What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2024-05-06 · 245 added, 102 removed, 346 unchanged (50% of the section changed)

6 unchanged sentences

Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 66.7% ownership interest in XPO LLC through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”).

We operate a diversified platform of ten brands spanning across verticals including Pilates, indoor cycling, barre, stretching, rowing, dancing, boxing, functional training, metabolic health and yoga.

We operate a diversified platform of nine brands spanning across verticals including Pilates, indoor cycling, barre, stretching, dancing, boxing, functional training, metabolic health and yoga.

In partnership with its franchisees and master franchisees, XPO LLC offers energetic, accessible, and personalized workout experiences led by highly qualified instructors in studio locations throughout North America and internationally, with franchise, master franchise and international expansion agreements in 49 U.S.

states and 22 additional countries as of March 31, 2024.

states, Puerto Rico, and 26 additional countries as of June 30, 2024.

The Company's portfolio of brands includes Club Pilates, the largest Pilates brand in the United States;

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StretchLab, a concept offering one-on-one and group stretching services;

Row House, the largest franchised indoor rowing brand in the United States;

AKT, a dance-based cardio workout combining toning, interval and circuit training;

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and Lindora, a provider of medically guided wellness and metabolic health solutions, which was acquired on January 2, 2024.

As of March 31, 2024, 2,724 studios were open in North America and franchisees were contractually committed to open 1,914 additional studios under existing franchise agreements.

In addition, as of March 31, 2024, we had 432 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,045 new studios, of which master franchisees have sold 265 licenses for studios not yet opened as of March 31, 2024.

During the three months ended March 31, 2024 and 2023, we generated revenue outside the United States of $3.1 million and $3.0 million, respectively.

As of March 31, 2024 and December 31, 2023, we did not have material assets located outside of the United States.

As of June 30, 2024, 2,660 studios were open in North America (consists of Canada, the United States and U.S.

territories) and franchisees were contractually committed to open 1,810 additional studios under existing franchise agreements.

In addition, as of June 30, 2024, we had 442 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,048 new studios, of which master franchisees have sold 261 licenses for studios not yet opened as of June 30, 2024.

During the six months ended June 30, 2024 and 2023, we generated revenue outside the United States of $6.6 million and $7.0 million, respectively.

As of June 30, 2024 and December 31, 2023, we did not have material assets located outside of the United States.

No franchisee accounted for more than 5% of our revenue.

We operate in one segment for financial reporting purposes.

Appointment of New Chief Executive Officer and Director

On May 10, 2024, Mr.

Anthony Geisler, our former Chief Executive Officer and member of our board of directors, was removed by our board of directors from his duties and suspended indefinitely as Chief Executive Officer.

At that time, our board of directors appointed Ms.

Brenda Morris, a member of our board of directors since 2019, to serve as our interim Chief Executive Officer.

On May 13, 2024, Mr.

Geisler resigned as Chief Executive Officer, effective immediately.

On June 17, 2024, we announced that our board of directors had unanimously appointed Mr.

Mark King as Chief Executive Officer effective June 17, 2024.

King also joined our board of directors.

At that time, Ms.

Morris ceased serving as interim Chief Executive Officer but continues to serve as a member of our board of directors.

King is a highly innovative, growth-oriented leader with an established track record scaling iconic global consumer brands and franchisors.

Lindora Acquisition

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The acquisition of the Lindora Franchisor was completed on January 2, 2024.

Lindora complements our existing brands and will help us deliver on consumers’ increasing demand for a holistic approach to health.

Lindora complements

our existing brands and will help us deliver on consumers’ increasing demand for a holistic approach to health.

See Note 3 of Notes to Condensed Consolidated Financial Statements for additional information.

Divestiture of Stride brand

On February 13, 2024, we entered into an asset purchase agreement with a buyer, pursuant to which we divested the Stride brand, including the intellectual property, franchise rights and franchise agreements for open studios.

Divestiture of Stride and Row House Brands

On February 13, 2024, we entered into an agreement with a buyer, pursuant to which we divested the Stride brand, including the intellectual property, franchise rights and franchise agreements for open studios.

The buyer of the Stride brand is a member of management and one of our shareholders.

We received no consideration from the divestiture of the Stride brand and will assist the buyer with transition support including cash payments of approximately $0.3 million payable over the 12-month period following divestiture.

The divestiture allows us to better focus and utilize our resources on our other brands.

On May 20, 2024, we entered into an agreement with a buyer, pursuant to which we divested the Row House brand, including the intellectual property, franchise rights and franchise agreements for open studios, and retained certain liabilities, including liabilities related to known litigation, pre-litigation, and disputes as of the closing of the divestiture.

We received no consideration from the divestiture of the Row House brand.

These divestitures allow us to better focus and utilize our resources on our other brands.

Restructuring Plan

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This refranchise termination resulted in us incurring losses for contract termination expenses, other expenses associated with exiting the studios, and loss contingencies related to the refranchisor’s unpaid payroll.

During the three months ended March 31, 2024, we recognized total restructuring charges of $6.9 million, net of gains, primarily for contract termination and other associated costs, loss on lease termination and sale or disposal of assets, and other restructuring charges.

During the three and six months ended June 30, 2024, we recognized total restructuring charges of $2.3 million, net of gains, and $9.2 million, net of gains, respectively, primarily for contract termination and other associated costs, loss on lease terminations and sale or disposal of assets, and other restructuring charges.

We expect to recognize additional restructuring charges throughout 2024 totaling approximately $13.5 million to $17.0 million for rent expense, including amortization of the right-of-use asset and accretion of the operating lease liability, lease termination gains or losses, and other variable lease costs related to company-owned transition studios and other restructuring charges.

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Our revenue growth depends to a significant extent on the number of studios that are open and operating.

Many factors affect whether a new studio will be opened on time, if at all, including the availability and cost of financing, selection and availability of suitable studio locations, delays in hiring personnel as well as any delays in equipment delivery or installation.

equipment delivery or installation.

To the extent franchisees are unable to open new studios on the timeline we anticipate, or at all, we will not realize the revenue growth that we expect.

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While we believe that these metrics are useful in evaluating our business, other companies may not use similar metrics or may not calculate similarly titled metrics in a consistent manner.

Beginning in the quarter ended June 30, 2023, we introduced an additional definition for studios no longer operating to better capture the composition of our studios in operation.

A studio is considered no longer operating and excluded from the total number of studios in operation if it has no sales for nine consecutive months or more.

If a studio deemed to be no longer operating subsequently generates sales at a future date, it re-enters the operating studio count (and the number of studios no longer operating is reduced).

All prior periods presented have been updated to reflect this additional definition.

The following table sets forth the total number of operating studios in North America for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table sets forth the total number of operating studios in North America for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

Franchisee-owned studios

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(2) Includes previously franchisee-owned studios that were converted to company-owned studios in the period.

The following table sets forth the total number of operating studios internationally for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table sets forth the total number of operating studios internationally for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

Total studios

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Studios operated at end of period

The following table sets forth the total number of operating studios globally for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table sets forth the total number of operating studios globally for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

Total studios

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Studios operated at end of period

The following table sets forth our key performance indicators for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table sets forth our key performance indicators for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands)

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Same store sales

(1) Global franchise licenses sold are presented gross of terminations.

The following table presents additional information related to our studio and license key performance indicators for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

(1) Franchise licenses sold are presented gross of terminations.

The following table presents additional information related to our studio and license key performance indicators for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

North America

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Studios obligated to open internationally under MFAs:

March 31, 2024

March 31, 2023

June 30, 2024

June 30, 2023

Gross studios obligated to open under MFAs

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Licenses sold by master franchisees, net (2)

Six Months Ended June 30,

North America

International

North America

International

Total operating studios:

Studios operating at beginning of period

New studio openings, net

Studios operating at end of period

Franchise licenses sold:

Franchise licenses sold (total beginning of period)

New franchise license sales

Franchise licenses sold (total end of period)

Studios obligated to open internationally under MFAs:

June 30, 2024

June 30, 2023

Gross studios obligated to open under MFAs

studios opened under MFAs

Remaining studios obligated to open under MFAs

Licenses sold by master franchisees, net (2)

(1) Global franchise licenses sold are presented gross of terminations.

(2) Reflects the number of licenses for studios which have already been sold, but not yet opened, by master franchisees under master franchise agreements, net of terminations.

All metrics above are presented on an adjusted basis to reflect historical information of Lindora prior to the acquisition by the Company in January 2024 and on an adjusted basis to remove historical information of Stride prior to the divestiture by the Company in February 2024.

All metrics above are presented on an adjusted basis to reflect historical information of Lindora prior to the acquisition by the Company in January 2024 and on an adjusted basis to remove historical information for both Stride and Row House prior to their divestitures by the Company in February 2024 and May 2024, respectively.

All references to these metrics in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” use this same basis of reporting, unless noted otherwise.

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The number of licenses sold is a useful indicator of the number of studios that have opened and that are expected to open in the future, which management reviews in order to monitor and forecast our revenue streams.

Of the franchisees that entered into the system in 2021 or later and opened their first studio in 2023 on average it took approximately 15.0 months from signing the franchise agreement to open a studio.

Of the franchisees that entered into the system in 2021 or later and opened their first studio in 2022, on average it took approximately 10.5 months from signing the franchise agreement to open a studio.

Management also reviews the number of licenses sold globally and the number of licenses contractually obligated to open internationally in order to help forecast studio growth and system-wide sales.

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Results of Operations

The following table presents our condensed consolidated results of operations for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table presents our condensed consolidated results of operations for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Selling, general and administrative expenses

Impairment of goodwill and other assets

Depreciation and amortization

Marketing fund expense

Acquisition and transaction expenses

Acquisition and transaction expenses (income)

Total operating costs and expenses

Operating income (loss)

Other (income) expense:

Other expense (income):

Interest income

2 unchanged sentences

Total other expense

Loss before income taxes

Income tax benefit

The following table presents our condensed consolidated results of operations for the three months ended March 31, 2024 and 2023 as a percentage of revenue:

Three Months Ended March 31,

Income (loss) before income taxes

Net income (loss)

The following table presents our condensed consolidated results of operations for the three and six months ended June 30, 2024 and 2023 as a percentage of revenue:

Three Months Ended June 30,

Six Months Ended June 30,

Revenue, net:

9 unchanged sentences

Selling, general and administrative expenses

Impairment of goodwill and other assets

Depreciation and amortization

3 unchanged sentences

Operating income (loss)

Other (income) expense:

Other expense (income):

Interest income

2 unchanged sentences

Total other expense

Loss before income taxes

Income taxes (benefit)

Three Months Ended March 31, 2024 and 2023

The following is a discussion of our consolidated results of operations for the three months ended March 31, 2024 versus the three months ended March 31, 2023.

Three Months Ended March 31,

Income (loss) before income taxes

Net income (loss)

Three Months Ended June 30, 2024 and 2023

The following is a discussion of our consolidated results of operations for the three months ended June 30, 2024 versus the three months ended June 30, 2023.

Three Months Ended June 30,

Change from Prior Year

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Total revenue.

Total revenue was $79.5 million in the three months ended March 31, 2024, compared to $70.7 million in the three months ended March 31, 2023, an increase of $8.8 million, or 13%.

Total revenue was $76.5 million in the three months ended June 30, 2024, compared to $77.3 million in the three months ended June 30, 2023, a decrease of $0.8 million, or 1%.

The decrease in total revenue was primarily due to a decrease in other service revenue and merchandise revenue, partially offset by an increase in franchise revenue.

Franchise revenue.

Franchise revenue was $43.0 million in the three months ended June 30, 2024, compared to $35.1 million in the three months ended June 30, 2023, an increase of $7.9 million, or 22%.

Franchise revenue consisted of franchise royalty fees of $28.5 million, franchise territory fees of $7.4 million, technology fees of $4.2 million and training fees of $2.9 million in the three months ended June 30, 2024, compared to franchise royalty fees of $23.0 million, franchise territory fees of $5.4 million, technology fees of $3.8 million and training fees of $2.9 million in the three months ended June 30, 2023.

The increase in franchise royalty fees and technology fees was primarily due to an increase in same store sales and an increase in number of operating studios globally since

June 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024), which also contributed to the increase in franchise territory fees.

The increase in franchise territory fees is also attributed to an increase in franchise agreement terminations year-over-year.

Equipment revenue.

Equipment revenue was $12.9 million in the three months ended June 30, 2024, compared to $14.4 million in the three months ended June 30, 2023, a decrease of $1.5 million, or 10%.

Most equipment revenue is recognized in the period when the equipment is installed.

Global equipment installations in the three months ended June 30, 2024, totaled 128 compared to 138 in the prior year period, primarily due to the decrease in studio openings compared to the prior year period.

The average revenue per installation decreased in the three months ended June 30, 2024, when compared to the three months ended June 30, 2023.

The decrease in average revenue was due to brand mix and a higher proportion of equipment installed with brands with lower equipment prices.

Merchandise revenue.

Merchandise revenue was $5.9 million in the three months ended June 30, 2024, compared to $8.4 million in the three months ended June 30, 2023, a decrease of $2.5 million, or 30%.

The decrease was due primarily to a decrease in demand from studios, a current year sales promotion and a lower number of company-owned transition studios in the current year period.

Franchise marketing fund revenue.

Franchise marketing fund revenue was $8.4 million in the three months ended June 30, 2024, compared to $6.6 million in the three months ended June 30, 2023, an increase of $1.8 million, or 27%.

The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America since June 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024).

Other service revenue.

Other service revenue was $6.3 million in the three months ended June 30, 2024, compared to $12.8 million in the three months ended June 30, 2023, a decrease of $6.5 million, or 51%.

The decrease was primarily due to a $6.3 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios.

Operating Costs and Expenses

Three Months Ended June 30,

Change from Prior Year

($ in thousands)

Costs of product revenue

Costs of franchise and service revenue

Selling, general and administrative expenses

Impairment of goodwill and other assets

Depreciation and amortization

Marketing fund expense

Acquisition and transaction expenses (income)

Total operating costs and expenses

Costs of product revenue.

Costs of product revenue was $12.9 million in the three months ended June 30, 2024, compared to $14.2 million in the three months ended June 30, 2023, a decrease of $1.4 million, or 10%, compared to a decrease in related revenues of 18%.

Costs of product revenue as a percentage of related revenue increased to 68% in the three months ended June 30, 2024, from 62% in the comparable prior year period.

The increase was due to a current year sales promotion that decreased gross margin and to a $0.5 million increase in write down of slow-moving inventory.

Costs of franchise and service revenue.

Costs of franchise and service revenue was $5.8 million in the three months ended June 30, 2024, compared to $3.7 million in the three months ended June 30, 2023, an increase of $2.1 million, or 57%.

The increase was primarily due to a $1.5 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase.

Selling, general and administrative expenses.

Selling, general and administrative expenses were $37.0 million in the three months ended June 30, 2024, compared to $37.2 million in the three months ended June 30, 2023, a decrease of $0.2 million, or 1%.

The decrease was primarily attributable to a decrease in salaries and wages of $2.9 million related to a lower average number of company-owned transition studios;

a decrease in occupancy expenses of $4.0 million primarily related to a decrease in the number of company-owned transition studios;

and a decrease in equity-based compensation expense of $1.9 million primarily due to a decrease in the number of equity-classified restricted stock units (“RSUs”) outstanding during the current year period and a decrease in the current year common stock price, resulting in lower expense to be recognized on current-year RSU grants, partially offset by an increase in expense due to $3.5 million mutual termination agreement income related to the acquisition of 14 Rumble studios in the prior year period;

an increase in legal expenses of $1.1 million related to various legal matters;

restructuring and related charges of $2.3 million in the current year period;

loss on disposal of subsidiaries of $1.3 million in the current year period and a net increase in other variable expenses of $0.4 million.

Impairment of goodwill and other assets.

Impairment of goodwill and other assets was $12.1 million in the three months ended June 30, 2024, compared to $7.2 million in the three months ended June 30, 2023, an increase of $4.9 million, or 67%.

The increase was primarily due to a write down of franchise agreements and goodwill of $12.1 million related to the CycleBar reporting unit in the current year period compared to a $7.2 million intangible asset write down in the prior year related to the acquisition of 14 Rumble studios.

Depreciation and amortization.

Depreciation and amortization expense was $4.5 million in the three months ended June 30, 2024, compared to $4.3 million in the three months ended June 30, 2023, an increase of $0.2 million, or 5%.

The increase was due primarily to an increase in fixed assets to support our online offerings.

Marketing fund expense.

Marketing fund expense was $7.8 million in the three months ended June 30, 2024, compared to $5.5 million in the three months ended June 30, 2023, an increase of $2.4 million, or 44% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction income.

Acquisition and transaction income was $1.2 million in the three months ended June 30, 2024, compared to $31.3 million in the three months ended June 30, 2023, a decrease of $30.0 million, or 96%.

This income primarily represented the non-cash change in contingent consideration related to 2021 business acquisitions, partially offset by a $0.3 increase in contingent consideration related to the Lindora acquisition and $0.1 million of acquisition related expenses in the current year period.

Other Expense (Income), net

Three Months Ended June 30,

Change from Prior Year

($ in thousands)

Interest income

Interest expense

Other expense

Total other expense, net

Interest income.

Interest income primarily consists of interest on notes receivable, which was $0.4 million in the three months ended June 30, 2024, compared to $0.5 million in the three months ended June 30, 2023.

Interest expense .

Interest expense was $11.3 million in the three months ended June 30, 2024 compared to $8.6 million in the three months ended June 30, 2023, an increase of $2.6 million, or 31%.

Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs and debt discount.

The increase in interest expense is due to higher average debt balances and higher interest rates in the current year period.

Other expense.

Other expense consists of TRA expense, which was $0.3 million in the three months ended June 30, 2024, compared to $0.7 million in the three months ended June 30, 2023.

Three Months Ended June 30,

Change from Prior Year

($ in thousands)

Income taxes .

Income taxes were (1.0)% of pre-tax book income (loss) in the three months ended June 30, 2024, compared to 0.5% in the three months ended June 30, 2023.

Six Months Ended June 30, 2024 and 2023

The following is a discussion of our consolidated results of operations for the six months ended June 30, 2024 versus the six months ended June 30, 2023.

Six Months Ended June 30,

Change from Prior Year

($ in thousands)

Franchise revenue

Equipment revenue

Merchandise revenue

Franchise marketing fund revenue

Other service revenue

Total revenue, net

Total revenue.

Total revenue was $156.0 million in the six months ended June 30, 2024, compared to $148.0 million in the six months ended June 30, 2023, an increase of $8.0 million, or 6%.

The increase in total revenue was primarily due to an increase in the number of open studios.

Franchise revenue.

Franchise revenue was $41.8 million in the three months ended March 31, 2024, compared to $33.0 million in the three months ended March 31, 2023, an increase of $8.8 million, or 27%.

Franchise revenue consisted of franchise royalty fees of $27.5 million, franchise territory fees of $7.3 million, technology fees of $4.2 million and training fees of $2.8 million in the three months ended March 31, 2024, compared to franchise royalty fees of $21.6 million, franchise territory fees of $5.2 million, technology fees of $3.6 million and training fees of $2.6 million in the three months ended March 31, 2023.

The increase in franchise royalty fees, technology fees and training fees was primarily due to a 9% increase in same store sales and 405 net new studio openings globally since March 31, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024), which also contributed to the increase in franchise territory fees.

Franchise revenue was $84.8 million in the six months ended June 30, 2024, compared to $68.1 million in the six months ended June 30, 2023, an increase of $16.7 million, or 25%.

Franchise revenue consisted of franchise royalty fees of $56.0 million, franchise territory fees of $14.7 million, technology fees of $8.3 million and training fees of $5.8 million in the six months ended June 30, 2024, compared to franchise royalty fees of $44.6 million, franchise territory fees of $10.6 million, technology fees of $7.4 million and training fees of $5.5 million in the six months ended June 30, 2023.

The increase in franchise royalty fees, technology fees and training fees was primarily due to an increase in same store sales and an increase in number of operating studios globally since June 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024), which also contributed to the increase in franchise territory fees.

The increase in franchise territory fees is also attributed to an increase in franchise agreement terminations year-over-year.

Equipment revenue.

Equipment revenue was $13.9 million in the three months ended March 31, 2024, compared to $13.1 million in the three months ended March 31, 2023, an increase of $0.8 million, or 6%.

Equipment revenue was $26.8 million in the six months ended June 30, 2024, compared to $27.5 million in the six months ended June 30, 2023, a decrease of $0.7 million, or 3%.

Most equipment revenue is recognized in the period when the equipment is installed.

Global equipment installations in the three months ended March 31, 2024, totaled 123 compared to 141 in the prior year period, primarily due to the decrease in studio openings compared to the prior year period.

The average revenue per installation increased in the three months ended March 31, 2024, when compared to the three months ended March 31, 2023.

The increase in average revenue is due to a brand mix and a higher proportion of equipment installed with brands with higher equipment prices.

Global equipment installations in the six months ended June 30, 2024, totaled 251 compared to 279 in the prior year period, primarily due to the decrease in studio openings compared to the prior year period.

The average revenue per installation increased in the three months ended June 30, 2024, when compared to the three months ended June 30, 2023.

The increase in average revenue is due to brand mix and a higher proportion of equipment installed with brands with higher equipment prices.

Merchandise revenue.

Merchandise revenue was $8.2 million in the three months ended March 31, 2024, compared to $7.2 million in the three months ended March 31, 2023, an increase of $1.0 million, or 14%.

The increase was due primarily to a higher number of operating studios in the current year period.

Merchandise revenue was $14.1 million in the six months ended June 30, 2024, compared to $15.6 million in the six months ended June 30, 2023, a decrease of $1.5 million, or 10%.

The decrease was due primarily to a decrease in demand from studios, a current year sales promotion and a lower number of company-owned transition studios in the current year period.

Franchise marketing fund revenue.

Franchise marketing fund revenue was $7.8 million in the three months ended March 31, 2024, compared to $6.2 million in the three months ended March 31, 2023, an increase of $1.6 million, or 26%.

The increase was primarily due to an increase in same store sales and 318 new studio openings in North America since March 31, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024).

Franchise marketing fund revenue was $16.2 million in the six months ended June 30, 2024, compared to $12.8 million in the six months ended June 30, 2023, an increase of $3.4 million, or 26%.

Other service revenue.

Other service revenue was $7.9 million in the three months ended March 31, 2024, compared to $11.3 million in the three months ended March 31, 2023, a decrease of $3.4 million, or 30%.

Other service revenue was $14.2 million in the six months ended June 30, 2024, compared to $24.0 million in the six months ended June 30, 2023, a decrease of $9.8 million, or 41%.

The decrease was primarily due to a $9.3 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios.

Operating Costs and Expenses

Three Months Ended March 31,

Six Months Ended June 30,

Change from Prior Year

3 unchanged sentences

Selling, general and administrative expenses

Impairment of goodwill and other assets

Depreciation and amortization

3 unchanged sentences

Costs of product revenue.

Costs of product revenue was $14.4 million in the three months ended March 31, 2024, compared to $14.0 million in the three months ended March 31, 2023, an increase of $0.4 million, or 3%, compared to an increase in related revenues of 9%.

Costs of product revenue as a percentage of related revenue decreased to 65% in the three months ended March 31, 2024, from 69% in the comparable prior year period.

The decrease was due to a higher percentage of non-branded merchandise revenue in 2024 for which we earn a commission with no corresponding cost of revenue.

Costs of product revenue was $27.3 million in the six months ended June 30, 2024, compared to $28.3 million in the six months ended June 30, 2023, a decrease of $1.0 million, or 4%, compared to a decrease in related revenues of 5%.

Costs of product revenue as a percentage of related revenue increased to 67% in the six months ended June 30, 2024, from 66% in the comparable prior year period.

The increase was due to a current year sales promotion that decreased gross margin and to a $0.5 million increase in write down of slow-moving inventory partially offset by a higher percentage of non-branded merchandise revenue in 2024 for which we earn a commission with no corresponding cost of revenue.

Costs of franchise and service revenue.

Costs of franchise and service revenue was $5.1 million in the three months ended March 31, 2024, compared to $4.0 million in the three months ended March 31, 2023, an increase of $1.1 million, or 27%.

Costs of franchise and service revenue was $11.0 million in the six months ended June 30, 2024, compared to $7.7 million in the six months ended June 30, 2023, an increase of $3.2 million, or 41%.

The increase was primarily due to a $2.4 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase.

Selling, general and administrative expenses.

Selling, general and administrative expenses were $37.2 million in the three months ended March 31, 2024, compared to $34.9 million in the three months ended March 31, 2023, an increase of $2.3 million, or 7%.

The increase was primarily attributable to restructuring and related charges of $7.9 million in the current year period and a net increase in other variable expenses of $1.9 million, partially offset by a decrease in salaries and wages of $1.1 million related to a lower average number of company-owned transition studios;

decrease in occupancy expenses of $1.7 million primarily related to company-owned transition studios;

decrease in financial transaction fees and related expenses of $1.4 million;

decrease in legal expenses of $1.2 million related to various legal matters and a decrease in equity-based compensation expense of $2.1 million primarily due to a decrease in the number of equity-classified restricted stock units (“RSUs”) outstanding during the current year period and a decrease in the current year common stock price, resulting in lower expense to be recognized on current-year RSU grants.

Selling, general and administrative expenses were $74.1 million in the six months ended June 30, 2024, compared to $72.1 million in the six months ended June 30, 2023, an increase of $2.0 million, or 3%.

The increase was primarily attributable to restructuring and related charges of $10.2 million in the current year period;

an increase in professional services, including consulting and recruiting fees, of $2.3 million;

an increase in expense due to $3.5 million mutual termination agreement income related to the acquisition of 14 Rumble studios in the prior year period and a loss on disposal of subsidiaries of $1.5 million in the current year period, partially offset by a decrease in salaries and wages of $4.0 million related to a lower average number of company-owned transition studios;

a decrease in occupancy expenses of $5.7 million primarily due to a decrease in the number of company-owned transition studios;

a decrease in financial transaction fees and related expenses of $1.0 million;

a decrease in equity-based compensation expense of $4.0 million primarily due to a decrease in the number of equity-classified RSUs outstanding during the current year period and a decrease in the current year common stock price, resulting in lower expense to be recognized on current-year RSU grants;

and a net decrease in other variable expenses of $0.8 million.

Impairment of goodwill and other assets.

Impairment of goodwill and other assets was $12.1 million in the six months ended June 30, 2024, compared to $7.2 million in the six months ended June 30, 2023, an increase of $4.9 million, or 67%.

The increase was primarily due to a write down of franchise agreements and goodwill of $12.1 million related to the CycleBar reporting unit compared to a $7.2 million intangible asset write down in the prior year related to the acquisition of 14 Rumble studios.

Depreciation and amortization.

Depreciation and amortization expense was $4.4 million in the three months ended March 31, 2024, compared to $4.2 million in the three months ended March 31, 2023, an increase of $0.2 million, or 6%.

Depreciation and amortization expense was $9.0 million in the six months ended June 30, 2024, compared to $8.5 million in the six months ended June 30, 2023, an increase of $0.5 million, or 6%.

The increase was due primarily to an increase in fixed assets to support our online offerings.

Marketing fund expense.

Marketing fund expense was $6.5 million in the three months ended March 31, 2024, compared to $5.0 million in the three months ended March 31, 2023, an increase of $1.5 million, or 30% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expense.

Acquisition and transaction expense was $4.5 million in the three months ended March 31, 2024, compared to $15.7 million in the three months ended March 31, 2023, a decrease of $11.2 million, or 71%.

Marketing fund expense was $14.4 million in the six months ended June 30, 2024, compared to $10.5 million in the six months ended June 30, 2023, an increase of $3.9 million, or 37% and is consistent with the increase in franchise marketing fund revenue.

Acquisition and transaction expense (income).

Acquisition and transaction expense was $3.3 million in the six months ended June 30, 2024, compared to income of $15.5 million in the six months ended June 30, 2023, an increase to expense of $18.8 million, or 121%.

This expense primarily represents the non-cash change in contingent consideration related to 2021 and 2024 business acquisitions and $0.5 million of acquisition related expenses in the current year period.

Other (Income) Expense, net

Three Months Ended March 31,

Other Expense (Income), net

Six Months Ended June 30,

Change from Prior Year

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Interest income.

Interest income primarily consists of interest on notes receivable, which was $0.4 million in the three months ended March 31, 2024, compared to $0.6 million in the three months ended March 31, 2023.

Interest income primarily consists of interest on notes receivable, which was $0.8 million in the six months ended June 30, 2024, compared to $1.2 million in the six months ended June 30, 2023.

Interest expense .

Interest expense was $11.6 million in the three months ended March 31, 2024 compared to $8.0 million in the three months ended March 31, 2023, an increase of $3.6 million, or 45%.

Interest expense was $22.8 million in the six months ended June 30, 2024 compared to $16.6 million in the six months ended June 30, 2023, an increase of $6.2 million, or 37%.

Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization of deferred loan costs and debt discount.

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Other expense.

Other expense consists of TRA expense, which was $0.6 million in the three months ended March 31, 2024, compared to $0.6 million in the three months ended March 31, 2023.

Three Months Ended March 31,

Other expense consists of TRA expense, which was $0.9 million in the six months ended June 30, 2024, compared to $1.3 million in the six months ended June 30, 2023.

Six Months Ended June 30,

Change from Prior Year

($ in thousands)

Income tax benefit

Income tax benefit .

Income tax benefit was 1.1% of our share of pre-tax book loss in the three months ended March 31, 2024, compared to 1.0% in the three months ended March 31, 2023.

Income taxes .

Income taxes were (0.5)% of pre-tax book income (loss) in the six months ended June 30, 2024, compared to 0.1% in the six months ended June 30, 2023.

Non-GAAP Financial Measures

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We define adjusted EBITDA as EBITDA (net income/loss before interest, taxes, depreciation and amortization), adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance.

These items include equity-based compensation and related employer payroll taxes, acquisition and transaction expenses (income) (including change in contingent consideration and transaction bonuses), litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business), fees for financial transactions, such as secondary public offering expenses for which we do not receive proceeds (including bonuses paid to executives related to completion of such transactions) and other contemplated corporate transactions, expense related to the remeasurement of our TRA obligation, loss on brand divestiture, and restructuring and related charges incurred in connection with our restructuring plan that we do not believe reflect our underlying business performance and affect comparability.

These items include equity-based compensation and related employer payroll taxes, acquisition and transaction expenses (income) (including change in contingent consideration and transaction bonuses), litigation expenses (consisting of legal and related fees for specific proceedings that arise outside of the ordinary course of our business), fees for financial transactions, such as secondary public offering expenses for which we do not receive proceeds (including bonuses paid to executives related to completion of such transactions) and other contemplated corporate transactions, expense related to the remeasurement of our TRA obligation, expense related to loss on impairment or write down of goodwill and other assets, loss on brand divestiture, executive transition costs (consisting of costs associated with the transition of our former CEO, such as professional services, legal fees, executive recruiting costs and other related costs), one-time costs associated with rebranding one studio to the KINRGY brand, and restructuring and related charges incurred in connection with our restructuring plan that we do not believe reflect our underlying business performance and affect comparability.

EBITDA and adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

We believe that adjusted EBITDA, viewed in addition to, and not in lieu of, our reported GAAP results, provides useful information to investors regarding our performance and overall results of operations because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period.

The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Net income (loss)

Interest expense, net

Income tax benefit

Depreciation and amortization

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Employer payroll taxes related to equity-based compensation

Acquisition and transaction expenses

Acquisition and transaction expenses (income)

Litigation expenses

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TRA remeasurement

Impairment of goodwill and other assets

Loss on brand divestiture

Executive transition costs

Non-recurring rebranding expenses

Restructuring and related charges

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Liquidity and Capital Resources

As of March 31, 2024, we had $16.7 million of cash and cash equivalents, excluding $10.5 million of restricted cash consisting of marketing fund restricted cash and a guarantee of standby letter of credit.

As of June 30, 2024, we had $15.0 million of cash and cash equivalents, excluding $11.0 million of restricted cash consisting of marketing fund restricted cash and a guarantee of standby letter of credit.

We require cash principally to fund day-to-day operations, finance capital investments, service our outstanding debt and address our working capital needs.

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and (ix) restricting the issuance of equity.

As of March 31, 2024, we were in compliance with these covenants.

As of June 30, 2024, we were in compliance with these covenants.

On February 13, 2024, we entered into a sixth amendment (the “Sixth Amendment”) to the Credit Agreement.

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The Sixth Amendment, among other things, also (i) increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the Sixth Amendment Incremental Term Loans) commencing on June 30, 2024 to $1.3 million and (ii) extended the maturity date for all outstanding term loans under the Credit Agreement to March 15, 2026.

The total principal amount outstanding on the Term Loans was $331.4 million at March 31, 2024.

The total principal amount outstanding on the Term Loans was $330.1 million at June 30, 2024.

See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information about our debt.

Material Cash Requirements

At March 31, 2024, there had been no material changes in our cash requirements from known contractual and other obligations as disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2023.

The following table presents summary cash flow information for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

At June 30, 2024, there had been no material changes in our cash requirements from known contractual and other obligations as disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2023.

The following table presents summary cash flow information for the six months ended June 30, 2024 and 2023:

Six Months Ended June 30,

(in thousands)

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Net cash provided by (used in) financing activities

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash Flows from Operating Activities

In the three months ended March 31, 2024, cash provided by operating activities was $2.7 million, compared to $11.4 million in the three months ended March 31, 2023, a decrease in cash provided of $8.7 million.

Of the decrease, $4.1 million was due to lower net income after adjustments to reconcile net loss to net cash provided by operating activities and $4.5 million in unfavorable changes in working capital related to deferred revenue, accrued expenses, other liabilities, and accounts receivable, partially offset by favorable changes in working capital related to prepaid expenses and other current assets, other current liabilities, inventories, and accounts payable in the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

In the six months ended June 30, 2024, cash provided by operating activities was $5.7 million, compared to $30.6 million in the six months ended June 30, 2023, a decrease in cash provided of $24.9 million.

Of the decrease, $15.6 million was due to lower net income after adjustments to reconcile net income/loss to net cash provided by operating activities and $9.3 million in unfavorable changes in working capital related to deferred revenue, accounts payable, other liabilities, and accrued expenses, partially offset by favorable changes in working capital related to prepaid expenses and other current assets, deferred costs, inventories, and other current liabilities in the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Cash Flows from Investing Activities

In the three months ended March 31, 2024 and 2023, cash used in investing activities was $9.2 million and $2.4 million, respectively.

In the six months ended June 30, 2024 and 2023, cash used in investing activities was $11.8 million and $5.6 million, respectively.

The change year over year in cash used of $6.1 million was primarily attributable to cash used of $8.5 million for our acquisition of Lindora;

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Cash Flows from Financing Activities

In the three months ended March 31, 2024, cash used in financing activities was $3.4 million, compared to $18.2 million in the three months ended March 31, 2023, a decrease in cash used of $14.8 million.

In the six months ended June 30, 2024, cash used in financing activities was $5.0 million, compared to $22.1 million in the six months ended June 30, 2023, a decrease in cash used of $17.1 million.

The decrease in cash used was primarily attributable to prior year payments of $130.8 million related to repurchase of convertible preferred stock, $8.1 million payment for taxes on net share settlements, and a $4.4 million loan to a shareholder compared to no similar payments in the current year.

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Off-Balance Sheet Arrangements

As of March 31, 2024, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees.

As of June 30, 2024, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees.

Our maximum total commitment under these agreements is approximately $1.4 million and would only require payment upon default by the primary obligor.

We determined the fair value of these guarantees at inception was not material, and as of March 31, 2024 no accrual has been recorded for our potential obligation under the guaranty arrangements.

We determined the fair value of these guarantees at inception was not material, and as of June 30, 2024 no accrual has been recorded for our potential obligation under the guaranty arrangements.

See Note 16 of Notes to Condensed Consolidated Financial Statements for more information regarding these operating leases and guarantees.

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We deposited cash in a restricted account as collateral for the standby letter of credit.

The estimated fair value of these guarantees at inception was not material, and as of March 31, 2024 a $0.2 million accrual has been recorded for our potential obligation under this guaranty arrangement.

The estimated fair value of these guarantees at inception was not material, and as of June 30, 2024 a $0.3 million accrual has been recorded for our potential obligation under this guaranty arrangement.

See Note 16 of Notes to Condensed Consolidated Financial Statements for more information.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis