Xponential Fitness, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto and the other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2023. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled “Factors Affecting Our Results of Operations” and “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2023. Xponential Fitness LLC (“XPO LLC”), the principal operating subsidiary of Xponential Fitness, Inc. (the “Company” or “XPO Inc.,” “we,” “us,” and “our”), is the largest global franchisor of boutique fitness brands. 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 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, 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; CycleBar, the largest indoor cycling brand in the United States; StretchLab, a concept offering one-on-one and group stretching services; AKT, a dance-based cardio workout combining toning, interval and circuit training; YogaSix, the largest franchised yoga brand in the United States; Pure Barre, a total body workout that uses the ballet barre to perform small isometric movements, and the largest barre brand in the United States; Rumble, a boxing-inspired full-body workout; BFT, a functional training and strength-based program; and Lindora, a provider of medically guided wellness and metabolic health solutions, which was acquired on January 2, 2024. 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. Mr. 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. Mr. King is a highly innovative, growth-oriented leader with an established track record scaling iconic global consumer brands and franchisors. Lindora Acquisition On December 1, 2023, we entered into an agreement to acquire Lindora Franchise, LLC, a Delaware limited liability company, the franchisor of the “Lindora” wellness brand (the “Lindora Franchisor”), for cash consideration of $8.5 million. The transaction also includes up to $1.0 million of contingent consideration which is subject to the achievement of certain milestones. The Lindora Franchisor was a subsidiary of Lindora Wellness, Inc. (“Lindora Wellness”). Lindora Wellness has owned and operated each of the Lindora clinics in California for at least 25 years and currently owns and operates 30 Lindora clinics in California and a single Lindora clinic in the state of Washington. Immediately prior to the execution of the purchase agreement on December 1, 2023, Lindora Wellness signed 31 franchise agreements with the Lindora Franchisor pursuant to which Lindora Wellness will continue to operate its Lindora clinics as a franchisee of the Lindora Franchisor. The acquisition of the Lindora Franchisor was completed on January 2, 2024. Lindora complements 33 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 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. 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 In the third quarter of 2023, we began a restructuring plan that involves exiting company-owned transition studios and other measures designed to reduce costs to achieve our long-term margin goals and focus on pure franchise operations. The plan was approved and initiated in the third quarter of 2023 and is expected to continue throughout 2024; however, ultimate timing will depend on lease termination negotiations. During the fourth quarter of 2023, our restructuring plan was expanded due to the addition of Rumble company-owned transition studios to the restructuring plan and a refranchising plan that was terminated by the Company due to the refranchisor’s non-compliance with the franchise agreements and the subsequent closure of certain studios. 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 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. We are negotiating lease terminations for operating leases for certain studios for which we have lease liabilities recorded and the expected cash payments and expenses to exit the lease may be greater than expected rent expense for that period, depending on the outcome of lease termination negotiations. Cash outflows related to these lease terminations are expected to be incurred throughout 2024. Once completed we estimate annualized gross savings of approximately $13.5 million to $15.5 million under the restructuring plan. Additionally, we may not be able to fully realize the cost savings and benefits initially anticipated from the restructuring plan, the expected charges may be greater than expected, and we may not be able to reach agreement with contractual counterparties, any of which could negatively impact our business. See Note 17 of Notes to Condensed Consolidated Financial Statements for additional information. Factors Affecting Our Results of Operations In addition to the impact of the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, we believe that the most significant factors affecting our results of operations include: • Licensing new qualified franchisees, selling additional licenses to existing franchisees and opening studios. Our growth depends upon our success in licensing new studios to new and existing franchisees. We believe our success in attracting new franchisees and attracting existing franchisees to invest in additional studios has resulted from our diverse offering of attractive brands, corporate level support, training provided to franchisees and the opportunity to realize attractive returns on their invested capital. We believe our significant investments in centralized systems and infrastructure help support new and existing franchisees. To continue to attract qualified new franchisees, sell additional studios to existing franchisees and assist franchisees in opening their studios, we plan to continue to invest in our brands to enable them to deliver positive consumer experiences and in our integrated services at the brand level to support franchisees. • Timing of studio openings. 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 34 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. We believe our investments in centralized systems and infrastructure, including real estate site selection, studio build-out and design assistance help enable franchisees to open studios in a timely manner, and we plan to continue to invest in our systems to continue to provide assistance during the opening process. • Increasing same store sales. Our long-term revenue prospects are driven in part by franchisees’ ability to increase same store sales (discussed below). Several factors affect our same store sales in any given period, including the number of stores that have been in operation for a significant period of time, growth in total memberships and marketing and promotional efforts. We expect to continue to seek to grow same store sales and Average Unit Volumes (“AUVs”) by helping franchisees acquire new members, increase studio utilization and drive increased spend from consumers. We also intend to expand ancillary revenue streams, such as our digital platform offerings and retail merchandise. • International and domestic expansion. We continue to invest in increasing the number of franchisees outside of North America. We have developed strong relationships and executed committed development contracts with master franchisees to propel our international growth. We plan to continue to invest in these relationships and seek new relationships and opportunities, including through acquisitions and partnerships, in countries that we have targeted for expansion. In the U.S., we may from time to time consider acquisition of and partnership with certain complimentary assets or businesses that can enhance and expand our brands and operations. • Demand and competition for consumer income . Our revenue and future success will depend in part on the attractiveness of our brands and the services provided by franchisees relative to other fitness and entertainment options available to consumers. Our franchisees’ AUVs are dependent upon the performance of studios and may be impacted by reduced capacity as a result of various factors, including shifting consumer demand and behavior for fitness services. Macroeconomic factors such as inflation and recession, and economic factors affecting a particular geographic territory, may also increase competition for discretionary income, impact the returns generated by franchisees and therefore impact our operating results. Key Performance Indicators In addition to our financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees, and monitor our business. 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. 35 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, 2024 2023 2024 2023 Franchisee-owned studios Studios operated at beginning of period 2,646 2,251 2,562 2,201 New studio openings 89 114 174 195 Refranchised studios (1) — 23 10 25 Defranchised studios (2) — (26 ) — (57 ) Studios no longer operating (76 ) 1 (87 ) (1 ) Studios operated at end of period 2,659 2,363 2,659 2,363 Company-owned transition studios Studios operated at beginning of period 1 69 21 40 New studio openings — — — — Franchise acquisitions (2) — 26 — 57 Refranchised studios (1) — (23 ) (10 ) (25 ) Studios no longer operating — (1 ) (10 ) (1 ) Studios operated at end of period 1 71 1 71 Total studios Studios operated at beginning of period 2,647 2,320 2,583 2,241 New studio openings 89 114 174 195 Studios no longer operating (76 ) — (97 ) (2 ) Studios operated at end of period 2,660 2,434 2,660 2,434 Studios contributing to AUV Operating studios (end of period) 2,660 2,434 NA NA Studios no longer operating but generated sales in the period 33 — NA NA Less: studios less than 6 months old (312 ) (302 ) NA NA Less: non-traditional studio locations (8 ) (9 ) NA NA Less: studios with no sales in the period (2 ) (14 ) NA NA Total 2,371 2,109 NA NA Studios contributing to same store sales Operating studios (end of period) 2,660 2,434 2,660 2,434 Studios no longer operating but generated sales in the period 16 — 35 — Less: studios less than 13 months old (456 ) (435 ) (456 ) (435 ) Less: non-traditional studio locations (7 ) (5 ) (7 ) (5 ) Less: studios without 13 months of consecutive sales (19 ) (49 ) (19 ) (40 ) Total 2,194 1,945 2,213 1,954 (1) Includes previously franchised company-owned studios that were converted to franchisee-owned studios in the period. (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 and six months ended June 30, 2024 and 2023: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Total studios Studios operated at beginning of period 432 345 411 312 New studio openings 19 29 45 63 Studios no longer operating (9 ) (2 ) (14 ) (3 ) Studios operated at end of period 442 372 442 372 36 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, 2024 2023 2024 2023 Total studios Studios operated at beginning of period 3,079 2,665 2,994 2,553 New studio openings 108 143 219 258 Studios no longer operating (85 ) (2 ) (111 ) (5 ) Studios operated at end of period 3,102 2,806 3,102 2,806 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, 2024 2023 2024 2023 ($ in thousands) System-wide sales $ 421,471 $ 340,758 $ 817,915 $ 657,023 Number of new studio openings globally, gross 108 143 219 258 Number of studios operating globally (cumulative total as of period end) 3,102 2,806 3,102 2,806 Number of licenses sold globally (cumulative total as of period end) (1) 6,125 5,480 6,125 5,480 Number of licenses contractually obligated to open internationally (cumulative total as of period end) 1,048 1,045 1,048 1,045 AUV (LTM as of period end) $ 641 $ 558 $ 641 $ 558 Quarterly AUV (run rate) $ 638 $ 581 NA NA Same store sales 7 % 15 % 8 % 17 % (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, 2024 2023 North America International Global North America International Global Total operating studios: Studios operating at beginning of period 2,647 432 3,079 2,320 345 2,665 New studio openings, net 13 10 23 114 27 141 Studios operating at end of period 2,660 442 3,102 2,434 372 2,806 Franchise licenses sold: (1) Franchise licenses sold (total beginning of period) 5,226 812 6,038 4,622 623 5,245 New franchise license sales 52 35 87 177 58 235 Franchise licenses sold (total end of period) 5,278 847 6,125 4,799 681 5,480 Studios obligated to open internationally under MFAs: June 30, 2024 June 30, 2023 Gross studios obligated to open under MFAs 1,474 1,402 Less: studios opened under MFAs 426 357 Remaining studios obligated to open under MFAs 1,048 1,045 Licenses sold by master franchisees, net (2) 261 250 37 Six Months Ended June 30, 2024 2023 North America International Global North America International Global Total operating studios: Studios operating at beginning of period 2,583 411 2,994 2,241 312 2,553 New studio openings, net 77 31 108 193 60 253 Studios operating at end of period 2,660 442 3,102 2,434 372 2,806 Franchise licenses sold: (1) Franchise licenses sold (total beginning of period) 5,106 759 5,865 4,474 582 5,056 New franchise license sales 172 88 260 325 99 424 Franchise licenses sold (total end of period) 5,278 847 6,125 4,799 681 5,480 Studios obligated to open internationally under MFAs: June 30, 2024 June 30, 2023 Gross studios obligated to open under MFAs 1,474 1,402 Less: studios opened under MFAs 426 357 Remaining studios obligated to open under MFAs 1,048 1,045 Licenses sold by master franchisees, net (2) 261 250 (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 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. System-Wide Sales System-wide sales represent gross sales by all studios in North America. System-wide sales includes sales by franchisees that are not revenue realized by us in accordance with GAAP. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, this operating metric relates to our revenue because we receive approximately 7% and 2% of the sales by franchisees as royalty revenue and marketing fund revenue, respectively. We believe that this operating measure aids in understanding how we derive our royalty revenue and marketing fund revenue and is important in evaluating our performance. System-wide sales growth is driven by new studio openings and increases in same store sales. Management reviews system-wide sales weekly, which enables us to assess changes in our franchise revenue, overall studio performance, the health of our brands and the strength of our market position relative to competitors. New Studio Openings The number of new studio openings reflects the number of studios opened during a particular reporting period. We consider a new studio to be open once the studio begins offering classes. Opening new studios is an important part of our growth strategy. New studios may not generate material revenue in the early period following an opening and their revenue may not follow historical patterns. Management reviews the number of new studio openings in order to help forecast operating results and to monitor studio opening processes. Studios No Longer Operating A studio is considered no longer operating and excluded from the total number of studios operating 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). Number of Studios Operating In addition to the number of new studios opened and studios no longer operating during a period, we track the number of total studios operating at the end of a reporting period. While nearly all our franchised studios are licensed to franchisees, from time to time we operate a limited number of company-owned transition studios (typically as we take possession of a studio following a franchisee ceasing to operate it and as we prepare it to be licensed to a new franchisee). Management reviews the number of studios operating at a given point in time in order to help forecast system-wide sales, franchise revenue and other revenue streams. 38 Non-Traditional Studio Locations Non-traditional studio locations refers to studios that are not operated as standalone studio locations. There are currently 24 non-traditional studio locations globally, which are comprised of studios operated inside of other fitness facilities and on cruise ships. Licenses Sold The number of licenses sold in North America and globally reflect the cumulative number of licenses sold by us (or, outside of North America, by our master franchisees), since inception through the date indicated. Licenses contractually obligated to open refer to licenses sold net of opened studios and terminations. Licenses contractually obligated to be sold internationally reflect the number of licenses that master franchisees are contractually obligated to sell to franchisees to open internationally that have not yet opened as of the date indicated. 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. 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. Average Unit Volume AUV is calculated by dividing sales during the applicable period for all studios contributing to AUV by the number of studios contributing to AUV. LTM AUV (last twelve months as of period end) consists of the average sales for the trailing 12 calendar months for all traditional studio locations in North America that have been open for at least 13 calendar months as of the measurement date and that have generated sales for the last 13 calendar months as of the measurement date. Quarterly run-rate AUV consists of average quarterly sales for all traditional studio locations in North America that are at least six months old at the beginning of the respective quarter, and that have sales in the period, multiplied by four. We measure sales for AUV based solely upon monthly sales as reported by franchisees. AUV growth is primarily driven by changes in same store sales and is also influenced by new studio openings. Management reviews AUV to assess studio economics. Same Store Sales Same store sales refer to period-over-period sales comparisons for the base of studios. We define the same store sales base to include studios in North America that are in traditional studio locations and that have generated sales for the last 13 consecutive calendar months as of the measurement date. Any transfer of ownership of a studio does not affect this metric. We measure same store sales based solely upon monthly sales as reported by franchisees. This measure highlights the performance of existing studios, while excluding the impact of new studio openings. Management reviews same store sales to assess the health of the franchised studios. 39 Results of Operations 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, 2024 2023 2024 2023 (in thousands) Revenue, net: Franchise revenue $ 43,020 $ 35,133 $ 84,774 $ 68,099 Equipment revenue 12,925 14,428 26,825 27,522 Merchandise revenue 5,882 8,401 14,055 15,565 Franchise marketing fund revenue 8,380 6,617 16,212 12,828 Other service revenue 6,310 12,761 14,172 24,016 Total revenue, net 76,517 77,340 156,038 148,030 Operating costs and expenses: Costs of product revenue 12,866 14,223 27,257 28,258 Costs of franchise and service revenue 5,834 3,714 10,955 7,746 Selling, general and administrative expenses 36,989 37,210 74,144 72,095 Impairment of goodwill and other assets 12,089 7,238 12,089 7,238 Depreciation and amortization 4,517 4,288 8,953 8,485 Marketing fund expense 7,847 5,466 14,362 10,472 Acquisition and transaction expenses (income) (1,217 ) (31,252 ) 3,298 (15,510 ) Total operating costs and expenses 78,925 40,887 151,058 118,784 Operating income (loss) (2,408 ) 36,453 4,980 29,246 Other expense (income): Interest income (387 ) (529 ) (750 ) (1,165 ) Interest expense 11,256 8,627 22,801 16,604 Other expense 253 698 862 1,252 Total other expense 11,122 8,796 22,913 16,691 Income (loss) before income taxes (13,530 ) 27,657 (17,933 ) 12,555 Income taxes 132 133 85 10 Net income (loss) $ (13,662 ) $ 27,524 $ (18,018 ) $ 12,545 40 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, 2024 2023 2024 2023 Revenue, net: Franchise revenue 56 % 45 % 55 % 46 % Equipment revenue 17 % 19 % 17 % 19 % Merchandise revenue 8 % 11 % 9 % 10 % Franchise marketing fund revenue 11 % 9 % 10 % 9 % Other service revenue 8 % 16 % 9 % 16 % Total revenue, net 100 % 100 % 100 % 100 % Operating costs and expenses: Costs of product revenue 17 % 18 % 17 % 18 % Costs of franchise and service revenue 8 % 5 % 7 % 5 % Selling, general and administrative expenses 48 % 48 % 48 % 49 % Impairment of goodwill and other assets 16 % 9 % 8 % 5 % Depreciation and amortization 6 % 6 % 6 % 6 % Marketing fund expense 10 % 7 % 9 % 7 % Acquisition and transaction expenses (income) (2 )% (40 )% 2 % (10 )% Total operating costs and expenses 103 % 53 % 97 % 80 % Operating income (loss) (3 )% 47 % 3 % 20 % Other expense (income): Interest income — % (1 )% — % (1 )% Interest expense 15 % 11 % 15 % 11 % Other expense — % 1 % — % 1 % Total other expense 15 % 11 % 15 % 11 % Income (loss) before income taxes (18 )% 36 % (12 )% 9 % Income taxes — % — % — % — % Net income (loss) (18 )% 36 % (12 )% 8 % 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. Revenue Three Months Ended June 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Franchise revenue $ 43,020 $ 35,133 $ 7,887 22.4 % Equipment revenue 12,925 14,428 (1,503 ) (10.4 )% Merchandise revenue 5,882 8,401 (2,519 ) (30.0 )% Franchise marketing fund revenue 8,380 6,617 1,763 26.6 % Other service revenue 6,310 12,761 (6,451 ) (50.6 )% Total revenue, net $ 76,517 $ 77,340 $ (823 ) (1.1 )% Total revenue. 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 41 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 2024 2023 $ % ($ in thousands) Costs of product revenue $ 12,866 $ 14,223 $ (1,357 ) (9.5 )% Costs of franchise and service revenue 5,834 3,714 2,120 57.1 % Selling, general and administrative expenses 36,989 37,210 (221 ) (0.6 )% Impairment of goodwill and other assets 12,089 7,238 4,851 67.0 % Depreciation and amortization 4,517 4,288 229 5.3 % Marketing fund expense 7,847 5,466 2,381 43.6 % Acquisition and transaction expenses (income) (1,217 ) (31,252 ) 30,035 (96.1 )% Total operating costs and expenses $ 78,925 $ 40,887 $ 38,038 93.0 % 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. 42 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 2024 2023 $ % ($ in thousands) Interest income $ (387 ) $ (529 ) $ 142 (26.8 )% Interest expense 11,256 8,627 2,629 30.5 % Other expense 253 698 (445 ) (63.8 )% Total other expense, net $ 11,122 $ 8,796 $ 2,326 26.4 % 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. Income Taxes Three Months Ended June 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Income taxes $ 132 $ 133 $ (1 ) (0.8 )% 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. 43 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. Revenue Six Months Ended June 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Franchise revenue $ 84,774 $ 68,099 $ 16,675 24.5 % Equipment revenue 26,825 27,522 (697 ) (2.5 )% Merchandise revenue 14,055 15,565 (1,510 ) (9.7 )% Franchise marketing fund revenue 16,212 12,828 3,384 26.4 % Other service revenue 14,172 24,016 (9,844 ) (41.0 )% Total revenue, net $ 156,038 $ 148,030 $ 8,008 5.4 % 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 $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 $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 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 $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 $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%. 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 $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. 44 Operating Costs and Expenses Six Months Ended June 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Costs of product revenue $ 27,257 $ 28,258 $ (1,001 ) (3.5 )% Costs of franchise and service revenue 10,955 7,746 3,209 41.4 % Selling, general and administrative expenses 74,144 72,095 2,049 2.8 % Impairment of goodwill and other assets 12,089 7,238 4,851 67.0 % Depreciation and amortization 8,953 8,485 468 5.5 % Marketing fund expense 14,362 10,472 3,890 37.1 % Acquisition and transaction expenses (income) 3,298 (15,510 ) 18,808 (121.3 )% Total operating costs and expenses $ 151,058 $ 118,784 $ 32,274 27.2 % Costs of product 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 $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 $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 $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 $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. 45 Other Expense (Income), net Six Months Ended June 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Interest income $ (750 ) $ (1,165 ) $ 415 (35.6 )% Interest expense 22,801 16,604 6,197 37.3 % Other expense 862 1,252 (390 ) (31.2 )% Total other expense, net $ 22,913 $ 16,691 $ 6,222 37.3 % Interest income. 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 $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. The increase in interest expense is due to higher average debt balances and higher interest rates in the current year period and to a $0.2 million increase in write off of debt issuance costs and debt discount related to credit agreement amendments. Other expense. 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. Income Taxes Six Months Ended June 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Income taxes $ 85 $ 10 $ 75 750.0 % 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 In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, is helpful to investors because it provides consistency and comparability with past financial performance. In addition, our management uses non-GAAP measures to compare our performance relative to forecasts and to benchmark our performance externally against competitors. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate and present similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as tools for comparison. A reconciliation is provided below for the non-GAAP financial measures to the most directly comparable financial measures stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business. We believe that the non-GAAP financial measures presented below, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. 46 Adjusted EBITDA 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, 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 and six months ended June 30, 2024 and 2023: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (in thousands) Net income (loss) $ (13,662 ) $ 27,524 $ (18,018 ) $ 12,545 Interest expense, net 10,869 8,098 22,051 15,439 Income taxes 132 133 85 10 Depreciation and amortization 4,517 4,288 8,953 8,485 EBITDA 1,856 40,043 13,071 36,479 Equity-based compensation 4,196 6,055 8,138 12,111 Employer payroll taxes related to equity-based compensation 109 91 422 565 Acquisition and transaction expenses (income) (1,217 ) (31,252 ) 3,298 (15,510 ) Litigation expenses 3,388 2,299 4,086 4,344 Financial transaction fees and related expenses 425 79 620 1,644 TRA remeasurement 253 698 862 1,252 Impairment of goodwill and other assets 12,089 7,238 12,089 7,238 Loss on brand divestiture 922 — 1,201 — Executive transition costs 690 — 690 — Non-recurring rebranding expenses 331 — 331 — Restructuring and related charges 2,325 — 10,389 — Adjusted EBITDA $ 25,367 $ 25,251 $ 55,197 $ 48,123 47 Liquidity and Capital Resources 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. Based on our current level of operations and anticipated growth, we believe that our available cash balance and the cash generated from our operations will be adequate to meet our anticipated debt service requirements and obligations under our TRA, capital expenditures, payment of tax distributions and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors”, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our credit facility or otherwise to enable us to service our indebtedness, including our credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Credit Facility On April 19, 2021, we entered into a Financing Agreement with Wilmington Trust, National Association, as administrative agent and collateral agent, and the lenders party thereto (the “Credit Agreement”), which consists of a $212 million senior secured term loan facility (the “Term Loan Facility”, and the loans thereunder, each a “Term Loan” and together, the “Term Loans”). Affiliates of the lenders also separately purchased 200,000 shares of our 6.50% Series A Convertible Preferred Stock for $200 million. Our obligations under the Credit Agreement are guaranteed by Xponential Intermediate Holdings, LLC and certain of our material subsidiaries, and are secured by substantially all of the assets of Xponential Intermediate Holdings, LLC and certain of our material subsidiaries. The Credit Agreement contains customary affirmative and negative covenants, including, among other things: (i) to maintain certain total leverage ratios, liquidity levels and EBITDA levels (in each case, as discussed further in the Credit Agreement); (ii) to use the proceeds of borrowings only for certain specified purposes; (iii) to refrain from entering into certain agreements outside of the ordinary course of business, including with respect to consolidation or mergers; (iv) restricting further indebtedness or liens; (v) restricting certain transactions with our affiliates; (vi) restricting investments; (vii) restricting prepayments of subordinated indebtedness; (viii) restricting certain payments, including certain payments to our affiliates or equity holders and distributions to equity holders; and (ix) restricting the issuance of equity. 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. The Sixth Amendment provides for, among other things, additional term loans in an aggregate principal amount of approximately $38.7 million, with an original issue discount of $4.1 million, (the “Sixth Amendment Incremental Term Loans”), the original issue discount was paid-in-kind by increasing the principal amount of the Credit Agreement. The proceeds of the Sixth Amendment were used to repay an aggregate of $38.7 million in existing term loans under the Credit Agreement and for the payment of fees, costs and expenses related to the making of the Sixth Amendment Incremental Term Loans. 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 $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 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. 48 Cash Flows The following table presents summary cash flow information for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 2023 (in thousands) Net cash provided by (used in) operating activities $ 5,696 $ 30,565 Net cash provided by (used in) investing activities (11,761 ) (5,613 ) Net cash provided by (used in) financing activities (5,012 ) (22,133 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ (11,077 ) $ 2,819 Cash Flows from Operating Activities 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 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; partially offset by a decrease in cash used to purchase property and equipment of $1.4 million. Cash Flows from Financing Activities 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. The decrease in cash used was partially offset by net borrowings on long-term debt of $124.3 million in the prior year compared to net payments on long-term debt of $2.5 million in the current year. Off-Balance Sheet Arrangements 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 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. In July 2022, we issued a standby letter of credit to a third-party financing company, who provides loans to our qualified franchisees. The standby letter of credit is contingent upon the failure of our franchisees to perform according to the terms of underlying contracts with the third party. 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 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. Critical Accounting Policies and Estimates There have been no significant changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2023. 49