Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included in Part I, Item 1. of this Form 10-Q, and together with our audited consolidated financial statements, the related notes thereto and other information set forth in our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the SEC on March 31, 2025 (the "2024 10-K"). Historic results are not necessarily indicative of future results.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as "anticipate," "estimate," "believe," "continue," "could," "intend," "may," "plan," "potential," "predict," "should," "will," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target," "trajectory" or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. Forward-looking statements include, but are not limited to, statements regarding:

These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and under Item 1A. Risk Factors, as well as the risks discussed in the Company's other filings with the Securities and Exchange Commission (the "SEC"). All forward-looking statements set forth in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. Forward-looking statements set forth in this Quarterly Report speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law. You should carefully read the "Risk Factors" section to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

Overview

Interactive Strength Inc. is the parent company of three leading brands serving the commercial and at-home markets with specialty fitness equipment and virtual training: CLMBR, FORME and Wattbike. CLMBR manufactures vertical climbing equipment and provides a unique digital and on-demand training platform. FORME is a hardware manufacturer and digital fitness service provider that combines award-winning smart gyms with live 1:1 personal training (from real humans) to deliver an immersive experience. Wattbike is a UK-based indoor-performance bike business. The combination of technology with expert training leads to better outcomes for both consumers and trainers alike. CLMBR, FORME and Wattbike offer unique fitness solutions for both the commercial and at-home markets.

Key milestones in our growth history include:

Our revenue is primarily generated from the sale of our connected fitness hardware products and associated recurring membership revenue. As we launched our first connected fitness hardware product in July 2021, we began generating revenue from sales of our products starting in the second half of 2021.

During the three and nine months ended September 30, 2025 and 2024, we generated total revenue of $4.8 million and $2.0 million and $7.4 million and $3.0 million, respectively, and incurred net losses of $(5.2) million and $(7.1) million and $(14.0) million and $(29.2) million, respectively. As we generated recurring net losses and negative operating cash flow since inception, we have funded our operations primarily with gross proceeds from the sales of our redeemable convertible preferred stock, the issuance of convertible notes, the issuance of promissory notes, and the issuance of common stock.

Business Model and Growth Strategy

Acquire complementary businesses that generate attractive synergies

We acquired CLMBR, Inc. in February 2024 and Wattbike (Holdings) Limited ("Wattbike"), a UK-based indoor-performance bike business, on July 1, 2025 and we believe that there are other compelling businesses to be acquired. We expect that we will be able to acquire revenue-generating businesses, which would generate higher earnings and cashflows through synergies with our existing

business. Our team has significant experience with M&A transactions and we are one of the few companies in our industry with a public currency, which we believe makes us an attractive acquirer.

Leverage well established equipment distributors to scale in commercial channels

We have high value partnerships with distributors, including Woodway, to sell CLMBR, FORME and Wattbike products into a variety of commercial environments. These relationships allow us to leverage the sales knowledge, relationships and specialization of third parties to accelerate our sales initiatives. Importantly, this construct allows us to make the vast majority of our sales related expenses variable, as we typically pay commissions only when units are sold.

Expand into new geographies

We intend to expand the international reach of our product and service offerings. We are currently working with Sportstech Brands Holding GmbH, a direct-to-consumer fitness brand in Germany and across Europe, towards a possible acquisition or a partnership. We plan to continue to pursue disciplined international expansion by targeting countries with high fitness penetration and spend, as well as the presence of boutique fitness, and where we believe CLMBR, FORME and Wattbike's value propositions will resonate.

Increase uptake of add-on services through compelling member experience

We intend to increase the uptake of our add-on memberships and services by providing compelling member experience focused on introducing our members to the variety of services available on our platform and specifically, the value-added benefits of our coaching and personal training offering. We believe our ability to provide service offerings at a number of price points will serve as a valuable lever for growth by increasing overall service revenues over time.

Reduce the cost of personal training and expand addressable market without sacrificing quality

We intend to continue to explore ways to leverage our products, technology, and proprietary trainer education platform to bring the cost of coaching down incrementally, while maintaining an unwavering focus on the quality of the coaching experience we deliver to our members. This strategy is key to our medium- to long-term objectives, as we believe we can expand the addressable market for coaching services by reducing the per session cost and increasing accessibility of expert coaching services through our hardware and mobile experiences.

Build out partnership ecosystem

We intend to continue to build our strategic partner ecosystem with a focus on relationships that enable us to extend our platform to new audiences. We are pursuing opportunities in a number of attractive verticals, including sports, physical therapy and rehabilitation, and telemedicine. We are continuously identifying and evaluating opportunities to apply our coaching know-how in new and innovative ways to expand our reach and impact.

Expand corporate wellness

We intend to expand our recently launched corporate wellness initiative. Historically, corporate wellness programs were generally one-size-fits-all solutions for employees, such as corporate gyms. The rise of the hybrid workforce has made robust corporate wellness both an imperative and a challenge for many companies. We believe our comprehensive product portfolio makes us a better fit for modern corporate wellness programs than many existing alternatives. Our solution enables employers to provide all of their employees with a coaching platform regardless of whether they work from home, in the office, or both. Our multi-pronged service offering also provides a new level of customization that can be adapted to employees at virtually all levels of tenure.

Digital Asset Treasury Strategy

On June 10, 2025, the Company and the Treasury Subsidiary sold and, on June 13, 2025, the closing date, issued, for $50 million, the June 2025 Convertible Exchangeable Notes which are both (a) convertible into shares of Common Stock and (b) exchangeable into the utility tokens and key medium of exchange on the Fetch.ai network ("FET"). As of September 30, 2025, the Company had used approximately $47.3 million of the proceeds from the sale of the June 2025 Convertible Exchangeable Notes to purchase FET. In addition, each investor in the transaction has the right to require the Company and the Treasury Subsidiary to issue additional senior secured convertible exchangeable notes, up to an aggregate principal amount of an additional $444.4 million. Asset appreciation of the FET could be a future source of income to the Company.

Factors Affecting Our Performance

Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:

We have experienced, and expect to continue to experience, some disruptions to parts of our supply chain, including procuring necessary components or parts in a timely fashion, with suppliers increasing lead times or placing products on allocation and raising prices. In addition, disruptions to commercial transportation infrastructure have increased delivery times for materials and components or parts of our fitness equipment, and has impacted, and could in the future impact, our ability to timely deliver our products to customers. These supply chain disruptions have not materially affected our business outlook and goals or our operating results, including our revenues or liquidity or capital resources, and we have not implemented any mitigation efforts to date as a result. However, we cannot predict the impact to us of any future or prolonged supply chain disruptions or any mitigation efforts we may take going forward. For example, as a result of these supply chain disruptions, we may be required to increase customer order lead times and place some products on allocation. In addition, we may consider additional or alternative third-party manufacturing and logistics providers or suppliers. Such mitigation efforts may result in cost increases and any attempts to offset such increases with price increases may result in reduced sales, increased customer dissatisfaction, or otherwise harm our reputation. Further, if we were to elect to transition or add manufacturing or logistics providers or suppliers, it may result in temporary or additional delays in product delivery or risks related to consistent product quality or reliability. This in turn may limit our ability to fulfill customer orders and we may be unable to satisfy all of the demand for our products. We may in the future also purchase components further in advance, which in return can result in less capital being allocated to other activities such as marketing and other business needs. We cannot quantify the impact of such disruptions at this time or predict the impact of any mitigation efforts we may take in response to supply chain disruptions on our business, financial condition, and results of operations.

In addition, customer demand for our products may be impacted by weak economic conditions, inflation, weak growth, recession, equity market volatility, or other negative economic factors in the United States or other nations. The United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase, it will likely affect our expenses, including, but not limited to, employee compensation expenses, increased manufacturing and supplier costs, and increasing market prices of certain components, parts, supplies, and commodity raw materials, which are incorporated into our products or used by our suppliers to manufacture our products. These components, parts, supplies, and commodities may from time to time become restricted, or general market factors and conditions may affect pricing of such components, parts, supplies and commodities, such as inflation or supply chain constraints. Given our limited operating history, we cannot predict how ongoing or increasing recessionary or inflationary pressures may impact our business, financial condition, and results of operations in the future.

Components of Our Operating Results

We generate revenue from sales of our connected fitness products, membership revenue, and personal training revenue. We identify our reportable segment based on the information used by management to monitor performance and make operating decisions. See Note 2 to our condensed consolidated financial statements included elsewhere in this report for additional information regarding our reportable segment.

Revenue

Connected Fitness Products

Connected Fitness Product revenue consists of sales of our connected fitness products and related accessories, delivery and installation services, and extended warranty agreements offered through a third-party. Fitness Product revenue is recognized at the time of delivery, except for extended warranty revenue which is recognized over the warranty period. For the third-party extended warranty service sold along with the connected fitness products, we do not obtain control of the warranty before transferring it to the customers. Therefore, we account for revenue related to the fees paid to the third-party extended warranty provider on a net basis, by recognizing only the net commission we retain. Connected fitness product revenue represented 95%, 88%, 80% and 64% of total revenue for the three and nine months ended September 30, 2025 and 2024, respectively.

Membership

Membership revenue consists of revenue generated from our monthly Connected Fitness membership. Membership revenue represented 3%, 7%, 11% and 20% of total revenue for the three and nine months ended September 30, 2025 and 2024, respectively.

Training

Training revenue consists of sales of our personal training services delivered through our connected fitness products and third-party mobile devices. Training revenue is recognized at the time of delivery. Training revenue represented 2%, 5%, 9% and 16% of total revenue for the three and nine months ended September 30, 2025 and 2024, respectively.

Cost of Revenue

Connected Fitness Products

Connected Fitness Product cost of revenue consists of CLMBR, Studio, Studio Lift, Wattbike and accessories product costs, including manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging, warranty replacement costs, fulfillment costs, warehousing costs, and certain allocated costs related to management and facilities expenses associated with supply chain logistics.

Membership

Membership cost of revenue includes costs associated with personnel related expenses, filming and production costs, hosting fees, music royalties, and amortization of capitalized software development costs.

Training

Training cost of revenue includes costs associated with personnel related expenses and rent expense.

Operating Expenses

Research and Development

Research and development expense primarily consists of personnel and facilities-related expenses, engineering costs, consulting and contractor expenses, tooling and prototype materials, and software platform expenses. We capitalize certain qualified costs incurred in connection with the development of internal-use software and software to be sold or marketed which may also cause research and development expenses to vary from period to period.

Sales and Marketing

Sales and marketing expense consists of performance marketing media spend, asset creation, and other brand creative expenses, all showroom expenses and related lease payments and sales and marketing personnel-related expenses.

General and Administrative

General and administrative expenses include personnel-related expenses and facilities-related costs primarily for our executive, finance, accounting, legal, human resources, and IT functions. General and administrative expenses also include fees for professional services principally comprised of legal, audit, tax and accounting services, and insurance.

We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses, and professional services. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue, but we expect to leverage these expenses over time as we grow our revenue and member base.

Other (Expense) Income, Net

Other (expense) income, net consists of unrealized currency gains and losses, expenses related to equity line of credit commitment, loss on exchange of warrants for equity, and fair value of issuance of Loss Restoration Agreement derivative.

Interest Expense

Interest expense consists of interest associated with the related party loans, term loans, promissory notes and convertible notes.

Interest Income

Interest income consists of interest associated with the loan receivable.

(Gain) loss upon extinguishment of debt and accounts payable

(Gain) loss on debt extinguishment was a result of conversion of promissory loans, convertible notes and senior secured debt into convertible notes.

Change in Fair Value of Convertible Notes

The change in fair value of convertible notes consists of the change in the fair value of the outstanding convertible notes since issuance date and the previous reporting period.

Change in Fair Value of Derivatives

The change in fair value of derivatives consists of the change in the fair value of the outstanding derivatives since the previous reporting period.

Change in Fair Value of Digital Assets

Change in fair value of digital assets consists of the subsequent remeasurement of our digital assets measured at fair value based on quoted prices on active exchanges pursuant to ASC 350-60.

Change in Fair Value of Warrants

The change in fair value of warrants consists of the change in the fair value of the outstanding warrants notes since the previous reporting period.

Provision for Income Taxes

The provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized.

Results of Operations

The following tables set forth our condensed consolidated results of operations in dollars and as a percentage of total revenue for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

For the three and nine months ended September 30, 2025 and 2024, $0.1 million and $- million and $0.5 million and $0.2 million of stock-based compensation was capitalized as software costs, respectively.

Comparison of the three and nine months ended September 30, 2025 and 2024

Revenue

Fitness product revenue increased by $2.9 million, or 182%, and $4.6 million, or 239%, for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively. The increase in Fitness Product revenue was mainly the result of the acquisition of Wattbike on July 1, 2025.

Membership revenue decreased $0.1 million, or 33%, and $0.1 million, or 17%, for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively. The decrease is a result of the acquisition of the CLMBR business and the evolution of the FORME business where the Company is now primarily selling to commercial customers ("B2B") through Woodway.

Training revenue decreased $0.06 million, or 35%, and $0.1 million, or 25%, for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively. The decrease was a result of a decrease in Live 1:1 training sessions.

Cost of Revenue and Gross Profit (Loss)

Fitness product cost of revenue increased by $2.0 million, or 145%, and $2.9 million, or 137%, for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively. The increase is mainly due cost of revenue associated with Wattbike, which was acquired on July 1, 2025.

Membership cost of revenue decreased by $0.4 million, or 53%, and $1.6 million, or 57% for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively. The decrease is primarily related to the decrease in software amortization expense.

Training cost of revenue increased $0.1 million, or 72%, and $0.4 million, or 79%, for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively. The increase is primarily attributable to the acquisition of CLMBR, Inc. with addition of in-training studio expenses including rent expense million

Our gross profit (loss) increased by $1.1 million or 386% and $2.7 million or 114% for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, respectively, mainly due to the Wattbike acquisition.

Operating Expenses

Research and Development

Research and development expense decreased by $1.8 million, or 82%, and $4.3 million, or 63%, for the three and nine months ended September 30, 2025, as compared to the three and nine months ended September 30, 2024, respectively, primarily due to decreases in personnel-related costs of $0.2 million and $0.9 million, a decrease in stock-based compensation expense of $1.1 million and $2.4 million, and a decrease of $0.3 million and $0.9 million in software and subscriptions, respectively.

Sales and Marketing

Sales and marketing expense increased by approximately $0.3 million, or 137%, and $0.4 million, or 64%, for the three and nine months ended September 30, 2025, as compared to the three and nine months ended September 30, 2024, respectively, driven by increases in advertising expense $0.2 million and $0.2 million, respectively, and intangible amortization expense of $0.1 million and $0.1 million, respectively, both of which are attributable to the Wattbike acquisition.

General and Administrative

General and administrative expense increased by $0.9 million, or 18%, and decreased by $0.3 million, or 2%, for the three and nine months ended September 30, 2025, as compared to the three and nine months ended September 30, 2024, respectively. The increase in expense for the third quarter of 2025 was mainly due to $2.3 million of expenses attributable to Wattbike in 2025 with no comparable amount for 2024, and an increase in consulting and professional fees of $0.3 million, partially offset by a decrease in stock-based compensation expense of $1.6 million. General and administrative expense for the nine months ended September 30, 2025 reflect the Wattbike expenses of $2.3 million and a charge to settle a vendor liability of $0.4 million, neither of which were present in 2024, offset by decreases in depreciation and amortization expense of $1.3 million and stock-based compensation expense of $1.8 million.

Other Income (Expense), net

Other Income (Expense), net

Other income (expense), net consists of unrealized currency gains and losses and issuance costs related to the June 2025 Convertible Exchangeable Notes for the three and nine months ended September 30, 2025 and fair value of warrants issued in connection with Registered Direct Offering for the three and nine months ended September 30, 2024.

Interest Expense

Interest expense increased $2.2 million and $3.5 million for the three and nine months ended September 30, 2025 as compared to the three and nine months ended September 30, 2024, respectively. The increase in interest expense for the three months ended September 30, 2025 was mainly attributable to an increase of $3.0 million in interest and debt discount in connection with the January 2025, March 2025 and June 2025 convertible notes and $0.4 million of interest expense attributable to Wattbike, partially offset by a $1.3 decrease in interest from the February 2024 Treadway convertible note (see Note 11 to the condensed consolidated financial statements). The increase for the nine months ended September 30, 2025 was primarily attributable to an $8.1 million increase in interest and discount amortization related to the January 2025, March 2025 and June 2025 convertible notes and $0.4 million of interest expense attributable to Wattbike, partially offset by a decrease in interest expense from the February 2024 Treadway convertible note in the amount of $3.6 million and a $1.5 million decrease in interest on the December 2023 convertible note.

Interest Income

Interest income increased $0.7 million and $1.1 million for the three and nine months ended September 30, 2025 as compared to the three and nine months ended September 30, 2024, respectively, as a result of loan agreement entered into with Sportstech in January 2025.

Loss on issuance of warrants

During the three and nine months ended September 30, 2024, we recorded a loss related to the fair value of warrants issued in connection with several equity offerings undertaken by the Company, with no comparable amount for the three and nine months ended September 30, 2025.

Gain (loss) on extinguishment of debt and accounts payable

Gain (loss) on extinguishment of debt and accounts payable for the three and nine months ended September 30, 2025 was mainly the result of the conversion of convertible notes $0.7 million and $5.1 million, respectively. For the nine months ended September 30, 2024, we recorded a loss on the extinguishment of debt in the amount of $1.6 million, which was mainly due to the conversion of promissory notes issued in fiscal 2023 and 2024 into Series A Preferred Stock.

Change in Fair Value of Convertible Notes

We recorded gains on the change in fair value of convertible notes for the three and nine months ended September 30, 2025 of $12.0 million and $18.6 million due to the increase in fair value of these notes, with no comparable amount for the three and nine months ended September 30, 2024.

Change in Fair Value of Digital Assets

Change in fair value of digital assets consists of the subsequent remeasurement of the Company's digital assets acquired in June of 2025 measured at fair value based on quoted prices on active exchanges pursuant to ASC 350-60. For the three and nine months ended September 30, 2025, we recognized losses of $10.6 million and $10.5 million, respectively, related to the change in fair value.

Change in Fair Value of Derivatives

The gain on the change in fair value of derivatives for the three months ended September 30, 2025 and 2024 of $1.4 million and $1.0 million, respectively, reflect the decrease in the fair value of the Company's derivative instruments, which are primarily related to the issuance of convertible promissory notes and warrants, issued in connection with the issuance of debt. We recorded a loss of $0.6 million and a gain of $0.2 million for the nine months ended September 30, 2025 and 2024, respectively, due to the changes in fair value of these derivatives.

Change in Fair Value of Warrants

The gain on the change in fair value of warrants for the three months ended September 30, 2025 and 2024 was $0.8 million and $5.9 million, respectively. For the nine months ended September 30, 2025 and 2024 the gain was $1.7 million and $9.1 million, respectively.

Liquidity and Capital Resources

In accordance with Accounting Standards Update ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (Subtopic 205-40), or ASU 205-40, management evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the accompanying condensed consolidated financial statements were issued.

As an emerging growth company, the Company is subject to certain inherent risks and uncertainties associated with the development of an enterprise. In this regard, since the Company's inception, substantially all of management's efforts have been devoted to making investments in research and development including the development of revenue generating products and services and the development of a commercial organization, all at the expense of short-term profitability.

As of the date the accompanying condensed consolidated financial statements were issued (the "issuance date"), management evaluated the following adverse conditions and events present at the Company in accordance with ASU 205-40:

These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

Cash Flows

Comparison of the nine months ended September 30, 2025 and 2024

Operating Activities

Net cash used in operating activities was $8.2 million and $8.9 million for the nine months ended September 30, 2025 and 2024, respectively, as the higher net loss, net of non-cash items, in 2025 was partially offset by a lower increase in accounts receivable. The following table represents the components of cash used in operating activities:

Investing Activities

Net cash used in investing activities of $53.5 million for the nine months ended September 30, 2025 was comprised of the acquisitions of digital assets of $47.3 million, software and content of $0.7 million, cash used for the acquisition of Wattbike of $0.4 million, and to the loan with Sportstech of $5.0 million.

Net cash used in investing activities of $1.4 million for the nine months ended September 30, 2024 related to the acquisition of CLMBR, Inc. net of cash acquired.

Financing Activities

Net cash provided by financing activities of $62.2 million for the nine months ended September 30, 2025 was primarily from proceeds from the issuance of convertible notes and exercise of incremental warrants of $60.2 million, net of issuance and offering costs, proceeds from issuance of promissory notes of $2.0 million, and At the Market Offering proceeds of $1.6 million.

Net cash provided by financing activities of $12.9 million for the nine months ended September 30, 2024 was primarily from the issuance of convertible notes of $4.8 million, proceeds from loans and related party loans of $1.9 million, proceeds from issuance of common stock from equity line of credit $0.4 million, proceeds from common stock offerings net of issuance and offering costs of $4.4 million and At the Market Offering proceeds of $4.0 million, partially offset by the payment of loans and related party loans and interest of $2.5 million.

Contractual Obligations and Other Commitments

Off-Balance Sheet Arrangements

In accordance with ASC 718, when a nonrecourse note is used to fund the exercise of a stock option, the stock option is not considered "exercised" for accounting purposes until the employee repays the loan. Prior to repayment of a nonrecourse loan, the outstanding shares received in exchange for the loan are excluded from the denominator of basic earnings per share. Additionally, the nonrecourse loan itself is not recorded on the Company's condensed consolidated balance sheet since the arrangement is, in substance, a stock option.

In 2022, the sale of the shares of common stock to several employees was completed in the form of issuances of Secured Partial Recourse Promissory Notes (the "Note(s)") by the respective employees to the Company.

The Notes were in the aggregate amount of $154,875 and 2 shares as of September 30, 2025 and December 31, 2024. The Notes are secured by a pledge of collateral, representing the shares of stock sold. Interest is charged at the mid-term Applicable Federal Rate as of the date of the Note and compounded annually. Per the terms of the Notes, 51% of the initial amounts of the outstanding principal balances plus any accrued and unpaid interest represent a full recourse note, and 49% of the initial amounts represent a nonrecourse note. The Company analyzed the terms of the Notes and concluded that the recourse portion of the notes are nonrecourse in nature as the Company does not have intention to seek repayment beyond the shares issued despite the recourse legal terms, and thus will be treated the same as the nonrecourse portion of the Notes. All Notes are outstanding as of September 30, 2025, and are not recorded on the condensed consolidated balance sheet.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the condensed consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders' equity, revenue, expenses, and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those noted below.

Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Form 10-K and in Note 2. to our consolidated financial statements included in our Form 10-K. As disclosed in Note 2 to our consolidated financial statements included in the 2024 Form 10-K, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. During the period covered by this Quarterly Report, there were no material changes to our critical accounting policies from those discussed in our Form 10-K other than those disclosed in Note 2. of this Quarterly Report.

Emerging Growth Company and Smaller Reporting Company Status

Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an "emerging growth company" can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have elected this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Where allowable we have early adopted certain standards as described in Note 2 of our condensed financial statements included elsewhere in this report. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will continue to remain an "emerging growth company" until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.235 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We are also a "smaller reporting company," meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.