**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB/A**

**(AmendmentNo. 2)**

 
| **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                   .** |

 

**Commission File No. 1-13919**

 

**Xponential, Inc.**

(Exact name of small business issuer as specified inits charter)

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

 

**6400Atlantic Blvd., Suite 190, Norcross, Georgia 30080**

(Address of principal executive offices)

 

**(678)720-0660**

(Issuer’s telephone number)

 

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 forsuch shorter 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 ý  No o

 

Check whether the registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Exchange Act afterdistribution of 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 o No ý

 

 

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**EXPLANATORYNOTE**

 

An income tax provision was recorded toaccount for income taxes as required under American Institute of CertifiedPublic Accountants Statement of Position 90-7 for entities which  emerge from bankruptcy.  Income tax expense was increased to $568,000from $18,000 for the three months ended September 30, 2003 as a result of thecorrection of the error.  This amendmentreclassifies amounts between additional paid in capital and retained earningsat September 30, 2003 for the effect of recording income taxes for the tenmonths ended June 30, 2003. Certain footnote disclosures have also been amendedto account for the additional income tax expense.  See Note 9 for a description of the restatement.

 

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                                                                                                                        |   |

 

3

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

 

**XPONENTIAL,INC. AND SUBSIDIARIES**

 

Consolidated Balance Sheets

(In thousands, except share and per sharedata)

 
|                                                                                                                                                                                          |   | **September 30,  2003**   |   | **June 30,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                          |   | **(Unaudited)  (As restated)** |   | **(As  restated)**      |   |
| 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                                                                                                                                                                    |   | 4,985                          |   | 4,403                   |   |
| Retained earnings (acccumulated deficit)                                                                                                                                                      |   | 981                            |   | (7                      | )      |
| 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 to consolidatedfinancial statements.

 

4

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**XPONENTIAL,INC. AND SUBSIDIARIES**

 

Consolidated Statements of Operations

(Unaudited)

 

(In thousands, except per share 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** |   |
|                                                                                                      |   | **(As  restated)**                                 |   |                                        |   |                                           |   |                                               |   |
| 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                                              |   | —                                      |   | —                                         |   | —                                             |   |
| Reorganization expenses                                                                                   |   | —                                             |   | (241                                        | )      | —                                         |   | (241                                               | )      |
| Net income/(loss) before taxes and  extraordinary items                                                   |   | 1,605                                              |   | (225                                        | )      | (13                                            | )      | (238                                               | )      |
| Income tax provision                                                                                      |   | 586                                                |   | —                                      |   | —                                         |   | —                                             |   |
| Extraordinary items:                                                                                      |   |                                               |   |                                        |   |                                           |   |                                               |   |
| Gain on debt discharge                                                                                    |   | —                                             |   | 11,810                                      |   | —                                         |   | 11,810                                             |   |
| Net income/(loss)                                                                                         |   | 1,019                                              |   | 11,585                                      |   | (13                                            | )      | 11,572                                             |   |
| Preferred stock dividend requirement                                                                      |   | (31                                                | )      | —                                      |   | (33                                            | )      | (33                                                | )      |
| Net income/(loss) allocable to common  stockholders                                                       |   | $                                                  | 988    |                                        | $      | 11,585                                         |   | $                                                  | (46    | ) | $ | 11,539 |   |
|                                                                                                      |   |                                               |   |                                        |   |                                           |   |                                               |   |
| Income (loss) per common share (note 5):                                                                  |   |                                               |   |                                        |   |                                           |   |                                               |   |
| Basic                                                                                                     |   |                                               |   |                                        |   |                                           |   |                                               |   |
| Continuing Operations                                                                                     |   | $                                                  | 0.48   |                                        | $      | (0.09                                          | )      | $                                                  | (0.02  | ) | $ |   | * |
| Extraordinary Items                                                                                       |   | —                                             |   | 4.72                                        |   | —                                         |   |                                               | *      |
|                                                                                                      |   | $                                                  | 0.48   |                                        | $      | 4.63                                           |   | $                                                  | (0.02  | ) | $ |   | * |
| Diluted                                                                                                   |   |                                               |   |                                        |   |                                           |   |                                               |   |
| Continuing Operations                                                                                     |   | $                                                  | 0.27   |                                        | $      | (0.09                                          | )      | $                                                  | (0.02  | ) | $ |   | * |
| Extraordinary Items                                                                                       |   | —                                             |   | 4.72                                        |   | —                                         |   |                                               | *      |
|                                                                                                      |   | $                                                  | 0.27   |                                        | $      | 4.63                                           |   | $                                                  | (0.02  | ) | $ |   | * |

 

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* Loss per share for period includes periods prior to and after Planconsummation and merger are therefore not meaningful.

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**XPONENTIAL,INC. AND SUBSIDIARIES**

 

Consolidated Statements of Cash Flows

(Unaudited)

 

(In thousands)

 
|                                                                                  |   | **Reorganized  Company**                                   |   | **Predecessor**                                       |   | **Reorganized  Company**                                |   |                                                       |   |
|---------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                                  |   | **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** |   |
|                                                                                  |   | **(As  Restated)**                                         |   |                                                  |   |                                                    |   |                                                       |   |
| Cash flows from operating activities:                                                 |   |                                                       |   |                                                  |   |                                                    |   |                                                       |   |
| Net income/ (loss)                                                                    |   | $                                                          | 1,019  |                                                  | $      | 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                                                         |   |
| Gain on debt discharge                                                                |   | —                                                     |   | (11,810                                               | )      | —                                                  |   | (11,810                                                    | )      |
| Gain on sale of investments                                                           |   | (1,631                                                     | )      | —                                                |   | —                                                  |   | —                                                     |   |
| Deferred income tax expense related to  bankruptcy                                    |   | 568                                                        |   | —                                                |   | —                                                  |   | —                                                     |   |
| 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 - Companyacquired CMHI on August 30, 2002 including $2.6 in cash and $5.1 millionin marketable securities in exchange for preferred stock.  See note 2 for more complete explanation.

 

See accompanying notes to consolidatedfinancial statements.

 

6

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**XPONENTIAL,INC. AND SUBSIDIARIES**

 

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)                      Basis of Presentation

 

The accompanying financial statements havebeen prepared in accordance with the American Institute of Certified PublicAccountants Statement of Position 90-7: “Financial Reporting by Entities inReorganization Under the Bankruptcy Code” (“SOP 90-7”) and generally acceptedaccounting principles for interim financial information and therefore do not includeall disclosures necessary for complete financial statements.  In the opinion of management, alladjustments have been made that are necessary for a fair presentation of thefinancial position and results of operations as of and for the periods presented.

 

The Board of Directors of the Companydetermined in May 2002 that it was in the Company’s best interest to change itsfiscal year end from the Saturday nearest January 31 to June 30 tomore accurately reflect the Company’s post bankruptcy operating results. Theresults of operations for the interim periods ended September 30, 2003 andSeptember 30, 2002 are not necessarily indicative of the results that maybe expected for the entire fiscal year or any other interim period.

 

The financial statements should be read inconjunction with the financial statements for the fiscal year endedJune 30, 2003 included in the Company’s Form 10-KSB and Form 10-KSB/A(Amendment No. 1) which have been previously filed with the Securities andExchange Commission.

 

Xponential, Inc., formerly PawnMart, Inc.(the “Company”), was incorporated in Delaware on January 13, 1994.  Effective February 28, 2003, theCompany changed its name to “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 property,and buying and selling pre-owned merchandise. As of September 30, 2003, the Company owned and operated 27 storeslocated in Georgia, North Carolina, and South Carolina.

 

The Company successfully emerged frombankruptcy on August 30, 2002 when it consummated a merger (the “Merger”)with C/M Holdings, Inc. (“CMHI”).  Thereorganized Company adopted fresh-start reporting (Note 2) and gave effect toits emergence from bankruptcy and consummation of the Plan on August 30,2002, including recognition of certain reorganization expenses associated withthe Merger in the Company’s Statement of Operations for the two months endedAugust 31, 2002.

 

Fresh-start reporting as set forth in SOP90-7 required that the reorganized Company restate its assets and liabilitiesto reflect their reorganization value, which approximates fair value at thedate of the reorganization.  In sorestating, SOP 90-7 required the reorganized Company to allocate itsreorganization value to its assets based upon their estimated fair value.  Each liability existing on the ConfirmationDate is to be stated at the present value of amounts to be paid, determinedusing an appropriate discount rate.

 

The fresh-start reporting reorganizationvalue of approximately $7.6 million resulted in a net value of approximately$1.9 million to the new common equity holders after allowance for postconfirmation 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 was based on estimates andassumptions about circumstances in a relatively high-risk investment scenariothat have not yet taken place in which there are significant economic andcompetitive uncertainties beyond the control of the reorganized Company.

 

Management believes the reorganized Companyhas sufficient liquidity and capital resources to meet its financialobligations and to make planned capital expenditures and debt payments as aresult of the Merger.  Future operatingperformance and expected cash flows will be subject to financial, economic andother factors affecting the business and operations beyond its control and willaffect the Company’s ability to expand its business as anticipated in itsfinancial plan.

 

7

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In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” (“SFAS 150”). This statement was effective for interim periods afterJune 15, 2003 and required that mandatorily redeemable preferred stock beclassified as a liability and related dividends be charged to the Company’s statement of operations.  Accordingly, the Company has reclassifiedits Preferred Stock – Series A to liabilities. Prior to June 15, 2003, thecharges 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, thecarrying value of the Company’s mandatorily redeemable preferred stock was$5,358,000.  The related dividends thatwould have been reflected as interest expense for the three months endedSeptember 30, 2002 was $22,000. Subsequent to the adoption of SFAS 150, the Company has reflected$67,000 as interest expense for the three months ended September 30, 2003.

 

(2)                      Plan of Reorganization -Fresh-start Reporting

 

Under the terms of the Plan, the Company cancelledall equity interests of its common and preferred shareholders and interests ofany holders of options and warrants. The Company issued 2,079,948 shares of Common Stock to its unsecuredcreditors in exchange for release of indebtedness and in connection with theMerger of the Company with CMHI, which is owned in part by Dwayne A. Moyers andJeffrey A. Cummer, officers and directors of the Company, issued 1,071,636shares of Series A Preferred Stock and 500,042 Series B Preferred Stock to theformer shareholders of CMHI.  At thetime of the Merger with CMHI, CMHI did not have any business operations andprincipally held investments.

 

The Company is paying the prepetitionpriority tax claims over a six year period from the assessment date withinterest at 7% per annum in quarterly installments of approximately $35,000 inaccordance with the Plan.

 

The Bankruptcy Court confirmed the Plan onMay 20, 2002 with an Effective Date of May 31, 2002.  The consummation of the Plan was contingent on several materialevents including consummation of the Merger which occurred on August 30,2002 which is reported herein as a material business combination.

 

The Company acquired 100 percent of theoutstanding 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’s reorganization value, computedimmediately before the Merger, was $7,567,000.

 

8

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The Company adopted fresh-start reportingbecause holders of existing voting shares immediately before confirmation ofthe Plan received less than 50% of the voting shares of the emerging entity(all pre-confirmation equity interests were cancelled), and the reorganization valueis less than the postpetition liabilities and allowed claims, as shown below.

 

The reorganization value was determined inconsideration of several factors and by reliance on various valuation methodsincluding discounting cash flow, book value multiples of comparable companiesin the Company’s industry, net realizable value of  asset sales and other applicable methods.  The Company assigned no value to its netoperating loss carryovers in the calculation of its reorganization value due tothe lack of certainty of utilizing the net operating loss based on historicaloperating results and the potential limitations 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 of the Company’s debtcapacity, extensive negotiations among parties in interest, projected earningsbefore interest and taxes, free cash flow to interest and debt service andother capital considerations, it was agreed that the Company’s organizationcapital 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 $605,000payable in quarter installments of approximately $100,000  per year at 7% interest per annum.

 

9

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On August 30, 2002, the Company acquired 100 percent of the outstandingcommon shares of CMHI pursuant the Plan.

 

The aggregate purchase price for CMHI was approximately $7.8 millionwhich was paid through the issuance of Series A and Series B Preferred Stockvalued at $5.3 million and $2.5 million, respectively.  The value of the Preferred Stock was basedon liquidation preferences and dividend and conversion features.

 

The following table summarizes the estimated value of the acquiredassets and liabilities assumed at 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 in other assets, $5.0 million are investments inmarketable securities.

 

The following is a condensed consolidated balance sheet August 30, 2002(unaudited), which reflects 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 torelated parties payable on completion of Merger.

 

10

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(3)       Notes Payable

 

*Revolving Credit Facility-*

 

The Company emerged from bankruptcy with a new $4,500,000 creditfacility (the “Credit Facility”) effective September 1, 2002 upon consummationof the Plan with the completion of the Merger on August 30, 2002.  The Credit Facility, which was modified onMay 19, 2003, bears interest at the current prevailing prime rate plus 2% andmatures on December 31, 2003. Amounts available under the Credit Facility are limited to certainpercentages of pawn loans, inventories, and pawn service charges receivable.  The Credit Facility is collateralized bysubstantially all of the unencumbered assets of the Company.  At September 30, 2003, $4,201,000 wasoutstanding under the Credit Facility and an additional $299,000 was availableto 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)       Stock Option Plan 

 

Effective January 1, 2003, the Company adopted the fair value methoddefined in SFAS No. 123, “Accounting for Stock-Based Compensation,” inaccounting for the Company’s stock option plans. Previously the Company appliedAccounting Principles Board’s Opinion No. 25, (“APB No. 25”), “Accounting forStock Issued to Employees,” and related Interpretations. SFAS No. 123 indicatesthat the fair value method is the preferable method of accounting, and theCompany has elected to apply it for all options granted for the reorganizedCompany.  Under APB No. 25, compensationcosts related to stock options issued pursuant to compensatory plans aremeasured based on the difference between the quoted market price of the stockat the measurement date (ordinarily the date of grant) and the exercise priceand should be charged to expense over the periods during which the granteeperforms the related services.  Alloutstanding stock options were cancelled in accordance with the Plan which wasconfirmed on May 20, 2002.

 

The Company adopted its 2003 Stock Option Plan (“Stock Option Plan”)and 2003 Stock Incentive Plan (“Incentive Plan”) effective January 1,2003.  Under the Stock Option Plan  stock options have been awarded todirectors, officers and employees. These stock options vest either immediately or over a period two yearsfrom the date certain contingency conditions are satisfied and expire ten yearsthereafter.  A total of 675,000 sharesof common stock are reserved for grant under the Stock Option Plan and a totalof the greater of 325,000 or the number of shares equal to 5% of the total number of shares of Common Stockoutstanding are reserved for issuance under the Incentive Plan.  In February 2003, the Company grantedoptions covering 455,000 common shares from the Stock Option Plan of which299,000 shares were immediately exercisable. The remaining options for thegrant of 156,000 shares were contingent upon achieving $500,000 EBITDA for thefiscal year ended June 30, 2003 which the Company did achieve.  These options vest 66 2/3% on June 30, 2004and 33 1/3% on June 30, 2005.  The$8,000 cost of these options is being amortized over the vesting perioddescribed above.   The Companyrecognized $1,200 of compensation expense for options granted during the threemonth period ended September 30, 2003. The Incentive Plan provides an opportunity to employees of the Companyto purchase common shares directly from the Company through payroll deductions.As of September 30, 2003, no shares have been issued under the Incentive Plan.

 

The following table summarizes the stock option activity of thereorganized Company from the time it 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 Average Shares and Net Income(Loss) Per Common Share

 

Net income (loss) per common share is calculated as required by FASBStatement of Financial Accounting Standards No. 128, “Earnings Per Share”(“Statement No. 128”).  Statement No.128 requires dual presentation of basic and diluted earnings per share and areconciliation between the two amounts. Basic earnings per share excludes dilution, and diluted earnings pershare reflects the potential dilution that would occur if securities for thepurchase of Common Stock were exercised. In loss periods, dilutive common equivalent shares are excluded as theeffect would be antidilutive.

 

The Company issued 2,079,948 shares of Common Stock upon consummationof the Plan and  500,042 shares ofSeries B Preferred Stock which is convertible at the option of the holders into1,720,130 shares of the Company’s Common Stock.  In loss periods, dilutive common equivalent shares are excludedas the effect would be antidilutive.

 

The reconciliation of basic and diluted weighted average common sharesand the reconciliation for the basic and diluted earnings per common share forthe three months ended September 30, 2003 following consummation of the Planand the issuance of the new common and convertible preferred stock pursuant tothe 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                    |   | $                                                  | 988,000   |       | 2,079,948 |          | $      | 0.48 |   |
|                                               |   |                                               |      |       |      |          |   |
| Effect of preferred dividend-Series B              |   | 31,000                                             |      | 1,720,130  |      |          |   |
|                                               |   |                                               |      |       |      |          |   |
| Diluted earnings per common share                  |   | $                                                  | 1,019,000 |       | 3,800,078 |          | $      | 0.27 |   |

 

12

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Series A preferred shares have been excluded from the computation ofdiluted earnings per share because the shares are not convertible into commonshares and are not dilutive. Accordingly, dividends paid  tothe Series A preferred shareholders in the amount of $67,000 during the threemonths ended September 30, 2003 are not included in the computation of dilutedearnings per share.

 

Stock option grants of 442,000 have been excluded from the computationbecause they are antidilutive.

 

(6)       Investmentsin Marketable Securities

 

Marketable equity securities have been categorized asavailable-for-sale and carried at fair value. Unrealized gains and losses for available-for-sale securities areincluded as a component of shareholders’ equity net of tax until realized.  Realized gains and losses on the sale ofsecurities are based on the specific identification method.  The Company continually reviews itsinvestments to determine whether a decline in fair value below the cost basisis other than temporary.  If the declinein the fair value is judged to be other than temporary, the cost basis of thesecurity is written down to fair value and the amount of the write-down isincluded in the consolidated statement of operations.

 

As of September 30, 2003, the Company owned the following marketablesecurities:

 
| **(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, the Company 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)       Comprehensive Income

 

Comprehensive income is as follows:

 
| **(in thousands)**                                         |   | **For the  Three Month  Period Ended  September 30, 2003** |   |
|------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                       |   |                                                       |   |
| Net income                                                 |   | $                                                          | 1,019  |   |
| Unrealized gain from available for sale  securities        |   | 134                                                        |   |
| Reclassification of realized gains included  in net income |   | (1,631                                                     | )      |
|                                                       |   |                                                       |   |
| Comprehensive income (loss)                                |   | $                                                          | (478   | ) |

 

(8)       Subsequent Events

 

In October 2003 the Company provided financing for American IronHorseMotorcycle Company, Inc. (“AIMC”), a Texas corporation, in the amount of$1,000,000.  Dwayne A. Moyers, adirector and officer of the Company, is a director and principal shareholder ofAIMC.  The financing provides forinterest to the Company at the rate of 12% per annum payable monthly and amanagement fee of $5,700 per week plus twenty-five (25) shares of common stockof AIMC for each hour worked by Robert W. Schleizer, a director and officer ofthe Company.  The Company received a$50,000 investment fee at the time the financing was provided and will receivean additional $50,000 investment fee at maturity or conversion of thenote.  The Company has the right toconvert the note into common stock in AIMC at a rate of one share for each$6.00 of principal and accrued interest converted, for a maximum of 166,667shares.  The Company also received warrantsto purchase 100,000 shares of AIMC common stock at $15.00 per share inconnection with the financing.

 

(9)       Restatement of Annual and Quarterly Financial Statements

 

The financial statements for the ten months ended June 30, 2003 and forthe three months ended September 30, 2003 have been restated from amountspreviously reported to reflect the correction of an error for theunderstatement of income tax expense related to the utilization of theCompany’s net operating loss carryforwards not previously recorded upon theemergence from bankruptcy.  Therestatement increased income tax expense by $197,000 for the ten months endedJune 30, 2003 and increased income tax expense and reduced net income by$568,000 for the three months ended September 30, 2003.with a correspondingincrease in paid in capital.  There is no effect on cash flows of theCompany for this restatement.

 

14

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

 

### *Statements appearingin the following discussion that are not historical facts are forward-lookingstatements (“forward-looking statements”) within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, which are intended to be covered by the safeharbors created by those sections.  Suchforward-looking statements are necessarily estimates reflecting the bestjudgment of the Company’s management based upon current information and involveknown and unknown risks, uncertainties and other factors which may cause theactual results, performance or achievements of the Company, or industryresults, to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors,include, but are not limited to, those set forth and those appearing from timeto time in filings made by the Company with the Securities and ExchangeCommission.  These risks, uncertaintiesand other factors should not be construed as exhaustive and the Company doesnot undertake, and specifically disclaims any obligation, to update anyforward-looking statements to reflect occurrences or unanticipated events orcircumstances after the date of such statements.*

### * *

*In addition, thefollowing discussion and analysis should be read in conjunction with theCompany’s financial statements and notes thereto and other financial dataincluded in the Company’s Form 10-KSB and Form 10-KSB/A for the fiscal yearended June 30, 2003.*

 

GENERAL

 

Xponential, Inc.(the “Company”) is a specialty finance and retail enterprise principallyengaged in establishing and operating stores which advance money secured by thepledge of tangible personal property and sell pre-owned merchandise to thevalue-conscious consumer.  The Companygenerates income through collection of a monthly service charge from advancingmoney to individuals based primarily upon the estimated resale value of pledgedpersonal property such as jewelry, consumer electronics, tools, musicalinstruments, firearms, automobiles and other miscellaneous items and throughprofit realized on the retail sale of the unredeemed or other purchasedpre-owned merchandise.

 

The Company’stotal revenues are derived primarily from service charges on loans and theproceeds from the sales of merchandise inventory.  The Company’s pawn loans are generally made on the pledge oftangible personal property for one month, with an automatic sixty-day extensionperiod.  All pawn loans arecollateralized by tangible personal property placed in the possession of theCompany, except for automobile title loans. During the term of an automobile title loan, the borrower is allowed tomaintain possession of the collateral. Pawn service charges are recognized when loans are repaid orrenewed.  If a loan is not repaid, theprincipal amount advanced on the loan, exclusive of any uncollected pawnservice charges, becomes the carrying value of the forfeited collateral (inventory),which is recovered through subsequent sales.

 

The Company filed forprotection under the Bankruptcy Code on July 9, 2001.  The Company operated as debtor in possession throughout thebankruptcy proceedings. The Plan was filed on February 15, 2002 and was amendedon April 3, 2002.  A confirmationhearing for the Plan was held on May 20, 2002 and the Plan was confirmed by theBankruptcy Court as of that date with an effective date of May 31, 2002.

 

Pursuant to the Plan, theCompany issued 2,079,948 shares of Common Stock to its unsecured creditors inexchange for release from indebtedness. The Company also completed a merger with C/M Holdings, Inc., a Texascorporation (“CMHI”), whereby the equity holders of CMHI received two newclasses of Preferred Stock, 1,071,636 shares of Series A Preferred Stock and500,042 shares of Series B Preferred Stock. The 500,042 shares of Series B Preferred Stock are convertible into1,720,130 shares of Common Stock, or approximately 45% of the total CommonStock.  The Company also negotiated aPost-Confirmation Credit Facility with a Bank in the amount of $4,500,000.  Terms of the Plan are set forth in theCompany’s Form 10-KSB for the year ended June 30, 2003.

 

Selectedelements of the Company’s unaudited statements of operations are shown belowfor the three months ended September 30, 2003 and September 30, 2002 as apercentage of total revenues.  Thefollowing table, as well as the discussion following, should be read in conjunctionwith the Company’s financial statements and notes thereto and other financialdata included in the Company’s Form 10-KSB and Form 10-KSB/A for the fiscalyear 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                                                |   |
| Operating income (loss)                                                  |   | (2.7                                                  | )      | 0.6                                              |   | (1.0                                               | )      |
| Gain on sale of marketable securities                                    |   | 34.8                                                  |   | —                                           |   | —                                             |   |
| Net income (loss) before income taxes                                    |   | 32.3                                                  | %      | 0.6                                              |   | (1.0                                               | )      |
| Income tax provision                                                     |   | 11.8                                                  |   | —                                           |   | —                                             |   |
| Net income (loss) before income taxes                                    |   | 20.5                                                  | %      | 0.6                                              | %      | (1.0                                               | )%     |

 

----

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

 

**RESULTS OF OPERATIONS**

** **

*ThreeMonths Ended September 30, 2003 Compared to Three Months Ended September 30,2002*

* *

Total revenuesincreased 29.1% to $4,984,000 during the three months ended September 30, 2003(the “Three Month 2004 Period”) as compared to $3,860,000 during the threemonths ended September 30, 2002 (the “Three Month 2003 Period”).  The overall increase was attributableprimarily to increases in pawn service charges on car loans and increasedjewelry scrap sales.  Stores thatremained open for the full 12 months or more as of September 30, 2003 (the“Comparable Stores”) experienced a net increase in revenues of $1,085,000 or28.3%.

 

Merchandisesales increased 32.4% to $3,321,000 during the Three Month 2004 Period from$2,508,000 during the Three Month 2003 Period primarily due to increasedjewelry scrap sales.  Sales in ComparableStores for the Three Month 2004 Period increased $728,000 or 28.6%.

 

Pawn servicecharges increased $346,000 or 27.2% to $1,618,000 during the Three Month 2004Period from $1,272,000 during the Three Month 2003 Period primarily due toincreased pawn service charges on car loans for the Three Month 2003Period.  Pawn service charges fromComparable Stores increased $329,000 or 25.9% for the Three Month 2004 Periodas compared to the Three Month 2003 Period.

 

Gross profitincreased 8.9% to $2,302,000 during the Three Month 2004 Period from $2,113,000during the Three Month 2003 Period primarily due to increased pawn servicecharges on car loans and increased scrap jewelry sales.  Gross profit for Comparable Stores increased$183,000 for the Three Month 2004 Period as compared to the Three Month 2003Period, an 8.8% increase.  Gross profitas a percentage of total revenues decreased to 46.2% during the Three Month2004 Period as compared to 54.7% during the Three Month 2004 Period primarilyas a result lower margins on merchandise sales due to more aggressive lendingpractices.

 

Store operatingexpenses increased to $1,518,000 for the Three Month 2004 Period from$1,345,000 during the Three Month 2003 Period primarily due to increasedpersonnel expenses for additional car title and compliance personnel.   On a Comparable Store basis, storeoperating expenses were 29.8% of total revenues during the Three Month 2004Period compared to 35.11% of total revenues during the Three Month 2003 Periodprimarily due to lower personnel and occupancy costs as a percentage of totalrevenue.

 

16

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Storecontribution margin (defined as total store revenues less direct operatingexpenses, which exclude corporate administrative expenses, interest expense,and depreciation and amortization expense) increased to $784,000 from $768,000during the Three Month 2004 Period compared to Three Month 2003 Periodprimarily due to increased pawn service charges on car loans, increased scrap jewelrysales offset by the lower gross profit on merchandise sales and costsattributable to two new stores.

 

Corporateadministrative expenses increased 14.9% to $641,000 during the Three Month 2004Period from $558,000 during the Three Month 2003 Period primarily due to costsrelated to additional personnel. Corporate administrative expenses decreased to 12.9% of total revenuesduring the Three Month 2004 Period as compared to 20.7% during the Three Month2003 Period.  Corporate administrativeexpenses did not increase at the same rate as revenues increased during thecomparable period.

 

Interestexpense increased $40,000 from $121,000 during the Three Month 2004 Period ascompared to the Three Month 2003 Period primarily due to the reclassificationof dividends as interest expense on preferred stock issued in conjunction withthe Plan in accordance with SFAS 150.

 

Interest anddividend income is the result of the Company’s investments in marketablesecurities.

 

The Companyalso recognized a gain of $1,631,000 on the sale of securities during the ThreeMonth 2004 Period.

 

The Companyrecognized income tax expense of $586,000 during the Three Month 2004 Period ofwhich $568,000 is the result of the utilization of net operating losscarryforwards not previously recognized upon the emergence from bankruptcy andis offset with a corresponding increase to paid in capital and therefore has noeffect on the Company’s cash flows.

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

The Company’soperations and growth have been financed with funds provided by the Merger inconjunction with the Plan, bank borrowings and funds generated from operations.

 

Under the terms ofthe Plan, the Company cancelled all equity interests as of the ConfirmationDate, which included all common and preferred shareholder interests, andinterests of any holders of options or warrants, and issued 2,079,948 shares ofCommon Stock to its unsecured creditors in exchange for cancellation ofindebtedness upon completion of the Merger on August 30, 2002.  The equity holders of CMHI received1,071,636 shares of Series A Preferred Stock and 500,042 shares of Series BPreferred Stock.  The Series B PreferredStock is convertible at a ratio of approximately 3.44 shares of Common Stockfor each share of Series B Preferred Stock to a total of 1,720,130 shares ofCommon Stock.  As a result of theMerger, the Company received $2,565,000 in cash and $5,084,000 in marketablesecurities.

 

The Companynegotiated a post-confirmation credit facility with a Bank in the amount of $4,500,000that matures on December 31, 2003 and bears interest at the prevailing primerate plus 2.0% (the “Credit Facility”). The Company also pledged additional collateral in the form of marketablesecurities totaling $1,200,000 to Comerica Bank.  Under the terms of the Credit Facility, the Company is requiredto maintain certain financial ratios and comply with certain technicalcovenants.  The Company was incompliance with the requirements and covenants as of September 30, 2003.   During the Three Month Fiscal 2004 Periodthe Company paid fees associated with the Credit Facility totaling $18,000.

 

As of September30, 2003 the Company’s sources of liquidity were $2,564,000 in cash and cashequivalents, $4,591,000 in marketable securities, $186,000 in trade accountsreceivable, $576,000 in pawn service charges receivable, $5,250,000 in pawnloan receivables and $2,825,000 in inventories. The Company also had $299,000available  under the Credit Facility.

 

The Company’sprofitability and liquidity is affected by the amount of loans outstanding,which is controlled in part by the Company’s lending decisions.  The Company is able to influence thefrequency of forfeiture of collateral by increasing or decreasing the amountloaned in relation to the sales value of the pledged property.  Tighter credit decisions generally result insmaller loans in relation to the estimated sales value of the pledged propertyand can thereby decrease the Company’s aggregate loan balance and,consequently, decrease pawn service charges. Additionally, lower loans in relation to the pledged property’sestimated sales value tend to slightly increase loan redemptions and improvethe Company’s liquidity.  Conversely,providing higher loans in relation to the estimated sales value of the pledgedproperty can result in an increase in the Company’s pawn service chargeincome.  Higher average loan balancescan also result in a slight increase in

 

17

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loan forfeitures,which increases the quantity of goods on hand and, unless the Company increasesinventory turnover, reduces the Company’s liquidity.

 

The Companybelieves it has sufficient working capital to fund its current operations forFiscal 2004.  The Company’s ability toexpand through the acquisition of new stores and other businesses will bedependent on its ability to replace its existing Credit Facility with a newborrowing agreement.  The Company’scurrent lender, has indicated that it will renew the loan on terms that may ormay not be acceptable to the Company. Management is also in negotiations with several lenders to provide a newcredit facility, but there are no assurances that a new facility can bearranged prior to the maturity date.  Inthe event a new credit facility is unavailable, the Company has sufficientworking capital on hand as of September 30, 2003 to pay off the CreditFacility.

 

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

 

18

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|             | XPONENTIAL,  INC. (Registrant) |
|------------------|--------------------------------|
|             |                           |
|             |                           |
| August  27, 2004 | By:                            | /s/  Robert W. Schleizer |   |
|             |                           | Robert  W. Schleizer, Executive Vice |   |
|             |                           | President  and Chief Financial Officer |   |

 

19

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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 Rule 13a-14(b) or 15d-14(b) under the  Securities Exchange Act of 1934, as amended |
|       |   |                                                                                                                                     |
| 32.2       |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) under the  Securities Exchange Act of 1934, as amended |

 

20

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