How does Degree Wellness classify leases with terms greater than 12 months?

According to the 2025 FDD, Degree Wellness recognizes right-of-use assets and lease liabilities for leases with terms greater than 12 months. Degree Wellness classifies these leases as either finance or operating leases. This classification determines how the lease expense is recognized. Finance leases are recognized based on an effective interest method, while operating leases are recognized on a straight-line basis over the term of the lease.

For a prospective Degree Wellness franchisee, this means that if they enter into a lease agreement for their studio location that exceeds 12 months, Degree Wellness will account for it as either a finance or operating lease. The distinction between these two types of leases is important because it affects how the lease expense is recorded in the franchisee's financial statements. Understanding the classification and accounting treatment of leases is crucial for managing the financial aspects of the franchise.

Furthermore, the FDD states that lease and non-lease components of a contract are accounted for as separate components. The Company's right-of-use assets and lease liabilities relate to office space. This indicates that Degree Wellness itself also enters into lease agreements for its office space and applies the same accounting principles. Franchisees should consult with financial professionals to fully understand the implications of lease classifications and their impact on their business's financial performance.