**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-QSB/A**

**(AmendmentNo. 1)**

 

| **ý** |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                 |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                   |
|       |   | **for the quarterly period ended  September 30, 2003.**                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                   |
| **o**      |   | **TRANSITION  REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                   |
|       |   | **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.) |

 

**2175 Old Concord Road SE, Suite 200, Smyrna, Georgia  30080**

(Address of principalexecutive offices)

 

**(678) 305-7211**

(Issuer’s telephonenumber)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days Yes ýNo o

 

Check whether the registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Exchange Act after distributionof securities under a plan confirmed by a court.  Yes ý No o

 

The Company has 2,079,948 shares of Common Stock, par value $0.01 pershare, outstanding as of October 31, 2003.

 

Transitional Small Business Disclosure Format (Check one):  Yes oNo ý

 

 

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EXPLANATORY NOTE

 

This Amendment No. 1 to the Quarterly Report on Form10-QSB of Xponential, Inc. for the quarterly period ended September 30, 2003,as filed with the Commission on November 19, 2003 (the “Original Report”), isbeing filed to correct the following disclosures and typographical errors:

 

1.                                       Inthe Consolidated Balance Sheets on page 3 in Item 1 of Part 1 of the OriginalReport, Common Stock issued as of September 30, 2003 was amended to 2,092,948shares.

 

2.                                       Inthe Consolidated Statement of Operations on page 4 in Item 1 of Part 1 of theOriginal Report, “Interest expense including preferred dividends of $67,000”was amended to “Interest expense including preferred dividends of $67”;

 

3.                                       InNote 1 of the Notes to Consolidated Financial Statements on page 6 in Item 1 ofPart 1 of the Original Report, the number of stores owned and operated by theCompany as of September 30, 2003, originally reported as 26, was changed to 27;

 

4.                                       InNote 1 of the Notes to Consolidated Financial Statements on page 7 in Item 1 ofPart 1 of the Original Report, the Company reported that it “has reclassifiedits Preferred Stock – Series B as liabilities” which is changed to “PreferredStock – Series A”;

 

5.                                       InNote 2 of the Notes to Consolidated Financial Statements on page 9 in Item 1 ofPart 1 of the Original Report, the sentence “The Company has classified thesesecurities as long term assets due to its intent to defer sale of thesesecurities to offset gains on disposition with accumulated net operatinglosses” was deleted; and

 

6.                                       InNote 7 of the Notes to Consolidated Financial Statements on page 13 in Item 1of Part 1 of the Original Report, an additional line for “Reclassification ofrealized gains previously recognized in comprehensive income” changing“Comprehensive Income” for the Three Month Period Ended September 30, 2003 from$1,721 to $90.

 

2

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**XPONENTIAL, INC.**

**INDEX**

 
| **PART I - FINANCIAL  INFORMATION** |                                                                                                                                                                     |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                                     |   |
| **Item 1**                          | Consolidated  Financial Statements                                                                                                                                       |   |
|                                |                                                                                                                                                                     |   |
|                                | Consolidated Balance Sheets as of  September 30, 2003 and June 30, 2003                                                                                                  |   |
|                                |                                                                                                                                                                     |   |
|                                | Consolidated Statements of  Operations for the Two Months Ended August 31,  2002, the One Month Ended September 30, 2002, and the Three Months Ended  September 30, 2003 |   |
|                                |                                                                                                                                                                     |   |
|                                | Consolidated  Statements of Cash Flows for the Two Months Ended August 31,  2002, the One Month Ended September 30, 2002, and the Three Months Ended  September 30, 2003 |   |
|                                |                                                                                                                                                                     |   |
|                                | Notes  to Consolidated Financial Statements                                                                                                                              |   |
|                                |                                                                                                                                                                     |   |
| **Item 2**                          | Management’s  Discussion and Analysis or Plan of Operation                                                                                                          |   |
|                                |                                                                                                                                                                     |   |
| **Item 3**                          | Controls  and Procedures                                                                                                                                                 |   |
|                                |                                                                                                                                                                     |   |
| **PART II - OTHER INFORMATION**     |                                                                                                                                                                     |
|                                |                                                                                                                                                                     |   |
| **Item 1**                          | Legal  Proceedings                                                                                                                                                       |   |
|                                |                                                                                                                                                                     |   |
| **Item 2**                          | Changes  in Securities                                                                                                                                                   |   |
|                                |                                                                                                                                                                     |   |
| **Item 3**                          | Defaults  Upon Senior Securities                                                                                                                                         |   |
|                                |                                                                                                                                                                     |   |
| **Item 4**                          | Submission  of Matters to a Vote of Security Holders                                                                                                                     |   |
|                                |                                                                                                                                                                     |   |
| **Item 5**                          | Other  Information                                                                                                                                                       |   |
|                                |                                                                                                                                                                     |   |
| **Item 6**                          | Exhibits  and Reports on Form 8-K                                                                                                                                        |   |

 

3

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##### **PART I. FINANCIAL INFORMATION**

 

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

 

**XPONENTIAL, INC. AND SUBSIDIARIES**

 

ConsolidatedBalance Sheets

(In thousands, exceptshare and per share data)

 
|                                                                                                                                                                                            |   | **September  30, 2003** |   | **June 30,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
|                                                                                                                                                                                            |   | **(Unaudited)**         |   |               |   |
| Assets                                                                                                                                                                                          |   |                    |   |               |   |
| Current assets:                                                                                                                                                                                 |   |                    |   |               |   |
| Cash and cash  equivalents                                                                                                                                                                      |   | $                       | 2,564  |               | $      | 220 |   |
| Accounts  receivable                                                                                                                                                                            |   | 186                     |   | 176                |   |
| Pawn service  charges receivable                                                                                                                                                                |   | 576                     |   | 503                |   |
| Pawn loans                                                                                                                                                                                      |   | 5,250                   |   | 4,571              |   |
| Inventories, net                                                                                                                                                                                |   | 2,825                   |   | 2,540              |   |
| Investments                                                                                                                                                                                     |   | 4,591                   |   | 7,725              |   |
| Prepaid expenses  and other current assets                                                                                                                                                      |   | 213                     |   | 245                |   |
| Total current  assets                                                                                                                                                                           |   | 16,205                  |   | 15,980             |   |
|                                                                                                                                                                                            |   |                    |   |               |   |
| Property and  equipment, net                                                                                                                                                                    |   | 882                     |   | 889                |   |
| Intangible  assets, net of amortization of $15 and $6 at September 30, 2003 and June 30,  2003, respectively                                                                                    |   | 99                      |   | 41                 |   |
| Other assets                                                                                                                                                                                    |   | 95                      |   | 107                |   |
| Total assets                                                                                                                                                                                    |   | $                       | 17,281 |               | $      | 17,017 |   |
|                                                                                                                                                                                            |   |                    |   |               |   |
| Liabilities and  Stockholders’ Equity                                                                                                                                                      |   |                    |   |               |   |
| Current  liabilities:                                                                                                                                                                           |   |                    |   |               |   |
| Accounts payable  and accrued liabilities                                                                                                                                                       |   | $                       | 1,094  |               | $      | 1,009 |   |
| Current  installments of notes payable                                                                                                                                                          |   | 4,238                   |   | 4,074              |   |
| Total current  liabilities                                                                                                                                                                      |   | 5,332                   |   | 5,083              |   |
| Long term  liabilities                                                                                                                                                                          |   |                    |   |               |   |
| Notes payable  –  net of current portion                                                                                                                                              |   | 359                     |   | 396                |   |
| Redeemable  Preferred Stock:                                                                                                                                                                    |   |                    |   |               |   |
| Preferred stock  – Series A; par value $0.01; 5% cumulative dividend, liquidation preference  $5.00 per share; 1,071,636  shares  issued at September 30, 2003 and June 30, 2003 |   | 5,358                   |   | 5,358              |   |
| Total long term  liabilities                                                                                                                                                                    |   | 5,717                   |   | 5,754              |   |
|                                                                                                                                                                                            |   |                    |   |               |   |
| Total  liabilities                                                                                                                                                                              |   | 11,049                  |   | 10,837             |   |
|                                                                                                                                                                                            |   |                    |   |               |   |
| 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 at  September 30, 2003 and June 30, 2003                   |   | 5                       |   | 5                  |   |
| Common  stock  $0.01 par value; authorized  10,000,000 shares,  issued 2,092,948  and 2,079,948 as of September 30, 2003 and June 30, 2003.                                           |   | 21                      |   | 21                 |   |
| Additional  paid-in capital                                                                                                                                                                     |   | 4,218                   |   | 4,206              |   |
| Retained  earnings                                                                                                                                                                              |   | 1,748                   |   | 190                |   |
| Accumulated  other comprehensive income                                                                                                                                                         |   | 261                     |   | 1,758              |   |
| Less treasury  stock, at cost; 13,000 common shares at September 30, 2003                                                                                                                       |   | (21                     | )      | —             |   |
| Total  stockholders’ equity                                                                                                                                                                |   | 6,232                   |   | 6,180              |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                |   | $                       | 17,281 |               | $      | 17,017 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

 Consolidated Statementsof Operations

(Unaudited)

(In thousands, except pershare data)

 
|                                                                                                  |   | **Reorganized  Company**                       |   | **Predecessor**                        |   | **Reorganized  Company**                  |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                  |   | **Three  Months  Ended  September 30,   2003** |   | **Two Months  Ended August 31,  2002** |   | **One Month  Ended  September 30,  2002** |   | **Three  Months  Ended  September 30,  2002** |   |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Revenues:                                                                                             |   |                                           |   |                                   |   |                                      |   |   |   |
| Merchandise  sales                                                                                    |   | $                                              | 3,321  |                                   | $      | 1,578                                     |   | $ | 930 |   | $ | 2,508 |   |
| Pawn service  charges                                                                                 |   | 1,618                                          |   | 853                                    |   | 419                                       |   | 1,272 |   |
| Other                                                                                                 |   | 45                                             |   | 38                                     |   | 42                                        |   | 80 |   |
| Total revenues                                                                                        |   | 4,984                                          |   | 2,469                                  |   | 1,391                                     |   | 3,860 |   |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Cost of sales                                                                                         |   | 2,682                                          |   | 1,075                                  |   | 672                                       |   | 1,747 |   |
| Gross profit                                                                                          |   | 2,302                                          |   | 1,394                                  |   | 719                                       |   | 2,113 |   |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Expenses:                                                                                             |   |                                           |   |                                   |   |                                      |   |   |   |
| Store operating  expenses                                                                             |   | 1,518                                          |   | 896                                    |   | 449                                       |   | 1,345 |   |
| Corporate  administrative expenses                                                                    |   | 641                                            |   | 336                                    |   | 222                                       |   | 558 |   |
| Depreciation and  amortization                                                                        |   | 111                                            |   | 63                                     |   | 23                                        |   | 86 |   |
| Total expenses                                                                                        |   | 2,270                                          |   | 1,295                                  |   | 694                                       |   | 1,989 |   |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Operating  income/(loss)                                                                              |   | 32                                             |   | 99                                     |   | 25                                        |   | 124 |   |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Interest and  dividend income                                                                         |   | 100                                            |   | —                                 |   | —                                    |   | — |   |
| Interest expense  including preferred dividends of $67 for the three months ended September 30,  2003 |   | (161                                           | )      | (83                                    | )      | (38                                       | )      | (121 | ) |
| Gain on  disposition of assets                                                                        |   | 3                                              |   | —                                 |   | —                                    |   | — |   |
| Gain on sale of  investments                                                                          |   | 1,631                                          |   | —                                 |   | —                                    |   | — |   |
| Income tax  provision                                                                                 |   | (18                                            | )      | —                                 |   | —                                    |   | — |   |
| Reorganization  expenses                                                                              |   | —                                         |   | (241                                   | )      | —                                    |   | (241 | ) |
| Net  income/(loss) before extraordinary items                                                         |   | 1,587                                          |   | (225                                   | )      | (13                                       | )      | (238 | ) |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Extraordinary  items:                                                                                 |   |                                           |   |                                   |   |                                      |   |   |   |
| Gain on debt  discharge                                                                               |   | —                                         |   | 11,810                                 |   | —                                    |   | 11,810 |   |
| Net  income/(loss)                                                                                    |   | 1,587                                          |   | 11,585                                 |   | (13                                       | )      | 11,572 |   |
| Preferred stock  dividend requirement                                                                 |   | (31                                            | )      | —                                 |   | (33                                       | )      | (33 | ) |
| Net  income/(loss) allocable to common stockholders                                                   |   | $                                              | 1,556  |                                   | $      | 11,585                                    |   | $ | (46 | ) | $ | 11,539 |   |
|                                                                                                  |   |                                           |   |                                   |   |                                      |   |   |   |
| Income (loss) per  common share (note 5):                                                             |   |                                           |   |                                   |   |                                      |   |   |   |
| Basic                                                                                                 |   |                                           |   |                                   |   |                                      |   |   |   |
| Continuing  Operations                                                                                |   | $                                              | 0.75   |                                   | $      | (0.09                                     | )      | $ | (0.02 | ) | $ |   | * |
| Extraordinary  Items                                                                                  |   | —                                         |   | 4.72                                   |   | —                                    |   |   | * |
|                                                                                                  |   | $                                              | 0.75   |                                   | $      | 4.63                                      |   | $ | (0.02 | ) | $ |   | * |
| Diluted                                                                                               |   |                                           |   |                                   |   |                                      |   |   |   |
| Continuing  Operations                                                                                |   | $                                              | 0.42   |                                   | $      | (0.09                                     | )      | $ | (0.02 | ) | $ |   | * |
| Extraordinary  Items                                                                                  |   | —                                         |   | 4.72                                   |   | —                                    |   |   | * |
|                                                                                                  |   | $                                              | 0.42   |                                   | $      | 4.63                                      |   | $ | (0.02 | ) | $ |   | * |

 

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* Loss per share forperiod includes periods prior to and after Plan consummation and merger aretherefore not meaningful.

 

See accompanying notes toconsolidated financial statements.

 

5

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

ConsolidatedStatements of Cash Flows

(Unaudited)

 
|                                                                                  |   | **Reorganized  Company**                              |   | **Predecessor**                                  |   | **Reorganized  Company**                            |   |                                                  |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------------------------|--------|-------------------------------------------------------|--------|
| **(In  thousands)**                                                                   |   | **For the  Three Months  Ended  September 30,  2003** |   | **For the  Two Months  Ended  August 31,  2002** |   | **For the  One Month  Ended   September 30,  2002** |   | **For the  Three Months  Ended  September 30,  2002** |   |
| Cash flows from  operating activities:                                                |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Net income/  (loss)                                                                   |   | $                                                     | 1,587  |                                             | $      | 11,585                                              |   | $                                                     | (13    | ) | $ | 11,572 |   |
| Adjustments to  reconcile net income/(loss) to net cash used in operating activities: |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Depreciation and  amortization                                                        |   | 111                                                   |   | 63                                               |   | 23                                                  |   | 86                                                    |   |
| Amortization of  prepaid loan fees                                                    |   | —                                                |   | —                                           |   | —                                              |   | —                                                |   |
| Gain on debt  discharge                                                               |   | —                                                |   | (11,810                                          | )      | —                                              |   | (11,810                                               | )      |
| Gain on sale of  investments                                                          |   | (1,631                                                | )      | —                                           |   | —                                              |   | —                                                |   |
| Unrealized gain  on investments                                                       |   | —                                                |   | —                                           |   | 175                                                 |   | 175                                                   |   |
| Changes in  operating assets and liabilities, net of effect of acquisition:           |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Accounts  receivable                                                                  |   | (10                                                   | )      | (24                                              | )      | (33                                                 | )      | (57                                                   | )      |
| Pawn service  charges receivable                                                      |   | (73                                                   | )      | (45                                              | )      | (24                                                 | )      | (69                                                   | )      |
| Inventories, net                                                                      |   | (285                                                  | )      | 62                                               |   | 46                                                  |   | 108                                                   |   |
| Prepaid expenses  and other current assets                                            |   | 32                                                    |   | (3                                               | )      | 25                                                  |   | 22                                                    |   |
| Accounts payable  and accrued liabilities                                             |   | 85                                                    |   | (56                                              | )      | (243                                                | )      | (299                                                  | )      |
| Net cash  provided by operating activities                                            |   | (184                                                  | )      | (228                                             | )      | (44                                                 | )      | (272                                                  | )      |
|                                                                                  |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Cash flows from  investing activities:                                                |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Pawn loans made,  net                                                                 |   | (679                                                  | )      | (414                                             | )      | (213                                                | )      | (627                                                  | )      |
| Proceeds from  sale of investments                                                    |   | 5,400                                                 |   | —                                           |   | —                                              |   | —                                                |   |
| Purchase of  Investments                                                              |   | (2,131                                                | )      | —                                           |   | —                                              |   | —                                                |   |
| Cash acquired in  merger (1)                                                          |   | —                                                |   | —                                           |   | 2,565                                               |   | 2,565                                                 |   |
| Purchases of  property and equipment                                                  |   | (95                                                   | )      | —                                           |   | (69                                                 | )      | (69                                                   | )      |
| Other assets                                                                          |   | (55                                                   | )      | —                                           |   | —                                              |   | —                                                |   |
| Net cash  provided by (used in) investing activities                                  |   | 2,440                                                 |   | (414                                             | )      | 2,283                                               |   | 1,869                                                 |   |
|                                                                                  |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Cash flows from  financing activities:                                                |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| (Principal  payments)/borrowings on notes payable                                     |   | 127                                                   |   | 455                                              |   | (370                                                | )      | 85                                                    |   |
| Sale of common  stock                                                                 |   | 13                                                    |   | —                                           |   | —                                              |   | —                                                |   |
| Purchase of  treasury stock                                                           |   | (21                                                   | )      | —                                           |   | —                                              |   | —                                                |   |
| Dividends paid                                                                        |   | (31                                                   | )      | —                                           |   | (33                                                 | )      | (11                                                   | )      |
| Net cash  provided by (used in) financing activities                                  |   | 88                                                    |   | 455                                              |   | (403                                                | )      | 52                                                    |   |
| Net increase  (decrease) in cash and cash equivalents                                 |   | 2,344                                                 |   | (187                                             | )      | 1,836                                               |   | 1,649                                                 |   |
| Cash and cash  equivalents at beginning of period                                     |   | 220                                                   |   | 377                                              |   | 190                                                 |   | 377                                                   |   |
| Cash and cash  equivalents at end of period                                           |   | $                                                     | 2,564  |                                             | $      | 190                                                 |   | $                                                     | 2,026  |   | $ | 2,026 |   |
|                                                                                  |   |                                                  |   |                                             |   |                                                |   |                                                  |   |
| Supplemental  disclosures of cash flow information -  Cash paid for interest          |   | $                                                     | 142    |                                             | $      | 83                                                  |   | $                                                     | 60     |   | $ | 143 |   |

 

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(1)           Non cash financing activities - Company acquired CMHI on August 30, 2002including $2.6 in cash and $5.1 million in marketable securities in exchangefor preferred stock.  See note 2 formore complete explanation.

 

See accompanying notes toconsolidated financial statements.

 

6

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**XPONENTIAL, INC. AND SUBSIDIARIES**

 

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)                                  Basisof Presentation

 

The accompanyingfinancial statements have been prepared in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position 90-7:“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”(“SOP 90-7”) and generally accepted accounting principles for interim financialinformation and therefore do not include all disclosures necessary for completefinancial statements.  In the opinion ofmanagement, all adjustments have been made that are necessary for a fairpresentation of the financial position and results of operations as of and forthe periods presented.

 

The Board of Directors ofthe Company determined in May 2002 that it was in the Company’s best interestto change its fiscal year end from the Saturday nearest January 31 to June 30to more accurately reflect the Company’s post bankruptcy operating results.  The results of operations for the interimperiods ended September 30, 2003 and September 30, 2002 are not necessarilyindicative of the results that may be expected for the entire fiscal year orany other interim period.

 

The financial statementsshould be read in conjunction with the financial statements for the fiscal yearended June 30, 2003 included in the Company’s Form 10-KSB which has beenpreviously filed with the Securities and Exchange Commission.

 

Xponential, Inc.,formerly PawnMart, Inc. (the “Company”), was incorporated in Delaware onJanuary 13, 1994.  EffectiveFebruary 28, 2003, the Company changed its name to “Xponential, Inc.” TheCompany is a specialty finance and retail enterprise principally engaged inestablishing and operating stores which advance money secured by the pledge oftangible personal property, and buying and selling pre-owned merchandise.  As of September 30, 2003, the Company ownedand operated 27 stores located in Georgia, North Carolina, and South Carolina.

 

The Company successfullyemerged from bankruptcy on August 30, 2002 when it consummated a merger (the“Merger”) with C/M Holdings, Inc. (“CMHI”). The reorganized Company adopted fresh-start reporting (Note 2) and gaveeffect to its emergence from bankruptcy and consummation of the Plan on August30, 2002, including recognition of certain reorganization expenses associatedwith the Merger in the Company’s Statement of Operations for the two monthsended August 31, 2002.

 

Fresh-start reporting asset forth in SOP 90-7 required that the reorganized Company restate its assetsand liabilities to reflect their reorganization value, which approximates fairvalue at the date of the reorganization. In so restating, SOP 90-7 required the reorganized Company to allocateits reorganization value to its assets based upon their estimated fairvalue.  Each liability existing on theConfirmation Date is to be stated at the present value of amounts to be paid,determined using an appropriate discount rate.

 

The fresh-start reportingreorganization value of approximately $7.6 million resulted in a net value ofapproximately $1.9 million to the new common equity holders after allowance forpost confirmation liabilities of the reorganized Company of $5.7 million.  The reorganization value was determined inconsideration of several factors and by reliance on various valuation methodsincluding discounted cash flow, book value multiples of comparable companies inits industry, net realizable value of asset sales and other applicable methods.  The calculated reorganization value wasbased on estimates and assumptions about circumstances in a relativelyhigh-risk investment scenario that have not yet taken place in which there aresignificant economic and competitive uncertainties beyond the control of thereorganized Company.

 

Management believes thereorganized Company has sufficient liquidity and capital resources to meet itsfinancial obligations and to make planned capital expenditures and debtpayments as a result of the Merger.  Futureoperating performance and expected cash flows will be subject to financial,economic and other factors affecting the business and operations beyond itscontrol and will affect the Company’s ability to expand its business asanticipated in its financial plan.

 

7

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In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”, (“SFAS 150”).  This statement was effective for interimperiods after June 15, 2003 and required that mandatorily redeemable preferredstock be classified as a liability and related dividends be charged to theCompany’s statement of operations. Accordingly, the Company has reclassified its Preferred Stock – Series Ato liabilities.  Prior to June 15, 2003,the charges related to the mandatorily redeemable preferred stock were notreflected in net income (loss), but were reflected in determining net income(loss) applicable to common stockholders. At September 30, 2003, the carrying value of the Company’s mandatorilyredeemable preferred stock was $5,358,000. The related dividends that would have been reflected as interest expensefor the three months ended September 30, 2002 was $22,000.  Subsequent to the adoption of SFAS 150, theCompany has reflected $67,000 as interest expense for the three months endedSeptember 30, 2003.

 

 

(2)                                  Planof Reorganization - Fresh-start Accounting

 

Under the terms of thePlan, the Company cancelled all equity interests of its common and preferred shareholdersand interests of any holders of options and warrants.  The Company issued 2,079,948 shares of Common Stock to itsunsecured creditors in exchange for release of indebtedness and in connectionwith the Merger of the Company with CMHI, which is owned in part by Dwayne A.Moyers and Jeffrey A. Cummer, officers and directors of the Company, issued1,071,636 shares of Series A Preferred Stock and 500,042 Series B PreferredStock to the former shareholders of CMHI. At the time of the Merger with CMHI, CMHI did not have any businessoperations and principally held investments.

 

The Company is paying theprepetition priority tax claims over a six year period from the assessment datewith interest at 7% per annum in quarterly installments of approximately$35,000 in accordance with the Plan.

 

The Bankruptcy Courtconfirmed the Plan on May 20, 2002 with an Effective Date of May 31, 2002.  The consummation of the Plan was contingenton several material events including consummation of the Merger which occurredon August 30, 2002 which is reported herein as a material business combination.

 

The Company acquired 100percent of the outstanding common stock of CMHI on August 30, 2002.  The results of CMHI’s operations have beenincluded in the financial statements since the date of the Merger.

 

The Company’sreorganization value, computed immediately before the Merger, was $7,567,000.

 

8

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The Company adoptedfresh-start reporting because holders of existing voting shares immediatelybefore confirmation of the Plan received less than 50% of the voting shares ofthe emerging entity (all pre-confirmation equity interests were cancelled), andthe reorganization value is less than the postpetition liabilities and allowed claims,as shown below.

 

The reorganization valuewas determined in consideration of several factors and by reliance on variousvaluation methods including discounting cash flow, book value multiples ofcomparable companies in the Company’s industry, net realizable value of assetsales and other applicable methods.  TheCompany assigned no value to its net operating loss carryovers in thecalculation of its reorganization value due to the lack of certainty of utilizingthe net operating loss based on historical operating results and the potentiallimitations on use resulting from the Plan.

 
|                                                         |   | **(in  thousands)** |   |
|--------------------------------------------------------------|--------|---------------------|--------|
| Postpetition  current liabilities                            |   | $                   | 5,145  |   |
| Liabilities  deferred pursuant to the Plan                   |   | 700                 |   |
| Liabilities  exchanged for equity in the reorganized Company |   | 11,810              |   |
| Total  postpetition liabilities and allowed claims           |   | 17,655              |   |
| Reorganization  value                                        |   | 7,567               |   |
| Excess of  liabilities over reorganization value             |   | $                   | 10,088 |   |

 

 

After consideration ofthe Company’s debt capacity, extensive negotiations among parties in interest,projected earnings before interest and taxes, free cash flow to interest anddebt service and other capital considerations, it was agreed that the Company’sorganization capital structure prior to the Merger, is as follows:

 
|                                          |   | **At August  30, 2002** |   |
|-----------------------------------------------|--------|-------------------------|--------|
|                                          |   | **(in  thousands)**     |   |
| Postpetition  current liabilities             |   | $                       | 1,274  |   |
| Notes payable –  priority tax claims (1) |   | 700                     |   |
| Post  confirmation bank line of credit        |   | 3,720                   |   |
| Common stock                                  |   | 1,873                   |   |
|                                          |   | $                       | 7,567  |   |

 

----

(1)          Approximately $95,000 due in cash and $605,000 payable in quarterinstallments of approximately $100,000 per year at 7% interest per annum.

 

9

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On August 30, 2002, theCompany acquired 100 percent of the outstanding common shares of CMHI pursuantthe Plan.

 

The aggregate purchaseprice for CMHI was approximately $7.8 million which was paid through theissuance of Series A and Series B Preferred Stock valued at $5.3 million and$2.5 million, respectively.  The valueof the Preferred Stock was based on liquidation preferences and dividend andconversion features.

 

The following tablesummarizes the estimated value of the acquired assets and liabilities assumedat the date of the Merger.

 
|                                    |   | **At August  30, 2002** |   |
|-----------------------------------------|--------|-------------------------|--------|
|                                    |   | **(in  thousands)**     |   |
| Current assets                          |   | $                       | 2,725  |   |
| Property and  equipment, net            |   | 36                      |   |
| Other assets and  marketable securities |   | 5,117                   |   |
| Total assets  acquired                  |   | 7,878                   |   |
| Total  liabilities assumed              |   | 20                      |   |
| Net assets  acquired                    |   | $                       | 7,858  |   |

 

Of the $5.1 million inother assets, $5.0 million are investments in marketable securities.

 

The following is acondensed consolidated balance sheet August 30, 2002 (unaudited), whichreflects the Merger:

 
| **(in  thousands)**                              |   | **Xponential,  Inc.  Reorganized  Balance Sheet  Prior to Merger** |   | **CMHI  Assets  Acquired and  Liabilities  Assumed as  of 8/30/2002** |   | **Reorganized  Balance Sheet  After Merger** |   |
|--------------------------------------------------|--------|--------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------|--------|
| Assets                                           |   |                                                               |   |                                                                  |   |                                         |   |
| Current assets                                   |   | $                                                                  | 6,772  |                                                                  | $      | 2,725                                        |   | $ | 9,497 |   |
| Property and  equipment, net                     |   | 674                                                                |   | 36                                                                    |   | 710                                          |   |
| Other assets                                     |   | 121                                                                |   | 5,117                                                                 |   | 5,238                                        |   |
| Total assets                                     |   | $                                                                  | 7,567  |                                                                  | $      | 7,878                                        |   | $ | 15,445 |   |
|                                             |   |                                                               |   |                                                                  |   |                                         |   |
| Liabilities and  Stockholders’ Equity       |   |                                                               |   |                                                                  |   |                                         |   |
| Current  Liabilities                             |   | $                                                                  | 1,469  |                                                                  | $      | 170                                          | (1)    | $ | 1,639 |   |
| Notes Payable                                    |   | 4,225                                                              |   | —                                                                |   | 4,225                                        |   |
|                                             |   | 5,694                                                              |   | 170                                                                   |   | 5,864                                        |   |
|                                             |   |                                                               |   |                                                                  |   |                                         |   |
| Redeemable  Preferred Stock                      |   | —                                                             |   | 5,358                                                                 |   | 5,358                                        |   |
|                                             |   |                                                               |   |                                                                  |   |                                         |   |
| Stockholders’  Equity:                      |   |                                                               |   |                                                                  |   |                                         |   |
| Preferred Stock                                  |   | —                                                             |   | 5                                                                     |   | 5                                            |   |
| Common Stock                                     |   | 21                                                                 |   | —                                                                |   | 21                                           |   |
| Additional Paid  In Capital                      |   | 1,852                                                              |   | 2,345                                                                 |   | 4,197                                        |   |
| Total  liabilities and stockholders’ equity |   | $                                                                  | 7,567  |                                                                  | $      | 7,878                                        |   | $ | 15,445 |   |

 

----

(1)          Includes $150,000 investment banking fee to related parties payable oncompletion of Merger.

 

10

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(3)                                  NotesPayable

 

*RevolvingCredit Facility-*

 

The Company emerged frombankruptcy with a new $4,500,000 credit facility (the “Credit Facility”)effective September 1, 2002 upon consummation of the Plan with the completionof the Merger on August 30, 2002.  TheCredit Facility, which was modified on May 19, 2003, bears interest at thecurrent prevailing prime rate plus 2% and matures on December 31,2003.  Amounts available under theCredit Facility are limited to certain percentages of pawn loans, inventories,and pawn servicecharges receivable.  The Credit Facilityis collateralized by substantially all of the unencumbered assets of theCompany.  At September 30, 2003,$4,201,000 was outstanding under the Credit Facility and an additional $299,000was available to the Company pursuant to the available borrowing base.  Under the terms of the Credit Facility, theCompany is required to maintain certain financial ratios and comply withcertain other covenants.  The Companywas in compliance with these covenants as of September 30, 2003.

 

 

(4)                                  StockOption Plan 

 

Effective January 1,2003, the Company adopted the fair value method defined in SFAS No. 123,“Accounting for Stock-Based Compensation,” in accounting for the Company’sstock option plans.  Previously theCompany applied Accounting Principles Board’s Opinion No. 25, (“APB No. 25”),“Accounting for Stock Issued to Employees,” and related Interpretations.  SFAS No. 123 indicates that the fair valuemethod is the preferable method of accounting, and the Company has elected toapply it for all options granted for the reorganized Company.  Under APB No. 25, compensation costs relatedto stock options issued pursuant to compensatory plans are measured based onthe difference between the quoted market price of the stock at the measurementdate (ordinarily the date of grant) and the exercise price and should becharged to expense over the periods during which the grantee performs therelated services.  All outstanding stockoptions were cancelled in accordance with the Plan which was confirmed on May20, 2002.

 

The Company adopted its2003 Stock Option Plan (“Stock Option Plan”) and 2003 Stock Incentive Plan(“Incentive Plan”)effective January 1, 2003.  Under theStock Option Plan stock options have been awarded to directors, officers andemployees.  These stock options vesteither immediately or over a period two years from the date certain contingencyconditions are satisfied and expire ten years thereafter.  A total of 675,000 shares of common stockare reserved for grant under the Stock Option Plan and a total of the greaterof 325,000 or the number of shares equal to 5% of the total number of shares ofCommon Stock outstanding are reserved for issuance under the IncentivePlan.  In February 2003, the Companygranted options covering 455,000 common shares from the Stock Option Plan ofwhich 299,000 shares were immediately exercisable.  The remaining options for the grant of 156,000 shares werecontingent upon achieving $500,000 EBITDA for the fiscal year ended June 30,2003 which the Company did achieve. These options vest 66 2/3% on June 30, 2004 and 33 1/3% on June 30, 2005.  The $8,000 cost of these options is beingamortized over the vesting period described above.  The Company recognized $1,200 of compensation expense for optionsgranted during the three month period ended September 30, 2003.  The Incentive Plan provides an opportunityto employees of the Company to purchase common shares directly from the Companythrough payroll deductions.  As ofSeptember 30, 2003, no shares have been issued under the Incentive Plan.

 

The following tablesummarizes the stock option activity of the reorganized Company from the timeit emerged from bankruptcy:

 

11

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|                               |   | **Weighted  Average**  |   |
|------------------------------------|--------|------------------------|--------|
|                               |   | **Number of  Options** |   | **Exercise  Price** |   |
| Outstanding at  August 30, 2002    |   | —                 |   | — |   |
| Granted                            |   | 455,000                |   | $ | 1.00 |   |
| Exercised                          |   | —                 |   | — |   |
| Forfeited                          |   | —                 |   | — |   |
| Outstanding at  June 30, 2003      |   | 455,000                |   | $ | 1.00 |   |
| Granted                            |   | —                 |   | — |   |
| Exercised                          |   | 13,000                 |   | $ | 1.00 |   |
| Forfeited                          |   | —                 |   | — |   |
| Outstanding at  September 30, 2003 |   | 442,000                |   | $ | 1.00 |   |
|                               |   |                   |   |   |   |
| Exercisable at  September 30, 2003 |   | 286,000                |   | $ | 1.00 |   |

 

 

(5)                    Weighted AverageShares and Net Income (Loss) Per Common Share

 

Net income (loss) percommon share is calculated as required by FASB Statement of FinancialAccounting Standards No. 128, “Earnings Per Share” (“Statement No. 128”).  Statement No. 128 requires dual presentationof basic and diluted earnings per share and a reconciliation between the twoamounts.  Basic earnings per shareexcludes dilution, and diluted earnings per share reflects the potentialdilution that would occur if securities for the purchase of Common Stock wereexercised.  In loss periods, dilutivecommon equivalent shares are excluded as the effect would be antidilutive.

 

The Company issued2,079,948 shares of Common Stock upon consummation of the Plan and  500,042 shares of Series B Preferred Stockwhich is convertible at the option of the holders into 1,720,130 shares of theCompany’s Common Stock.  In lossperiods, dilutive common equivalent shares are excluded as the effect would beantidilutive.

 

The reconciliation ofbasic and diluted weighted average common shares and the reconciliation for thebasic and diluted earnings per common share for the three months endedSeptember 30, 2003 following consummation of the Plan and the issuance of thenew common and convertible preferred stock pursuant to the Plan is as follows:

 
| **For the Three Months Ended  September 30, 2003** |   | **Net Income  Allocable to  Common  Shareholders** |      | **Shares** |      | **Per Share** |   |
|----------------------------------------------------|--------|----------------------------------------------------|-----------|------------|-----------|---------------|--------|
|                                               |   |                                               |      |       |      |          |   |
| Basic earnings  per common share                   |   | $                                                  | 1,556,000 |       | 2,079,948 |          | $      | 0.75 |   |
|                                               |   |                                               |      |       |      |          |   |
| Effect of  preferred dividend-Series B             |   | 31,000                                             |      | 1,720,130  |      |          |   |
|                                               |   |                                               |      |       |      |          |   |
| Diluted earnings  per common share                 |   | $                                                  | 1,587,000 |       | 3,800,078 |          | $      | 0.42 |   |

 

12

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Series A preferred shares have been excluded from thecomputation of diluted earnings per share because the shares are notconvertible into common shares and are not dilutive.  Accordingly, dividends paid to the Series A preferredshareholders in the amount of $67,000 during the three months ended September30, 2003 are not included in the computation of diluted earnings per share.

 

Stock option grants of442,000 have been excluded from the computation because they are antidilutive.

 

 

(6)                                  Investmentsin Marketable Securities

 

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

 

As of September 30, 2003,the Company owned the following marketable securities:

 
| **(in  thousands)** |   | **Cost** |   | **Unrealized  Gain/(Loss)** |   | **Market  Value** |   |
|---------------------|--------|----------|--------|-----------------------------|--------|-------------------|--------|
|                |   |     |   |                        |   |              |   |
| Stocks              |   | $        | 7      |                        | $      | (7                | )      | $ | — |   |
| Bonds               |   | 4,323    |   | 268                         |   | 4,591             |   |
|                |   |     |   |                        |   |              |   |
| Total               |   | $        | 4,330  |                        | $      | 261               |   | $ | 4,591 |   |

 

As of June 30, 2003, theCompany owned the following marketable securities:

 
| **(in thousands)** |   | **Cost** |   | **Unrealized Gain** |   | **Market Value** |   |
|--------------------|--------|----------|--------|---------------------|--------|------------------|--------|
|               |   |     |   |                |   |             |   |
| Stocks             |   | $        | 3,415  |                | $      | 1,686            |   | $ | 5,101 |   |
| Bonds              |   | 2,552    |   | 72                  |   | 2,624            |   |
|               |   |     |   |                |   |             |   |
| Total              |   | $        | 5,967  |                | $      | 1,758            |   | $ | 7,725 |   |

 

13

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(7)                    ComprehensiveIncome

 

Comprehensive income isas follows:

 
| **(in  thousands)**                                                               |   | **For the  Three Month  Period Ended  September 30, 2003** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                              |   |                                                       |   |
| Net income                                                                        |   | $                                                          | 1,587  |   |
| Unrealized gain  from available for sale securities                               |   | 134                                                        |   |
| Reclassification  of realized gains previously recognized in comprehensive income |   | (1,631                                                     | )      |
|                                                                              |   |                                                       |   |
| Comprehensive  Income                                                             |   | $                                                          | 90     |   |

 

(8)                    SubsequentEvents

 

In October 2003 theCompany provided financing for American IronHorse Motorcycle Company, Inc.(“AIMC”), a Texas corporation, in the amount of $1,000,000.  Dwayne A. Moyers, a director and officer ofthe Company, is a director and principal shareholder of AIMC.  The financing provides for interest to theCompany at the rate of 12% per annum payable monthly and a management fee of$5,700 per week plus twenty-five (25) shares of common stock of AIMC for eachhour worked by Robert W. Schleizer, a director and officer of the Company.  The Company received a $50,000 investmentfee at the time the financing was provided and will receive an additional$50,000 investment fee at maturity or conversion of the note.  The Company has the right to convert thenote into common stock in AIMC at a rate of one share for each $6.00 ofprincipal and accrued interest converted, for a maximum of 166,667 shares.  The Company also received warrants topurchase 100,000 shares of AIMC common stock at $15.00 per share in connectionwith the financing.

 

14

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**ITEM 2****.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

### *Statementsappearing in the following discussion that are not historical facts areforward-looking statements (“forward-looking statements”) within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, which are intended to be coveredby the safe harbors created by those sections. Such forward-looking statements are necessarily estimates reflecting thebest judgment of the Company’s management based upon current information andinvolve known and unknown risks, uncertainties and other factors which maycause the actual results, performance or achievements of the Company, orindustry results, to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements.  Such risks, uncertaintiesand other factors, include, but are not limited to, those set forth and thoseappearing from time to time in filings made by the Company with the Securitiesand Exchange Commission.  These risks,uncertainties and other factors should not be construed as exhaustive and theCompany does not undertake, and specifically disclaims any obligation, toupdate any forward-looking statements to reflect occurrences or unanticipatedevents or circumstances after the date of such statements.*

 

*In addition, the following discussion and analysis should beread in conjunction with the Company’s financial statements and notes theretoand other financial data included in the Company’s Form 10-KSB for the fiscalyear ended June 30, 2003.*

 

GENERAL

 

Xponential, Inc. (the “Company”) is a specialtyfinance and retail enterprise principally engaged in establishing and operatingstores which advance money secured by the pledge of tangible personal propertyand sell pre-owned merchandise to the value-conscious consumer.  The Company generates income throughcollection of a monthly service charge from advancing money to individualsbased primarily upon the estimated resale value of pledged personal propertysuch as jewelry, consumer electronics, tools, musical instruments, firearms,automobiles and other miscellaneous items and through profit realized on theretail sale of the unredeemed or other purchased pre-owned merchandise.

 

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 sixty-day extension period. All pawn loans are collateralized by tangible personal property placedin the possession of the Company, except for automobile title loans.  During the term of an automobile title loan,the borrower is allowed to maintain possession of the collateral.  Pawn service charges are recognized whenloans are repaid or renewed.  If a loanis not repaid, the principal amount advanced on the loan, exclusive of anyuncollected pawn service charges, becomes the carrying value of the forfeitedcollateral (inventory), which is recovered through subsequent sales.

 

The Company filed for protection under the BankruptcyCode on July 9, 2001.  The Companyoperated as debtor in possession throughout the bankruptcy proceedings.  The Plan was filed on February 15, 2002 andwas amended on April 3, 2002.  Aconfirmation hearing for the Plan was held on May 20, 2002 and the Plan wasconfirmed by the Bankruptcy Court as of that date with an effective date of May31, 2002.

 

Pursuant to the Plan, the Company issued 2,079,948shares of Common Stock to its unsecured creditors in exchange for release fromindebtedness.  The Company alsocompleted a merger with C/M Holdings, Inc., a Texas corporation (“CMHI”),whereby the equity holders of CMHI received two new classes of Preferred Stock,1,071,636 shares of Series A Preferred Stock and 500,042 shares of Series BPreferred Stock.  The 500,042 shares ofSeries B Preferred Stock are convertible into 1,720,130 shares of Common Stock,or approximately 45% of the total Common Stock.  The Company also negotiated a Post-Confirmation Credit Facilitywith a Bank in the amount of $4,500,000. Terms of the Plan are set forth in the Company’s Form 10-KSB for theyear ended June 30, 2003.

 

Selected elements of the Company’s unauditedstatements of operations are shown below for the three months ended September30, 2003 and September 30, 2002 as a percentage of total revenues.  The following table, as well as thediscussion following, should be read in conjunction with the Company’sfinancial statements and notes thereto and other financial data included in theCompany’s Form 10-KSB for the fiscal year ended June 30, 2003.

 

15

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|                                                                            |   | **For the  Three Months  Ended  September 30,  2003** |   | **For the  Two Months  Ended  August 31,  2002** |   | **For the  One Month Ended  September 30,  2002** |   |
|---------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------|--------|
| Merchandise  sales                                                              |   | 66.6                                                  | %      | 63.9                                             | %      | 66.9                                              | %      |
| Pawn service  charges                                                           |   | 32.5                                                  |   | 34.6                                             |   | 30.1                                              |   |
| Other income                                                                    |   | 0.9                                                   |   | 1.5                                              |   | 3.0                                               |   |
| Total revenues                                                                  |   | 100.0                                                 |   | 100.0                                            |   | 100.0                                             |   |
| Cost of sales                                                                   |   | 53.8                                                  |   | 43.5                                             |   | 48.3                                              |   |
| Gross profit                                                                    |   | 46.2                                                  |   | 56.5                                             |   | 51.7                                              |   |
| Store operating  expenses                                                       |   | 30.5                                                  |   | 36.3                                             |   | 32.3                                              |   |
| Store  contribution margin                                                      |   | 15.7                                                  |   | 20.2                                             |   | 19.4                                              |   |
| Corporate  administrative expenses  (excluding  gain on debt discharge (1) |   | 12.9                                                  |   | 13.6                                             |   | 16.0                                              |   |
| Interest expense                                                                |   | 3.2                                                   |   | 3.4                                              |   | 2.7                                               |   |
| Depreciation and  amortization                                                  |   | 2.3                                                   |   | 2.6                                              |   | 1.7                                               |   |
| Gain on sale of                                                                 |   | 34.8                                                  |   | —                                           |   | —                                            |   |
| Net loss                                                                        |   | 32.2                                                  | %      | 0.6                                              | %      | (1.0                                              | )%     |

 

----

(1)  Extraordinary gain on debtdischarge of $11,810,000 excluded from calculation.

** **

**RESULTSOF OPERATIONS**

 

*Three Months Ended September 30, 2003 Compared toThree Months Ended September 30, 2002*

 

Total revenues increased 29.1% to $4,984,000 duringthe three months ended September 30, 2003 (the “Three Month 2004 Period”) ascompared to $3,860,000 during the three months ended September 30, 2002 (the“Three Month 2003 Period”).  The overallincrease was attributable primarily to increases in pawn service charges on carloans and increased jewelry scrap sales. Stores that remained open for the full 12 months or more as of September30, 2003 (the “Comparable Stores”) experienced a net increase in revenues of$1,085,000 or 28.3%.

 

Merchandise sales increased 32.4% to $3,321,000 duringthe Three Month 2004 Period from $2,508,000 during the Three Month 2003 Periodprimarily due to increased jewelry scrap sales.  Sales in Comparable Stores for the Three Month 2004 Periodincreased $728,000 or 28.6%.

 

Pawn service charges increased $346,000 or 27.2% to$1,618,000 during the Three Month 2004 Period from $1,272,000 during the ThreeMonth 2003 Period primarily due to increased pawn service charges on car loansfor the Three Month 2003 Period.  Pawnservice charges from Comparable Stores increased $329,000 or 25.9% for theThree Month 2004 Period as compared to the Three Month 2003 Period.

 

Gross profit increased 8.9% to $2,302,000 during theThree Month 2004 Period from $2,113,000 during the Three Month 2003 Periodprimarily due to increased pawn service charges on car loans and increasedscrap jewelry sales.  Gross profit forComparable Stores increased $183,000 for the Three Month 2004 Period as comparedto the Three Month 2003 Period, an 8.8% increase.  Gross profit as a percentage of total revenues decreased to 46.2%during the Three Month 2004 Period as compared to 54.7% during the Three Month2004 Period primarily as a result lower margins on merchandise sales due tomore aggressive lending practices.

 

Store operating expenses increased to $1,518,000 forthe Three Month 2004 Period from $1,345,000 during the Three Month 2003 Periodprimarily due to increased personnel expenses for additional car title andcompliance personnel.  On a ComparableStore basis, store operating expenses were 29.8% of total revenues during theThree Month 2004 Period compared to 35.11% of total revenues during the ThreeMonth 2003 Period primarily due to lower personnel and occupancy costs as apercentage of total revenue.

 

Store contribution margin (defined as total storerevenues less direct operating expenses, which exclude corporate administrativeexpenses, interest expense, and depreciation and amortization expense) increasedto

 

16

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$784,000 from $768,000 during the Three Month 2004 Period compared toThree Month 2003 Period primarily due to increased pawn service charges on carloans, increased scrap jewelry sales offset by the lower gross profit onmerchandise sales and costs attributable to two new stores.

 

Corporate administrative expenses increased 14.9% to$641,000 during the Three Month 2004 Period from $558,000 during the ThreeMonth 2003 Period primarily due to costs related to additional personnel.  Corporate administrative expenses decreasedto 12.9% of total revenues during the Three Month 2004 Period as compared to20.7% during the Three Month 2003 Period. Corporate administrative expenses did not increase at the same rate asrevenues increased during the comparable period.

 

Interest expense increased $40,000 from $121,000during the Three Month 2004 Period as compared to the Three Month 2003 Periodprimarily due to the reclassification of dividends as interest expense onpreferred stock issued in conjunction with the Plan in accordance with SFAS150.

 

Interest and dividend income is the result of theCompany’s investments in marketable securities.

 

The Company also recognized a gain of $1,631,000 onthe sale of securities during the Three Month 2004 Period.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s operations and growth have been financedwith funds provided by the Merger in conjunction with the Plan, bank borrowingsand funds generated from operations.

 

Under the terms of the Plan, the Company cancelled allequity interests as of the Confirmation Date, which included all common andpreferred shareholder interests, and interests of any holders of options orwarrants, and issued 2,079,948 shares of Common Stock to its unsecuredcreditors in exchange for cancellation of indebtedness upon completion of theMerger on August 30, 2002.  The equityholders of CMHI received 1,071,636 shares of Series A Preferred Stock and 500,042shares of Series B Preferred Stock.  TheSeries B Preferred Stock is convertible at a ratio of approximately 3.44 sharesof Common Stock for each share of Series B Preferred Stock to a total of1,720,130 shares of Common Stock.  As aresult of the Merger, the Company received $2,565,000 in cash and $5,084,000 inmarketable securities.

 

The Company negotiated a post-confirmation creditfacility with a Bank in the amount of $4,500,000 that matures on December 31,2003 and bears interest at the prevailing prime rate plus 2.0% (the “CreditFacility”).  The Company also pledgedadditional collateral in the form of marketable securities totaling $1,200,000to Comerica Bank.  Under the terms ofthe Credit Facility, the Company is required to maintain certain financialratios and comply with certain technical covenants.  The Company was in compliance with the requirements and covenantsas of September 30, 2003.  During theThree Month Fiscal 2004 Period the Company paid fees associated with the CreditFacility totaling $18,000.

 

As of September 30, 2003 the Company’s sources ofliquidity were $2,564,000 in cash and cash equivalents, $4,591,000 inmarketable securities, $186,000 in trade accounts receivable, $576,000 in pawnservice charges receivable, $5,250,000 in pawn loan receivables and $2,825,000 ininventories.  The Company also had$299,000 available under the Credit Facility.

 

The Company’s profitability and liquidity is affectedby the amount of loans outstanding, which is controlled in part by theCompany’s lending decisions.  TheCompany is able to influence the frequency of forfeiture of collateral byincreasing or decreasing the amount loaned in relation to the sales value ofthe pledged property.  Tighter creditdecisions generally result in smaller loans in relation to the estimated sales valueof the 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 in relation to the estimatedsales value of the pledged property can result in an increase in the Company’spawn service charge income.  Higheraverage loan balances can also result in a slight increase in loan forfeitures,which increases the quantity of goods on hand and, unless the Company increasesinventory turnover, reduces the Company’s liquidity.

 

17

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The Company believes it has sufficient working capitalto fund its current operations for Fiscal 2004.  The Company’s ability to expand through the acquisition of newstores and other businesses will be dependent on its ability to replace itsexisting Credit Facility with a new borrowing agreement.  The Company’s current lender, has indicatedthat it will renew the loan on terms that may or may not be acceptable to theCompany.  Management is also innegotiations with several lenders to provide a new credit facility, but thereare no assurances that a new facility can be arranged prior to the maturitydate.  In the event a new creditfacility is unavailable, the Company has sufficient working capital on hand asof September 30, 2003 to pay off the Credit Facility.

 

The Series A Preferred Stock must be redeemed for cashat $5.00 per share by the Company beginning April 30, 2005 in amounts of atleast $500,000 per year.  Each April 30thereafter through 2009 an additional 100,000 shares must be redeemed for cashat $5.00 per share.  On April 30, 2010any unredeemed shares must be redeemed for cash at $5.00 per share plus anyaccrued and unpaid dividends.

 

**ITEM 3****.****                             CONTROLSAND PROCEDURES**

 

Under the supervision of, and with the participationof management, including the Chief Executive Officer and Chief FinancialOfficer, the Company has evaluated its disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934, as amended) as of the end of the period covered by this report asrequired by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of1934, as amended.  Based on thisevaluation, the Company has concluded that its disclosure controls andprocedures were operating effectively 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’s internalcontrols over financial reporting (as defined in Rules 13a-15(f)and 15d-15(f) of the Securities and Exchange Act of 1934, as amended)during its most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

18

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**PARTII.  OTHER INFORMATION**

 

**ITEM 1.****                             LEGAL PROCEEDINGS** - None

 

**ITEM 2.****                             CHANGES IN SECURITIES -**None

 

**ITEM 3.****                             DEFAULTS UPON SENIOR SECURITIES -**None

 

**ITEM 4.****                             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** - None

 

**ITEM 5.****                             OTHER INFORMATION** - None

 

**ITEM 6.****                             EXHIBITS AND REPORTS ON FORM 8-K**

 

**(a)****                                  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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*                               Filedherewith.

 

**(b)****                                  Reportson Form 8-K**- none

 

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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) |
|-------------------|-------------------------------|
|              |                          |
|              |                          |
| December 29, 2003 | By:                           |   /s/ John R. Boudreau |
|              |                          | John R. Boudreau, President and Chief  Executive Officer |
|              |                          |
| December 29, 2003 | By:                           |   /s/ Robert W. Schleizer |
|              |                          | Robert W. Schleizer, Executive Vice  President and Chief Financial Officer |

 

20

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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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