Consolidated  Financial Statements                                                            |   |
|                                  |                                                                                          |   |
|                                  | Consolidated Balance Sheets as of March 31, 2005 and  June 30, 2004                 |   |
|                                  |                                                                                          |   |
|                                  | Consolidated Statements of Income for the  Nine Months Ended March 31, 2005 and 2004     |   |
|                                  |                                                                                          |   |
|                                  | Consolidated Statements of Income for the  Three Months Ended March 31, 2005 and 2004    |   |
|                                  |                                                                                          |   |
|                                  | Consolidated Statements of Cash Flows for  the Nine Months Ended March 31, 2005 and 2004 |   |
|                                  |                                                                                          |   |
|                                  | 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 4**                            | Submission  of Matters to a Vote of Security Holders                                          |   |
|                                  |                                                                                          |   |
| **Item 6**                            | Exhibits                                                                                      |   |

 

2

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**ITEM 1.****  CONSOLIDATED FINANCIALSTATEMENTS**

 

**XPONENTIAL, INC. AND SUBSIDIARIES**

Consolidated Balance Sheets

(In thousands, except share and per sharedata)

 
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **March 31, 2005** | ** ** | **June 30, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **(Unaudited)**         | ** ** | ** **             | ** ** |
| Assets                                                                                                                                                                                                                                                                                      |       |                    |       |                   |       |
| Current assets:                                                                                                                                                                                                                                                                             |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                   |       | $                       | 1,486      |                   | $          | 206 |   |
| Accounts receivable                                                                                                                                                                                                                                                                         |       | 190                     |       | 73                     |       |
| Pawn service charges receivable                                                                                                                                                                                                                                                             |       | 434                     |       | 489                    |       |
| Pawn loans                                                                                                                                                                                                                                                                                  |       | 3,942                   |       | 4,449                  |       |
| Inventories, net                                                                                                                                                                                                                                                                            |       | 3,485                   |       | 2,968                  |       |
| Investments                                                                                                                                                                                                                                                                                 |       | 1,159                   |       | 3,017                  |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                   |       | 234                     |       | 275                    |       |
| Total current assets                                                                                                                                                                                                                                                                        |       | 10,930                  |       | 11,477                 |       |
|                                                                                                                                                                                                                                                                                        |       |                    |       |                   |       |
| Property and equipment, net                                                                                                                                                                                                                                                                 |       | 873                     |       | 869                    |       |
| Intangible assets, net of amortization of  $72 and $42 at March 31, 2005 and June 30, 2004, respectively                                                                                                                                                                          |       | 6                       |       | 35                     |       |
| Investments-restricted                                                                                                                                                                                                                                                                      |       | 1,000                   |       | —                 |       |
| Investment in American IronHorse Motorcycle  Company, Inc.                                                                                                                                                                                                                             |       | 4,821                   |       | 3,018                  |       |
| Other assets                                                                                                                                                                                                                                                                                |       | 524                     |       | 155                    |       |
| Total assets                                                                                                                                                                                                                                                                                |       | $                       | 18,154     |                   | $          | 15,554 |   |
|                                                                                                                                                                                                                                                                                        |       |                    |       |                   |       |
| Liabilities and Stockholders’ Equity                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                                                                                       |       |                    |       |                   |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                                                                                    |       | $                       | 731        |                   | $          | 696 |   |
| Current installments of notes payable                                                                                                                                                                                                                                                       |       | 359                     |       | 121                    |       |
| Current amount due of redeemable preferred  stock – Series A; shares subject to mandatory redemption; par value  $0.01; 5% cumulative dividend, liquidation preference $5.00 per share;  1,071,636 shares issued and outstanding at March 31, 2005 and  June 30, 2004   |       | 500                     |       | 500                    |       |
| Total current liabilities                                                                                                                                                                                                                                                                   |       | 1,590                   |       | 1,317                  |       |
| Long term  liabilities                                                                                                                                                                                                                                                                      |       |                    |       |                   |       |
| Notes payable – net of current portion                                                                                                                                                                                                                                                 |       | 5,134                   |       | 3,050                  |       |
| Redeemable preferred stock – Series A;  shares subject to mandatory redemption; par value $0.01; 5% cumulative  dividend, liquidation preference $5.00 per share; 1,071,636 shares issued and  outstanding at March 31, 2005 and June 30, 2004, net of current  portion |       | 4,858                   |       | 4,858                  |       |
| Total long term liabilities                                                                                                                                                                                                                                                                 |       | 9,992                   |       | 7,908                  |       |
| Total liabilities                                                                                                                                                                                                                                                                           |       | 11,582                  |       | 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 March 31, 2005 and June 30, 2004                                                                                           |       | 5                       |       | 5                      |       |
| Common stock $0.01 par value; authorized  10,000,000 shares, issued 2,380,804 as of March 31, 2005 and 2,344,206  as of June 30, 2004                                                                                                                                             |       | 24                      |       | 24                     |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                  |       | 5,628                   |       | 5,319                  |       |
| Retained earnings                                                                                                                                                                                                                                                                           |       | 926                     |       | 740                    |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                                                      |       | 29                      |       | 281                    |       |
| Less treasury stock, at cost; 25,000 common  shares at March 31, 2005 and June 30, 2004, respectively                                                                                                                                                                             |       | (40                     | )          | (40                    | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                             |       | 6,572                   |       | 6,329                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                             |       | $                       | 18,154     |                   | $          | 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)**                                                                                      | ** ** | **Nine Months Ended  March 31, 2005** | ** ** | **Nine Months Ended  March 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| Revenues:                                                                                                                       |       |                                       |       |                                       |       |
| Merchandise sales                                                                                                               |       | $                                          | 9,807      |                                       | $          | 10,715 |   |
| Pawn service charges and related fee income                                                                                     |       | 4,635                                      |       | 5,102                                      |       |
| Management advisory and related fee income                                                                                      |       | 128                                        |       | 301                                        |       |
| Total revenues                                                                                                                  |       | 14,570                                     |       | 16,118                                     |       |
|                                                                                                                            |       |                                       |       |                                       |       |
| Expenses:                                                                                                                       |       |                                       |       |                                       |       |
| Cost of sales                                                                                                                   |       | 7,208                                      |       | 8,936                                      |       |
| Store operating expenses                                                                                                        |       | 4,267                                      |       | 4,680                                      |       |
| Corporate administrative expenses                                                                                               |       | 2,198                                      |       | 2,212                                      |       |
| Depreciation and amortization                                                                                                   |       | 324                                        |       | 355                                        |       |
| Total expenses                                                                                                                  |       | 13,997                                     |       | 16,183                                     |       |
| Operating income (loss)                                                                                                         |       | 573                                        |       | (65                                        | )          |
| Interest and dividend income                                                                                                    |       | 131                                        |       | 319                                        |       |
| Interest expense including preferred  dividends (Series A) of $201 for the nine months ended March 31,  2005 and 2004 |       | (494                                       | )          | (523                                       | )          |
| Gain on sale of investments                                                                                                     |       | 317                                        |       | 2,018                                      |       |
| Net income before taxes                                                                                                         |       | 527                                        |       | 1,749                                      |       |
| Income tax provision                                                                                                            |       | 247                                        |       | 681                                        |       |
| Net income                                                                                                                      |       | 280                                        |       | 1,068                                      |       |
| Preferred stock dividend requirement  (Series B)                                                                           |       | (94                                        | )          | (94                                        | )          |
| Net income allocable to common stockholders                                                                                     |       | $                                          | 186        |                                       | $          | 974 |   |
|                                                                                                                            |       |                                       |       |                                       |       |
| Income per common share (note 4):                                                                                               |       |                                       |       |                                       |       |
|                                                                                                                            |       |                                       |       |                                       |       |
| Basic                                                                                                                           |       | $                                          | 0.08       |                                       | $          | 0.42 |   |
|                                                                                                                            |       |                                       |       |                                       |       |
| Diluted                                                                                                                         |       | $                                          | 0.07       |                                       | $          | 0.26 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

Consolidated Statements of Income

(Unaudited)

 
| ** **                                                                                                                      | ** ** | **Three Months Ended March 31, 2005** | ** ** | **Three Months Ended March 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| Revenues:                                                                                                                       |       |                                       |       |                                       |       |
| Merchandise sales                                                                                                               |       | $                                          | 3,313      |                                       | $          | 3,414 |   |
| Pawn service charges and related fee income                                                                                     |       | 1,493                                      |       | 1,687                                      |       |
| Management advisory and related fee income                                                                                      |       | 43                                         |       | 149                                        |       |
| Total revenues                                                                                                                  |       | 4,849                                      |       | 5,250                                      |       |
|                                                                                                                            |       |                                       |       |                                       |       |
| Expenses:                                                                                                                       |       |                                       |       |                                       |       |
| Cost of sales                                                                                                                   |       | 2,459                                      |       | 2,953                                      |       |
| Store operating expenses                                                                                                        |       | 1,407                                      |       | 1,579                                      |       |
| Corporate administrative expenses                                                                                               |       | 764                                        |       | 767                                        |       |
| Depreciation and amortization                                                                                                   |       | 108                                        |       | 126                                        |       |
| Total expenses                                                                                                                  |       | 4,738                                      |       | 5,425                                      |       |
| Operating income (loss)                                                                                                         |       | 111                                        |       | (175                                       | )          |
| Interest and dividend income                                                                                                    |       | 46                                         |       | 64                                         |       |
| Interest expense including preferred  dividends (Series A) of $67 for the three months ended March 31,  2005 and 2004 |       | (174                                       | )          | (198                                       | )          |
| Gain on sale of investments                                                                                                     |       | 78                                         |       | 72                                         |       |
| Net income (loss) before taxes                                                                                                  |       | 61                                         |       | (237                                       | )          |
| Income tax (provision) benefit                                                                                                  |       | (43                                        | )          | 58                                         |       |
| Net income (loss)                                                                                                               |       | 18                                         |       | (179                                       | )          |
| Preferred stock dividend requirement  (Series B)                                                                           |       | (31                                        | )          | (31                                        | )          |
| Net loss allocable to common stockholders                                                                                       |       | $                                          | (13        | )                                          | $          | (210 | ) |
|                                                                                                                            |       |                                       |       |                                       |       |
| Loss per common share (note 4):                                                                                                 |       |                                       |       |                                       |       |
|                                                                                                                            |       |                                       |       |                                       |       |
| Basic                                                                                                                           |       | $                                          | (0.01      | )                                          | $          | (0.09 | ) |
|                                                                                                                            |       |                                       |       |                                       |       |
| Diluted                                                                                                                         |       | $                                          | (0.01      | )                                          | $          | (0.09 | ) |

 

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  Nine Months Ended**

**March 31, 2005** | ** ** | **For the  Nine Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                           |       |                                                    |       |                                                |       |
| Cash flows from operating activities:                                          |       |                                                    |       |                                                |       |
| Net income                                                                     |       | $                                                       | 280        |                                                | $          | 1,068 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                                                    |       |                                                |       |
| Depreciation and amortization                                                  |       | 324                                                     |       | 355                                                 |       |
| Gain on sale of investments                                                    |       | (317                                                    | )          | (2,018                                              | )          |
| Deferred income tax expense related to  bankruptcy                             |       | 247                                                     |       | 663                                                 |       |
| Changes in operating assets and  liabilities:                                  |       |                                                    |       |                                                |       |
| Accounts receivable                                                            |       | (117                                                    | )          | 109                                                 |       |
| Pawn service charges receivable                                                |       | 55                                                      |       | 20                                                  |       |
| Pawn loans made                                                                |       | (11,533                                                 | )          | (13,496                                             | )          |
| Pawn loans repaid                                                              |       | 5,273                                                   |       | 5,791                                               |       |
| Inventory acquired from loan forfeitures                                       |       | 6,767                                                   |       | 7,890                                               |       |
| Subtotal pawn loans                                                            |       | 507                                                     |       | 185                                                 |       |
| Inventories, net                                                               |       | (517                                                    | )          | (200                                                | )          |
| Prepaid expenses and other current assets                                      |       | 41                                                      |       | (182                                                | )          |
| Accounts payable and accrued liabilities                                       |       | 35                                                      |       | (354                                                | )          |
| Net cash provided by (used in) operating  activities                           |       | 538                                                     |       | (354                                                | )          |
| Cash flows from investing activities:                                          |       |                                                    |       |                                                |       |
| Proceeds from sale of investments                                              |       | 2,049                                                   |       | 8,200                                               |       |
| Purchase of investments                                                        |       | (2,926                                                  | )          | (6,010                                              | )          |
| Purchases of property and equipment                                            |       | (302                                                    | )          | —                                              |       |
| Purchase of other assets                                                       |       | (369                                                    | )          | (338                                                | )          |
| Net cash provided by (used in) investing  activities                           |       | (1,548                                                  | )          | 1,852                                               |       |
| Cash flows from financing activities:                                          |       |                                                    |       |                                                |       |
| Borrowings on notes payable                                                    |       | 10,821                                                  |       | 9,011                                               |       |
| Principal payments on notes payable                                            |       | (8,499                                                  | )          | (10,076                                             | )          |
| Sale of common stock                                                           |       | 62                                                      |       | 281                                                 |       |
| Purchase of treasury stock                                                     |       | —                                                  |       | (40                                                 | )          |
| Dividends paid                                                                 |       | (94                                                     | )          | (94                                                 | )          |
| Net cash provided by (used in) financing  activities                           |       | 2,290                                                   |       | (918                                                | )          |
| Net increase in cash and cash equivalents                                      |       | 1,280                                                   |       | 580                                                 |       |
| Cash and cash equivalents at beginning of  period                              |       | 206                                                     |       | 220                                                 |       |
| Cash and cash equivalents at end of period                                     |       | $                                                       | 1,486      |                                                | $          | 800 |   |
| Supplemental disclosures of cash flow  information -                           |       |                                                    |       |                                                |       |
| Cash paid for interest                                                         |       | $                                                       | 456        |                                                | $          | 440 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

6

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)   Basisof Presentation

 

The consolidated financial statements includethe accounts of Xponential, Inc. and its wholly-owned subsidiaries,Xponential Advisors, Inc., PawnMart, Inc. and Xponential Real EstateHoldings, Inc.  All significantintercompany 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-ownedsubsidiary PawnMart, Inc. (“PawnMart”) is a specialty finance and retailenterprise principally engaged in establishing and operating stores (“pawnshops”) which advance money secured by the pledge of tangible personal propertyand buy and sell pre-owned merchandise. As of March 31, 2005, PawnMart owned and operated 26 stores locatedin Georgia and North Carolina.

 

The financial statements as of March 31,2005 and 2004 and for the three and nine 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 ninemonth periods are not necessarily indicative of the results that may beexpected for the full fiscal year.

 

Certain balances for the periods ended June 30,2004 and March 31, 2004 have been reclassified to conform to current yearpresentation.

 

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 previouslyfiled with the Securities and Exchange Commission.

 

(2)   NotesPayable

 

*Revolving Credit Facility-*

 

PawnMart obtained a revolving credit facilityon 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% (7.75% at March 31, 2005), 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 and adjustments.  The Credit Facility is collateralized bysubstantially all of the unencumbered assets of PawnMart and is guaranteed bythe Company  The Company has pledgedadditional collateral in the form of marketable securities to the Lender in theamount of $1,000,000 to secure the loan. The Company is required to maintain certain financial ratios and complywith certain covenants, including a prohibition against paying cash dividendson its common stock unless specifically approved by the Lender.  At March 31, 2005, $1,421,000 wasoutstanding under the Credit Facility and an additional $1,615,000 wasavailable to borrow pursuant to the available borrowing base. The Company wasin compliance with the financial ratios and other covenants under the CreditFacility at March 31, 2005.

 

*Notes Payable – American IronHorse StockPurchase*

 

On July 25, 2004 the Company purchased100,000 shares of common stock of American IronHorse Motorcycle Company, Inc.from a limited partnership 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, 2004and is included as a liability at March 31, 2005 of $447,000.

 

7

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*8% Limited Recourse Secured ConvertibleSubordinated Notes-*

 

The Company had sold $3,328,000 of its 8% LimitedRecourse Secured Convertible Subordinated Notes as of March 31, 2005.  The notes from the $20 million offeringmature in 2014 and are convertible at a rate of 100 shares of the Company’scommon stock for each $1,000 of principal amount of the notes.  Interest is payable monthly and the principalof the notes is due at maturity.  Thenotes are collateralized by the common stock of the Company’s subsidiary,PawnMart.  The Company has guaranteed theinterest payments for the initial five year term of the notes.

 

(3)   StockOption Plan and Incentive Plan

 

Effective January 1, 2003 the Companyadopted the fair value method defined in SFAS No. 123, “Accounting forStock-Based Compensation,” in accounting for the Company’s stock optionplans.  Previously the Company appliedAccounting Principles Board’s Opinion No. 25 (“APB No. 25”), “Accountingfor Stock Issued to Employees,” and related Interpretations.  SFAS No. 123 indicates that the fairvalue method is the preferable method of accounting, and the Company haselected to apply it for all options granted for the Company.  Under APB No. 25, compensation costsrelated to stock options issued pursuant to compensatory plans are measuredbased on the difference between the quoted market price of the stock at themeasurement date (ordinarily the date of grant) and the exercise price andshould be charged to expense over the periods during which the grantee performsthe related services.

 

The Company adopted its 2003 Stock OptionPlan (“Stock Option Plan”) effective January 1, 2003.  Under the Stock Option Plan, stock optionshave been awarded to directors, officers and employees.  These stock options vest either immediatelyor over a period of two years and expire ten years thereafter.  A total of 675,000 shares of common stock arereserved for grant under the Stock Option Plan. The Company recognized $400 and$1,200 of compensation expense during the three month periods ended March 31,2005 and 2004, respectively, and $1,200 and $3,700 of compensation expense forthe nine month periods ended March 31, 2005 and 2004, respectively, foroptions previously granted.

 

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                          |       | 4,000                  |       | 1.00 |   |
| Outstanding at March 31, 2005 |       | 220,000                |       | $ | 1.13 |   |
|                               |       |                   |       |   |   |
| Exercisable at March 31, 2005 |       | 180,000                |       | $ | 1.17 |   |

 

8

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*Restricted Stock-*

 

The Company has issued 74,856 shares ofrestricted stock under it 2003 Stock Incentive Plan.  The stock vests over a two year period.  The Company recognized compensation expenseof $0 and $18,750 during the three month periods ending March 31, 2005 and2004, respectively, and $53,381 and $54,218 during the nine month periodsending March 31, 2005 and 2004, respectively related to the stock grants.  Effective January 1, 2005, the Companydiscontinued issuing restricted stock under the 2003 Stock Incentive Plan dueto changes to regulations under section 409A of the Internal Revenue Code.

 

(4)   WeightedAverage Shares and Net Income (Loss) Per Common Share

 

Net income per common share is calculated asrequired by FASB Statement of Financial Accounting Standards No. 128, “EarningsPer Share” (“Statement No. 128”). Statement No. 128 requires dual presentation of basic and dilutedearnings per share and reconciliation between the two amounts.  Basic earnings per share excludes dilution,and diluted earnings per share reflects the potential dilution that would occurif securities for the purchase of Common Stock were exercised.  In loss periods, dilutive common equivalentshares are excluded as the effect would be antidilutive.

 

In loss periods, dilutive common equivalentshares are excluded as the effect would be antidilutive.  Thereconciliation of basic and diluted weighted average common shares and thereconciliation for the basic and diluted earnings per common share for the ninemonths ended March 31, 2005 and 2004 is as follows:

 
| **For the Nine Months Ended  March 31, 2005**   | ** ** | **Net Income  Allocable to  Common  Shareholders** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------|------------|
|                                                 |       |                                               |       |       |       |          |       |   |   |
| Basic earnings per common share                      |       | $                                                  | 186,000    |       | 2,356,614  |          | $          | 0.08 |   |
| Assumed conversion of Series B  preferred stock |       | 94,000                                             |       | 1,720,130  |       |          |       |
| Dilutive effect of stock options                     |       | —                                             |       | 73,095     |       |          |       |
| Diluted earnings per common share                    |       | $                                                  | 280,000    |       | 4,149,839  |          | $          | 0.07 |   |

 
| **For the Nine Months Ended  March 31, 2004**   | ** ** | **Net Income  Allocable to  Common  Shareholders** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------|------------|
|                                                 |       |                                               |       |       |       |          |       |   |   |
| Basic earnings per common share                      |       | $                                                  | 974,000    |       | 2,322,862  |          | $          | 0.42 |   |
| Assumed conversion of Series B  preferred stock |       | 94,000                                             |       | 1,720,130  |       |          |       |
| Diluted earnings per common share                    |       | $                                                  | 1,068,000  |       | 4,042,992  |          | $          | 0.26 |   |

 

9

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The Company had stock options outstanding forthe purchase of 220,000 and  236,000common shares as of March 31, 2005 and 2004, respectively. The Company’scommon stock began trading on the Nasdaq OTC Bulletin Board in September 2004.  As of March 31, 2005,  the exercisable stock options were dilutiveas the market value of the Company’s common shares exceeded the strike pricefor the outstanding options. Consequently, for the nine month periods ended March 31,2005, none of the exercisable options to purchase common shares have beenexcluded from the computation.  Thecommon shares issuable upon conversion of the 8% Limited Recourse SecuredConvertible Subordinated Notes are not included in the computation for the ninemonth period end March 31, 2005 because they are antidilutive. For thethree and nine month periods ended March 31, 2004, all outstanding optionsto purchase common shares have been excluded from the computation because thoseoptions are antidilutive.

 

(5)   Investmentsin Marketable Securities

 

Marketable equity securities have beencategorized as available-for-sale and carried at fair value.  The Company does not own any securitiesclassified as held-to-maturity securities. Unrealized gains and losses for available-for-sale securities areincluded as a component of shareholders’ equity net of tax until realized.  Realized gains and losses on the sale ofsecurities are based on the specific identification method.  The Company continually reviews itsinvestments to determine whether a decline in fair value below the cost basisis other than temporary.  If the declinein the fair value is judged to be other than temporary, the cost basis of thesecurity is written down to fair value and the amount of the write-down isincluded in the consolidated statement of operations.

 

As of March 31, 2005 the Company ownedthe following marketable securities:

 
| **(in thousands)** | ** ** | **Cost** | ** ** | **Unrealized  Gain/(Loss)** | ** ** | **Market Value** | ** ** |
|--------------------|------------|----------|------------|-----------------------------|------------|------------------|------------|
|               |       |     |       |                        |       |             |       |
| Stocks             |       | $        | 7          |                        | (6         | )                | 1          |   |
| Bonds              |       | 2,123    |       | 35                          |       | 2,158            |       |
|               |       |     |       |                        |       |             |       |
| Total              |       | $        | 2,130      |                        | 29         |             | 2,159      |   |

 

In October 2004, the Company pledged$1,000,000 of its marketable securities as additional collateral for theCompany’s Credit Facility.  The$1,000,000 in marketable securities is reported as a long term asset on theCompany’s balance sheet.

 

As of June 30, 2004, the Company ownedthe following 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      |   |

 

10

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(6)   ComprehensiveIncome

 

Comprehensive income is as follows:

 
| **(in thousands)**                                                     | ** ** | **For the Three Month  Period Ended  March 31, 2005** | ** ** | **For the Three Month  Period Ended  March 31, 2004** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                                   |       |                                                       |       |                                                       |       |
| Net income (loss)                                                      |       | $                                                          | 18         |                                                       | $          | (179 | ) |
| Unrealized loss from available for sale  securities                    |       | (170                                                       | )          | (88                                                        | )          |
| Reclassification of realized gains, net of  tax included in net income |       | (46                                                        | )          | (40                                                        | )          |
|                                                                   |       |                                                       |       |                                                       |       |
| Comprehensive income (loss)                                            |       | $                                                          | (198       | )                                                          | $          | (307 | ) |

 
| **(in thousands)**                                                     | ** ** | **For the Nine Month  Period Ended  March 31, 2005** | ** ** | **For the Nine Month  Period Ended  March 31, 2004** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                                   |       |                                                      |       |                                                      |       |
| Net income                                                             |       | $                                                         | 280        |                                                      | $          | 1,068 |   |
| Unrealized loss from available for sale  securities                    |       | (252                                                      | )          | (1,511                                                    | )          |
| Reclassification of realized gains, net of  tax included in net income |       | (143                                                      | )          | (1,142                                                    | )          |
|                                                                   |       |                                                      |       |                                                      |       |
| Comprehensive income (loss)                                            |       | $                                                         | (115       | )                                                         | $          | (1,585 | ) |

 

(7)   Investmentin American IronHorse Motorcycle Company, Inc.

 

The Company has invested $4,821,000 inAmerican IronHorse Motorcycle Company, Inc. (“American IronHorse”) as of March 31,2005.  The Company owns 15.05% of thecommon stock of American IronHorse and accounts for this investment on the costmethod.**** $600,000 of the investment is financed by theseller with a promissory note at 5% interest per annum requiring monthlypayments of principal and interest of $21,372 for 36 months which began August 25,2004 and is included as a liability at March 31, 2005 of $447,000.  It is possible the Company may increase itsinvestment in American IronHorse, which could result in the requirement to usethe equity method of accounting.

 

Following is summary unaudited financial information for AmericanIronHorse as of March 31, 2005 and March 31, 2004:

 
| **(in thousands)**        | ** ** | **As of  March 31, 2005** | ** ** | **As of  December 31, 2004** | ** ** |
|---------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **(Unaudited)**                | ** ** | **(Unaudited)**                   | ** ** |
|                      |       |                           |       |                              |       |
| Current assets            |       | $                              | 40,200     |                              | $          | 30,000 |   |
| Current liabilities       |       | $                              | 32,500     |                              | $          | 22,800 |   |
| ** **                | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Total assets              |       | $                              | 44,900     |                              | $          | 34,600 |   |
| Total liabilities         |       | 35,100                         |       | 25,500                            |       |
| Stockholders’ equity |       | $                              | 9,800      |                              | $          | 9,100 |   |

 

11

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| **(in thousands)** | ** ** | **For the Three  Months Ended  March 31, 2005** | ** ** | **For the  Year Ended  December 31, 2004** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **         | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                 | ** ** |
|               |       |                                                 |       |                                            |       |
| Total revenue      |       | $                                                    | 23,000     |                                            | $          | 71,400 |   |
| Net income (loss)  |       | $                                                    | 600        |                                            | $          | (1.400 | ) |

 

(8)   OperatingSegment Information

 

The Company has two reportable businesssegments; one in the pawn lending industry and one for its investment,management and advisory services. PawnMart, Inc. operates 26 pawn shops in Georgia and NorthCarolina.  Xponential Advisors, Inc.provided management and advisory services to American IronHorse through March 31,2005.  Xponential Advisors, Inc.directs the investment of the Company’s available funds in marketablesecurities and other investment opportunities. In February 2005, theCompany formed a new subsidiary, Xponential Real Estate Holdings, Inc.,which had no activity during the reporting period.

 

Operating segment data for the three monthsended March 31, 2005 and 2004 is set forth below (in thousands):

 
| **Three Months Ended  March 31, 2005** | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 3,313      |                                               | $          | —           |       | $ | 3,313 |   |
| Pawn service charges and related fee income |       | 1,493             |       | —                                             |       | 1,493            |       |
| Management advisory and related fee income  |       | —            |       | 43                                                 |       | 43               |       |
| **Total Revenue**                           |       | 4,806             |       | 43                                                 |       | 4,849            |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 2,459             |       | —                                             |       | 2,459            |       |
| Store operating expenses                    |       | 1,407             |       | —                                             |       | 1,407            |       |
| Corporate administrative expenses           |       | 465               |       | 299                                                |       | 764              |       |
| Depreciation and amortization               |       | 103               |       | 5                                                  |       | 108              |       |
| **Operating income (loss)**                 |       | 372               |       | (261                                               | )          | 111              |       |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | 1                 |       | 45                                                 |       | 46               |       |
| Interest expense                            |       | (75               | )          | (99                                                | )          | (174             | )          |
| Gain on sale of investments                 |       | —            |       | 78                                                 |       | 78               |       |
| **Net income (loss) before taxes**          |       | $                 | 298        |                                               | $          | (237             | )          | $ | 61 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 9,348      |                                               | $          | 8,806            |       | $ | 18,154 |   |

 

12

----

 
| **Three Months Ended  March 31, 2004** | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 3,414      |                                               | $          | —           |       | $ | 3,414 |   |
| Pawn service charges and related fee income |       | 1,687             |       | —                                             |       | 1,687            |       |
| Management advisory and related fee income  |       | —            |       | 149                                                |       | 149              |       |
| **Total Revenue**                           |       | 5,101             |       | 149                                                |       | 5,250            |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 2,953             |       | —                                             |       | 2,953            |       |
| Store operating expenses                    |       | 1,579             |       | —                                             |       | 1,579            |       |
| Corporate administrative expenses           |       | 468               |       | 299                                                |       | 767              |       |
| Depreciation and amortization               |       | 124               |       | 2                                                  |       | 126              |       |
| **Operating loss**                          |       | (23               | )          | (152                                               | )          | (175             | )          |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | —            |       | 64                                                 |       | 64               |       |
| Interest expense                            |       | (123              | )          | (75                                                | )          | (198             | )          |
| Gain on sale of investments                 |       | —            |       | 72                                                 |       | 72               |       |
| **Net loss before taxes**                   |       | $                 | (146       | )                                                  | $          | (91              | )          | $ | (237 | ) |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 9,087      |                                               | $          | 6,886            |       | $ | 15,973 |   |

 

Operating segment data for the nine monthsended March 31, 2005 and 2004 is set forth below (in thousands):

 
| **Nine Months Ended  March 31, 2005**  | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 9,807      |                                               | $          | —           |       | $ | 9,807 |   |
| Pawn service charges and related fee income |       | 4,635             |       | —                                             |       | 4,635            |       |
| Management advisory and related fee income  |       | —            |       | 128                                                |       | 128              |       |
| **Total Revenue**                           |       | 14,442            |       | 128                                                |       | 14,570           |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 7,208             |       | —                                             |       | 7,208            |       |
| Store operating expenses                    |       | 4,267             |       | —                                             |       | 4,267            |       |
| Corporate administrative expenses           |       | 1,398             |       | 800                                                |       | 2,198            |       |
| Depreciation and amortization               |       | 319               |       | 5                                                  |       | 324              |       |
| **Operating income (loss)**                 |       | 1,250             |       | (677                                               | )          | 573              |       |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | 2                 |       | 129                                                |       | 131              |       |
| Interest expense                            |       | (233              | )          | (261                                               | )          | (494             | )          |
| Gain on sale of investments                 |       | —            |       | 317                                                |       | 317              |       |
| **Net income (loss) before taxes**          |       | $                 | 1,019      |                                               | $          | (492             | )          | $ | 527 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 9,348      |                                               | $          | 8,806            |       | $ | 18,154 |   |

 

13

----

 
| **Nine Months Ended  March 31, 2004**  | ** ** | **Pawn  Lending** | ** ** | **Investment,  Management and  Advisory Services** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------------------------------------|------------|------------------|------------|
| **Revenue:**                                |       |              |       |                                               |       |             |       |
| Merchandise sales                           |       | $                 | 10,715     |                                               | $          | —           |       | $ | 10,715 |   |
| Pawn service charges and related fee income |       | 5,102             |       | —                                             |       | 5,102            |       |
| Management advisory and related fee income  |       | —            |       | 301                                                |       | 301              |       |
| **Total Revenue**                           |       | 15,817            |       | 301                                                |       | 16,118           |       |
|                                        |       |              |       |                                               |       |             |       |
| **Expenses:**                               |       |              |       |                                               |       |             |       |
| Cost of sales                               |       | 8,936             |       | —                                             |       | 8,936            |       |
| Store operating expenses                    |       | 4,680             |       | —                                             |       | 4,680            |       |
| Corporate administrative expenses           |       | 1,405             |       | 807                                                |       | 2,212            |       |
| Depreciation and amortization               |       | 349               |       | 6                                                  |       | 355              |       |
| **Operating income (loss)**                 |       | 447               |       | (512                                               | )          | (65              | )          |
|                                        |       |              |       |                                               |       |             |       |
| Interest and dividend income                |       | —            |       | 319                                                |       | 319              |       |
| Interest expense                            |       | (298              | )          | (225                                               | )          | (523             | )          |
| Gain on sale of investments                 |       | —            |       | 2,018                                              |       | 2,018            |       |
| **Net income before taxes**                 |       | $                 | 149        |                                               | $          | 1,600            |       | $ | 1,749 |   |
|                                        |       |              |       |                                               |       |             |       |
| **Total Assets**                            |       | $                 | 9,087      |                                               | $          | 6,886            |       | $ | 15,973 |   |

 

14

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

 

### *Statements appearing in the following discussion thatare not historical facts are forward-looking statements (“forward-lookingstatements”) within the meaning of Section 27A of the Securities Act of1933, 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 bythose sections.  Such forward-lookingstatements are necessarily estimates reflecting the best judgment of theCompany’s management based upon current information and involve known and unknownrisks, uncertainties and other factors which may cause the actual results,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 ExchangeCommission.  These risks, uncertaintiesand other factors should not be construed as exhaustive and the Company doesnot undertake, and specifically disclaims any obligation, to update anyforward-looking statements to reflect occurrences or unanticipated events orcircumstances after the date of 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 Form 10-KSBfor the fiscal year ended June 30, 2004.*

 

GENERAL

 

Xponential, Inc. (the “Company”) is a holdingcompany.  Its wholly owned subsidiary,PawnMart, Inc. (“PawnMart”), is a specialty finance and retail businessprincipally engaged in establishing and operating pawn shops which advance moneysecured by the pledge of tangible personal property and sell pre-ownedmerchandise to value-conscious consumers. PawnMart generates income through collection of a monthly service chargefrom advancing money to individuals based primarily upon the estimated resalevalue of pledged personal property such as jewelry, consumer electronics,tools, musical instruments, automobiles and other miscellaneous items andthrough profit realized on the retail sale of the unredeemed or other purchasedpre-owned merchandise.

 

The Company also has invested in American IronHorseMotorcycle Company, Inc. (“American IronHorse”), a Texas corporation thatmanufactures specialty motorcycles.  At March 31,2005 the Company and its wholly-owned subsidiary, Xponential Advisors, Inc.,collectively owned 798,659 shares (exclusive of warrants to purchase 100,000shares of common stock of American IronHorse), or 15.1% of the outstandingcommon stock of American IronHorse (which would be reduced to 11.5% assumingconversion and exercise of all outstanding convertible securities).

 

At March 31,2005 directors and officers of the Company, directly and through affiliates,collectively owned an additional 964,361 shares (exclusive of warrants topurchase 208,707 shares and options to purchase 34,166 shares of common stockof American IronHorse), or 18.2% of the outstanding common stock of AmericanIronHorse (which would be reduced to 15.4% assuming conversion and exercise ofall outstanding convertible securities). These include shares of common stock and options and warrants topurchase common stock owned by Jeffrey Cummer, Carroll Dawson, Dwayne Moyers,Investors Strategic Partners I, Ltd., and Sanders Morris Harris Group Inc.  Mr. Moyers is also the chairman of theboard of directors of American IronHorse.

 

The Company also provided management advisory servicesin conjunction with its financing and investment in American IronHorse.  Xponential Advisors, Inc. was paid amanagement fee of twenty-five (25) shares of common stock of American IronHorsefor each hour worked by Robert W. Schleizer up to a maximum of 24 hours perweek for services provided.  The advisoryrole of Mr. Schleizer with American IronHorse ended on March 31,2005.

 

The Company’s total revenues are derived primarilyfrom service charges on loans and the proceeds from the sales of merchandiseinventory.  The Company’s pawn loans aregenerally made on the pledge of tangible personal property for one month, withan automatic extension 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 value ofthe forfeited collateral (inventory), which is recovered through subsequentsales.

 

15

----

 

Selected elements of the Company’s unaudited statements of operationsare shown below for the three months ended March 31, 2005 and March 31,2004 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 fiscalyear ended June 30, 2004.

 
| ** **                                       | ** ** | **For the  Three Months Ended  March 31, 2005** | ** ** | **For the  Three Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
|                                             |       |                                                 |       |                                                 |       |
| Merchandise sales                                |       | 68.3                                                 | %          | 65.0                                                 | %          |
| Pawn service charges and related fee income      |       | 30.8                                                 |       | 32.1                                                 |       |
| Management advisory fees and related fee  income |       | 0.9                                                  |       | 2.9                                                  |       |
| Total revenues                                   |       | 100.0                                                |       | 100.0                                                |       |
| Cost of sales                                    |       | 50.7                                                 |       | 56.2                                                 |       |
| Store operating expenses                         |       | 29.0                                                 |       | 30.1                                                 |       |
| Corporate administrative expenses                |       | 15.8                                                 |       | 14.6                                                 |       |
| Depreciation and amortization                    |       | 2.2                                                  |       | 2.4                                                  |       |
| Operating income                                 |       | 2.3                                                  |       | (3.3                                                 | )          |
| Interest and dividend income                     |       | 0.9                                                  |       | 1.2                                                  |       |
| Interest expense                                 |       | (3.6                                                 | )          | (3.8                                                 | )          |
| Gain on sale of marketable securities            |       | 1.6                                                  |       | 1.4                                                  |       |
| Income tax provision (benefit)                   |       | (0.9                                                 | )          | 1.1                                                  |       |
| Net income before income taxes                   |       | 0.3                                                  | %          | (3.4                                                 | )%         |

** **

**RESULTS OF OPERATIONS**

** **

*Three Months Ended March 31,2005 Compared to Three Months Ended March 31, 2004*

* *

Total revenues decreased 7.6% to $4,849,000 during thethree months ended March 31, 2005 (the “Three Month 2005 Period”) ascompared to $5,250,000 during the three months ended March 31, 2004 (the “ThreeMonth 2004 Period”).  The overalldecrease was attributable primarily to decreases in pawn service charges on carloans.  Stores that remained open for thefull twelve months or more as of March 31, 2005 (the “Comparable Stores”)experienced a net decrease in revenues of $ 171,000, or 3.7%.

 

Merchandise sales decreased $101,000 or 3.0% to $3,313,000 during theThree Month 2005 Period from $3,414,000 during the Three Month 2004 Periodprimarily due to decreased car and jewelry scrap sales.  Sales in Comparable Stores for the ThreeMonth 2005 Period decreased $27,000, or 0.9%.

 

Pawn service charges decreased $194,000 or 11.5% to $1,493,000 duringthe Three Month 2005 Period from $1,687,000 during the Three Month 2004 Periodprimarily due to decreased pawn service charges on car loans, which decreasedto $334,000 during the Three Month 2005 Period compared to $602,000 during theThree Month 2004 Period due to a change in advance rates on car titleloans.  Pawn service charges fromComparable Stores decreased $144,000 or 9.0% for the Three Month 2005 Period ascompared to the Three Month 2004 Period.

 

Management advisory income decreased to $43,000 during the Three Month2005 Period from $149,000 during the Three Month 2004 Period due to reducedfinancing fees.

 

Cost of sales decreased $494,000 to $2,459,000 or16.7% during the Three Month 2005 Period from $2,953,000 during the Three Month2004 Period primarily due to reduced jewelry, jewelry scrap, and carsales.  Cost of sales as a percent oftotal revenue decreased to 50.7% during the Three Month 2005 Period as comparedto 56.2%  for the Three Month 2004 Periodprimarily due to improved gross profit on merchandise sales and reduced losseson car title loans and sales of repossessed cars.

 

Store operating expenses decreased $172,000 or 10.9%to $1,407,000 for the Three Month 2005 Period from $1,579,000 during the ThreeMonth 2004 Period primarily due to decreased personnel expenses for car titleand compliance personnel.  On aComparable Store basis, store operating expenses were  30.6% of total revenues during the ThreeMonth 2005 Period compared to 31.2% of total revenues during the Three Month2004 Period.

 

16

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Corporate administrative expenses decreased 0.4% to $764,000 during theThree Month 2005 Period from $767,000 during the Three Month 2004 Periodprimarily due reduced personnel costs which are offset by costs related tolegal and professional fees related to registering the Company’s common stockfor trading on the OTC Bulletin Board. Corporate administrative expenses increased to 15.8% of total revenuesduring the Three Month 2005 Period as compared to 14.6% during the Three Month2004 Period.

 

Interest expense decreased $24,000 to $174,000 during the Three Month2005 Period as compared $198,000 during the Three Month 2004 Period primarilydue to increased interest expense related to notes payable for the purchase ofAmerican IronHorse common stock and interest expense on the 8% Limited RecourseSecured Convertible Subordinated Notes which was offset by a reduction in theLine of Credit.

 

Interest and dividend income for the Three Month 2005 Period decreased28.1% due primarily to the investment of $4,821,000 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 recognized a gain of $78,000 on the sale of securitiesduring the Three Month 2005 Period compared to a gain of $72,000 in the ThreeMonth 2004 Period.

 

The Company recognized income tax expense (benefit) of $43,000 and($58,000) during the Three Month 2005 Period and Three Month 2004 Period,respectively, as a result of the utilization of net operating losscarryforwards not previously recognized upon the emergence from bankruptcy andis offset with a corresponding increase (decrease) to paid in capital and,therefore, has no effect on the Company’s cash flows.

 

*Nine Months Ended March 31,2005 Compared to Nine Months Ended March 31, 2004*

* *

Total revenues decreased 9.6% to $14,570,000 duringthe nine months ended March 31, 2005 (the “Nine Month 2005 Period”) ascompared to $16,118,000 during the nine months ended March 31, 2004 (the “NineMonth 2004 Period”).  The overalldecrease was attributable primarily to decreases in pawn service charges on carloans and decreased jewelry scrap sales. Stores that remained open for the full twelve months or more as of March 31,2005 (the “Comparable Stores”) experienced a net decrease in revenues of$465,000, or 3.3%.

 

Merchandise sales decreased 8.5% to $9,807,000 during the Nine Month2005 Period from $10,715,000 during the Nine Month 2004 Period primarily due todecreased car and jewelry scrap sales.  Salesin Comparable Stores for the Nine Month 2005 Period decreased $118,000, or1.3%.

 

Pawn service charges decreased $467,000 or 9.2% to $4,635,000 duringthe Nine Month 2005 Period from $5,102,000 during the Nine Month 2004 Periodprimarily due to decreased pawn service charges on car loans which decreased to$1,102,000 during the Nine Month 2005 Period compared to $1,668,000 during theNine Month 2004 Period due to a change in advance rates on car titleloans.  Pawn service charges fromComparable Stores decreased $348,000 or 7.1% for the Nine Month 2005 Period ascompared to the Nine Month 2004 Period.

 

Management advisory income decreased to $128,000 during the Nine Month2005 Period from $301,000 during the Nine Month 2004 Period due to reducedfinancing fees.

 

Cost of sales decreased $1,728,000 to $7,208,000 or19.3% during the Nine Month 2005 Period from $8,936,000 during the Nine Month2004 Period primarily due to reduced jewelry, jewelry scrap, and carsales.  Cost of sales as a percent oftotal revenue decreased to 49.5% during the Nine Month 2005 Period as comparedto 55.4%  for the Nine Month 2004 Periodprimarily due to increased gross profit on merchandise sales and reduced losseson car title loan repossessions and write offs.

 

Store operating expenses decreased to $4,267,000 forthe Nine Month 2005 Period from $4,680,000 during the Nine Month 2004 Periodprimarily due to decreased personnel expenses for car title and compliancepersonnel.  On a Comparable Store basis,store operating expenses were 30.7% of total revenues during the Nine Month2005 Period compared to 31.5% of total revenues during the Nine Month 2004Period.

 

Corporate administrative expenses decreased 0.6% to $2,198,000 duringthe Nine Month 2005 Period from $2,212,000 during the Nine Month 2004 Periodprimarily due to costs related to personnel savings which were offset byincreased costs related to legal and professional fees related to registeringthe Company’s common stock for

 

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trading on the OTC Bulletin Board and the new Credit Facility.  Corporate administrative expenses increasedto 15.1% of total revenues during the Nine Month 2005 Period as compared to13.7% during the Nine Month 2004 Period.

 

Interest expense decreased $29,000 to $494,000 during the Nine Month2005 Period as compared to $523,000 during the Nine Month 2004 Period primarilydue to reduced line of credit interest offset by notes payable interest for thepurchase of American IronHorse common stock.

 

Interest and dividend income for the Nine Month 2005 Period decreased58.9% due primarily to the investment of $4,821,000 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 Nine Month2004 Period.

 

The Company recognized a gain of $317,000 on the sale of securitiesduring the Nine Month 2005 Period compared to a gain of $2,018,000 in the NineMonth 2004 Period.

 

The Company recognized income tax expense of $247,000 and $681,000during the Nine Month 2005 Period and Nine Month 2004 Period, respectively, asa result 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.

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

The Company’s operations and growth have been financedwith working capital, borrowings under its Credit Facility, proceeds from salesof the 8% Limited Recourse Secured Convertible Subordinated Note offering andfunds generated from operations.

 

The Company’s current credit facility with a financecompany in the amount of $4,500,000 matures on June 17, 2007 and bears interestat the prevailing prime rate plus 2.0% (the “Credit Facility”).  Under the terms of the Credit Facility, theCompany is required to pledge $1,000,000 of marketable securities to thefinance company and to maintain certain financial ratios and comply withcertain technical covenants.  The Companywas in compliance with the requirements and covenants as of March 31,2005.  During the Nine Month 2005 Periodthe Company paid fees associated with the Credit Facility totaling $27,000.

 

As of March 31, 2005 the Company’s sources ofliquidity were $1,486,000 in cash and cash equivalents, $1,159,000 inmarketable securities, $190,000 in accounts receivable, $434,000 in pawnservice charges receivable, $3,942,000 in pawn loan receivables, $3,485,000 ininventories and $1,615,000 available for borrowing under the Credit Facility.

 

The Company’s profitability and liquidity is affectedby the amount of loans outstanding, which is controlled in part by the Company’slending decisions.  The Company is ableto influence the frequency of forfeiture of collateral by increasing ordecreasing the amount loaned in relation to the sales value of the pledgedproperty.  Tighter credit decisionsgenerally result in smaller loans in relation to the estimated sales value ofthe pledged property and can thereby decrease the Company’s aggregate loanbalance and, consequently, decrease pawn service charges.  Additionally, lower loans in relation to thepledged property’s estimated sales value tend to slightly increase loanredemptions and improve the Company’s liquidity.  Conversely, providing higher loans inrelation to the estimated sales value of the pledged property can result in anincrease in the Company’s pawn service charge income.  Higher average loan balances can also resultin a slight increase in loan forfeitures, which increases the quantity of goodson hand and, unless the Company increases inventory turnover, reduces theCompany’s liquidity.

 

The Company believes it has sufficient working capitalto fund its current operations for fiscal year ending June 30, 2005 and toexpand through the acquisition of new stores and other businesses.  The Company’s ability to expand and theextent through the acquisition of new stores and other businesses will bedependent on its ability to maintain sufficient availability under its CreditFacility and the success of the sale of securities through the $20 million 8%Limited Recourse Secured Convertible Subordinated Note offering.

 

The Series A Preferred Stock must be redeemed forcash at $5.00 per share by the Company beginning April 30, 2005 in amountsof at least $500,000 per year.  Each April 30thereafter through 2009 an additional

 

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100,000 sharesmust be redeemed for cash at $5.00 per share. On April 30, 2010 any unredeemed shares must be redeemed for cashat $5.00 per share plus any accrued and unpaid dividends.

 

**ITEM 3.****                             CONTROLSAND 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 theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the endof the period covered by this report as required by Rules 13a-15(b) and15d-15(b) of the Exchange Act. Based on this evaluation, the Company hasconcluded that its disclosure controls and procedures were operatingeffectively as designed. As required, the Company will continue to evaluate theeffectiveness of these controls 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) and15d-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 4.****                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

An annual meeting of the stockholders of theCompany was held on January 18, 2005. At that meeting the following matters were submitted to a vote of thestockholders:

 

The holders of shares of Common Stock are entitledto elect three members of the Board of Directors of the Company.  Management’s three Common Stock nomineeslisted in the proxy statement pertaining to the meeting were elected directorsfor the ensuing year.  Of the 1,244,991shares of Common Stock present in person or presented by proxy at the meeting,the number of shares of Common Stock voted for, and the number of shares ofCommon Stock as to which authority to vote in the election was withheld, wereas follows with respect to each of the Common Stock nominees:

 
| **Name**            | ** ** | **Shares Voted For  Election** | ** ** | **Shares as to Which  Voting Authority  Withheld** | ** ** |
|---------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|
| Carroll Dawson      |       | 1,223,187                      |       | 21,804                                             |       |
| James R. Richards   |       | 1,223,187                      |       | 21,804                                             |       |
| Robert W. Schleizer |       | 1,223,187                      |       | 21,804                                             |       |

 

The holders of shares of Series B PreferredStock are entitled to elect four members of the Board of Directors of theCompany.  Management’s three Series BPreferred Stock nominees listed in the proxy statement pertaining to themeeting were elected directors for the ensuing year.  At the time of the election there was avacancy on the Board of Directors and the Nominating and Governance Committeewas conducting a search for a qualified individual to serve on the Board ofDirectors, but as of the date of the meeting had not identified such an individual.  John H. Wilson was subsequently appointed on April 29,2005 as a director to represent the holders of Series B PreferredStock.  Of the 391,272 shares of Series BPreferred Stock present in person or presented by proxy at the meeting, thenumber of shares of Series B Preferred Stock voted for, and the number ofshares of Series B Preferred Stock as to which authority to vote in theelection was withheld, were as follows with respect to each of the Series BPreferred Stock nominees:

 
| **Name**          | ** ** | **Shares Voted For  Election** | ** ** | **Shares as to Which  Voting Authority  Withheld** | ** ** |
|-------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|
| J. Robert Collins |       | 391,272                        |       | 0                                                  |       |
| Jeffrey A. Cummer |       | 391,272                        |       | 0                                                  |       |
| Dwayne A. Moyers  |       | 391,272                        |       | 0                                                  |       |

 

A proposal to ratify the appointment of GrantThornton LLP as independent auditors of the Company for the year ended June 30,2005 was approved.  Of the 1,244,991shares of Common Stock and 391,272 shares of Series B Preferred Stock(with each such share being entitled to 3.44 votes) present or represented byproxy at the meeting voting together as a single class, 2,560,381 shares werevoted for the proposal, 1,565 shares were voted against the proposal, and29,019 shares abstained from voting with respect to the proposal.

 

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

 
| **Number** | ** ** | **Description**                                                                                                                                                 |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|               | XPONENTIAL,  INC. (Registrant) |
|--------------------|--------------------------------|
|               |                           |
|               |                           |
| May 16,  2005 | By:                            | /s/  Robert W. Schleizer |
|               |                           | Robert  W. Schleizer, Executive Vice |
|               |                           | President  and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                               |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                    |
| 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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