Xponential Fitness, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such. Without limiting the foregoing, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “should,” “would,” “could,” “will,” “likely” and the negative thereof and similar words and expressions are intended to identify forward-looking statements. 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, 2024. 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, 2024. The following Management’s Discussion and Analysis gives effect to the correction of the Company’s condensed consolidated financial statements for the three months ended March 31, 2024, as more fully described in Note 2 of Notes to Condensed Consolidated Financial Statements. Overview Xponential Fitness LLC (“XPO LLC”), the principal operating subsidiary of Xponential Fitness, Inc. (the “Company” or “XPO Inc.,” “we,” “us,” and “our”), is one of the leading global franchisors of boutique health and wellness brands. Pursuant to a reorganization into a holding company structure, the Company is a holding company with its principal asset being a 71.7% ownership interest in XPO LLC through its ownership interest in Xponential Intermediate Holdings, LLC (“XPO Holdings”). We operate a diversified platform of eight brands spanning across verticals including Pilates, indoor cycling, barre, stretching, 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 30 additional countries as of March 31, 2025. 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; 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. As of March 31, 2025, 2,806 studios were open in North America (consists of Canada, the United States and U.S. Territories) and franchisees were contractually committed to open 1,509 additional studios under existing franchise agreements. In addition, as of March 31, 2025, we had 492 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,027 new studios, of which master franchisees have sold 229 licenses for studios not yet opened as of March 31, 2025. During the three months ended March 31, 2025 and 2024, we generated revenue outside the United States of $2.6 million and $3.6 million, respectively. As of March 31, 2025 and December 31, 2024, 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. 32 Recent Developments Paused offering or selling franchises On April 10, 2023, we received notice of an investigation from the Commissioner of California’s Department of Financial Protection and Innovation (“DFPI”) related to our compliance with California’s Franchise Investment Law. In addition, on April 26, 2024, we received a request for information from the Office of the Attorney General of the State of Maryland related to our compliance with Maryland’s Franchise Registration and Disclosure Law. As a result of both of those inquiries, the Company was unable to offer and sell franchises in California or Maryland, except in cases where an exemption permitted sales to persons who met specific criteria. On November 4, 2024, without admission of wrongdoing, we entered into a Consent Order with the DFPI to resolve the matter. The Company has also received inquiries from the Office of the Attorney General of the State of New York, the Washington Department of Financial Institutions, and the Minnesota Department of Commerce regarding the Company’s compliance with applicable franchise laws. In March 2025, we issued 2025 Franchise Disclosure Documents (“FDDs”) for the BFT, Club Pilates, CycleBar, Pure Barre, Rumble, Stretch Lab, and Yoga Six franchise programs. The franchisors can offer and sell franchises in most states using the 2025 FDDs and continue pursuit of registration of the FDDs from the few remaining states that still require registration. Given the prior pause on franchise sales, while we completed the process of updating and renewing the FDDs, our inability to sell licenses for an extended period has slowed our growth and could result in a reduction in our anticipated royalty or franchise revenue, which in turn may materially and adversely affect our business, results of operations, cash flows and financial condition. 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 2025; however, the ultimate timing of the completion of our restructuring plan 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 months ended March 31, 2025 and 2024, we recognized total restructuring charges of $2.4 million, net of gains, and $6.8 million, net of gains, respectively, primarily for contract termination and other associated costs, loss (gain) 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 2025 totaling between approximately $5.2 million to $9.0 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 2025. Once completed we estimate annualized savings of approximately $13.5 million to $15.5 million as a result of the restructuring plan. However, we may not be able to fully realize the cost savings and benefits initially anticipated from the restructuring plan, as we may not be able to reach agreement with contractual counterparties or the charges may be greater than expected. Any reduction in the amount of annualized savings we expect to achieve would negatively impact our business. See Note 16 of Notes to Condensed Consolidated Financial Statements for additional information. 33 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, 2024, 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 ability to successfully license new studios to new and existing franchisees. We believe our success in attracting new franchisees and expanding our relationships with our existing franchisees 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 also 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 or 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. 34 The following table sets forth our key performance indicators for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 ($ in thousands) System-wide sales $ 466,797 $ 396,444 Number of new studio openings globally, gross 116 111 Number of studios operating globally (cumulative total as of period end) 3,298 3,079 Number of licenses sold globally (cumulative total as of period end) 6,286 6,038 Number of licenses contractually obligated to open internationally (cumulative total as of period end) 1,027 1,045 AUV (LTM as of period end) $ 673 $ 630 Quarterly AUV (run rate) $ 659 $ 609 Same store sales 4 % 9 % The following tables present additional information related to our studio and license key performance indicators for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 North America International Global North America International Global Total operating studios: Studios operating at beginning of period 2,758 475 3,233 2,583 411 2,994 New studio openings, net 48 17 65 64 21 85 Studios operating at end of period 2,806 492 3,298 2,647 432 3,079 Franchise licenses sold: Franchise licenses sold (total beginning of period) 5,359 906 6,265 5,106 759 5,865 New franchise license sales — 21 21 120 53 173 Franchise licenses sold (total end of period) 5,359 927 6,286 5,226 812 6,038 Studios obligated to open internationally under MFAs: March 31, 2025 March 31, 2024 Gross studios obligated to open under MFAs 1,503 1,461 Less: studios opened under MFAs 476 416 Remaining studios obligated to open under MFAs 1,027 1,045 Licenses sold by master franchisees, net (1) 229 265 (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. 35 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. Furthermore, studios no longer operating also includes de-branded studios (studios that exit our franchise system and continue to operate independently under non-Xponential branding). 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, subheader “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 months ended March 31, 2025 and 2024, this represented 0.2% and 2.3%, 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 months ended March 31, 2025 and 2024, respectively: Three Months Ended March 31, 2025 2024 North America franchisee-owned studios Studios operated at beginning of period 2,757 2,562 New studio openings 93 85 Refranchised studios (1) — 10 Studios no longer operating (45 ) (11 ) Studios operated at end of period 2,805 2,646 North America company-owned transition studios Studios operated at beginning of period 1 21 Refranchised studios (1) — (10 ) Studios no longer operating — (10 ) Studios operated at end of period 1 1 Total North America studios Studios operated at beginning of period 2,758 2,583 New studio openings 93 85 Studios no longer operating (45 ) (21 ) Studios operated at end of period 2,806 2,647 (1) Includes previously franchised company-owned studios that were converted to franchisee-owned studios in the period. 36 The following table sets forth the total number of operating studios internationally for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 Total studios Studios operated at beginning of period 475 411 New studio openings 23 26 Studios no longer operating (6 ) (5 ) Studios operated at end of period 492 432 The following table sets forth the total number of operating studios globally for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 Total studios Studios operated at beginning of period 3,233 2,994 New studio openings 116 111 Studios no longer operating (51 ) (26 ) Studios operated at end of period 3,298 3,079 Non-Traditional Studio Locations Non-traditional studio locations refers to studios that are not operated as standalone studio locations. There are currently 20 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 or to 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 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. As of March 31, 2025, we estimate approximately one third of our global license obligations are over 12 months behind the applicable development schedule due to various circumstances and are currently inactive. This delay in development has resulted in delays in studio openings and may also lead to increased terminations, which could have a negative long-term impact on our business and operating results. 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, as 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. 37 The following table reconciles our North America operating studios for the three months ended March 31, 2025 and 2024, respectively, to the total studios contributing to both AUV (LTM as of period end) and Quarterly AUV (run rate): Three Months Ended March 31, 2025 2024 North America studios contributing to AUV (LTM as of period) Operating studios (end of period) 2,806 2,647 Studios no longer operating but generated sales in the period 11 — Less: studios less than 13 months old (415 ) (479 ) Less: non-traditional studio locations (4 ) (9 ) Less: studios without 13 months of consecutive sales as of measurement date (10 ) (73 ) Total 2,388 2,086 North America studios contributing to Quarterly AUV (run rate) Operating studios (end of period) 2,806 2,647 Studios no longer operating but generated sales in the period 67 58 Less: studios less than 6 months old (272 ) (323 ) Less: non-traditional studio locations (4 ) (10 ) Less: studios with no sales in the period — (23 ) Total 2,597 2,349 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 calendar 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. The following table reconciles our North America operating studios for the three months ended March 31, 2025 and 2024, respectively, to the total studios contributing to same store sales: Three Months Ended March 31, 2025 2024 North America studios contributing to same store sales Operating studios (end of period) 2,806 2,647 Studios no longer operating but generated sales in the period 45 5 Less: studios less than 13 months old (415 ) (479 ) Less: non-traditional studio locations (4 ) (9 ) Less: studios without 13 months of consecutive sales as of the last month that had positive sales within the period being measured (7 ) (61 ) Total 2,425 2,103 38 Results of Operations The following table presents our condensed consolidated results of operations for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 (in thousands) Revenue, net: Franchise revenue $ 43,894 $ 41,754 Equipment revenue 11,104 13,900 Merchandise revenue 6,255 8,345 Franchise marketing fund revenue 9,269 7,832 Other service revenue 6,361 7,862 Total revenue, net 76,883 79,693 Operating costs and expenses: Costs of product revenue 11,972 14,566 Costs of franchise and service revenue 4,097 5,047 Selling, general and administrative expenses 45,545 36,620 Impairment of goodwill and other noncurrent assets 1,915 — Depreciation and amortization 2,956 4,436 Marketing fund expense 9,357 6,515 Acquisition and transaction expenses (income) (8,638 ) 4,515 Total operating costs and expenses 67,204 71,699 Operating income 9,679 7,994 Other expense (income): Interest income (619 ) (363 ) Interest expense 11,388 11,545 Other expense 1,084 609 Total other expense 11,853 11,791 Loss before income taxes (2,174 ) (3,797 ) Income taxes (benefit) 485 (47 ) Net loss $ (2,659 ) $ (3,750 ) 39 The following table presents our condensed consolidated results of operations for the three months ended March 31, 2025 and 2024 as a percentage of revenue: Three Months Ended March 31, 2025 2024 Revenue, net: Franchise revenue 57 % 52 % Equipment revenue 14 % 17 % Merchandise revenue 8 % 11 % Franchise marketing fund revenue 12 % 10 % Other service revenue 9 % 10 % Total revenue, net 100 % 100 % Operating costs and expenses: Costs of product revenue 16 % 18 % Costs of franchise and service revenue 5 % 6 % Selling, general and administrative expenses 59 % 46 % Impairment of goodwill and other noncurrent assets 2 % — % Depreciation and amortization 4 % 6 % Marketing fund expense 12 % 8 % Acquisition and transaction expenses (income) (11 )% 6 % Total operating costs and expenses 87 % 90 % Operating income 13 % 10 % Other expense (income): Interest income (1 )% — % Interest expense 15 % 14 % Other expense 1 % 1 % Total other expense 15 % 15 % Loss before income taxes (2 )% (5 )% Income taxes (benefit) 1 % — % Net Loss (3 )% (5 )% Comparison of the three months ended March 31, 2025 and 2024 The following is a discussion of our consolidated results of operations for the three months ended March 31, 2025 versus the three months ended March 31, 2024. Revenue Three Months Ended March 31, Change from Prior Year 2025 2024 $ % ($ in thousands) Franchise revenue $ 43,894 $ 41,754 $ 2,140 5.1 % Equipment revenue 11,104 13,900 (2,796 ) (20.1 )% Merchandise revenue 6,255 8,345 (2,090 ) (25.0 )% Franchise marketing fund revenue 9,269 7,832 1,437 18.3 % Other service revenue 6,361 7,862 (1,501 ) (19.1 )% Total revenue, net $ 76,883 $ 79,693 $ (2,810 ) (3.5 )% Total revenue. Total revenue was $76.9 million in the three months ended March 31, 2025, compared to $79.7 million in the three months ended March 31, 2024, a decrease of $2.8 million, or 4%. The decrease in total revenue was primarily due to a decrease in equipment revenue due to a decrease in equipment installations and a decrease in merchandise revenue, partially offset by an increase in franchise revenue. 40 Franchise revenue. Franchise revenue was $43.9 million in the three months ended March 31, 2025, compared to $41.8 million in the three months ended March 31, 2024, an increase of $2.1 million, or 5%. Franchise revenue consisted of franchise royalty fees of $32.5 million, franchise territory fees of $3.9 million, technology fees of $4.4 million and training fees of $3.1 million in the three months ended March 31, 2025, compared to franchise royalty fees of $27.5 million, franchise territory fees of $7.3 million, technology fees of $4.2 million and training fees of $2.8 million in the three months ended March 31, 2024. The increase in franchise royalty fees, technology fees and training fees was primarily due to an increase in same store sales and increase in number of operating studios globally since March 31, 2024. The decrease in franchise territory fees is primarily attributed to a decrease of $2.4 million, or 75%, in revenue recognized as a result of franchise agreement terminations year-over-year to $0.8 million in the three months ended March 31, 2025, compared to $3.2 million in the prior year period. Equipment revenue. Equipment revenue was $11.1 million in the three months ended March 31, 2025, compared to $13.9 million in the three months ended March 31, 2024, a decrease of $2.8 million, or 20%. Most equipment revenue is recognized in the period when the equipment is installed. The decrease in equipment revenue was primarily driven by a decrease in global equipment installations in the three months ended March 31, 2025, compared to the prior year period. Merchandise revenue. Merchandise revenue was $6.3 million in the three months ended March 31, 2025, compared to $8.3 million in the three months ended March 31, 2024, a decrease of $2.1 million, or 25%. The decrease was primarily due to lower demand from studios and a decrease in vendor rebates compared to the prior period. Franchise marketing fund revenue. Franchise marketing fund revenue was $9.3 million in the three months ended March 31, 2025, compared to $7.8 million in the three months ended March 31, 2024, an increase of $1.4 million, or 18%. The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America since March 31, 2024 . Other service revenue. Other service revenue was $6.4 million in the three months ended March 31, 2025, compared to $7.9 million in the three months ended March 31, 2024, a decrease of $1.5 million, or 19%. The decrease was primarily due to a $1.3 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios. Operating Costs and Expenses Three Months Ended March 31, Change from Prior Year 2025 2024 $ % ($ in thousands) Costs of product revenue $ 11,972 $ 14,566 $ (2,594 ) (17.8 )% Costs of franchise and service revenue 4,097 5,047 (950 ) (18.8 )% Selling, general and administrative expenses 45,545 36,620 8,925 24.4 % Impairment of goodwill and other noncurrent assets 1,915 — 1,915 N/A Depreciation and amortization 2,956 4,436 (1,480 ) (33.4 )% Marketing fund expense 9,357 6,515 2,842 43.6 % Acquisition and transaction expenses (income) (8,638 ) 4,515 (13,153 ) (291.3 )% Total operating costs and expenses $ 67,204 $ 71,699 $ (4,495 ) (6.3 )% Costs of product revenue. Costs of product revenue was $12.0 million in the three months ended March 31, 2025, compared to $14.6 million in the three months ended March 31, 2024, a decrease of $2.6 million, or 18%, compared to a decrease in related revenues of 22%. Costs of product revenue as a percentage of related revenue increased to 69% in the three months ended March 31, 2025, from 65% in the comparable prior year period. The increase was partly due to an increase in write downs of slow-moving inventory in the current year period. Additionally, in the prior year period we had a higher percentage of sales relating to non-branded merchandise for which we earn a commission with no corresponding cost of revenue compared to the current year period. Costs of franchise and service revenue. Costs of franchise and service revenue was $4.1 million in the three months ended March 31, 2025, compared to $5.0 million in the three months ended March 31, 2024, a decrease of $1.0 million, or 19%. The decrease was primarily due to a $1.5 million decrease in franchise sales commissions, consistent with the related franchise territory revenue decrease. The decrease in cost of franchise and service revenue is also attributed to a decrease of $1.0 million, or 71%, in costs recognized as a result of franchise agreement terminations year-over-year to $0.4 million in the three months ended March 31, 2025, compared to $1.4 million in the prior year period. 41 Selling, general and administrative expenses. Selling, general and administrative expenses were $45.5 million in the three months ended March 31, 2025, compared to $36.6 million in the three months ended March 31, 2024, an increase of $8.9 million, or 24%. The increase was primarily attributable to an increase in legal expenses of $15.6 million (net of insurance reimbursements) related to various legal matters including government investigations; an increase in salaries and wages of $0.3 million; and a net increase in other variable expenses of $2.3 million, partially offset by lower restructuring and related charges of $7.2 million in the current year period; a decrease in occupancy expenses of $0.6 million primarily due to a decrease in the number of company-owned transition studios; a decrease of $0.7 million in equity-based compensation expense due to an increase in forfeitures over the prior year period, and a decrease in marketing and advertising expenses of $0.8 million. Impairment of goodwill and other noncurrent assets. Impairment of goodwill and other noncurrent assets was $1.9 million in the three months ended March 31, 2025, compared to $0.0 million in the three months ended March 31, 2024, an increase of $1.9 million. The increase was due to impairment of right-of use assets. Depreciation and amortization. Depreciation and amortization expense was $3.0 million in the three months ended March 31, 2025, compared to $4.4 million in the three months ended March 31, 2024, a decrease of $1.5 million, or 33%. The decrease was primarily due to a decrease in fixed assets related to impairment of software assets and a decrease in intangible assets due to impairments during the year ended December 31, 2024. Marketing fund expense. Marketing fund expense was $9.4 million in the three months ended March 31, 2025, compared to $6.5 million in the three months ended March 31, 2024, an increase of $2.8 million, or 44%. Marketing fund expenses are recorded as incurred, which may not occur in the same period as the recognition of franchise marketing fund revenue. For the three months ended March 31, 2025, marketing fund expense was $0.1 million higher than marketing fund revenue as the Company’s spending increased after a slowdown in the second half of 2024. Acquisition and transaction expense (income). Acquisition and transaction income was $8.6 million in the three months ended March 31, 2025, compared to expense of $4.5 million in the three months ended March 31, 2024, a decrease to expense of $13.2 million, or 291%. These charges primarily represent the non-cash change in contingent consideration related to 2021 and 2024 business acquisitions. Other (Income) Expense, net Three Months Ended March 31, Change from Prior Year 2025 2024 $ % ($ in thousands) Interest income $ (619 ) $ (363 ) $ (256 ) 70.5 % Interest expense 11,388 11,545 (157 ) (1.4 )% Other expense 1,084 609 475 78.0 % Total other expense, net $ 11,853 $ 11,791 $ 62 0.5 % Interest income. Interest income primarily consists of interest on notes receivable and interest income received from various interest-bearing bank accounts, which was $0.6 million in the three months ended March 31, 2025, compared to $0.4 million in the three months ended March 31, 2024. Interest expense . Interest expense was $11.4 million in the three months ended March 31, 2025 compared to $11.5 million in the three months ended March 31, 2024, a decrease of $0.2 million, or 1%. 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 decrease was primarily due to a decrease in interest rates in the current year and a $0.2 million write off of debt issuance costs and debt discount related to credit agreement amendments in the comparable prior year period, partly offset by higher average debt balances in the current year period. Other expense. Other expense consists of TRA expense, which was $1.1 million in the three months ended March 31, 2025, compared to $0.6 million in the three months ended March 31, 2024. 42 Income Taxes Three Months Ended March 31, Change from Prior Year 2025 2024 $ % ($ in thousands) Income taxes (benefit) $ 485 $ (47 ) $ 532 (1,131.9 )% Income taxes (benefit) . Income taxes (benefit) was (22.3%) of our share of pre-tax book loss in the three months ended March 31, 2025, compared to 1.2% in the three months ended March 31, 2024. 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 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 (gain) and ongoing expenses related to brand divestitures and wind down (including ongoing expenses directly related to the divested or wound down brands for arrangements that existed prior to divestiture or wind down), transformation initiative costs (primarily consisting of third-party professional consulting fees related to modifications of our business strategy and cost saving initiatives), 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. 43 The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted EBITDA for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 (in thousands) Net loss $ (2,659 ) $ (3,750 ) Interest expense, net 10,769 11,182 Income taxes (benefit) 485 (47 ) Depreciation and amortization 2,956 4,436 EBITDA 11,551 11,821 Equity-based compensation 3,281 3,942 Employer payroll taxes related to equity-based compensation 115 313 Acquisition and transaction expenses (income) (8,638 ) 4,515 Litigation expenses 16,189 698 Financial transaction fees and related expenses 303 195 TRA remeasurement 1,084 609 Impairment of goodwill and other noncurrent assets 1,915 — Loss (gain) and ongoing expenses due to brand divestitures and wind down (excluding impairments) 81 (58 ) Transformation initiative costs 889 — Restructuring and related charges (excluding impairments) 555 7,885 Adjusted EBITDA $ 27,325 $ 29,920 Liquidity and Capital Resources As of March 31, 2025, we had $26.6 million of cash and cash equivalents, excluding $16.0 million of restricted cash consisting of marketing fund restricted cash and a standby letter of credit guarantee. We principally require cash to fund day-to-day operations, finance capital investments, service our outstanding debt and address our working capital needs. Additionally, we require cash to fund the investments in our data warehouse project and other investments to become a data driven company. 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 beginning April 1, 2025 and beyond such twelve month period based on our current business plans. 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, 2024. 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 consisted 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. 44 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. Additionally, on March 10, 2025 we obtained a waiver related to EBITDA levels as the Credit Agreement did not contain active exceptions for non-recurring legal expenses. The waiver permits the exclusion of certain non-recurring legal expenses from the calculation of EBITDA through March 31, 2026. As of March 31, 2025, we were in compliance with these covenants. On March 14, 2025, we entered into an eighth amendment (the “Eighth Amendment”) to the Credit Agreement. The Eighth Amendment extends the final maturity date under the Credit Agreement to August 1, 2027 (the “Final Maturity Date”) and provides for, among other things, additional term loans in an aggregate principal amount of $10.0 million (the “Eighth Amendment Incremental Term Loans”), an upfront fee equal to 3% of the (a) aggregate principal amount of term loans outstanding as of the amendment date and (b) the Eighth Amendment Incremental Term Loans funded on the funding date, which will be capitalized and added to the outstanding loan principal, and an exit fee of approximately $7.2 million payable upon the earlier of the Final Maturity Date or the date all loans under the Credit Agreement have been repaid or prepaid. The proceeds of the Eighth Amendment will be used for general corporate purposes. The Eighth Amendment also increased the amount of the quarterly principal payments of the loans provided pursuant to the Credit Agreement (including the Eighth Amendment Incremental Term Loans) commencing on March 31, 2025 to $1.4 million. The total principal amount outstanding on the Term Loans, including exit fee, was $379.1 million at March 31, 2025. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information about our debt. Material Cash Requirements At March 31, 2025, 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, 2024. Cash Flows The following table presents summary cash flow information for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 (in thousands) Net cash provided by (used in) operating activities $ 5,818 $ 2,681 Net cash provided by (used in) investing activities (997 ) (9,204 ) Net cash provided by (used in) financing activities 5,010 (3,353 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 9,831 $ (9,876 ) Cash Flows from Operating Activities In the three months ended March 31, 2025, cash provided by operating activities was $5.8 million, compared to $2.7 million in the three months ended March 31, 2024, an increase in cash provided of $3.1 million. Of the increase, $9.3 million was due to lower net income after adjustments to reconcile net loss to net cash provided by operating activities and $12.5 million in favorable changes in working capital related to accrued expenses, other current liabilities, deferred revenue and other assets, partially offset by unfavorable changes in working capital related to accounts receivable, prepaid expenses and other current assets and accounts payable in the three months ended March 31, 2025, compared to the three months ended March 31, 2024. Cash Flows from Investing Activities In the three months ended March 31, 2025 and 2024, cash used in investing activities was $1.0 million and $9.2 million, respectively. The change year over year of $8.2 million was primarily attributable to cash used of $8.5 million for acquisition of Lindora in the prior year and the decrease in cash used to purchase property and equipment of $0.4 million in the current year. 45 Cash Flows from Financing Activities In the three months ended March 31, 2025, cash provided by financing activities was $5.0 million, compared to cash used of $3.4 million in the three months ended March 31, 2024, the change year over year of $8.4 million. The increase in cash provided was primarily attributable to net borrowings on long-term debt of $8.5 million in the current year. Off-Balance Sheet Arrangements As of March 31, 2025, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately $2.8 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 March 31, 2025 a $1.1 million accrual has been recorded for our potential obligation under the guaranty arrangements. See Note 15 of Notes to Condensed Consolidated Financial Statements for more information regarding these operating leases and guarantees. In July 2022, we entered into an agreement with a third-party financing company, who provides loans to our qualified franchisees, pursuant to which we serve as guarantor for such loans. In addition, we issued a $0.8 million standby letter of credit in connection therewith, which represents a portion of our potential aggregate liability under the guaranty. 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 March 31, 2025 a $1.0 million accrual has been recorded for our potential obligation under this guaranty arrangement. See Note 15 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, 2024. 46