Xponential Fitness, Inc. (XPOF) FY 2024 MD&A

Item 7. 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 consolidated financial statements and related notes thereto and the other financial information included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in the section titled “Risk Factors.”

This Management’s Discussion and Analysis gives effect to the correction of the Company’s consolidated financial statements for the years ended December 31, 2023 and 2022, as more fully described in Note 2 of Notes to 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 69.5% 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 December 31, 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; 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 December 31, 2024, 2,758 studios were open in North America (consists of Canada, the United States and U.S. territories) and franchisees were contractually committed to open 1,607 additional studios under existing franchise agreements. In addition, as of December 31, 2024, we had 475 studios open internationally and our master franchisees were contractually obligated to sell licenses to franchisees to open an additional 1,043 new studios, of which master franchisees have sold 237 licenses for studios not yet opened as of December 31, 2024.

During the years ended December 31, 2024, 2023 and 2022, we generated revenue outside the United States of $14.0 million, $13.4 million, and $12.2 million, respectively. As of December 31, 2024 and 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.

Recent Developments

Executive Team Transition

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. Additionally, our board of directors withdrew its nomination of Mr. Geisler as a Class III director in connection with our 2024 Annual Meeting of Stockholders and his term as a director expired on May 30, 2024.

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.

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On November 1, 2024, Mr. Ryan Junk tendered his resignation as our Chief Operating Officer effective November 4, 2024. On December 11, 2024, Ms. Sarah Luna tendered a written resignation as our President. Ms. Luna’s last day of employment was December 13, 2024.

In January 2025 we announced the appointment of four seasoned executives to our leadership team. The appointments include John Kawaja as President of North America; Tim Weiderhoft as Chief Operating Officer of North America; Kevin Beygi as Chief Technology Officer; and Eric Simon as Chief Development Officer. Prior to being promoted to President of North America, Mr. Kawaja served as the Company’s President of Wholesale. Previously, Mr. Kawaja was President at TaylorMade Golf Company and the Head of Marketing for North America at Adidas Group. Prior to joining the Company as Chief Operating Officer of North America, Mr. Weiderhoft was Chief Operating Officer and Vice President of Franchising for Central Bark USA, Chief Executive Officer at Wow Wow Hawaiian Lemonade, and Vice President of Franchise Development at Massage Envy Franchising LLC. Prior to joining the Company as Chief Technology Officer, a newly created role at the Company, Mr. Beygi was Director of Data Analytics, Enablement and Operations for Microsoft Corporation, and held senior advisory roles with The Walt Disney Company, MISO, Shell and Total Energies. Prior to joining the Company as Chief Development Officer, another newly created role at the Company, Mr. Simon was Senior Vice President of Franchise Sales and Development at The Joint Chiropractic, Director of Franchise Development at AAMCO Transmission and Total Car Care, and International Development Manager for The UPS Store.

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 our existing brands and will help us deliver on consumers’ increasing demand for a holistic approach to health. See Note 4 of Notes to 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 former 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 the wind down of 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. As of December 31, 2024, there were no operational AKT studios, with the exception of the studio operating under a licensing agreement.

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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 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 Office of the Attorney General of the State of Maryland, the Washington Department of Financial Institutions, and the Minnesota Department of Commerce regarding the Company’s compliance with applicable franchise laws.

We are also in the process of updating and renewing the FDDs and, as a result, have paused selling franchises in all states, except in cases where an exemption permits sales to persons who met specific criteria. Upon the issuance of the 2025 FDDs, the franchisors will begin offering and selling franchises in states that do not require registration of the FDDs. In the remaining states that require registration of the FDDs, we will continue to pause all sales until registration is obtained from the relevant regulatory agencies, except in cases where an exemption permits sales to persons who met specific criteria. Sales will resume promptly following such approvals, subject to any applicable waiting periods. 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, 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 years ended December 31, 2024 and 2023, we recognized total restructuring charges of $29.6 million, net of gains, and $14.0 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 2025 totaling approximately $7.1 million to $10.8 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 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 19 of Notes to Consolidated Financial Statements for additional information.

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Factors Affecting Our Results of Operations

In addition to the impact of the risks described above under “Risk Factors”, we believe that the most significant factors affecting our results of operations include:

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Licensing new qualified franchisees, selling additional licenses to existing franchisees and opening studios. Our growth depends upon our success in licensing new studios to new and existing franchisees. We believe our success in attracting new franchisees and attracting existing franchisees to invest in additional studios has resulted from our diverse offering of attractive brands, corporate level support, training provided to franchisees and the opportunity to realize attractive returns on their invested capital. We believe our significant investments in centralized systems and infrastructure help support new and existing franchisees. To continue to attract qualified new franchisees, sell additional studios to existing franchisees and assist franchisees in opening their studios, we plan to continue to invest in our brands to enable them to deliver positive consumer experiences and in our integrated services at the brand level to support franchisees.

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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.

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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.

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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.

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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.

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The following table sets forth our key performance indicators for the years ended December 31, 2024, 2023 and 2022:

The following tables present additional information related to our studio and license key performance indicators for the years ended December 31, 2024, 2023 and 2022:

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(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.

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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, 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 years ended December 31, 2024, 2023 and 2022, this represented 0.5%, 0.5%, 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.

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The following tables contain information about changes in the number of our North America operating studios for the years ended December 31, 2024, 2023 and 2022, respectively:

(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 years ended December 31, 2024, 2023 and 2022:

The following table sets forth the total number of operating studios globally for the years ended December 31, 2024, 2023 and 2022:

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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 December 31, 2024, we estimate approximately 30% of our licenses contractually obligated to open in North America 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:

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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.

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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.

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The following table reconciles our North America operating studios for the years ended December 31, 2024, 2023 and 2022, respectively, to the total studios contributing to both AUV (LTM as of period end) and Quarterly AUV (run rate):

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.

The following table reconciles our North America operating studios for the years ended December 31, 2024, 2023 and 2022, respectively, to the total studios contributing to same store sales:

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Results of Operations

The following table presents our consolidated results of operations for the years ended December 31, 2024, 2023 and 2022:

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The following table presents our consolidated results of operations for the years ended December 31, 2024, 2023 and 2022 as a percentage of revenue:

Comparison of the years ended December 31, 2024 and December 31, 2023

The following is a discussion of our consolidated results of operations for the year ended December 31, 2024 versus the year ended December 31, 2023.

Revenue

Total revenue. Total revenue was $320.3 million in the year ended December 31, 2024, compared to $317.9 million in the year ended December 31, 2023, an increase of $2.4 million, or 1%. 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.

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Franchise revenue. Franchise revenue was $174.5 million in the year ended December 31, 2024, compared to $143.2 million in the year ended December 31, 2023, an increase of $31.3 million, or 22%. Franchise revenue consisted of franchise royalty fees of $118.3 million, franchise territory fees of $27.9 million, technology fees of $16.9 million and training fees of $11.4 million in the year ended December 31, 2024, compared to franchise royalty fees of $94.6 million, franchise territory fees of $21.9 million, technology fees of $15.7 million and training fees of $11.0 million in the year ended December 31, 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 December 31, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024), which also contributed to the increase in franchise territory fees. The increase in franchise territory fees is also attributed to an increase of $6.2 million, or 101%, in revenue recognized as a result of franchise agreement terminations year-over-year to $12.3 million in the year ended December 31, 2024.

Equipment revenue. Equipment revenue was $54.2 million in the year ended December 31, 2024, compared to $56.5 million in the year ended December 31, 2023, a decrease of $2.3 million, or 4%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the year ended December 31, 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 year ended December 31, 2024, when compared to the year ended December 31, 2023. The increase in average revenue is due to brand mix and international versus domestic mix.

Merchandise revenue. Merchandise revenue was $27.2 million in the year ended December 31, 2024, compared to $33.3 million in the year ended December 31, 2023, a decrease of $6.1 million, or 18%. 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 $34.0 million in the year ended December 31, 2024, compared to $27.3 million in the year ended December 31, 2023, an increase of $6.7 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 December 31, 2023 (including studios related to the Lindora acquisition in the first quarter of 2024).

Other service revenue. Other service revenue was $30.5 million in the year ended December 31, 2024, compared to $57.7 million in the year ended December 31, 2023, a decrease of $27.2 million, or 47%. The decrease was primarily due to a $22.5 million decrease in package and memberships revenue due to a lower average number of company-owned transition studios and a $4.0 million decrease in vendor commission and brand access fee revenues.

Operating Costs and Expenses

Costs of product revenue. Costs of product revenue was $59.5 million in the year ended December 31, 2024, compared to $60.3 million in the year ended December 31, 2023, a decrease of $0.9 million, or 1%, compared to a decrease in related revenues of 9%. Costs of product revenue as a percentage of related revenue increased to 73% in the year ended December 31, 2024, from 67% in the year ended December 31, 2023. The increase was due to current year sales promotions, that decreased gross margin and an increase in write downs of slow-moving inventory.

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Costs of franchise and service revenue. Costs of franchise and service revenue was $21.8 million in the year ended December 31, 2024, compared to $16.0 million in the year ended December 31, 2023, an increase of $5.8 million, or 36%. The increase was primarily due to a $3.7 million increase in franchise sales commissions, consistent with the related franchise territory revenue increase. The increase in cost of franchise and service revenue is also attributed to an increase of $3.2 million, or 113%, in costs recognized as a result of franchise agreement terminations year-over-year to $6.1 million in the year ended December 31, 2024.

Selling, general and administrative expenses. Selling, general and administrative expenses were $176.9 million in the year ended December 31, 2024, compared to $168.9 million in the year ended December 31, 2023, an increase of $8.0 million, or 5%. The increase was primarily attributable to an increase in restructuring and related charges of $10.9 million in the current year period; an increase in legal expenses and settlement accruals of $25.5 million related to various legal matters including government investigations; a loss on brand divestitures and wind down of $2.1 million, and $3.5 million mutual termination agreement income related to the acquisition of 14 Rumble studios in the prior year period and no similar income in the current year period, partially offset by a decrease in salaries and wages of $12.3 million related to a lower average number of company-owned transition studios; a decrease in occupancy expenses of $13.3 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 an increase in forfeitures over the prior year period; a decrease in marketing and advertising expenses of $3.8 million; and a net decrease in other variable expenses of $2.1 million.

Impairment of goodwill and other assets. Impairment of goodwill and other assets was $62.6 million in the year ended December 31, 2024, compared to $16.8 million in the year ended December 31, 2023, an increase of $45.8 million, or 273%. The increase was primarily due to a write down of franchise agreements intangible asset and goodwill of $30.3 million related to the BFT reporting unit, a write down of goodwill of $10.3 million related to the Rumble reporting unit, a write down of franchise agreements intangible assets, trademark, and goodwill of $12.6 million related to the CycleBar reporting unit, a write down of right-of-use assets of $7.0 million, and other impairments of $2.4 million primarily related to our Xpass platform in the current year compared to a $7.2 million intangible assets write down related to the acquisition of 14 Rumble studios, a $4.7 million write down of goodwill and intangible assets related to Stride and Row House, and a $4.8 million write down of goodwill and intangible assets related to Rumble in the prior year period.

Depreciation and amortization. Depreciation and amortization expense was $17.7 million in the year ended December 31, 2024, compared to $16.9 million in the year ended December 31, 2023, an increase of $0.8 million, or 5%. The increase was due primarily to an increase in fixed assets to support our online offerings.

Marketing fund expense. Marketing fund expense was $26.7 million in the year ended December 31, 2024, compared to $22.7 million in the year ended December 31, 2023, an increase of $4.0 million, or 18%. 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 year ended December 31, 2024, marketing fund expense was $7.3 million lower than marketing fund revenue primarily led by a slowdown in spending during the second half of the year to avoid competing with presidential election media coverage and holiday advertisements.

Acquisition and transaction expenses (income). Acquisition and transaction expense was $8.9 million in the year ended December 31, 2024, compared to income of $18.5 million in the year ended December 31, 2023, an increase to expense of $27.4 million, or 148%. This expense primarily represents the non-cash change in contingent consideration related to 2021 and 2024 business acquisitions.

Other Expense (Income), net

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Interest income. Interest income primarily consists of interest on notes receivable, which was $1.8 million in the year ended December 31, 2024, compared to $1.6 million in the year ended December 31, 2023.

Interest expense. Interest expense was $46.3 million in the year ended December 31, 2024, compared to $38.7 million in the year ended December 31, 2023, an increase of $7.5 million, or 19%. 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 in the current year period.

Other expense. Other expense consists of Tax Receivable Agreement (“TRA”) expense, which was $1.0 million in the year ended December 31, 2024, compared to $3.2 million in the year ended December 31, 2023.

Income Taxes

Income taxes. Income taxes were 0.3% of pre-tax book income (loss) in the year ended December 31, 2024, compared to (19.1)% in the year ended December 31, 2023.

Comparison of the years ended December 31, 2023 and December 31, 2022

The following is a discussion of our consolidated results of operations for the year ended December 31, 2023 versus the year ended December 31, 2022.

Revenue

Total revenue. Total revenue was $317.9 million in the year ended December 31, 2023, compared to $243.2 million in the year ended December 31, 2022 an increase of $74.7 million, or 31%. The increase in total revenue was primarily due to an increase in the number of open studios.

Franchise revenue. Franchise revenue was $143.2 million in the year ended December 31, 2023 , compared to $115.0 million in the year ended December 31, 2022, an increase of $28.2 million, or 25%. Franchise revenue consisted of franchise royalty fees of $94.6 million, franchise territory fees of $21.9 million, technology fees of $15.7 million and training fees of $11.0 million in the year ended December 31, 2023, compared to franchise royalty fees of $69.8 million, franchise territory fees of $27.0 million, technology fees of $10.2 million and training fees of $8.0 million in the year ended December 31, 2022. 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 December 31, 2022. Franchise territory fees decreased due to a decrease in franchise agreement terminations in the year ended December 31, 2023 compared to the prior year period.

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Equipment revenue. Equipment revenue was $ 56.5 million in the year ended December 31, 2023, compared to $ 43.5 million in the year ended December 31, 2022, a increase of $13.0 million, or 30%. Most equipment revenue is recognized in the period when the equipment is installed. Global equipment installations in the year ended December 31, 2023, increased due to the increase in studio openings compared to the prior year period. The average revenue per installation increased in the year ended December 31, 2023, when compared to the year ended December 31, 2022. The increase in average revenue is due to brand mix and international versus domestic mix.

Merchandise revenue. Merchandise revenue was $33.3 million in the year ended December 31, 2023, compared to $26.0 million in the year ended December 31, 2022, a increase of $7.3 million, or 28%. The increase was due primarily to a higher number of operating studios in the year ended December 31, 2023 compared to the prior year period.

Franchise marketing fund revenue. Franchise marketing fund revenue was $27.3, million in the year ended December 31, 2023, compared to $20.4 million in the year ended December 31, 2022, an increase of $6.9 million, or 34%. The increase was primarily due to an increase in same store sales and an increase in number of operating studios in North America in the year ended December 31, 2023 compared to the prior year period.

Other service revenue. Other service revenue was $57.7 million in the year ended December 31, 2023, compared to $38.4 million in the year ended December 31, 2022, a increase of $19.3 million, or 50%. The increase was primarily due to $15.5 million increase in package and memberships revenue due to a higher average number of company-owned transition studios and a $4.8 million increase in vendor commission and brand access fee revenues, offset by a $1.3 million decrease in on-demand revenue. We refranchised or closed company-owned transition studios under our restructuring plan that started in the year ended December 31, 2023.

Operating Costs and Expenses

Costs of product revenue. Costs of product revenue was $60.3 million in the year ended December 31, 2023, compared to $46.5 million in the year ended December 31, 2022, a increase of $13.9 million, or 30%, compared to a decrease in related revenues of 29%. The costs of product revenue as a percentage of related revenue was 67% in the years ended 2023 and 2022.

Costs of franchise and service revenue. Costs of franchise and service revenue was $16.0 million in the year ended December 31, 2023, compared to $18.4 million in the December 31, 2022, a decrease of $2.5 million, or 13%. The decrease was primarily due to a $3.7 million decrease in franchise sales commissions, consistent with the related franchise territory revenue decrease, partially offset by a $1.1 million increase in cost of technology.

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Selling, general and administrative expenses. Selling, general and administrative expenses were $168.9 million in the year ended December 31, 2023, compared to $126.3 million in the year ended December 31, 2022, an increase of $42.6 million, or 34%. The increase was primarily attributable to restructuring and related charges of $15.3 million in the year ended December 31, 2023; an increase in salaries and wages of $19.0 million related to higher average number of company-owned transition studios; an increase in occupancy expenses of $9.5 million primarily related to company-owned transition studios; increase in financial transaction fees and related expenses of $8.2 million primarily related to expenses incurred in completed and terminated financing transactions; increase in bad debt expenses of $3.2 million; increase in marketing and promotion expense of $2.1 million; increase in state and local taxes of $1.5 million and a net increase in other variable expenses in 2023 of $5.0 million, partially offset by a decrease in equity-based compensation of $11.0 million primarily due to vesting of performance-based awards in the year ended December 31, 2022 offset by an increase in expense related to RSUs granted since December 31, 2022; a decrease in legal expenses of $3.6 million related to various legal matters; one-time mutual termination agreement income of $3.5 million related to the acquisition of 14 Rumble studios in 2023; a decrease in information technology expenses of $3.1 million primarily related to one-time credit from a vendor.

Impairment of goodwill and other assets. Impairment of goodwill and other assets was $16.8 million in the year ended December 31, 2023 compared to $3.7 million in the year ended December 31, 2022, an increase of $13.1 million, or 358%. The increase was primarily related to an increase in goodwill impairment of $3.4 million, impairment of franchise agreement intangible asset net of reacquired franchise right of $7.2 million upon acquisition of 14 Rumble studios in the year ended December 31, 2023, and an aggregate $2.2 million of impairment of reacquired franchise rights and property and equipment related to the Rumble held for sale studios in the year ended December 31, 2023.

Depreciation and amortization. Depreciation and amortization expense was $16.9 million in the year ended December 31, 2023 compared to $15.3 million in the year ended December 31, 2022, an increase of $1.6 million, or 10%. The increase was due primarily to amortization of intangibles related to BodyFit trademark acquired in the second quarter of 2022 and to an increase in fixed assets to support our online offerings.

Marketing fund expense. Marketing fund expense was $22.7 million in the year ended December 31, 2023, compared to $17.3 million in the year ended December 31, 2022, an increase of $5.4 million, or 31%. Marketing fund expenses are recorded as incurred, which may not occur in the same period as the recognition of franchise marketing fund revenue.

Acquisition and transaction expenses (income). Acquisition and transaction expense (income) was ($18.5) million in the year ended December 31, 2023, compared to $2.4 million in the year ended December 31, 2022, a change of $20.9 million, or 857%. These expenses (income) represent the non-cash change in contingent consideration related to 2017 and 2021 business acquisitions and $0.5 million of acquisition related expenses in the year ended December 31, 2023.

Other Expense (Income), net

Interest income. Interest income primarily consists of interest on notes receivable, which was $1.6 million in the year ended December 31, 2023, compared to $1.8 million in the year ended December 31, 2022.

Interest expense. Interest expense was $38.7 million in the year ended December 31, 2023, compared to $13.0 million in the year ended December 31, 2022, an increase of 25.7 million, or 198%. 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 year ended December 31, 2023.

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Other expense. Other expense consists of Tax Receivable Agreement (“TRA”) expense, which was $3.2 million in the year ended December 31, 2023, compared to $0.5 million in the year ended December 31, 2022, and increase of $2.7 million.

Income Taxes

Income taxes. Income taxes were $1.0 million in the year ended December 31, 2023, compared to $0.5 in the year ended December 31, 2022.

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), employee retention credit (a tax credit for retaining employees throughout the COVID-19 pandemic), 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, transformation initiative costs (primarily consisting of third-party professional consulting fees related to modifications of our business strategy and cost saving initiatives), contract settlement expenses (related to, among other things, the settlement of disputed costs and the elimination of the option for us to repurchase the master franchise rights from the BFT seller without requiring our payment of a repurchase cancellation fee), 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.

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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 years ended December 31, 2024, 2023 and 2022:

Liquidity and Capital Resources

As of December 31, 2024, we had $16.6 million of cash and cash equivalents, excluding $16.1 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. 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.” 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.

We plan to refinance and/or extend the maturity date for our outstanding Term Loans under the Credit Agreement that matures on March 15, 2026.

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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.

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 December 31, 2024, we were in compliance with these covenants.

Additionally, on March 10, 2025 we obtained a waiver related to EBITDA levels as our Credit Agreement did not currently contain active exceptions for non-recurring legal expenses. The waiver provides for exceptions for certain non-recurring legal expenses at different levels through March 31, 2026.

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, (i) 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”), (ii) an increased 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 (iii) a prepayment premium on the Seventh Amendment Incremental Term Loans. The proceeds of the Seventh Amendment will be used for general corporate purposes, including working capital, lease liabilities, and legal expenses arising from previously disclosed regulatory matters.

The total principal amount outstanding on the Term Loans was $352.4 million at December 31, 2024. See Note 9 of Notes to Consolidated Financial Statements for additional information about our debt.

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Cash Flows

The following table presents summary cash flow information for the years ended December 31, 2024 and 2023. Analysis of our cash flows for the year ended December 31, 2022 is included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Cash Flows from Operating Activities

In the year ended December 31, 2024, cash provided by operating activities was $11.7 million, compared to $32.7 million in the year ended December 31, 2023, a decrease in cash provided of $21.0 million. Of the decrease, $36.2 million was due to lower net income after adjustments to reconcile net income (loss) to net cash provided by operating activities. The decrease was partially offset by $15.2 million in favorable changes in working capital related to accounts payable, deferred costs, inventories, accounts receivable, accrued expenses and operating lease liabilities, partially offset by unfavorable changes in working capital related to other current liabilities, deferred revenue, other assets and other liabilities in the year ended December 31, 2024, compared to the year ended December 31, 2023.

Cash Flows from Investing Activities

In the year ended December 31, 2024, cash used in investing activities was $14.1 million, compared to $11.7 million in the year ended December 31, 2023. The change year over year in cash used of $2.5 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 of $2.7 million.

Cash Flows from Financing Activities

In the year ended December 31, 2024, cash used in financing activities was $1.9 million, compared to $21.3 million in the year ended December 31, 2023, a decrease in cash used of $19.4 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, and a $4.4 million loan to a shareholder compared to no similar payments in the current year as well as a decrease of $8.0 million in payments for taxes on net share settlements. The decrease in cash used was partially offset by net borrowings on long-term debt of $184.9 million and a payment received from a shareholder of $9.2 million in the prior year compared to net borrowings on long-term debt of $19.1 million in the current year.

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Material Cash Commitments

The table below represents our material cash commitments, including the scheduled maturities of our contractual obligations as of December 31, 2024. The table excludes certain potential cash requirements because they may involve future cash payments that are considered uncertain and cannot be estimated because they vary based upon future conditions; however, the exclusion of these obligations should not be construed as an implication that they are immaterial, as they could significantly affect our short- and long-term liquidity and capital resource needs depending on a variety of future events, facts and conditions.

(1)
We lease our facilities under non-cancelable operating leases.

(2)
Represents scheduled debt obligation payments on debt outstanding as of December 31, 2024.

(3)
Represents estimated scheduled interest payments on debt outstanding as of December 31, 2024.

(4)
Includes estimated contingent consideration liabilities at December 31, 2024, based on expected achievement dates for earn-out targets, which includes the contingent consideration relating to BFT and Lindora.

(5)
Represents the additional loans obligated to fund under agreements with shareholders (see Note 11 of Notes to Consolidated Financial Statements).

(6)
Represents payments related to the Xponential Procurement Services acquisition (see Note 4 of Notes to Consolidated Financial Statements).

Off-Balance Sheet Arrangements

As of December 31, 2024, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately $3.6 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 December 31, 2024, a $2.0 million accrual has been recorded for our potential obligation under the guaranty arrangements. See Note 18 of Notes to Consolidated Financial Statements for more information regarding these 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 $750 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 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 December 31, 2024, a $0.2 million accrual has been recorded for our potential obligation under this guaranty arrangement. See Note 18 of Notes to Consolidated Financial Statements for more information.

Critical Accounting Estimates and Policies

We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.

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Our critical accounting policies are those that materially affect our consolidated financial statements, including those that involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below are those that are most important to our results of operations or involve the most difficult management decisions related to the use of significant estimates and assumptions as described above. For a more detailed summary of our significant accounting policies, see the Note 3 of Notes to Consolidated Financial Statements.

Business Combinations

We account for business combinations using the acquisition method of accounting, which results in the assets acquired and liabilities assumed being recorded at fair value.

The valuation methodologies used are based upon the nature of the asset or liability. The significant assets measured at fair value include intangible assets. The fair value of trademarks is estimated by following the relief from royalty method. The fair value of franchise agreements is based upon following the excess earnings method. The fair value of internal use software is based upon following the cost method. Inputs used in the methodologies primarily included sales forecasts, projected future cash flows, royalty rate and discount rate commensurate with the risk involved.

Amortization of definite-lived trademarks, franchise agreements and internal use software is recorded over the estimated useful lives of the assets using the straight-line method, which we believe approximates the period during which we expect to receive the related benefits.

Acquisition-Related Contingent Consideration

Some of the business combinations that we have consummated include contingent consideration to be potentially paid based upon the occurrence of future events. Acquisition-related contingent consideration associated with a business combination is initially recognized at fair value and remeasured each reporting period, with changes in fair value recorded in the consolidated statement of operations. The estimates of fair value involve the use of acceptable valuation methods, such as probability-weighted discounted cash flow analysis, and contain uncertainties as they require assumptions about the likelihood of achieving specified milestone criteria, projections of future financial performance and assumed discount rates. Changes in the fair value of the acquisition-related contingent consideration result from several factors including changes in the timing and amount of revenue estimates, changes in probability assumptions with respect to the likelihood of achieving specified milestone criteria, changes in discount rates and changes in our stock price. A change in any of these assumptions could produce a different fair value, which could have a material impact on our results of operations. Assuming there had been a 10% increase in the fair value, contingent consideration would have increased by $1.1 million for the year ended December 31, 2024.

Impairment of Long-Lived Assets, Including Goodwill and Intangible Assets

Goodwill has been assigned to our reporting units for purposes of impairment testing. Our reporting units are each of the brand names under which we sell franchises. We test for impairment of goodwill annually or sooner whenever events or circumstances indicate that goodwill might be impaired. The annual impairment test is performed as of the first day of our fourth quarter. When evaluating goodwill for impairment, we may decide to first perform a qualitative assessment, or “step zero” impairment test, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of a reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the respective reporting unit. We generally determine the estimated fair value using a discounted cash flow approach, giving consideration to the market valuation approach. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in the amount the carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

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During the quarter ended December 31, 2024, we determined it was necessary to re-evaluate goodwill of the BFT and Rumble reporting units for impairment due to indicators of potential impairment resulting from a decline in forecasted and actual cash flows. Therefore, we performed a quantitative assessment of the fair value of the reporting units using an income approach with assumptions that are considered Level 3 inputs and concluded that the carrying value of the BFT and Rumble reporting units exceeded their fair value, resulting in a goodwill impairment of $16.4 million, and $10.3 million, respectively, and $5.1 million of goodwill remaining for the BFT reporting unit no goodwill remaining for the Rumble reporting unit. The fair value of the reporting unit was determined by discounting estimated future cash flows, which were calculated based on revenue and expense long-term growth assumptions ranging 11.0% to 22.0%, at a weighted average cost of capital (discount rate) of 22.0% for the BFT reporting unit and revenue and expense long-term growth assumptions ranging from 6.0% to 12.0%, at a weighted average cost of capital (discount rate) of 19.0% for the Rumble reporting unit. As this was a partial impairment for the BFT reporting unit, the goodwill for BFT is considered to be at a heightened risk of future impairment in the event of significant unfavorable changes in assumptions, including forecasted future cash flows, as well as discount rates and other macroeconomic factors.

During the quarter ended June 30, 2024, we determined it was necessary to re-evaluate goodwill of the CycleBar reporting unit for impairment due to indicators of potential impairment resulting from a decline in forecasted and actual cash flows. Therefore, we performed a quantitative assessment of the fair value of the reporting unit using an income approach with assumptions that are considered Level 3 inputs and concluded that the carrying value of the CycleBar reporting unit exceeded its fair value, resulting in a goodwill impairment of $10.9 million and no goodwill remaining for the CycleBar reporting unit. The fair value of the reporting unit was determined by discounting estimated future cash flows, which were calculated based on revenue and expense long-term growth assumptions ranging from (1.0%) to 3.0%, at a weighted average cost of capital (discount rate) of 16.0%.

At December 31, 2024, the goodwill related to our Pure Barre reporting unit of $42.5 million is at a heightened risk of future impairment if the fair value of this reporting unit, and its associated assets, decrease in value due to the amount and timing of expected future cash flows, an inability to execute our business strategies or general market conditions, such as economic downturns, and changes in interest rates, including discount rates. Future cash flow estimates are, by their nature, subjective, and actual results may differ materially from our estimates. If our ongoing cash flow projections are not met or if market factors utilized in the impairment test deteriorate, including an unfavorable change in the terminal growth rate or the weighted-average cost of capital, we may have to record impairment charges in future periods.

We recorded goodwill impairments related to the Rumble, Stride and Row House reporting units during the year ended December 31, 2023 and a goodwill impairment related to the AKT reporting unit during the year ended December 31, 2022. See Note 8 of Notes to Consolidated Financial Statements for further discussion of these impairments.

We test for impairment of indefinite-lived trademarks annually or sooner whenever events or circumstances indicate that trademarks might be impaired. We first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the trademarks is less than the carrying amount. In the absence of sufficient qualitative factors, trademark impairment is determined utilizing a two-step analysis. The two-step analysis involves comparing the fair value to the carrying value of the trademarks. We determine the estimated fair value using a relief from royalty approach. If the carrying amount exceeds the fair value, we impair the trademarks to their fair value. During the quarter ended December 31, 2024, we recognized an impairment loss of indefinite-lived trademark of $0.3 related to the CycleBar reporting unit. As this was a partial impairment, the trademark intangible asset, which was $9.6 million as of December 31, 2024, is considered to be at a heightened risk of future impairment in the event of significant unfavorable changes in assumptions, including forecasted future cash flows, as well as discount rates and other macroeconomic factors. See Note 8 of Notes to Consolidated Financial Statements for further discussion of these impairments.

We assess potential impairments to our long-lived assets, which include property and equipment, operating lease ROU assets, and amortizable intangible assets, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. See Note 7, Note 8 and Note 10 of Notes to Consolidated Financial Statements for further discussion of these impairments.

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We evaluate our property and equipment and other long-lived assets for impairment based on our classification as assets held for sale. Several criteria must be met before an asset is classified as held for sale, including that management with the appropriate authority commits to a formal plan to sell the asset at a reasonable price in relation to its fair value and is actively seeking a buyer. For assets held for sale, we compare the carrying value of the disposal group to fair value less costs to sell. The impairment is the excess of the carrying value over the fair value of the asset. See Note 4 of Notes to Consolidated Financial Statements for additional discussion of the held for sale classification as of December 31, 2023 for certain Rumble company-owned transition studios.

As a result of our restructuring plan that started in the third quarter of 2023, we are exiting company-owned transition studios. Restructuring charges associated with closing company-owned transition studios include accelerated amortization of right-of-use assets. For studio operating leases where we will derive no economic benefit from leased space, that will be vacated at a cease use date, we record accelerated amortization to fully reduce the carrying value of the right-of-use assets between the decision date and the cease use date. During the year ended December 31, 2023, we recognized $6.0 million of accelerated amortization of right-of-use assets.

During the year ended December 31, 2024, we recorded impairments of franchise agreements intangible assets of $1.2 million and $13.9 million related to the CycleBar and BFT reporting units, respectively, as well as an impairment of deferred video production costs and web design and domain intangible assets of $0.2 million related to the AKT reporting unit. During the year ended December 31, 2023, we recorded impairments of franchise agreements, trademarks and deferred video production intangible assets related to the Stride and Row House reporting units aggregating impairment loss of $0.2 million for the franchise agreements, an aggregate impairment loss of $0.2 million for the trademarks and an aggregate impairment loss of $0.1 for the deferred video production intangibles assets. Additionally, during the year ended December 31, 2023, we recorded a write down of franchise agreements, net of reacquired franchise rights, in the amount of $7.2 million in connection with the acquisition of 14 Rumble studios on June 5, 2023. During the year ended December 31, 2022, we recorded impairments of trademark and franchise agreements intangible assets related to the AKT reporting unit aggregating $0.3 million.

Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected revenues, income, cash flows, discount rates, and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. If our ongoing cash flow projections are not met or if market factors utilized in the impairment test deteriorate, including an unfavorable change in the terminal growth rate or the weighted-average cost of capital, we may have to record impairment charges in future periods.

Equity-Based Compensation

We have equity-based compensation plans under which we receive services from our employees and directors as consideration for equity instruments, including restricted stock units (“RSUs”) and performance-based RSUs. The compensation expense is determined based on the fair value of the award as of the grant date. Compensation expense for time-based units is recognized over the vesting period, which is the period over which all of the specified vesting conditions are satisfied. Compensation expense for performance-based units is recorded over the requisite service period, and only if performance-based conditions are considered probable to be satisfied. If any performance goals are not met, no compensation expense is ultimately recognized and, to the extent previously recognized, compensation expense is reversed.

We use the Monte Carlo valuation model to determine the fair value of performance-based awards that vest based on a market condition. The use of the Monte Carlo valuation model requires us to make estimates and assumptions, such as expected volatility, expected term and risk-free interest rate. We utilize a dividend yield of zero as we do not currently declare or pay dividends on our Class A common stock, nor do we expect to do so in the foreseeable future. For awards that contain a market condition, expense is recognized over the defined or derived service period using a Monte Carlo valuation model.

Forfeitures are recognized as they occur. As the amount and timing of compensation expense to be recorded in future periods may be affected by the achievement of performance conditions and employee terminations, equity-based compensation may vary significantly period to period.

Recent Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 3 of Notes to Consolidated Financial Statements included in this Annual Report.

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