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 27 additional countries as of September 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 concept that combines 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 September 30, 2024, 2,722 studios were open in North America (consists of Canada, the United States and U.S. territories) and franchisees were contractually committed to open 1,735 additional studios under existing franchise agreements. In addition, as of September 30, 2024, we had 456 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,093 new studios, of which master franchisees have sold 245 licenses for studios not yet opened as of September 30, 2024. During the nine months ended September 30, 2024 and 2023, we generated revenue outside the United States of $10.4 million and $10.3 million, respectively. As of September 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. Wind down of AKT brand franchise operations During the three months ended September 30, 2024, we announced that we would wind down AKT franchise operations. As part of the wind down, we began terminating franchise agreements with existing AKT studios and signed a licensing agreement with a former franchisee for no consideration received. 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 nine months ended September 30, 2024, we recognized total restructuring charges of $12.2 million, net of gains, and $21.4 million, net of gains, respectively, primarily for contract termination and other associated costs, loss on lease terminations and sale or disposal of assets, impairment of right-of-use assets, and other restructuring charges. We expect to recognize additional restructuring charges throughout 2024 and 2025 totaling approximately $11.5 million to $15.5 million for rent expense, including amortization of the right-of-use assets 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 considering subleases or 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 negotiations. Cash outflows related to these lease terminations are expected to be incurred throughout 2024 and 2025. Once completed we estimate annualized 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 34 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 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. All metrics in this “Key Performance Indicators” section 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. Historical information has not been adjusted to reflect the wind-down of AKT. 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. 35 The following table sets forth our key performance indicators for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 ($ in thousands) System-wide sales $ 431,160 $ 356,745 $ 1,249,075 $ 1,013,768 Number of new studio openings globally, gross 125 127 344 385 Number of studios operating globally (cumulative total as of period end) 3,178 2,898 3,178 2,898 Number of licenses sold globally (cumulative total as of period end) 6,209 5,696 6,209 5,696 Number of licenses contractually obligated to open internationally (cumulative total as of period end) 1,093 1,042 1,093 1,042 AUV (LTM as of period end) $ 650 $ 580 $ 650 $ 580 Quarterly AUV (run rate) $ 631 $ 585 NA NA Same store sales 5 % 15 % 7 % 16 % The following table presents additional information related to our studio and license key performance indicators for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, 2024 2023 North America International Global North America International Global Total operating studios: Studios operating at beginning of period 2,660 442 3,102 2,434 372 2,806 New studio openings, net 62 14 76 80 12 92 Studios operating at end of period 2,722 456 3,178 2,514 384 2,898 Franchise licenses sold: Franchise licenses sold (total beginning of period) 5,278 847 6,125 4,799 681 5,480 New franchise license sales 60 24 84 170 46 216 Franchise licenses sold (total end of period) 5,338 871 6,209 4,969 727 5,696 Studios obligated to open internationally under MFAs: September 30, 2024 September 30, 2023 Gross studios obligated to open under MFAs 1,533 1,411 Less: studios opened under MFAs 440 369 Remaining studios obligated to open under MFAs 1,093 1,042 Licenses sold by master franchisees, net (1) 245 261 Nine Months Ended September 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 139 45 184 273 72 345 Studios operating at end of period 2,722 456 3,178 2,514 384 2,898 Franchise licenses sold: Franchise licenses sold (total beginning of period) 5,106 759 5,865 4,474 582 5,056 New franchise license sales 232 112 344 495 145 640 Franchise licenses sold (total end of period) 5,338 871 6,209 4,969 727 5,696 Studios obligated to open internationally under MFAs: September 30, 2024 September 30, 2023 Gross studios obligated to open under MFAs 1,533 1,411 Less: studios opened under MFAs 440 369 Remaining studios obligated to open under MFAs 1,093 1,042 Licenses sold by master franchisees, net (1) 245 261 36 (1) 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. 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 (a) the Company has reason to believe, after reasonable inquiry, that the studio is permanently closed, with no plans for re-opening or relocation, or (b) it has no sales for nine consecutive months or more, whichever comes first. 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). Studios classified as no longer operating are deemed permanently closed. 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. This number represents studios that have already opened, are generating revenue, and are regularly holding classes, though this number could include some number of studios that have temporarily suspended operations, but that are not permanently closed and have not yet met the definition for a Studio No Longer Operating. The number of studios that have temporarily suspended operations is an immaterial percentage of our total studio base. Please see the table in the “Same Store Sales” section, sub header “North America studios contributing to same store sales.” The line “studios without 13 months of consecutive sales as of the last month that had positive sales within the period being measured” is an indicator for the number of North America traditional location studios that are older than 13 months, and that have had a recent or current disruption in sales, but that are still included in the Number of Studios Operating count. For the three and nine months ended September 30, 2024, this represented 0.7% and 0.6%, respectively, of our North America studio base. 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. The following tables contain information about changes in the number of our North America operating studios for the three and nine months ended September 30, 2024 and 2023, respectively: 37 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 North America franchisee-owned studios Studios operated at beginning of period 2,659 2,364 2,562 2,200 New studio openings 96 100 270 295 Refranchised studios (1) — 36 10 61 Defranchised studios (2) — (4 ) — (59 ) Studios no longer operating (34 ) (11 ) (121 ) (12 ) Studios operated at end of period 2,721 2,485 2,721 2,485 North America company-owned transition studios Studios operated at beginning of period 1 70 21 41 New studio openings — — — — Franchise acquisitions (2) — 4 — 59 Refranchised studios (1) — (36 ) (10 ) (61 ) Studios no longer operating — (9 ) (10 ) (10 ) Studios operated at end of period 1 29 1 29 Total North America studios Studios operated at beginning of period 2,660 2,434 2,583 2,241 New studio openings 96 100 270 295 Studios no longer operating (34 ) (20 ) (131 ) (22 ) Studios operated at end of period 2,722 2,514 2,722 2,514 (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 nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total studios Studios operated at beginning of period 442 372 411 312 New studio openings 29 27 74 90 Studios no longer operating (15 ) (15 ) (29 ) (18 ) Studios operated at end of period 456 384 456 384 The following table sets forth the total number of operating studios globally for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total studios Studios operated at beginning of period 3,102 2,806 2,994 2,553 New studio openings 125 127 344 385 Studios no longer operating (49 ) (35 ) (160 ) (40 ) Studios operated at end of period 3,178 2,898 3,178 2,898 Non-Traditional Studio Locations Non-traditional studio locations refers to studios that are not operated as standalone studio locations. There are currently 22 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. The number of licenses sold is not reduced by terminations. The number of licenses sold does not generally include license renewals or licenses issued in connection with a change in 38 ownership of operating studios. 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 contractually obligated to open is a useful indicator of the number of studios that may open in the future, although it is not certain that these studios will open. Management reviews the number of licenses sold and the number of licenses contractually obligated to open to help monitor and forecast studio growth, system-wide sales and revenue streams. 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. All traditional studio locations in North America are included in the AUV calculation, so long as they meet certain time since opening and sales criteria (as defined immediately below). In particular, AUV (LTM as of period end) and Quarterly AUV (run rate) are calculated as follows: • AUV (LTM as of period end) consists of the average sales for the trailing 12 calendar months for all traditional studio locations in North America that opened at least 13 calendar months ago as of the measurement date and that have generated positive sales for each of the last 13 calendar months as of the measurement date. • Quarterly AUV (run rate) consists of average quarterly sales for all traditional studio locations in North America that had opened at least six calendar months ago as of the beginning of the respective quarter, and that have non-zero sales in the respective quarter (including nominal or negative sales figures; the only figures excluded are exact $0 amounts in the quarter), multiplied by four. We measure sales for AUV based solely upon monthly sales as derived through the designated point-of-sale system. AUV is impacted by changes in same store sales, studio openings, and studio closures. Management reviews AUV to assess studio economics. The following table reconciles our North America operating studios for the three and nine months ended September 30, 2024 and 2023, respectively, to the total studios contributing to both AUV (LTM as of period end) and Quarterly AUV (run rate): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 North America studios contributing to AUV (LTM as of period) Operating studios (end of period) 2,722 2,514 2,722 2,514 Studios no longer operating but generated sales in the period 7 1 7 1 Less: studios less than 13 months old (451 ) (446 ) (451 ) (446 ) Less: non-traditional studio locations (6 ) (8 ) (6 ) (8 ) Less: studios without 13 months of consecutive sales as of measurement date (19 ) (50 ) (19 ) (50 ) Total 2,253 2,011 2,253 2,011 North America studios contributing to Quarterly AUV (run rate) Operating studios (end of period) 2,722 2,514 NA NA Studios no longer operating but generated sales in the period 44 2 NA NA Less: studios less than 6 months old (270 ) (294 ) NA NA Less: non-traditional studio locations (6 ) (18 ) NA NA Less: studios with no sales in the period — (7 ) NA NA Total 2,490 2,197 NA NA 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 monthly sales for any traditional studio location in North America. If the studio has generated at least 13 months of consecutive positive sales and opened at least 13 calendars months ago as of any month within the measurement period, the respective comparable months will be included. We measure same store sales based solely upon monthly sales as derived through the designated point-of-sale system. 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 The following table reconciles our North America operating studios for the three and nine months ended September 30, 2024 and 2023, respectively, to the total studios contributing to same store sales: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 North America studios contributing to same store sales Operating studios (end of period) 2,722 2,514 2,722 2,514 Studios no longer operating but generated sales in the period 20 1 64 4 Less: studios less than 13 months old (451 ) (446 ) (451 ) (446 ) Less: non-traditional studio locations (6 ) (8 ) (6 ) (8 ) Less: studios without 13 months of consecutive sales as of the last month that had positive sales within the period being measured (18 ) (40 ) (15 ) (24 ) Total 2,267 2,021 2,314 2,040 Results of Operations The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Revenue, net: Franchise revenue $ 44,458 $ 36,425 $ 129,232 $ 104,524 Equipment revenue 14,681 12,564 41,506 40,086 Merchandise revenue 6,538 8,456 20,593 24,021 Franchise marketing fund revenue 8,565 6,948 24,777 19,776 Other service revenue 6,249 16,042 20,421 40,058 Total revenue, net 80,491 80,435 236,529 228,465 Operating costs and expenses: Costs of product revenue 17,071 12,709 44,328 40,967 Costs of franchise and service revenue 4,867 3,559 15,822 11,305 Selling, general and administrative expenses 46,164 43,908 120,308 116,003 Impairment of goodwill and other assets 4,502 4,671 16,591 11,909 Depreciation and amortization 4,226 4,216 13,179 12,701 Marketing fund expense 6,423 5,817 20,785 16,289 Acquisition and transaction expenses (income) 3,664 (1,923 ) 6,962 (17,433 ) Total operating costs and expenses 86,917 72,957 237,975 191,741 Operating income (loss) (6,426 ) 7,478 (1,446 ) 36,724 Other expense (income): Interest income (481 ) (24 ) (1,231 ) (1,189 ) Interest expense 11,843 10,638 34,644 27,242 Other expense 51 1,845 913 3,097 Total other expense 11,413 12,459 34,326 29,150 Income (loss) before income taxes (17,839 ) (4,981 ) (35,772 ) 7,574 Income taxes 131 202 216 212 Net income (loss) $ (17,970 ) $ (5,183 ) $ (35,988 ) $ 7,362 40 The following table presents our condensed consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 as a percentage of revenue: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue, net: Franchise revenue 55 % 45 % 55 % 46 % Equipment revenue 18 % 16 % 17 % 18 % Merchandise revenue 8 % 10 % 9 % 10 % Franchise marketing fund revenue 11 % 9 % 10 % 8 % Other service revenue 8 % 20 % 9 % 18 % Total revenue, net 100 % 100 % 100 % 100 % Operating costs and expenses: Costs of product revenue 21 % 16 % 19 % 18 % Costs of franchise and service revenue 6 % 5 % 7 % 5 % Selling, general and administrative expenses 57 % 54 % 51 % 51 % Impairment of goodwill and other assets 6 % 6 % 7 % 5 % Depreciation and amortization 5 % 5 % 5 % 6 % Marketing fund expense 8 % 7 % 9 % 7 % Acquisition and transaction expenses (income) 5 % (2 )% 3 % (8 )% Total operating costs and expenses 108 % 91 % 101 % 84 % Operating income (loss) (8 )% 9 % (1 )% 16 % Other expense (income): Interest income (1 )% — % (1 )% (1 )% Interest expense 15 % 13 % 15 % 12 % Other expense — % 2 % 1 % 2 % Total other expense 14 % 15 % 15 % 13 % Income (loss) before income taxes (22 )% (6 )% (16 )% 3 % Income taxes — % — % — % — % Net income (loss) (22 )% (6 )% (16 )% 3 % Three Months Ended September 30, 2024 and 2023 The following is a discussion of our consolidated results of operations for the three months ended September 30, 2024 versus the three months ended September 30, 2023. Revenue Three Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Franchise revenue $ 44,458 $ 36,425 $ 8,033 22.1 % Equipment revenue 14,681 12,564 2,117 16.8 % Merchandise revenue 6,538 8,456 (1,918 ) (22.7 )% Franchise marketing fund revenue 8,565 6,948 1,617 23.3 % Other service revenue 6,249 16,042 (9,793 ) (61.0 )% Total revenue, net $ 80,491 $ 80,435 $ 56 0.1 % Total revenue. Total revenue was $80.5 million in the three months ended September 30, 2024, compared to $80.4 million in the three months ended September 30, 2023, an increase of $0.1 million, or 0%. The increase in total revenue was primarily due to an increase in franchise revenue and equipment revenue, partially offset by a decrease in other service revenue. Franchise revenue. Franchise revenue was $44.5 million in the three months ended September 30, 2024, compared to $36.4 million in the three months ended September 30, 2023, an increase of $8.0 million, or 22%. Franchise revenue consisted of franchise royalty fees of $29.7 million, franchise territory fees of $7.5 million, technology fees of $4.3 million and training fees of $3.0 million in the three months ended September 30, 2024, compared to franchise royalty fees of $24.2 million, franchise territory fees of $5.3 million, technology fees of $4.0 million and training fees of $2.9 million in the three months ended September 30, 2023. The increase 41 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 September 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 $14.7 million in the three months ended September 30, 2024, compared to $12.6 million in the three months ended September 30, 2023, an increase of $2.1 million, or 17%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the three months ended September 30, 2024, increased compared to the prior year period. The average revenue per installation increased in the three months ended September 30, 2024, when compared to the three months ended September 30, 2023. The increase in average revenue was due to brand mix and a higher proportion of equipment installed with brands with higher equipment prices. Merchandise revenue. Merchandise revenue was $6.5 million in the three months ended September 30, 2024, compared to $8.5 million in the three months ended September 30, 2023, a decrease of $1.9 million, or 23%. The decrease was due primarily to a decrease in demand from studios, current year sales promotions and a lower number of company-owned transition studios in the current year period. Franchise marketing fund revenue. Franchise marketing fund revenue was $8.6 million in the three months ended September 30, 2024, compared to $6.9 million in the three months ended September 30, 2023, an increase of $1.6 million, or 23%. The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America since September 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024). Other service revenue. Other service revenue was $6.2 million in the three months ended September 30, 2024, compared to $16.0 million in the three months ended September 30, 2023, a decrease of $9.8 million, or 61%. The decrease was primarily due to a $8.2 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 September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Costs of product revenue $ 17,071 $ 12,709 $ 4,362 34.3 % Costs of franchise and service revenue 4,867 3,559 1,308 36.8 % Selling, general and administrative expenses 46,164 43,908 2,256 5.1 % Impairment of goodwill and other assets 4,502 4,671 (169 ) (3.6 )% Depreciation and amortization 4,226 4,216 10 0.2 % Marketing fund expense 6,423 5,817 606 10.4 % Acquisition and transaction expenses (income) 3,664 (1,923 ) 5,587 (290.5 )% Total operating costs and expenses $ 86,917 $ 72,957 $ 13,960 19.1 % Costs of product revenue. Costs of product revenue was $17.1 million in the three months ended September 30, 2024, compared to $12.7 million in the three months ended September 30, 2023, an increase of $4.4 million, or 34%, compared to an increase in related revenues of 1%. Costs of product revenue as a percentage of related revenue increased to 80% in the three months ended September 30, 2024, from 60% in the comparable prior year period. The increase was due to current year sales promotions that decreased gross margin and to an increase in write downs of slow-moving inventory. Costs of franchise and service revenue. Costs of franchise and service revenue was $4.9 million in the three months ended September 30, 2024, compared to $3.6 million in the three months ended September 30, 2023, an increase of $1.3 million, or 37%. The increase was primarily due to a $1.3 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 $46.2 million in the three months ended September 30, 2024, compared to $43.9 million in the three months ended September 30, 2023, an increase of $2.3 million, or 5%. The increase was primarily attributable to an increase in legal expenses of $9.8 million related to various legal matters; an increase in restructuring and related charges of $2.8 million in the current year period; and an increase in equity-based compensation expense of $1.4 million primarily due to an increase in the number of equity-classified restricted stock units (“RSUs”) outstanding during the current year period, partially offset by a decrease in salaries and wages of $4.9 million related to a lower average number of company-owned transition studios; a decrease in occupancy expenses of $4.9 million primarily related to a decrease in the number of company-owned 42 transition studios; a decrease in marketing and advertising expenses of $1.4 million; and a net decrease in other variable expenses of $0.5 million. Impairment of goodwill and other assets. Impairment of goodwill and other assets was $4.5 million in the three months ended September 30, 2024, compared to $4.7 million in the three months ended September 30, 2023, a decrease of $0.2 million, or 4%. The decrease was primarily due to a write down of right-of-use assets and intangible assets of $4.5 million related to studio exits in conjunction with our restructuring plan and wind down of AKT franchise operations in the current year period compared to $4.7 million in the prior year primarily related to goodwill and intangible asset write downs related to Stride and Row House. Depreciation and amortization. Depreciation and amortization expense was $4.2 million in the three months ended September 30, 2024, compared to $4.2 million in the three months ended September 30, 2023. Marketing fund expense. Marketing fund expense was $6.4 million in the three months ended September 30, 2024, compared to $5.8 million in the three months ended September 30, 2023, an increase of $0.6 million, or 10% and is consistent with the increase in franchise marketing fund revenue. Acquisition and transaction expenses (income). Acquisition and transaction expense was $3.7 million in the three months ended September 30, 2024, compared to income of $1.9 million in the three months ended September 30, 2023, an increase to expense of $5.6 million, or 291%. This expense primarily represented the non-cash change in contingent consideration related to 2021 business acquisitions and to the Lindora acquisition. Other Expense (Income), net Three Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Interest income $ (481 ) $ (24 ) $ (457 ) 1,904.2 % Interest expense 11,843 10,638 1,205 11.3 % Other expense 51 1,845 (1,794 ) (97.2 )% Total other expense, net $ 11,413 $ 12,459 $ (1,046 ) (8.4 )% Interest income. Interest income primarily consists of interest on notes receivable, which was $0.5 million in the three months ended September 30, 2024, compared to $0.0 million in the three months ended September 30, 2023. Interest expense . Interest expense was $11.8 million in the three months ended September 30, 2024, compared to $10.6 million in the three months ended September 30, 2023, an increase of $1.2 million, or 11%. 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 in the current year period. Other expense. Other expense consists of TRA expense, which was $0.1 million in the three months ended September 30, 2024, compared to $1.8 million in the three months ended September 30, 2023. Income Taxes Three Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Income taxes $ 131 $ 202 $ (71 ) (35.1 )% Income taxes . Income taxes were (0.7)% of pre-tax book income (loss) in the three months ended September 30, 2024, compared to (4.0)% in the three months ended September 30, 2023. 43 Nine Months Ended September 30, 2024 and 2023 The following is a discussion of our consolidated results of operations for the nine months ended September 30, 2024 versus the nine months ended September 30, 2023. Revenue Nine Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Franchise revenue $ 129,232 $ 104,524 $ 24,708 23.6 % Equipment revenue 41,506 40,086 1,420 3.5 % Merchandise revenue 20,593 24,021 (3,428 ) (14.3 )% Franchise marketing fund revenue 24,777 19,776 5,001 25.3 % Other service revenue 20,421 40,058 (19,637 ) (49.0 )% Total revenue, net $ 236,529 $ 228,465 $ 8,064 3.5 % Total revenue. Total revenue was $236.5 million in the nine months ended September 30, 2024, compared to $228.5 million in the nine months ended September 30, 2023, an increase of $8.1 million, or 4%. The increase in total revenue was primarily due to an increase in the number of open studios, partially offset by a decrease in other service revenue. Franchise revenue. Franchise revenue was $129.2 million in the nine months ended September 30, 2024, compared to $104.5 million in the nine months ended September 30, 2023, an increase of $24.7 million, or 24%. Franchise revenue consisted of franchise royalty fees of $85.6 million, franchise territory fees of $22.2 million, technology fees of $12.6 million and training fees of $8.8 million in the nine months ended September 30, 2024, compared to franchise royalty fees of $68.8 million, franchise territory fees of $15.9 million, technology fees of $11.4 million and training fees of $8.4 million in the nine months ended September 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 September 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 $41.5 million in the nine months ended September 30, 2024, compared to $40.1 million in the nine months ended September 30, 2023, an increase of $1.4 million, or 4%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the nine months ended September 30, 2024, decreased compared to 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 nine months ended September 30, 2024, when compared to the nine months ended September 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 $20.6 million in the nine months ended September 30, 2024, compared to $24.0 million in the nine months ended September 30, 2023, a decrease of $3.4 million, or 14%. The decrease was due primarily to a decrease in demand from studios, current year sales promotions and a lower number of company-owned transition studios in the current year period. Franchise marketing fund revenue. Franchise marketing fund revenue was $24.8 million in the nine months ended September 30, 2024, compared to $19.8 million in the nine months ended September 30, 2023, an increase of $5.0 million, or 25%. The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America since September 30, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024). Other service revenue. Other service revenue was $20.4 million in the nine months ended September 30, 2024, compared to $40.1 million in the nine months ended September 30, 2023, a decrease of $19.6 million, or 49%. The decrease was primarily due to a $17.5 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios. 44 Operating Costs and Expenses Nine Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Costs of product revenue $ 44,328 $ 40,967 $ 3,361 8.2 % Costs of franchise and service revenue 15,822 11,305 4,517 40.0 % Selling, general and administrative expenses 120,308 116,003 4,305 3.7 % Impairment of goodwill and other assets 16,591 11,909 4,682 39.3 % Depreciation and amortization 13,179 12,701 478 3.8 % Marketing fund expense 20,785 16,289 4,496 27.6 % Acquisition and transaction expenses (income) 6,962 (17,433 ) 24,395 (139.9 )% Total operating costs and expenses $ 237,975 $ 191,741 $ 46,234 24.1 % Costs of product revenue. Costs of product revenue was $44.3 million in the nine months ended September 30, 2024, compared to $41.0 million in the nine months ended September 30, 2023, an increase of $3.4 million, or 8%, compared to a decrease in related revenues of 3%. Costs of product revenue as a percentage of related revenue increased to 71% in the nine months ended September 30, 2024, from 64% in the comparable prior year period. The increase was due to current year sales promotions, that decreased gross margin and an increase in write downs of slow-moving inventory. Costs of franchise and service revenue. Costs of franchise and service revenue was $15.8 million in the nine months ended September 30, 2024, compared to $11.3 million in the nine months ended September 30, 2023, an increase of $4.5 million, or 40%. The increase was primarily due to a $3.6 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 $120.3 million in the nine months ended September 30, 2024, compared to $116.0 million in the nine months ended September 30, 2023, an increase of $4.3 million, or 4%. The increase was primarily attributable to an increase in restructuring and related charges of $13.1 million in the current year period; an increase in legal expenses of $9.8 million related to various legal matters; 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 brand divestitures and wind down of $1.8 million in the current year period; and a net increase in other variable expenses of $0.6 million, partially offset by a decrease in salaries and wages of $8.9 million related to a lower average number of company-owned transition studios; a decrease in occupancy expenses of $10.6 million primarily due to a decrease in the number of company-owned transition studios; a decrease in equity-based compensation expense of $2.5 million primarily due to a decrease in the current year common stock price, resulting in lower expense to be recognized on current-year RSU grants; and a decrease in marketing and advertising expenses of $2.5 million. Impairment of goodwill and other assets. Impairment of goodwill and other assets was $16.6 million in the nine months ended September 30, 2024, compared to $11.9 million in the nine months ended September 30, 2023, an increase of $4.7 million, or 39%. The increase was primarily due to a write down of franchise agreements intangible asset and goodwill of $12.1 million related to the CycleBar reporting unit and a write down of right-of-use assets of $4.3 million in the current year compared to a $7.2 million intangible asset write down related to the acquisition of 14 Rumble studios and a $4.6 million write down of goodwill and intangible asset related to Stride and Row House in the prior year period. Depreciation and amortization. Depreciation and amortization expense was $13.2 million in the nine months ended September 30, 2024, compared to $12.7 million in the nine months ended September 30, 2023, an increase of $0.5 million, or 4%. The increase was due primarily to an increase in fixed assets to support our online offerings. Marketing fund expense. Marketing fund expense was $20.8 million in the nine months ended September 30, 2024, compared to $16.3 million in the nine months ended September 30, 2023, an increase of $4.5 million, or 28% and is consistent with the increase in franchise marketing fund revenue. Acquisition and transaction expense (income). Acquisition and transaction expense was $7.0 million in the nine months ended September 30, 2024, compared to income of $17.4 million in the nine months ended September 30, 2023, an increase to expense of $24.4 million, or 140%. 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 Nine Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Interest income $ (1,231 ) $ (1,189 ) $ (42 ) 3.5 % Interest expense 34,644 27,242 7,402 27.2 % Other expense 913 3,097 (2,184 ) (70.5 )% Total other expense, net $ 34,326 $ 29,150 $ 5,176 17.8 % Interest income. Interest income primarily consists of interest on notes receivable, which was $1.2 million in the nine months ended September 30, 2024, compared to $1.2 million in the nine months ended September 30, 2023. Interest expense . Interest expense was $34.6 million in the nine months ended September 30, 2024, compared to $27.2 million in the nine months ended September 30, 2023, an increase of $7.4 million, or 27%. Interest expense consists of interest on long-term debt, accretion of earn-out liabilities and amortization and write off 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 $0.9 million in the nine months ended September 30, 2024, compared to $3.1 million in the nine months ended September 30, 2023. Income Taxes Nine Months Ended September 30, Change from Prior Year 2024 2023 $ % ($ in thousands) Income taxes $ 216 $ 212 $ 4 1.9 % Income taxes . Income taxes were (0.6)% of pre-tax book income (loss) in the nine months ended September 30, 2024, compared to 2.8% in the nine months ended September 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. 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 46 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 divestitures and wind down, 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 income (loss), the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Net income (loss) $ (17,970 ) $ (5,183 ) $ (35,988 ) $ 7,362 Interest expense, net 11,362 10,614 33,413 26,053 Income taxes 131 202 216 212 Depreciation and amortization 4,226 4,216 13,179 12,701 EBITDA (2,251 ) 9,849 10,820 46,328 Equity-based compensation 4,983 3,536 13,121 15,647 Employer payroll taxes related to equity-based compensation (7 ) 94 415 659 Acquisition and transaction expenses (income) 3,664 (1,923 ) 6,962 (17,433 ) Litigation expenses 10,435 1,511 14,521 5,855 Financial transaction fees and related expenses — 327 620 1,971 TRA remeasurement 51 1,845 913 3,097 Impairment of goodwill and other assets 4,502 4,671 16,591 11,909 Loss on brand divestitures and wind down (excluding impairments) 408 — 1,609 — Executive transition costs — — 690 — Non-recurring rebranding expenses — — 331 — Restructuring and related charges (excluding impairments) 9,194 6,611 19,583 6,611 Adjusted EBITDA $ 30,979 $ 26,521 $ 86,176 $ 74,644 Liquidity and Capital Resources As of September 30, 2024, we had $24.8 million of cash and cash equivalents, excluding $13.0 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 47 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 September 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, (ii) included a prepayment premium on the Sixth Amendment Incremental Term Loans and (iii) extended the maturity date for all outstanding term loans under the Credit Agreement to March 15, 2026. On August 23, 2024, we entered into a seventh amendment (the “Seventh Amendment”) to the Credit Agreement. The Seventh Amendment provides for, among other things, additional term loans in an aggregate principal amount of $25.0 million, with an original issue discount of $0.8 million, (the “Seventh Amendment Incremental Term Loans”). The proceeds of which will be used for general corporate purposes, including working capital, lease liabilities, and legal expenses arising from previously disclosed regulatory matters. The Seventh Amendment, among other things, also increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the Seventh Amendment Incremental Term Loans) commencing on September 30, 2024 to $1.3 million and included a prepayment premium on the Seventh Amendment Incremental Term Loans. The total principal amount outstanding on the Term Loans was $353.8 million at September 30, 2024. See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information about our debt. Material Cash Requirements At September 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. Cash Flows The following table presents summary cash flow information for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 (in thousands) Net cash provided by (used in) operating activities $ 10,915 $ 38,194 Net cash provided by (used in) investing activities (13,934 ) (8,595 ) Net cash provided by (used in) financing activities 3,699 (15,089 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 680 $ 14,510 Cash Flows from Operating Activities In the nine months ended September 30, 2024, cash provided by operating activities was $10.9 million, compared to $38.2 million in the nine months ended September 30, 2023, a decrease in cash provided of $27.3 million. Of the decrease, $26.4 million was due to lower net income after adjustments to reconcile net income (loss) to net cash provided by operating activities and $0.9 million in unfavorable changes in working capital related to deferred revenue, accounts payable, and other liabilities, partially offset by favorable changes in working capital related to prepaid expenses and other current assets, deferred costs, inventories, accounts receivable, accrued 48 expenses, and operating lease liabilities in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. Cash Flows from Investing Activities In the nine months ended September 30, 2024 and 2023, cash used in investing activities was $13.9 million and $8.6 million, respectively. The change year over year in cash used of $5.3 million was primarily attributable to cash used of $8.5 million for our acquisition of Lindora; partially offset by decreases in cash used to purchase property and equipment and intangible assets of $1.3 million and $1.0 million, respectively. Cash Flows from Financing Activities In the nine months ended September 30, 2024, cash provided by financing activities was $3.7 million, compared to cash used in financing activities of $15.1 million in the nine months ended September 30, 2023, a decrease in cash used of $18.8 million. The decrease in cash used was primarily attributable to prior year payments of $130.8 million related to repurchase of convertible preferred stock, $50.4 million for share repurchases, $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 $186.1 million and a payment received from a shareholder of $8.1 million in the prior year compared to net borrowings on long-term debt of $20.4 million in the current year. Off-Balance Sheet Arrangements As of September 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 $1.8 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 September 30, 2024 a $0.8 million 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 September 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